Attached is a link to my recent in-depth interview with GlobeSt.com, the influential commercial real estate trends watcher. In the interview, I was asked to comment on American Ventures' investment plans for 2007 and the state of the REIT industry, given the ongoing takeover battle for Equity Office Properties Trust. A bit more perspective on REITs is the theme of this posting.
In prior postings, I outlined why I think public REITs offer a poor substitute to outright private ownership of commercial real estate. Quite contrary to the flexibility enabled in a private market environment -- where defense against takeovers can be achieved with a simple yet direct “not interested” -- the public market offers no such easy escape. In fact, as a public entity, it’s the management's fiduciary obligation to explore alternatives that could promise to boost shareholder value. However, the current wave of REIT takeovers should abate as the list of likely targets gets whittled down.
The public market value of the typical collection of assets owned by REITs is often far exceeded by the break-up value of the assets. This would suggest that either management or capital structure, or both, are drags on value. That axiom (along with an inefficient public market valuation system) is behind our ongoing exploration of REIT investment as a viable avenue to gain control of assets we find desirable. In fact, we are actively looking into regional office and commercial property REITs for acquisition as part of our 2007 plan to invest up to $1 billion in new real estate holdings. In a REIT structure, highly talented managers generally are hampered by the quarterly metric pressures of the public market. These same managers often are quite more effective in a private ownership structure (ala an American Ventures Realty Investors).
In terms of individual asset acquisition, the wave of LBOs (both announced and yet to come) for large REITs like Crescent, will inevitably lead to divestitures to reduce debt. As a result, we could see one of the largest "for sale" markets in commercial real estate history by year-end 2007 and into 2008, creating vast opportunity for buyers who are credible and have deep pockets.
