May 30, 2007
After an exceptionally strong year for Archstone-Smith Trust (NYSE: ASN ) , shareholders of the apartment REIT had been looking for some revitalized interest in 2007. Fortunately, an announcement by the company yesterday that it is set to be acquired by the private equity group of Tishman Speyer and Lehman Brothers has given the stock, and the industry as a whole, a needed boost.
Word of the deal has since sent shares of Archstone-Smith Trust soaring nearly 18% above their Friday open. The transaction has also sent a charge through the entire apartment REIT sector, as similar companies such as AvalonBay Communities (NYSE: AVB ) , Apartment Investment & Management Co. (NYSE: AIV ) , and Essex Property Trust (NYSE: ESS ) have all seen their shares appreciate in the 7% to 10% range over the past couple of days. The ProFunds Real Estate UltraSector (FUND: REPIX ) fund, which holds primarily REITs, is up more than 5% today alone.
High occupancy rates, a slumping housing market, and increasing rental rates made REITs an attractive investment in 2006 and were among the driving forces behind the sector's run-up. The relatively high valuations in the industry would have made it unreasonable for investors to expect similar returns out of REITs this year. It now appears that as well as healthy dividend yields, shareholders might be able to profit from the recent interest by private equity groups in owning REITs.
Investors who had owned shares in Equity Office Properties (EOP) made out like bandits when the REIT was taken over by private equity group The Blackstone Group. This buyout occurred only after The Blackstone Group waged a fierce bidding war against Vornado Realty Trust (NYSE: VNO ) , which was also interested in acquiring EOP.
At this point, it appears unlikely that another bidder will emerge for Archstone-Smith, but its shareholders have already profited nicely from this transaction. This trend of private equity interest in REITs only reinforces the attractiveness of owning REITs in one's portfolio -- not only because they could become potential takeover targets, as the Archstone-Smith and EOP buyouts demonstrate, but also because the valuations of REITs may not be all that unreasonable.
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Fool contributor Billy Fisher does own shares of Essex Property Trust. The Fool has a disclosure policy.