As retail REIT stock prices continue to fall further from all-time peaks and many companies wrestle with debt coming due, is the sector becoming ripe for consolidation? In the first sign that the sector may be reconfiguring, letter sent last week from Equity One, Inc. to Ramco-Gershenson Properties Trust implies the two REITS are engaged in merger discussions. Analysts say the deal might make sense—depending on how much Equity One would have to pay for Ramco's 20-million-square-foot portfolio.

Talk of a potential deal heated up on March 25, when Farmington Hills, Mich.-based Ramco-Gershenson (NYSE: RPT) issued a statement that it was considering strategic and financial alternatives to increase shareholder value. Among possible strategies, the company cited financing and restructuring deals, asset sales and strategic transactions with third parties. It also disclosed it had received expressions of interest from third parties, including a letter from Equity One, a North Miami Beach, Fla.-based shopping center REIT (NYSE: EQY) with a 17.8-million-square-foot portfolio.

The move to consider alternatives might have been spurred by the fact that about 48 percent of Ramco's $670 million in long-term debt is scheduled to reach maturity within the next two years. Moreover, at the end of the day Monday, its stock was trading at $6.48 per share, down 73 percent from the 52-week high of $24.10 per share. The firm faces approximately $208 million in maturities in 2009 and another $127 million in maturities in 2010, putting it in a somewhat precarious financial position, according to Michael Magerman, senior vice president for the REIT sector with Realpoint, LLC, a Horsham, Pa.-based credit rating agency.

On the day following Ramco's announcement, Equity One sent a second letter to Dennis E. Gershenson, Ramco's president and CEO. The letter hinted at Ramco's need to deal with its short-term debt load and noted that a merger of the two companies might be the optimal solution. Equity One declined to comment on the dalliance between the two firms, referring inquiries to the text of the letter. Ramco-Gershenson did not return calls in time for the publication of this article.

At the time of the announcement, Equity One already owned 1,790,000 shares, or 9.63 percent, of Ramco-Gershenson's common stock. Today, Equity One's balance sheet remains relatively healthy, with a loan to value ratio of approximately 55 percent and less than $1 billion in total long-term debt. And this would seem to be an opportune time to buy, given Ramco's low valuation.

From a strategic viewpoint, a merger might make sense—Ramco-Gershenson assets, which are located in many of the same areas as Equity One's, would fit well within the latter's existing portfolio, says Joel Bloomer, a REIT analyst with Morningstar. But given the continuing freeze in the credit markets, an acquisition would be fraught with risk.

But buying Ramco would also force Equity One to take on $670 million in additional debt and possibly eat into its cash reserves, which at the end of last year totaled just $5.4 million, says Jason Lail, senior real estate analyst with SNL Financial LC, a Charlottesville, Va.-based research firm. (REITs rarely have high amounts of cash on the books because most of the money goes to pay shareholder dividends).

"The transaction would have to be financed at least partially through a credit facility and it might have to be entered as a joint venture," Lail notes.

The most likely candidate for the REIT's joint venture partner would be Gazit-Globe, Ltd., a publicly-traded Israeli real estate investment firm that owns more than 30 percent of Equity One's stock, according to Lail. As of December, the firm had more than $1 billion in cash reserves.

There might be another drawback to acquiring Ramco's portfolio, however, as so many of its assets are based in areas hard hit by the recession and feature large concentrations of big-box tenants, a sector most affected by the recent spate of retailer bankruptcies and liquidations, adds Magerman. About 48 percent of Ramco's centers are located in Michigan, 11 percent in Ohio and close to 8 percent in the South Florida region. That's why most analysts say the deal's viability will ultimately come down to pricing. If a portfolio's valuation is low enough, it might make sense to acquire it even if the assets carry a bit of risk.

"I am sure it's a tough call," says Magerman. "But it seems to me that almost any investment could be a good investment if it's cheap enough."

For its part, Ramco-Gershenson might be adopting what looks like a "poison pill" strategy to protect itself from a too low bid, says Lail. Along with its plan to consider financial and strategic alternatives, the company announced a limited duration shareholder rights plan. The plan states that if a person or group buys more than 15 percent of the company's outstanding shares, the remaining Ramco-Gershenson shareholders will have the right to purchase additional shares with a market value of twice the purchase price paid by the original bidder. The plan will remain in effect until March 25, 2010.