Last month, Madison International Realty became one of the largest shareholders in Monogram Residential Trust, a real estate investment trust focused on multifamily properties. It did so by buying a 5.3 percent stake in the Plano, Texas-based company at a deep discount. But none of this was part of Madison’s original plan.
Madison, which specializes in acquiring partial ownership, joint venture, private REIT and listed shares in Class A real estate in the US and Europe, sought to increase its exposure to the multifamily space, given the strong fundamentals supporting the sector: the low interest rate environment, US economic growth, lack of interest by Millennials in home buying and dearth of new construction over the past five years.
Madison found Monogram to be the ideal REIT through which to expand its multifamily exposure. “We think it’s the best-in-class multifamily portfolio that we know of in the US multifamily business,” said Ronald Dickerman, the company’s founder and president.
Monogram’s portfolio, which encompasses 56 multifamily properties totaling 16,126 units in 12 states, is one of the youngest among listed US multifamily REITs, with an average age of five years. It was formed in 2006 as Behringer Harvard Multifamily REIT and registered with the US Securities and Exchange Commission as a non-traded public REIT in 2008. Over the next three years, the REIT raised $1.5 billion of capital from high-net-worth investors through the sale of its securities through the US broker-dealer network.
But because the shares were not openly traded, investors in the REIT had no liquid market to sell their shares. In August 2014, the REIT, which had rebranded as Monogram two months earlier, announced that it was considering various alternatives to create liquidity for its shareholders, and given the size and composition of its portfolio, among other factors, believed that a listing on a major US stock exchange was the best option.
Madison met with Monogram after the announcement was made. In Madison’s view, there were a number of liquidity alternatives to going public, including buying out some of the shareholders. As Dickerman recalled, Madison had concerns that a listing initially would create a supply-demand imbalance where there would be more sellers than buyers of the REIT’s stock.
However, Monogram proceeded with its original listing plan, and on November 21, began trading on the New York Stock Exchange under the ticker symbol “MORE.” Upon listing, the REIT also began a tender offer to purchase for cash up to $100 million of its shares from its shareholders.
Over the course of 17 trading days during this tender offer period, Madison, on behalf of Madison International Real Estate Liquidity Fund V, accumulated 8.89 million shares of the company for a total of $80.92 million, according to a filing with the SEC. The price per share at which Madison bought the REIT’s stock ranged from as high as $9.50 at the beginning of its buying program to as low as $8.77 toward the end of the program – all of which were at a nine percent to 16 percent discount to the estimated per share valuation of $10.41 that Monogram’s board had determined in August. According to Dickerman, most public multifamily REITs trade at premiums or discounts of two or three percent.
The share price has since stabilized, and was trading at $9.33 as of press time. Dickerman, however, believes that Monogram’s share price will rise in the future as it becomes more established as a public entity. “As the company becomes better known and the quality and the vintage of their assets will become better known, the stock price will more fully reflect the value of the properties,” he said.
Share purchases in public REITs – which include AmREIT in 2010 – represent less than 20 percent of Madison’s deal activity. While some argue that shares in listed REITs also could be purchased directly and for lower fees as public equities investments, Dickerman maintains that the public REIT deals done by Madison capture an opportunity only available within a very narrow window of time. With regard to the acquisition of its stake in Monogram, “we caught them at a moment where we were able to create a low basis,” he said. “No investor could have duplicated it.”