For 1998, IPO and M&A activity has started strong. Several trends are noted from last year's activity that are expected to continue. First, the newer IPOs are becoming more specialized. Examples for this year include Capital Automotive, which buys, then leases back (sale/leaseback) auto dealerships; a hotel REIT - LaSalle Hotels, and a timber REIT, Timberland Growth. In addition, most other new REITs are mortgage oriented. After all, the number of mortgage REITs is under 15% of all REITs and is also considered a specialized area.

Second, the larger REITs are gobbling up smaller companies, both REITs and non-REITs. Some of these behemoths include Equity Office, Equity Residential, Starwood, and Patriot Am. These major players all have capitalized values of several billion dollars and, collectively, these and a few others represent a significant part of the REIT industry.

Third, there is Whitehouse scrutiny over a few of these larger players that are in a "paired-share" REIT structure. (Please see the paired share articles). This structure enables a few grandfathered REITs to avoid paying corporate tax on their operating activities. Allegedly, it has enabled these companies to pay more for acquisitions than competitors. One of these four companies has topped 10 billion in capitalized value, and two others are not far behind. This scrutiny over the "paired share" structure may bring further scrutiny on the REIT market in general and appears to have helped dampen the enthusiasm for REIT stocks in the beginning of this year.

Fourth, there is a trend to mock the "paired share" structure with "paper clip" operating companies that are associated with REITs, but are not REITs themselves. This allows principals of these REITs, within certain regulations, to become involved in service and management opportunities that would be prohibitive under the REIT structure. An example of this is Reckson Service Industries. However, this trend may have also lost some steam with scrutiny over the "paired share" structure.

REIT Reflections

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