Magazine article Real Estate Issues


Magazine article Real Estate Issues


Article excerpt


Talk of taking REITs private continues despite the recent rebound in equity REIT stocks. Many smaller REITs have been left out of the multiple expansion being enjoyed by their larger peers and continue to explore strategic alternatives. While the renewed strength of the large cap REITs increases the possibility of selling out to a large competitor (who now can more easily manage a stock-for-stock transaction or perhaps even a cash deal), the option of going private is often an attractive alternative, particularly because of the continued healthy valuations in the private real estate markets. And from the perspective of financing sources, the gap between the Wall Street valuations for REITs and the private market values of the assets held by REITs presents an obvious opportunity. These dynamics have resulted in a number of successful LBO transactions in the REIT sector, and will likely result in additional activity.

While the idea of taking a REIT private is relatively simple, execution is often complex, in that it involves weaving through a number of business andm legal constraints. Recent LBO activity in the REIT market and broader experience from other sectors provide a number of useful guidelines which should be kept in mind when evaluating a potential going private transaction involving a REIT:

* Pricing Considerations.

It is important to understand at the outset that procedural constraints (outlined below), competition from other bidders, the value demanded by shareholders as an inducement to approve a transaction, and transaction expenses typically will push up the cost of the deal to a number which is not too far off from real value. Bargain basement bids (measured by real value, not just current stock price) usually attract competition, litigation, and other scrutiny, and are unlikely to succeed in their initial form.

* Inability to Control Outcome.

Once the LBO process is initiated, the process often takes on a life of its own and the initiators (management and its financing sources) will likely lose control and be unable to assure a particular outcome. Management-led buy-outs typically result in auctions in which third-party bidders have the opportunity to compete with the insider group on a "level playing field." Also, importantly, the ultimate decision of whether to consummate any particular transaction and with whom generally rests in the hands of the shareholders.

* Managing Conflicts of Interest. …

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