Wachtell Issues Year-End REIT Summary

REIT deal activity in 2013 was robust and unusually varied, with the principal themes of the transactions we saw being (i) acquisitions by an increasingly dominant class of large cap REITs as they consolidate their sectors, (ii) migration of corporate, non-traded and previously-LBO’d real estate into the public REIT space through M&A and IPOs, (iii) spin-offs, and (iv) increased pressure from activists.  We note below a few observations on 2013, and some thoughts about trends for 2014:

Growth.  While the drop in REIT valuations will likely slow down the pace of activity, there is a healthy pipeline of transactions that will further grow the public REIT market, probably well beyond its current all-time high of around $1 trillion in aggregate enterprise value.  As long as public valuations hold steady or rise, we expect to see more non-traded REITs list or sell to public REITs, more transfers of corporate real estate into REITs, and a continuing boomerang of privatized portfolios back to the REIT market.


Going Private Transactions.  At the same time, particularly in the case of REITs and industry sectors that continue to trade below private valuations (and that gap is widening in several cases), we expect some going private transactions.  The gating issues will be confidence in the recovery and the target’s projections, and the availability of enough low-cost debt to make the numbers work.


Spin-offs.  We saw more REIT spins than usual in the last year, and some of the drivers may continue to apply in 2014.  The trend to separate out the different businesses of existing diversified REITs, in order to enhance focus and valuations, has likely just begun.


Voting OPUs.  OP Unitholders have finally started getting the vote, and we expect the trend to continue.  OPUs have long been unfairly disenfranchised in REITland, but the view that the tax benefits of an UPREIT are somehow inconsistent with the right to vote has finally been exposed as lacking in logic or legal basis and being rather un-American. 


Activists.  Activists were unusually active in REITland in 2013, working overtime to spread the short-termism virus.  Pressure from both activist and certain institutional shareholders and their growing roster of proxies in the media, academy and government has, in some cases, begun to stifle entrepreneurship and long-term value creation in favor of short-term thinking.  Well-functioning boards should prepare by understanding the landscape and the nature of attacks they may face and by working with management to encourage appropriate risk-taking and entrepreneurship, including in the M&A arena, if the long-term interests of the REIT and its investors are to be served, sometimes even at the temporary cost of short-term performance.


Executive Compensation.  Executive compensation will continue to be a hot issue, rightly on occasion, but often wrongly.  The continuing dichotomy between the portfolio managers with investment authority and deep knowledge of a company’s performance and the role of management, and the separate governance “experts,” including the proxy advisory services, without responsibility for investment choices or results, presents fertile ground for non-optimal investment stewardship and voting decisions.  Boards and management teams need to understand the governance complex and engage with governance decision-makers proactively in order to avoid complaint and formulaic applications of mechanical voting principles and measurement metrics.