Lazard was top advisor in lean year for real estate M&A

Real Estate Alert, March 17, 2004

Lazard Freres topped Banc of America and Wachovia as the most-active advisor on real estate mergers and acquisitions last year, according to a Real Estate Alert survey.

But M&A activity plunged by 68%, to $7.2 billion--the smallest total in the eight years that the survey has been conducted.

Just 14 transactions were completed, the second-lowest total ever, and only two of them reached the $1 billion threshold--Pennsylvania Real Estate Investment's $1.2 billion acquisition of Crown American Realty, and Developers Diversified Realty's $1 billion acquisition of JDN Realty. By contrast, eight deals topped $1 billion in 2002, when $22.3 billion of mergers and acquisitions closed.

The low activity can actually be seen as a sign of good times in the industry. The stock prices of REITs are high, leaving potential buyers unable to pay premiums. For example, earlier this month, Inland Group bowed out of talks to buy Pan Pacific Retail Properties for more than $2 billion. The problem? Pan Pacific was seeking $60 a share--a significant premium over its current market value.

"There is interest in strategic activity, but it's difficult to pay a premium--to trade at a value in excess of the value of the assets," said Matthew J. Lustig, a managing director of Lazard Freres. When stock prices tumbled in 2001 and into 2002, "sellers were more willing, because there were fewer options," Lustig added. But with interest rates low and access to public capital readily available, REITs are facing little pressure to consolidate.

Last year's "anemic" M&A activity also reflected the absence of any giant mergers, noted Adam O. Emmerich, a partner at law firm Wachtell Lipton. The volume in 2002 was pumped up by two $5 billion-plus deals involving companies exiting the real estate industry--Rodamco and Security Capital.

Lazard served as an advisor to buyers or sellers on five transactions valued at $2.7 billion last year. That meant it played a role in 38% of overall activity. Lazard was the only player to work on more than two deals. That was a significant increase from 2002, when it worked on $361 million of deals, or 1.6% of the total.

Wachovia made its debut in the survey, finishing second. It advised on two transactions totaling $1.9 billion. Five other investment banks handled at least $1 billion of volume. Goldman Sachs, the top advisor in 2001 and 2002, dropped to seventh place last year. Its lone transaction was advising Developers Diversified on its acquisition of JDN.

The sale of retail companies again dominated the survey. Besides the two $1 billion-plus deals, Kimco Realty acquired Mid-Atlantic Realty (a $700 million deal), Lightstone Group acquired Prime Retail ($606 million), Pan Pacific Retail Properties acquired Center Trust ($600 million) and Phillips Edison acquired Aegis Realty ($156 million). Also, Investors Real Estate Trust acquired T.F. James Co. ($71 million), which had a portfolio of retail and other commercial properties.

"Retail and hotel are the only property types that have synergy in consolidation," said Lustig. "There is efficiency through tenant relationships across a portfolio. The same is true for branding of hotels."

Market players don't expect M&A activity to pick up dramatically this year, although a few large transactions have already been struck. CNL Hospitality has agreed to buy luxury hotel player KSL Recreation for $2.2 billion. Lennar Corp. and affiliate LNR Property completed a $992 million acquisition of Newhall Land and Farming, and Ventas completed a $184 million acquisition of ElderTrust.

The survey counted deals of at least $50 million (including assumed debt) in which the acquired entity primarily owned income-producing commercial real estate in the U.S (office, industrial, retail, hotel, apartments, and senior housing and related properties). The survey did not include single-property or portfolio transactions, sales of advisory, management or brokerage firms, or roll-ups of investment vehicles or other reorganizations in which ownership did not substantially change. It counted only transactions that closed in 2003.

Real Estate Mergers

       Amount    No. of
       ($Bil.)   Deals

1996    $24.0      54
1997     33.0      67
1998     59.1      53
1999     26.4      29
2000     17.8      19
2001     16.3       9
2002     22.3      18
2003      7.2      14

2003 Ranking of M&A Advisors

Full credit given to all representatives of buyers and sellers

                                      2003   No. of   Share
                                   ($Mil.)    Deals    (%)

 1   Lazard Freres                $2,745.9        5    38.2
 2   Wachovia                      1,915.0        2    26.7
 3   Banc of America               1,431.5        3    19.9
 4   Credit Suisse First Boston    1,279.5        2    17.8
 5   Citigroup                     1,215.0        1    16.9
 5   Lehman Brothers               1,215.0        1    16.9
 7   Goldman Sachs                 1,030.0        1    14.3
 8   Merrill Lynch                   750.0        2    10.4
 9   CIBC                            720.0        1    10.0
 9   Raymond James                   720.0        1    10.0
11   UBS                             700.0        1     9.7
12   Morgan Keegan                   679.5        1     9.5
13   Granite Partners                606.0        1     8.4
13   Houlihan Lokey                  606.0        1     8.4
15   CB Richard Ellis                602.0        1     8.4
16   RBC Capital Markets             156.0        1     2.2
17   Cohen & Steers                  142.0        1     2.0
18   Legg Mason                      137.4        1     1.9
     J.P. Morgan Chase                 0.0        0     0.0
     ING Barings                       0.0        0     0.0
     Deutsche Bank                     0.0        0     0.0
     OTHERS                            0.0        0     0.0
     TOTAL                         7,181.1       14   100.0

                                      2002   No. of   Share
                                   ($Mil.)    Deals     (%)

 1   Lazard Freres                  $361.2        2     1.6
 2   Wachovia                          0.0        0     0.0
 3   Banc of America               3,516.8        3    15.8
 4   Credit Suisse First Boston    1,495.0        1     6.7
 5   Citigroup                     5,094.3        5    22.9
 5   Lehman Brothers               4,630.8        3    20.8
 7   Goldman Sachs                 9,223.6        3    41.4
 8   Merrill Lynch                 7,789.6        3    35.0
 9   CIBC                              0.0        0     0.0
 9   Raymond James                     0.0        0     0.0
11   UBS                           3,895.9        3    17.5
12   Morgan Keegan                     0.0        0     0.0
13   Granite Partners                  0.0        0     0.0
13   Houlihan Lokey                    0.0        0     0.0
15   CB Richard Ellis                  0.0        0     0.0
16   RBC Capital Markets               0.0        0     0.0
17   Cohen & Steers                    0.0        0     0.0
18   Legg Mason                        0.0        0     0.0
     J.P. Morgan Chase             7,267.5        5    32.6
     ING Barings                   5,287.7        3    23.7
     Deutsche Bank                 4,939.8        4    22.2
     OTHERS                        4,904.3        5    22.0
     TOTAL                        22,284.2       18   100.0

Real Estate Mergers and Acquisitions in 2003

Purchases of companies that primarily own U.S. office, retail, hotel,
multi-family or industrial properties (deals of $50 million or more)

Acquired Entity                      Buyer

Crown American Realty                Pennsylvania Real Estate Inv.
JDN Realty                           Developers Diversified Realty
IRT Property                         Equity One
Mid-Atlantic Realty                  Kimco Realty
RFS Hotel Advisors                   CNL Hospitality
Prime Retail                         Lightstone Group
Dermody Properties (90% stake)       California State Teachers
Center Trust                         Pan Pacific Retail Properties
American Apartment Communities III   General Motors Asset Mgmt.
Aegis Realty                         Phillips Edison
Marriott Senior Living               Sunrise Assisted Living
ARV Assisted Living (56.5% stake)    Prometheus Assisted Living
Merry Land Properties                Cornerstone Realty Income
T.F. James Co.                       Investors Real Estate

Acquired Entity                      Seller's Advisor

Crown American Realty                Wachovia
JDN Realty                           Lazard Freres
IRT Property                         Raymond James
Mid-Atlantic Realty                  Wachovia
RFS Hotel Advisors                   CS First Boston, Morgan Keegan
Prime Retail                         Houlihan Lokey
Dermody Properties (90% stake)       Banc of America, Lazard Freres
Center Trust                         Merrill Lynch, Lazard Freres
American Apartment Communities III   Lazard Freres
Aegis Realty                         RBC Capital Markets
Marriott Senior Living               Merrill Lynch
ARV Assisted Living (56.5% stake)    Cohen & Steers
Merry Land Properties                Legg Mason
T.F. James Co.                       (None)

Acquired Entity                      Buyer's Advisor

Crown American Realty                Citigroup, Lehman Brothers
JDN Realty                           Goldman Sachs
IRT Property                         CIBC
Mid-Atlantic Realty                  UBS
RFS Hotel Advisors                   Banc of America
Prime Retail                         Granite Partners
Dermody Properties (90% stake)       CB Richard Ellis
Center Trust                         Credit Suisse First Boston
American Apartment Communities III   (None)
Aegis Realty                         (None)
Marriott Senior Living               Banc of America
ARV Assisted Living (56.5% stake)    Lazard Freres
Merry Land Properties                (None)
T.F. James Co.                       (None)

Acquired Entity                      Price ($Mil)

Crown American Realty                    $1,215.0
JDN Realty                                1,030.0
IRT Property                                720.0
Mid-Atlantic Realty                         700.0
RFS Hotel Advisors                          679.5
Prime Retail                                606.0
Dermody Properties (90% stake)              602.0
Center Trust                                600.0
American Apartment Communities III          371.9
Aegis Realty                                156.0
Marriott Senior Living                      150.0
ARV Assisted Living (56.5% stake)           142.0
Merry Land Properties                       137.4
T.F. James Co.                               71.3