So far, two large non-traded REITs (Cole Credit Property Trust II and American Realty Capital Trust III) have merged with traded REITs. Merging with a traded REIT is one way for these otherwise largely illiquid investments to bring their assets to market and allow their investors to cash out. The more traditional 'exit strategy', and the strategy anticipated by most non-traded REIT offering documents, would be to have an independent initial public offering (IPO). So why are some non-traded REITs merging instead of having an IPO?
Kaitlin Ugolik at Law360 offers an answer:
The current public trading market tends to value properties higher than the private investor market, [Peter Fass, Proskauer Rose LLP real estate capital markets and finance partner] said, so many of the strongest nontraded REITs that have amassed a great number of quality assets are turning to the New York Stock Exchange and Nasdaq to get better yields for their investors.By this argument, private investors who might participate in an IPO are less interested in the assets of a non-traded REIT than a pre-existing traded REIT would be. The article notes that a traded REIT might be interested in merging with a non-traded REIT in order to increase its overall size, which could increase its access to capital and diversify its portfolio of properties.
However, in both of the mergers we have seen so far, the non-traded REIT has been the much larger entity. Also, most non-traded REIT shares sell in the limited secondary market for a substantial discount to their offering prices. It may be the case that large non-traded REITs are looking to 'purchase' the brand and ticker of a traded REIT rather than risk an IPO based on its own assets. It will also be interesting to see if smaller or more obviously troubled non-traded REITs also pursue mergers, and what value investors will eventually receive for their shares.