International Bar Association Conference Real Estate Investment Trusts
International Bar Association Conference Real Estate Investment Trusts Panel 4 – REIT Growth and Expansion 17 October 2007 Singapore – Capital Markets Forum tdo-corp 7256234 v 1
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 $105 billion (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 2
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 growth 2 § 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 ⇒ Pro. Logis 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 7
Survey of M&A REIT Activity United States § Blackstone $39 B acquisition of EOP (February 2007) ⇒ Bidding war (deal initially signed in November 2006) ⇒ Purchase price increased by $3 B ⇒ Properties “flipped” at or near closing § Mission West Properties $1. 8 B 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 - $15 B 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 9
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 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. 5 x 12. 2 x 12. 7 x 22. 0 x 13. 6 x 12. 3 x 15. 2 x AFFO Multiple(1, 2) 16. 0 x 15. 2 x 19. 6 x 22. 6 x 18. 4 x 15. 8 x 18. 3 x (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 10
Survey of REIT M&A Activity (cont’d) Singapore § 18 REITs (only recently permitted in Singapore) with an aggregate portfolio of $8. 5 B+ have emerged since 2002 § No consolidation or takeover activity yet § Strong annual growth performance attracting investors and making up values § REIT dividends are taxed with non-residents paying about 10% § Capita. Mall Trust and Capita. Commercial Trust recently acquired Raffles City for S$ 2 B. Suntec and K-REIT buying 33% interest in One Raffles Quay 11
Survey of REIT M&A Activity (cont’d) Australian Market § 69 REITs with combined market capitalisation of US$115 Bn § Consolidation and takeover activity Øsignificant consolidation since early 1990 s driven by desire for scale (to facilitate further growth and stock liquidity) Øboth takeover bids and schemes of arrangement possible (takeover laws apply unlike some jurisdictions) Ønumerous transactions, including hostile and contested and with/without payment for management rights Øsome recent high profile transactions (Macquarie Prologis privatisation; Centro trust merger; Multiplex takeover by Brookfield; Morgan Stanley takeover of Investa) 12
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) 13
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 Y 28, 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 Pro. Logis 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 Oct-04 Various Deutsche Trusts DB Rreef Trust AU$4, 989 Diversified 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-07 Jul-04 (1) Deal Size (MM) A$7, 300 A$10, 000 AU$762 Description diversified Retail 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 Sources: Capital IQ, Bloomberg, Company press releases 14
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) 16
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 17
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 18
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 19
Cross-Border Activity § Pro. Logis acquisition of Macquarie Pro. Logis 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 – Pro. Logis ⇒ 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 21
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 22
REIT Growth – Individual Property Acquisitions (cont’d) § Retained interest financings 4 ⇒ 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 23
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 difficult 5 § 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 24
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 25
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 countries 4 § 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 Halterm 6 26
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 § ? ? 27
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. * * * 32
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. 33
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