Report predicts REIT M&A deals to wane.

After witnessing the largest private equity leveraged buyout in U.S. history, REITs continue to see much merger and acquisition interest that could increase leverage and secured debt for firms involved, Moody's Investors Service said in a new report.

The rating agency expects this wave of REIT M&A deals to begin to wane, however, as institutional investors in particular reach their targeted allocations for real estate, and as other asset classes become more attractive--especially with the run up in REIT stock prices in recent years.

"The question is whether the leveraged buyout of Equity Office Properties represents the high watermark or the tip of the iceberg, in leveraged buyout activity," said Moody's Analyst Christopher Wimmer. "In Moody's view, the REIT privatization party may not be over, but it could be time to switch to water."

Wimmer said that the current conditions that have led to the spate of privatizations--lower interest rates, easy mortgage underwriting terms and capitalization rate compression--are sure to change.

Also, Moody's said that public REITs have also been involved in the chase for acquisition targets--M&A activity has not been exclusively in the public-to-private direction. REIT consolidation continues.

Moody's said that public-to-public transactions are generally a plus for credit ratings, if financed conservatively, as they usually add to a REITs' scale, leadership and diversity.

John J. Kriz, Managing Director of Real Estate Finance at Moody's, said, "In the 1990s, during the wave of REIT IPOs and their initial growth spurt, the talk was how REITs would soon eclipse the privately owned commercial property space. That did not happen. In a similar manner, talk that REITs and other public property firms are waning as a business concept is also false."

Wimmer also suggested that many of these privatizations are likely to end up being returned to the public REIT market, at least in part, as investors generally have intermediate-term investment horizons and will want to liquidate their positions to move on. IPOs are the easiest way to liquidate large pools of property.