In May, when ProLogis, an industrial real estate investment trust, agreed to buy Keystone Property Trust, which owns 33.8 million square feet of commercial property, for $1.6 billion, it happily avoided issuing either stock or debt to finance the purchase. Instead, the Aurora, Coloradobased REIT formed a joint venture with Boston’s Eaton Vance Management to buy Keystone, based in West Conshohocken, Pennsylvania. Under the terms of the deal, the joint venture will acquire 22.9 million square feet of the Keystone portfolio and ProLogis will purchase the remaining 10.9 million square feet on its own.
More and more REITs are linking up with institutional investors to acquire existing properties and to develop new ones. Among the 45 REITs covered by Fitch Ratings, investments in joint venture partnerships totaled $8.6 billion in 2003, compared with $3.4 billion in 1997.
“It would have been possible to do the Keystone deal on our own if we were interested in issuing a tremendous amount of stock and ballooning our balance sheet, but we weren’t interested in doing that,” says ProLogis CFO Walter Rakowich. “The joint venture allowed us to use a lot less capital and to grow at a higher return on invested capital.”
Joint ventures began to take off in late 1998, when capital markets were largely closed to REITs. In the debt market that fall, the meltdown of Long-Term Capital Management and the collapse of the Russian ruble sent interest rates soaring for any bond that wasn’t issued by the U.S. Treasury. In equity markets the fervor for technology and telecommunications stocks left REIT shares out in the cold. “Joint ventures were a way to raise equity capital that wasn’t otherwise available to REITs,” says Tara Innes, who heads the REIT group at Fitch Ratings.
In addition to permitting REITs to access capital without issuing stock or debt, joint ventures allow them to claim an ownership stake in a larger and more diverse portfolio of properties than they could manage on their own. REITs are also able to earn a steady stream of fee income for managing the joint-venture properties.
What’s in it for the institutional investors? They gain the industry knowledge, contacts and management expertise of established real estate players. “The biggest benefits are access to a real quality operator and access to product,” says Robert Plumb, principal and head of acquisitions for AEW Capital Management, a Boston-based real estate investment advisory firm, which currently manages some $13.4 billion in capital.
Yet some REIT analysts are leery of the joint ventures with institutional investors. Typically, the REIT originates acquisition, development or redevelopment opportunities; once the properties are stabilized, they are sold or contributed to the joint venture. Some analysts worry that REIT managements will place their newer, more desirable properties in the joint venture, leaving the core portfolio, properties that are 100 percent owned by REIT investors, loaded with the older, less-attractive properties. “There’s the potential for adverse selection,” says Innes.
Of course, if REIT investors disapprove of the joint venture choices made by REIT management, they can vote with their feet -- and sell their stock.
