Regency Centers Corp (NYSE:REG) has offered to buy smaller competitor AmREIT (NYSE: AMRE) for $433 million, or about $22 per share.
This represents a premium of nearly 15% over AmREIT's pre-announcement share price, and the deal could get even sweeter. It makes me wonder, will this be the first of many acquisitions in the REIT sector?
Shopping center operator Regency Centers wants to buy AmREIT in order to expand its geographical footprint into Texas and Georgia, particularly into the strong Houston market.
Also, in a somewhat unusual move, Regency has made it clear in its letter to AmREIT that the offer is not final, and the company is open to discussing a higher price. Regency also said it was willing to complete the transaction in either cash or stock, or a combination of the two.
So, what other large REITs may be looking to expand their reach, or to reduce competition?
How to find potential buyout targets
Generally, it makes the most sense for an REIT to acquire another specializing in the same type of property. And, it's easier to finance the purchase of a much smaller company. In the case of the Regency – AmREIT offer, Regency is more than 10 times the size of AmREIT and anticipates financing a deal with its existing credit facility.
One excellent example of potential buyouts is REITs that specialize in health care properties. There are a few big players in the space, such as Ventas (NYSE:VTR), HCP (NYSE:PEAK), and Health Care REIT (NYSE:WELL), all of which have a market capitalization of around $19 billion.
All of these are known to acquire smaller health care REITs. Ventas has completed several big acquisitions over the past several years, including Altria Senior Living Group for $1.5 billion and Nationwide Health Properties for $7.4 billion, both of which specialized in senior citizen housing, which makes up about two thirds of Ventas' revenue.
Similarly, HCR completed a $6.1 billion acquisition in 2011, and Health Care REIT acquired Genesis Health Care for $2.4 billion the same year.
So, if I were looking for potential acquisition targets for these companies, I would use the $1-$5 billion range, assuming any buyout prices will be at a premium to the share price, and look for REITs specializing in similar property types.
For example, National Health Investors (NYSE: NHI) has a market cap of about $2.1 billion and specializes in senior housing communities. LTC Properties also specializes in various senior housing and has a market cap of $1.4 billion. Either of these would make a great takeover target for the three big REITs mentioned.
Whether or not either of the smaller companies mentioned gets bought out by the larger ones remains to be seen, but they would definitely make sense as buyout targets.
The same type of logic can be applied to REITs specializing in industrial properties, shopping malls, or apartment buildings.
And, as the wave of health care REIT acquisitions in 2011 shows, M&A activity definitely seems to come in waves. It makes me think the Regency offer to buy AmREIT will not be the only REIT buyout of 2014.