It isn’t the first time Madison International Realty has demonstrated that it’s agnostic in its hunt for value by acquiring shares in a publicly traded REIT. The New York-based manager’s acquisition of a 3.12 percent stake in Capital & Counties in early June was the latest of several equities purchases made on behalf of its private capital.
Acquired in a deal valuing the REIT at £1.85 billion ($2.33 billion; €2.08 billion), the stake was the latest purchase in a long-running strategy of investing in listed real estate alongside the firm’s own private properties.
In February 2018, Madison International bought a 5 percent stake in the New Jersey-based REIT Mack-Cali Realty Corporation. Similarly, in 2013, the firm took a minority stake in the publicly listed Songbird Estates, which holds a 69.4 percent majority interest in the London office and retail landlord Canary Wharf Group. The firm then exited the investment in 2015.
Historically, as much as 20 percent of Madison International’s private funds have been invested in listed properties, according to Ronald Dickerman, the firm’s founder and president. Investors see the liquidity of listed REIT investments as an added bonus. “Our whole thesis is finding quality that is trading at a large discount with some type of a catalyst that will close the NAV discount,” Dickerman told PERE.
He observed a dislocation in pricing between the private and public markets given the backdrop of Brexit uncertainty. He estimated that Capital & Counties was trading at a 35 percent discount to net asset value at the time of purchase.
There is another catalyst on the horizon that would close the NAV discount, according to Dickerman. He believes Capital & Counties will sell its development site at London’s Earl’s Court, which accounts for around one-third of its value. This will leave the REIT with the retail trophy asset Covent Garden. Once the sale of Earl’s Court takes place, Dickerman says it could open the possibility of Capital & Counties getting acquired by another listed REIT or a sovereign wealth fund.
Investors might want to rely on managers to make capital allocation decisions in the public markets because of their specific expertise, and because listed REITs periodically trade at a discount to NAV, according to Dirk Aulabaugh, managing director of advisory and consulting at Green Street Advisors. An investment in listed REITs alongside private property investments can also be attractive because of the ease of capital deployment, he said.
Investing in listed REITs alongside direct real estate could be helpful for managers seeking a certain level of liquidity to handle flows while maintaining real estate exposure, as is the case for those running open-ended funds, agreed Jay Rosenberg, head of Nuveen public real assets.
Additionally, firms managing closed-ended funds may be interested in some listed REIT investments because they can add instant geographic or sector diversification. Managers could use listed REITs to gain exposure to more niche property sectors or sectors that require a platform or considerable scale. It can be very difficult to do operationally intensive deals on a one-off basis, Rosenberg explained.
While buying listed positions – outside of a privatization scenario – can leave a manager exposed to stock market forces unconnected to the real estate market, it can also serve as a return enhancer, according to Rosenberg. While institutional investors can buy these shares on their own, a manager can generate excess return when compared to passive listed REIT exposure by actively identifying relative valuation opportunities in the public markets.