REITs Merge as the Sector Struggles

Real estate investment trusts Terra Property Trust, Inc. and Western Asset Mortgage Capital Corporation announced they will merge in an all equity deal valued at $1.2 billion. Terra Property Trust “originates, invests in, and manages loans and assets secured by commercial real estate,” while acquirer Western Asset Mortgage Capital Corporation “invests in, finances, and manages a portfolio of real estate-related securities, whole loans, and other financial assets,” according to the REITs’ joint press release. The transaction arrives amid a turbulent climate for real estate investment trusts (REITs) which have struggled during much of 2023 due to higher interest rates and macroeconomic headwinds.

REITs were created in 1960 in the U.S. by legislation that permitted individual investors to pool funds in order to own and operate income-producing real estate. The goal was to “create a mutual fund-like investment structure for real estate. These investment vehicles offer exposure to commercial and residential properties, including apartments, mortgages, hotels, office buildings, shopping malls, self-storage facilities and warehouses.” 

The U.S. continues to be the world’s largest listed real estate market but this approach to real estate investment has since spread to over 40 countries in the ensuing decades, with 893 listed REITs listed worldwide as of year-end 2022, boasting a combined equity market capitalization of approximately $1.9 trillion. 


Despite overall growth during the past decades, REITs have largely struggled during 2023. The sector bounced back from large declines in 2020 at the height of the pandemic, but this year has hit the sector with new challenges. Last month, Fitch downgraded its U.S. REIT sector outlook for the year to “Deteriorating from Neutral, reflecting further tightening of commercial real estate (CRE) lending conditions stemming from the U.S. banking sector stress, as well as ongoing pressure on valuations and fundamentals from higher interest rates and macroeconomic headwinds, respectively.” 


REIT capital raising activity rose sharply in May and has trended higher than in 2022. Further, REITs have shifted from issuing common equity to debt. 


According to Matterhorn’s comprehensive M&A database, which harnesses AI to track current and historical deals, Terra Property Trust, Inc. is represented by law firm 

Alston & Bird LLP and financial adviser Raymond James & Associates, Inc. Western Asset Mortgage Capital Corporation is advised by Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, and financial adviser JMP Securities LLC.