Why No Private Equity Deals for Non-Traded REITs (or Management Wealth Maximization over Shareholder Value Maximization)
I was on a conference call Friday morning with a non-traded REIT sponsor. The subject of private equity came up and he explained why no non-traded REITs have sold to a private equity firm. An acquisition of a non-traded REIT by a private equity firm would likely not include the purchase of the affiliated outside advisors that give the REIT management huge paydays. Private equity firms would likely replace the current REIT management with their own managers, which stops large ongoing salaries for current management. Non-traded REIT managers are protecting their jackpot and cash cows at the expense of investors by avoiding private equity.

In a market where private equity is paying premiums for public REITs, it's strange that there have been no offers to buy the non-traded REITs. When the low relative leverage of non-traded REITs is viewed (private equity firms love low leveraged companies) the lack of deals gets even odder. Private equity firms have been paying large premiums for real estate firms - Blackstone paid a 40% premium for Hilton Hotels - and the low leverage of the non-traded REITs should make them attractive to private equity.

Non-traded REIT managers do not want to miss out on their big payday even if it means investors are the losers. It is time for legitimate, unsolicited takeover offers from well capitalized private equity firms, not the low ball, half-assed offers from proxy firms looking to take advantage of unsophisticated investors to acquire a single digit percentage of the REITs. Stop the nonsense paydays for the bullshit outside advisors and provide investors with better returns.

Let's look at this in other, hypothetical terms. Wells Real Estate Investment Trust bought its management company for $164 million, based on a $8.38 share price, in April. If, when the REIT goes public, it lists for over $8.38 Wells is a hero and the $164 million grows because the $164 million was paid in stock. If the stock trades at $9.00 Wells not only is a hero, but it has a successful track record of providing liquidity to investors. On the other hand if Wells had looked to sell Wells Real Estate Investment Trust to a private equity firm for a a 30% to 40% premium to the $8.38 share price investors would receive $11 to $12 a share rather than the $9, but Wells would be out the $164 million and the annuity for managing the REIT. Unfortuantely, investors will not know about this second option because it does not benefit Wells management. (This is not an indictment against Wells, I am using it as an example because it recently filed to go public. Dividend Capital, CNL, and Inland all bought their affiliated management companies before going public of being acquired, so you can substitute any of these names for Wells in the above example.)