REIT window of opportunity closing, lawyer says.

The window of opportunity for private real estate companies to go public as real estate investment trusts (REITs) appears all but closed for the time being, says J. Philip Rosen, a partner in the real estate department at Weil, Gotshal & Manges, paving the way for mere mergers and acquisitions in the field as various players seek to access the capital markets via established REITs.

The deals will help solve a problem for some of the mere mature REITs as well, says Rosen, as mergers and acquisitions provide the growth opportunities that are the lifeblood of entities which must by law distribute a very high percentage of their income as dividends.

"Companies that would have been natural candidates for conversion to the REIT structure in 1992 and 1993 are finding the market reception to new issues in 1995 chilly," said Rosen. "In the current interest rate environment, investors are interested in very high quality REIT's offering the greatest potential for high dividend yields, a factor that is fueling the urge to merge on both sides of the transaction."

With the IPO market in the doldrums and more traditional sources of capital still somewhat skittish, real estate companies with financing problems will find that aligning themselves with REIT's via acquisition is one of the few ways to raise funds and, perhaps, the only way to do so via the public capital markets. Recent examples cited by Rosin include Equity Residential, which acquired the Artery Portfolio and Colonial Properties.

Private companies won't be alone in the PElT sector's movement towards mergers and acquisitions. Indeed, Rosen says, recent events suggests PElT consolidation will be one of the major trends in the real estate industry in 1995, as entities choose to combine their assets to increase their revenue stream and strengthen their appeal to investors.

"We have already seen a number of REIT mergers, with Property Trust of America merging with Security Capital Pacific and Holly Properties merging with Wellsford Residential and Drega Healthcare merging with Health Equity Properties," said Rosen.

The implications of the trend have been particularly clear, Rosen says, in two separate cases in which IPOs in registration have merged with REITs before even reaching the market.

"The CenterMark merger with General Growth and the Forsyth merger with Highwoods, which both occurred or are occurring before these PElTs got to the marketplace, are strong indicators that merger activity is going to a major element in the expansion and growth of public REITs," says Rosen.

And while the merger and acquisition trend will bring with it a host of new problems for the participants in the area of tax and securities law, the best of the transactions will create stronger, well-positioned PElTs better able to thrive in the changing economic environment.