NAV Discounts Breed REIT M&A

The SNL US REIT Equity index has been trading at a continuous discount to NAV for more than 10 months, as of March 7. This represents the longest stretch since the 26-month period between May 4, 2007, and July 23, 2009, when REITs averaged a discount to NAV of 14.8% and traded at a premium for only a single day.

With that NAV environment in mind, an analysis of U.S. equity REIT M&A deals with a publicly traded target found that in four of the five busiest years by aggregate transaction value, M&A targets traded at average NAV discounts ranging between 1.1% and 12.1% on the day before the transaction announcement.

The only year that this wasn't the case was 2005, which also saw the smallest aggregate transaction value. That year, target REITs traded at an average premium to NAV of 13.9% the day prior to the respective deal announcements.

The year 2015 marked the most active year since 2007 in terms of both the number of public REIT deals and aggregate transaction value. M&A targets in 2015 traded at an average 12.1% discount to NAV on the day before the deal announcement.

A Sept. 30, 2015, analysis by SNL Financial found that the heavy NAV discounts at which REITs were trading created takeover opportunities for potential buyers, although the buyer pool appeared to be limited to large, well-positioned private equity firms.

So far in 2016, one public U.S. equity REIT acquisition has been announced. Rouse Properties Inc. entered into a definitive agreement Feb. 25 to be acquired by Brookfield Asset Management Inc. The day prior to the deal announcement, Rouse traded at a 12% discount to NAV.

As of March 7, the SNL US REIT Equity index traded at a 4.2% discount to NAV, while the year-to-date period saw an average 8.6% discount.