Yearly Archives: 2018

We offer some quick observations from recent REIT deal activity, with a more fulsome discussion in our attached updated playbook:

1. N A V are the three most misunderstood letters in the REIT lexicon, often viewed doubly incorrectly as both a floor for what a sale process should yield, and an indicator of opportunities for activists. A REIT’s so-called NAV is merely an estimate (best viewed as a range), is backward looking, typically fails to account for frictional costs, and may, in many cases, not reflect fundamental value.
2. Activist pressure, or its threat, is often a driver, but should never be allowed to dictate results, particularly where short-termism is at play.
3. Frictional costs can vary widely from deal to deal, depending on tax protection agreements, debt breakage, transfer taxes, severance, litigation and other issues. This should be top of the list in due diligence.
4. Auction bidder pools vary in depth depending on the asset class and complexity involved, with some strategic buyers exercising caution, and with the larger PE firms and sovereign funds focusing rather selectively, particularly in light of unusual uncertainty around underlying value in certain asset classes. Most PE firms and sovereign funds are unwilling or unable to take down the larger or even mid-size REITs without clubbing, which obviously adds a layer of complexity and execution risk.
5. Post-deal market checks can be an attractive tool for maximizing value, providing the benefits of an “auction with a floor.” A no-shop coupled with a two-tiered break fee (low for an initial period and then climbing to market) is sometimes a helpful compromise between go-shops and high-break-fee no-shops. Negotiating the right balance of deal protections while preserving the ability to fulfill fiduciary duties is especially important as topping bids are increasingly considered and made.
6. Deal litigation continues to be largely inevitable, but should not be allowed to wag the dog. If a process is properly managed, the courts will afford boards wide latitude to determine how best to maximize shareholder value, with litigation/settlement costs controlled and kept to a minimum.
7. Executive retention and termination protection issues should be considered early in the process, preferably on a clear day.

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