When Centro Properties Group, a publicly traded Australian company, acquired New Plan Excel Realty Trust for $6.2 billion in February, it sent a message to the real estate investment world that REITs with weak growth prospects are vulnerable. Paying a fat 12.9% premium to the share price, a cash-rich company picked up a REIT that was a prime acquisition target, says Rich Moore, an analyst with RBC Capital Marks Corp.

“In today's competitive climate, small companies and companies with inferior strategies are going to be swallowed up,” Moore says. “The strong companies are getting stronger and consolidating the weaker ones.”

Centro paid a capitalization rate — initial yield — of 5.6% for the purchase, estimates Moore. He and other analysts were surprised at the yield, figuring that New Plan should have a cap rate of more than 6%. The hefty price is likely to put upward pressure on shares of other shopping center REITs, say analysts. Compared to competing REIT portfolios, New Plan's holdings were considered mediocre because some of the properties are in states with low population growth, such as Ohio and Michigan.

Before the deal, the consensus was that competing REITs, including Kimco Realty Corp. and Weingarten Realty Investors, owned higher-quality shopping centers and therefore should command higher share prices. “With this transaction, people will have to change their outlook on the prices for other shopping center REITs,” says Shawn Barnes, an Edward Jones analyst.

Market reaction to the deal was muted. After the acquisition announcement, New Plan shares rose from below $30 to around $33, near the purchase price. Shares of Centro, which trades on the Australian Stock Exchange, dropped from 10 Australian dollars (about $8 U.S.) to around 9 Australian dollars. The deal could close as early as this month.

For Centro, which owns and manages retail properties in Australia, New Plan was the third purchase of a U.S. neighborhood shopping center REIT. Last fall, Centro bought Heritage Property Investment Trust for $3.2 billion, and purchased Kramont Realty Trust for $1.3 billion in 2005. The two earlier purchases were regional businesses, while New Plan operates in 38 states. “By combining the three companies, Centro now can create a national operation,” says Moore.

Shopping center companies are particularly appealing to pension funds and other conservative investors that have a stake in Centro, says Barnes. “Community shopping centers tend to be stable because they are often anchored by grocery and drug stores with long leases,” he explains. “Office buildings can suddenly suffer vacancies, but grocery stores tend to be busy — even in recessions.”

Lately, foreign investors and private equity groups have been the main acquirers of REITs. This year, Simon Property Group and hedge fund Farrallon Capital Management LLC agreed to buy regional mall REIT The Mills Corp. for $9.5 billion in cash and assumed debt. In addition, private equity giant Blackstone Group announced it would pay $38 billion for Equity Office Properties.

REITs posted a total return of 34.4% in 2006, according to the FTSE NAREIT U.S. Real Estate Index. Can the bull market last? Savvy investors think so, says Lowell Bolken, associate portfolio manager of Advantus Capital Management. “Lots of capital is still sitting on the sidelines, ready to invest.”