REIT Axes Office Deal Amid Market Turmoil
One of the largest pending office building acquisitions in Southern California has fallen apart, the latest and most dramatic example of how commercial real estate deals are slowing due to the financial woes affecting real estate investment trusts.
Crescent Real Estate Equities of Fort Worth has pulled out of a previously announced deal to buy half of Costa Mesa’s Two Town Center complex across from South Coast Plaza and all of the tower occupied by Blue Shield at Howard Hughes Center in Westchester, sources close to the deal say.
Crescent announced in July it was acquiring the office buildings from Prudential Insurance Co. of America, along with another 1.2-million-square-foot property in the suburbs of Chicago. Real estate experts estimate the combined value at $450 million.
Analysts say the Crescent deal is a prime example of how REITs nationwide have been putting the brakes on acquisitions as building prices have surged and the cost of raising money in the public market has become prohibitive. Analysts say more large purchases are likely to fall through unless share values rise.
“Stock prices are at levels where it doesn’t make sense to make acquisitions,” says Kit Case, senior analyst with Dallas-based Southwest Securities. “The cost of capital is too expensive.”
The Prudential buildings are the second property purchase that Crescent, led by billionaire financier Richard Rainwater, has pulled out of in the last month.
Criticism from the board of directors prompted Crescent to back out of the $1.5-billion acquisition of Station Casinos of Las Vegas, a deal Crescent claims was nullified when Station postponed a key shareholder vote. Both sides have filed lawsuits against each other.
In August, Crescent’s operating company also terminated negotiations with Magellan Health Services to acquire an interest in psychiatric hospital manager Charter Behavioral Systems, which leases several of Crescent’s properties.
As late as last year, Crescent was still regarded as a “high-octane growth stock,” with its share price quadrupling from its 1994 initial public offering. This year it has taken a beating, as growth investors became jittery about its long-term prospects in a rapidly rising real estate market. Many have bolted to other investments, says Greg Whyte, an analyst with Morgan Stanley, Dean Witter, Discover & Co. in New York.
Crescent shares, which trade on the New York Stock Exchange, have plunged 44% from their 52-week high of $40.88, to $22.88 on Wednesday. By contrast, a Bloomberg index of 161 REIT shares is down just 24% from its 52-week high reached in October.
Crescent Chief Executive Gerald Haddock declined to comment on the failed Southern California deal. However, he said that in “tumultuous” market conditions people have to “be a little more careful on the buy and sell side.” Prudential officials also declined to comment.
Crescent had reportedly struck an agreement to sell the 321,000-square-foot Blue Shield building at 6701 Center Drive to another REIT, Arden Realty, which had purchased the land and buildings in the surrounding Howard Hughes Center near Los Angeles International Airport.
Richard Ziman, chief executive of Arden, acknowledged that Crescent had backed out of the deal, but said his firm “remains interested” in buying the building from Prudential.
Analysts say pulling out of the two real estate deals doesn’t hurt the REIT, but proves it knows when to quit. After Crescent announced it had terminated its deal with Station, traders voiced their approval by lifting the share price 6%, one of the only boosts the stock has received all year.
“Wall Street never liked Crescent getting into gaming,” analyst Case said. “In their eyes it was a risky venture.”
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Devalued Property
Real estate investment trust stocks have been pummeled since last fall on a variety of worries, including fears that the commercial real estate sector is again being overbuilt. The Bloomberg index of 161 REIT shares has tumbled 24% from its 52-week high, and now is at its lowest level since November 1996. Monthly closes and latest for the index:
Wednesday: 113.75
How REIT Sectors Have Fared
REITs that primarily own mortgage loans on properties have been hurt worst in the sector’s downturn. By contrast, REITs that directly own retail properties have fared best. Declines in key REIT indexes from their 52-week highs:
Retail REIT index: -16%
General REIT index: -24%
Health-care REIT index: -31%
Mortgage REIT index: -47%
Source: Bloomberg News
