We've seen several headline-grabbing deals among publicly traded real estate investment trusts (REITs) this year. The biggest was Realty Income's (NYSE: O) all-stock merger with VEREIT (NYSE: VER), which will create a $50 billion REIT behemoth.
Meanwhile, rather quietly below the surface, the REIT industry has seen several deals among non-traded REITs, including those managed by real estate crowdfunding platforms. While these deals don't often appear on the front page of the Wall Street Journal, they're noteworthy for real estate investors, even if they don't own shares in the consolidating REITs.
Here's a closer look at some of the recent deals and what they might signal for the real estate crowdfunding sector.
Consolidation is heating up
Several non-traded REITs unveiled consolidation transactions over the past few months. One of the biggest came from funds managed by CIM Group, a community-focused real estate and infrastructure firm, which is merging affiliated non-traded REITs CIM Real Estate Finance Trust and CIM Income NAV. The combined entity will have a $6 billion enterprise value.
CIM noted several factors driving the decision to consolidate these two REITs:
- Greater scale and relevance: It will become one of the largest credit-focused REITs.
- Diversification: The combined portfolio will have 590 properties and reduce their top five tenant concentration from more than 19% to having no single tenant over 5%.
- Path to liquidity: The transaction positions the combined non-traded REIT to potentially list on the public market as soon as next year.
- Cost savings: The REITs can save $2.8 million per year in general and administrative expenses and another $2.5 million from ongoing stockholder service fees.
Meanwhile, direct-to-consumer real estate investment platform Fundrise has consolidated several of its products over the past year. It recently closed the combination of Growth eREIT V and Growth eREIT 2019 into a single larger entity, the Fundrise Development e-REIT. That move followed the merger of three e-Funds into one consolidated eFund last year.
A final deal to note is the merger between publicly traded residential REIT Independence Realty Trust (NYSE: IRL) and non-traded REIT Steadfast Apartment REIT. The combined company will have a $7 billion enterprise value and create a top-three multifamily REIT focused on the Sun Belt region.
These deals were also about gaining scale, greater diversification, reducing costs, and in the case of Steadfast, its ticket to providing investors with greater liquidity.
Is more consolidation coming?
While we've already seen a lot of M&A activity among non-traded REITs this year, more seems likely. To get an industry perspective, I asked Aaron Halfacre, the CEO of non-traded REIT and crowdfunding platform Modiv for his take on the subject. His company has a lot of consolidation experience. It previously combined two of its non-traded REITs into one entity. Modiv also internalized its manager and fintech crowdfunding platform, formally known as Rich Uncles, all into one non-traded REIT.
REIT M&A is very appealing, and market conditions are conducive for it right now. Within the real estate crowdfunding industry, I can't help but draw parallels to the financial services industry over the last 30 years -- lots of innovation but also a lot of consolidation. I believe we could see a fair amount of M&A and/or public listing events within crowdfunding.
He pointed out two case studies of successful M&A in the financial services industry: CBRE (NYSE: CBRE) and BlackRock (NYSE: BLK). Both formed in the late 1980s; these well-run, innovative companies were industry trailblazers in utilizing M&A to scale their businesses. They've since grown into behemoths, as CBRE is a top-ranked global real estate services firm while BlackRock is a top asset manager.
This M&A playbook could help take the real estate crowdfunding industry to the next level. It could give companies that successfully utilize this strategy the scale to reduce costs and provide additional services to investors.
Modiv knows this M&A playbook quite well. Halfacre worked for BlackRock for 11 years, while its Chairman Ray Wirtha is the retired Chairman and CEO of CBRE. Given the success those companies had with M&A, Halfacre sees it as part of Modiv's culture and its future. It recently raised $50 million of preferred equity, which it intends to use on acquiring larger real estate portfolios, other real crowdfunding platforms, or both.
As platforms like Modiv grow their scale through M&A, it will likely lead others to follow that blueprint so that they're not left behind. While an M&A growth strategy is riskier than one focused on organic expansion, a well-executed plan in the financial service industry can benefit shareholders and customers.
Expect more private real estate deals
We've already seen several M&A transactions among public non-traded REITs this year, which will likely continue. In addition, we'll probably start seeing some crowdfunding platform consolidations as companies look to scale their operations to provide more services to their investors. Those that can execute on an M&A strategy could emerge as long-term winners. Because of that, real estate investors should keep an eye on future deals since that could signal where to find greater long-term returns.
Disclosure: Matt DiLallo owns shares of Modiv and the Fundrise Development e-REIT.