Wachtell Lipton: REIT M&A in 2024: The Top 10

REIT M&A volume was relatively robust in 2023 despite the challenging environment. We expect increased activity in 2024, mostly stock-for-stock deals but perhaps also an upswing in cash deals, if interest rates and the capital markets cooperate. The benefits of scale and other drivers of continued consolidation are perhaps more powerful than ever, and gaps between seller- and buyer-valuations are narrowing. The complicated and unpredictable cocktail of rates, multi- ples and yields, and the influence of the macro and geopolitical environments, are of course the wild card, but we are cautiously optimistic.

We’ve highlighted below our top ten issues for REIT boards and management teams to consider as they refine their thinking around M&A and governance for 2024:

Stock-for-Stock Deals. Relative value deals bypass thorny valuation discussions and will remain the go-to strategy until capital markets, post-pandemic re-alignment and transac- tion volumes stabilize.
Cash Deals. It’s all about rates. Period. But the trend – today – is positive.
Spinoffs. Disrupted REITs often think about good-REIT/bad-REIT separations. Easier said than done, and often stymied by debt covenants and questions about who wants to own the stub.
NAVs. REITs considering a major transaction would do well to look closely at their in- ternal valuations, or NAVs, and if appropriate revise them to reflect the current market. Historic, unrealistic NAVs can create unnecessary impediments to deals, and can increase and complexify litigation risk.
Digitalization. AI should be added to (the top of) the usual list of trends to keep an eye on, both defensively and, as important, because of the opportunities that might be created. Just ask ChatGPT.
Risk Management. Our current thinking and advice, in our recent memo.
Restructurings. With continued weakness in certain sectors and regional economic chal- lenges combined with looming maturities in some cases, expect to see more restructur- ings. Those with weaker, un-laddered balance sheets will be in defensive mode and those with stronger will be poised to capitalize on the opportunities.
Governance. Our updated list of key issues for boards to keep an eye on can be found here, with succession planning, board refreshment, risk management and diversity high on the list in the current environment.
M&A Architecture. No size fits all, but two-tier no shops, targeted pre-signing pro- cesses, rights to shed assets or spin prior to closing, and fixed exchange ratios remain popular.
Activism. Activism continues to be a force at any size level, and it is important to refresh on preparedness, be your own activist, keep an eye on the bigger picture, and stay nimble. Our latest memo on activism defense can be found here.

We remain bullish on the publicly-traded REIT model, which has now been tested

through financial crises, pandemics and other trials. Liquid real estate’s advantages have re- sulted in a vibrant $1.5 trillion market for REIT stocks and a well-functioning market for corpo- rate control of real estate. We expect more growth and consolidation, punctuated by take-pri- vates (interest rates and some stability in valuations permitting), spins and debt-driven restructur- ings as the market continues to evolve.

Adam O. Emmerich

Jodi Schwartz

David K. Lam

Victor Goldfeld

Viktor Sapezhnikov

Adam J. Shapiro

Steven R. Green

Robin Panovka

David E. Shapiro

Karessa L. Cain

Tijana J. Dvornic

Mark A. Stagliano

Erica E. Aho