Transcript International Bar Association Conference Real Estate

International Bar Association Conference
Real Estate Investment Trusts
Panel 4 – REIT Growth and Expansion
17 October 2007
Singapore – Capital Markets Forum
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Market Conditions
“It’s almost autumn and what could be better than a fall sale? In the
markdown aisle are publicly traded real estate investment trusts. Like
most of the public market, REITs have been hammered during this
frenzy over subprime mortgage defaults and the so-called credit
crunch … The reality is … just about every REIT is finding it
impossible to make an accretive acquisition, placing most of them in a
holding pattern.” G. Marr, Fin. Post, Aug. 27/07
“The private equity party may be over, but that news hasn’t yet made it
to the real estate buyout funds, which are currently seeking $105billion (U.S.) in new capital, a six-fold increase from January, 2006…
This contrasts with the rest of the private equity market, which is
expected to raise slightly less this year than it did in 2006 …” Private
Equity Intelligence, October, 2007
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REIT Growth and Expansion – Discussion Points
 REIT M&A Activity
 REIT Growth and Expansion
 Cross-Border Issues
 Defensive Measures and Responses unique to REITs and other
forms of Income Trusts
 Going Private issues
 Tax considerations in acquiring REITs and REIT Property Portfolios
3
Global REIT Growth
 Acquisition of REITs has been active recently in the U.S., Canada and
Europe. Economic fundamentals:
⇒ Access to cheap capital
⇒ Cash rich private equity funds
 Of the investors surveyed in the study, 78 per cent said they plan to
increase their allocations to private equity real estate in the mid to long
term. Private Equity Intelligence, Oct/07
⇒ Targets may prefer private equity capital due to lower regulatory compliance
costs
⇒ But, tightening of credit markets slowing growth activity
 REIT growth and related consolidation activity tends to be about yield/DPU,
accretive considerations, potential for capital growth and diversification
 Synergies arising from entity acquisitions potentially less obvious than for
other businesses – generally focused on reducing G&A Expenses
4
Global REIT Growth (cont’d)
 Broad-based global consolidation trends a factor
 Accretive transactions may be more readily identifiable in the form of
individual asset acquisitions
 Scale viewed as a contributing factor for organic growth2
 Global reach of REITs increasingly a priority – diversify and reduce
risk
5
Global REIT Growth ( cont’d)
 REIT-to-REIT acquisitions may be negatively affected by REIT
foreign ownership rules in some countries
 REIT growth and expansion through portfolio acquisitions is often
“structured” to enable sellers to achieve positive tax results
 Potential for sponsorship of real estate funds and related
management fees drawing growth and expansion into managing
⇒ ProLogis in Mexico, Asia and Europe
⇒ AMB in Asia and Europe
⇒ Archstone-Smith in Germany
6
Global REIT Growth (cont’d)
 REITS spun out of larger business can create immediate value –
⇒ higher multiples and future liquidity pipeline
⇒ OMERS creation of Primaris REIT
⇒ Fairmont creation of Legacy Hotel REIT
Institutional investors including pension funds have been drawn to the
realty asset class including REIT owned and managed properties as
part of the quest for stable returns to offset their long-term
liabilities… (Private Equity Intelligence Oct/07)
 Significant untapped private equity commitments in the pipeline
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Survey of M&A REIT Activity
United States
 Blackstone $39B acquisition of EOP (February 2007)
⇒ Bidding war (deal initially signed in November 2006)
⇒ Purchase price increased by $3B
⇒ Properties “flipped” at or near closing
 Mission West Properties $1.8B transaction (July 2007)
⇒ U.S. private equity buyer
⇒ Agreement negotiated and lending commitment in place
⇒ Lenders walked from deal
 Declining numbers of REITs due to consolidation
8
Survey of REIT M&A Activity (cont’d)
Canada
 Canadian Markets – 36 REITs with most having been formed since
1993
 Canadian REITs - $15B transaction value so far in 20072 at
aggressive NAV CAP rates and cash flow multiples
 Canadian M&A activity has been largely focused on consolidation of
Canadian REITs although GE has been a major buyer of REIT real
estate underlying assets
 Acquisitions have tended to be dependent on AFFO multiples,
accretion objections and limited synergies
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Canadian REIT M&A Market Overview
⇒ An active M&A environment for Canadian REITs (~$15 billion in Transaction
Value since beginning of 2007) has had a positive impact on valuations
Transaction
acquisition of
aquisition of
acquisition of
acquisition of
acquisition of
acquisition of
acquisition of
Date Announced/
Closing Date
8/14/2007 /
Pending
8/1/2007 /
Pending
7/12/2007 /
09/13/07
1/12/2007 /
04/26/07
12/01/2006 /
05/22/2007
10/5/2006 /
2/2/2007
8/30/2006 /
1/26/2007
Transaction
Value
US$1.4 Billion
$1.2 Billion
$2.5 Billion
$2.3 Billion
$1.0 Billion
$2.8 Billion
$3.3 Billion
Bid Price
US$9.75
$19.10
$12.60
$16.50
$18.60
$8.35
$30.00
Price Prior to
Announcement
US$9.30
$14.26
$12.00
$11.05
$14.89
$6.79
$25.45
Bid Premium Over
Prior Day Price
4.8%
33.9%
5.0%
49.3%
24.9%
23.0%
17.9%
Implied Cap Rate
at Bid Price(1)
7.5%
6.7%
6.5%
5.8%
6.8%
8.4%
6.0%
FFO Multiple(1,2)
10.5x
12.2x
12.7x
22.0x
13.6x
12.3x
15.2x
AFFO Multiple(1,2)
16.0x
15.2x
19.6x
22.6x
18.4x
15.8x
18.3x
(1)
Implied cap rates and FFO/AFFO multiples are based on RBC research estimates, with the exception of IPC and Legacy, whose estimates are consensus street estimates
(2)
Multiples are based on 1-year forward estimates
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Survey of REIT M&A Activity (cont’d)
Singapore
 18 REITs (only recently permitted in Singapore) with an aggregate
portfolio of $8.5B+ have emerged since 2002
 No consolidation or takeover activity yet
 Strong annual growth performance attracting investors and making
up values
 REIT dividends are taxed with non-residents paying about 10%
 CapitaMall Trust and CapitaCommercial Trust recently acquired
Raffles City for S$ 2B. Suntec and K-REIT buying 33% interest in
One Raffles Quay
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Survey of REIT M&A Activity (cont’d)
Australian Market
 69 REITs with combined market capitalisation of US$115 Bn
 Consolidation and takeover activity
 significant consolidation since early 1990s driven by desire for scale (to
facilitate further growth and stock liquidity)
 both takeover bids and schemes of arrangement possible (takeover
laws apply unlike some jurisdictions)
 numerous transactions, including hostile and contested and with/without
payment for management rights
 some recent high profile transactions (Macquarie Prologis privatisation;
Centro trust merger; Multiplex takeover by Brookfield; Morgan Stanley
takeover of Investa)
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Survey of REIT M&A Activity (cont’d)
Australian Market (cont’d)
 Significant level of offshore acquisitions by Australian REITs:
⇒ particularly US and more recently Europe and Japan (now 40% of REIT asset
base)
⇒ driven by scarcity of local investment grade property and strong supply of capital
from compulsory pension scheme
 Move to set up funds management platforms/subsidiary wholesale funds:
⇒ allows REIT to spin-off assets which may not meet investment profile (eg,
mature or new higher risk/return assets) to institutional investors
⇒ gives REIT alternative source of funds, allowing improved ROE for REIT, with
scale maintained and additional fee income source
 Increase in foreign interest in Australian REITs including advent of private
equity takeovers (Multiplex; Investa)
Hong Kong
 7 REITs with market capitalisation of US$8.7 Bn
⇒ No consolidation activity to date.
Takeover provisions do not apply (with some
resulting vulnerability for investors/managers)
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Consolidation and Global Expansion by Australian LPTs
 Driven in part by asset scarcity, there has been ongoing consolidation activity amongst Australian Listed
Property Trusts (“LPTs”).3 Australian LPTs are now becoming more active on the global front.
Global Acquisitions by Australian LPTs
Date
Target
Acquirer
Sep-07
Sapporo Ai
Babcock & Brown Japan
Y28,000
Retail
Apr-07
New Plan Excel Realty
Centro Properties
U$6,800
Retail
Sep-06
BNP Residential Properties Inc.
Babcock & Brown
US$778
Residential
Aug-06
Summit REIT Canada
ING Industrial Fund
US$3,367
Industrial
Heritage Property Investment Trust
Centro Properties Group
US$3,204
Retail
Mar-05
Leisureworld Inc. (U.S. and Canada)
Macquarie Bank Limited
C$528
Dec-04
Merry Hill Shopping Centre
Westfield Holdings Limited
Jul-06
Deal Size (MM)
GBP$3,200
Description
Healthcare / Seniors
Retail
Consolidation of Australian LPTs
Date
Target
Acquirer
Multiplex
Brookfield Asset Management
Aug-07
Centro Retail and Centro Shopping America
Merger
Apr-07
Macquarie ProLogis
ProLogis
A$1,240
Industrial
Aug-07
Investa Property Group
Morgan Stanley
A$6,600
Office
Jan-05
James Fielding Group
Mirvac Group
AU$636
Diversified
DB Rreef Trust
AU$4,989
Diversified
Jul-07
(1)
Deal Size (MM)
A$7,300
A$10,000
Description
diversified
Retail
Oct-04
Various Deutsche Trusts
Sep-04
Ronin Property Group
Multiplex Group
AU$1,500
Office Buildings
Dec-04
Various Westfield Trusts (2)
Westfield Holdings Limited
AU$6,476
Retail
Principal America Office
Macquarie Office Trust
Jul-04
AU$762
US Office Buildings
1. Includes Deutsche Diversified Trust, Deutsche Industrial Trust & Deutsche Office Trust
2. Includes Westfield Holdings Limited, Westfield Trust & Westfield America Trust
3. Slide provided by Bank of Canada
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Sources: Capital IQ, Bloomberg, Company press releases
Survey of M&A REIT Activity
Benelux
 Lease Invest Real Estate’s acquisition of Dexia Immo Lux (March 2006)
⇒ Private transaction (transfer of controlling interest (51,13 %) by Dexia and
Ethias)
⇒ Public take over bid
⇒ Squeeze Out
 Launch of Government Property Sicav aborted (end 2006)
⇒ Public procurement issues – Cofinimmo / Befimmo
⇒ Ended up with sale to Befimmo (capital increase to finance
 Take over battle for Immo Croissance (Luxembourg) (June/July 2007)
⇒ Voluntary take over bid by Cofinimmo
⇒ Higher bid by Leaseinvest Real Estate
⇒ Knock out bid by Baugur (Iceland)
 Various smaller Reits : consolidation to be expected (see also
Unibail/Rodamco deal) or otherwise easy take over targets ?
15
REIT Growth – Individual Property Acquisitions
Belgium
 Access to capital markets to raise cash equity to purchase property
portfolios : impracticable
⇒ Need to respect pre-emptive rights of existing shareholders (no lifting)
 Acquisitions of individual properties through contribution in kind
⇒ Impediments under Corporate Law (pricing of shares to be issued)
⇒ Tax considerations
 Net result : REITs tend to acquire additional property portfolios through
mergers or split (issuance of new shares)
⇒ No roll over for vendors but in case of mergers/split (corporate) vendors
benefit from exit tax regime of 16,995 % (final taxation)
⇒ prospectus (exemption) – block trading (underwriting agreement)
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Going Private Considerations
Belgium (cont’d)
 Pre Reits : real estate certificates : take over rules did not apply (law now
changed to equally apply to them)
 Reits structured as corporates :
⇒ take over regulations (European Take Over Directive) applicable –
⇒ 30 % threshold triggers take over obligation (grandfathering)
⇒ Difficult to “lock in” the deal (issues around “irrevocables”)
 Issues with respect to acquiring control over Reit structured as CVA
(Commanditaire Vennootschap op Aandelen/Société en Commandite par
Actions)
 Squeeze out vs. Right for minority shareholders to request to be bought out
(under new take over regulations) – 95 %
 Insider dealing issues
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Takeover Defenses
Belgium
 Structural defenses
⇒ CVA-structure : need to pre-agree with shareholders of General Partner
⇒ NV-structure : right to designate majority of directors attached to
specific class of shares
 Traditional take over defenses
⇒ Approval rights (tilting share)
⇒ Need to have prior shareholder approval in respect poison pill type
structure (to be made public)
⇒ Opt in/Opt out under Take over Directive
 Consequences of loss of Reits status
⇒ Free float requirement
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Transaction Failures - MAC Clauses
 Using “MAC” clauses as closing condition
⇒ Does not generally cover
˿ General adverse economic conditions or matters affecting relevant industry
˿ Reaction to announcement of transaction
˿ Military actions/Acts of terrorism/Changes in law
⇒ Exception where disproportionate impact on party in question
⇒ Typically viewed as protecting against “unknown events that substantially
threaten the overall earnings potential of the target in a durationallysignificant manner”3
⇒ Burden to prove is on party asserting the clause
⇒ KKR/Goldman aborted acquisition of Harman
⇒ Genesco
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Cross-Border Activity
 ProLogis acquisition of Macquarie ProLogis Trust (Australia) and
Parkridge (UK)
 Ventas acquisition of Sunrise Senior Living (U.S. to Canada)
 ING Real Estate acquisition of Summit REIT (Australia to Canada)
 Limitations on cross-border activity include restrictions in certain
countries on REITs investing outside of the local jurisdiction
 Fund structures popular – ProLogis
⇒ REIT asset management strategy
20
Limitations - Future M&A Activity for REITS
 Recent slowdown
⇒ Tightening credit markets following sub-prime mortgage crisis
⇒ Limited access to leveraged financing and high yield markets as lenders
retrench
⇒ Asset-backed commercial paper crisis in certain countries
 Significant backlog of committed bank bridge loans
 Compression of cap rates and higher borrowing costs are slowing
acquisition activities in the short-term
⇒ Creates opportunities for aggressive buyers
⇒ May not affect REIT-to-REIT transactions
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REIT Growth – Individual Property Acquisitions
 REITs tend to buy additional property portfolios versus other REITs
⇒ Tax considerations
⇒ Can often use paper for transactions and create a rollover tax structure for
vendors of real property assets
 REITs often also access capital markets to raise cash equity to purchase
property portfolios
⇒ Tightening capital markets have substantially increased cost of capital
⇒ REITs turning to other sources of capital such as retained interest financings
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REIT Growth – Individual Property Acquisitions (cont’d)
 Retained interest financings4
⇒ REIT subsidiary issues securities in exchange for property portfolio
˿ Securities exchangeable for units of parent public REIT
˿ Preserves tax deferral leaving taxable event to the holders of the exchangeable
securities
˿ Sometimes accompanied by issuance of special voting units or rights
 Retained interests may impact on REIT-to-REIT M&A activity
⇒ Often unclear with respect to ability to squeeze-out holders of such
securities
⇒ Rights of holders are generally governed by partnership agreement of
subsidiary entity that may contain prohibitions or penalties on change of
control
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Structuring REIT-to-REIT Acquisitions
 US - statutory mergers are typical although tender offers may
increase in popularity due to recent clarification of the law
 Canada – takeover bid or tender offer route available
⇒ No statutory compulsory acquisition or statutory amalgamation
infrastructure available for REIT trusts
⇒ Acquiring 100% somewhat more difficult5
 Roll-over tax treatment available for a REIT-to-REIT consolidations
in countries like Canada and US
 Cross-border acquisitions can attract withholding tax on distributions
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Structuring REIT-to-REIT Acquisitions
 Issues with respect to collapsing trusts after acquisition
⇒ Recent
purchase of Legacy REIT take-over bid from to Caisse de
dêpot and its partner and subsequent wind-up of trust
 Often related party disclosure and compliance issues around
external management contracts
⇒ Need to treat all selling unitholders equally or identically
⇒ REIT external management arrangements can complicate transactions
˿ payments to terminate
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Going Private Considerations
 For REITs structured as trusts, may be no statutory squeeze-out provisions
unless incorporated in Declaration of Trust
 Absent DOT squeeze-out provisions, other methods may be available such as a
consent solicitation made in conjunction with a takeover bid entitling the acquiror
to vote acquired units to amend DOT to enable a redemption
 Unitholders that do not tender may have no dissent and appraisal rights
 Going private transactions may attract additional regulatory requirements
including valuation and majority of minority votes in certain countries4
 It may be possible to avoid acquiring REIT entity by acquiring partnership
interests or shares of subsidiaries leaving the REIT with cash to distribute
⇒ This type of a transaction will typically require approval of unitholders
⇒ Macquarie Infrastructure Partners acquisition of Halterm6
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Tax Considerations –REIT Growth and Consolidation
Transactions
 Tax deferred transaction structuring where both parties to the transaction
are REITS
 Unit deals and retained interest structures on property portfolio
transactions to preserve tax deferrals and facilitate portfolio acquisitions
 Acquisitions by tax exempt pension plans
 [NTD: Tax impact to partnerships – potential conflict with interest to
public shareholders]
 ?? Scott/Pieter
 ??
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Takeover Defenses
 Use of shareholder rights plans or poison pills
 Australian LPT’s invested in real estate
⇒ Change in control of responsible entity
 Poison management contract structures
⇒ Termination fees on change of control
⇒ Termination rights on change of control
 In non-corporate jurisdictions, DOT terms may well restrict or affect
the likely success of planned takeover bids or hostile transactions
⇒ No compulsory acquisition provisions for non-tendering unitholders
⇒ Restrictions on consent solicitations
28
Takeover Defenses
 Convertible debt change of control acceleration and premium for
early repayment
 Lack of iron clad guarantees that unitholders do not bear any risk of
liability
 Shareholder protection statutes
29
REIT – M&A – Expansion & Growth – U.S. Tax Considerations
 Use of UPREIT Structures
 “Going Private” Transactions
⇒ Taxable Forward Merger of REIT into Acquiring Corporation
30
REIT – M&A – Cross-Border Tax Considerations

P/E in foreign country where real estate assets situated --- exposure to direct
corporate income tax on rental income and gains on sales of real estate

Withholding taxes and branch profits taxes

Use of intermediate holding companies (foreign or domestic such as taxable
REIT subsidiary) and “disregarded entities”

Exemption from tax in jurisdiction where REIT formed on sales of real estate
situated outside of such jurisdiction or intermediate holding companies
incorporated outside of such jurisdiction to hold foreign real estate

Step-up in basis of assets
31
REIT – M&A – Cross Border Tax Considerations
 Transfer, VAT taxes, stamp taxes etc.
*
*
*
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Endnotes
1.
RBC Dominion Securities, September 17, 2007.
2.
RBC Dominion Securities, September 17, 2007.
3.
IBP v. Tyson
4.
Sometimes called “unit deals” for a variety of reasons.
5.
In Canada, for example, amending the Declaration of Trust to permit redemption of unitholders not tendering to a takeover bid would be
considered to be a going private transaction requiring special protections including a majority of the minority vote. The holding of a meeting
may be supplanted by written resolution in certain circumstances which may require or include regulatory approval in countries like Canada.
6.
See Reay, Blake, Cassels & Graydon, Innovative Financing, Federated Press, 2007.
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