Hostile Takeover Activity Growing for REITs

This article is republished with permission from REITCafe.

Hostile takeovers are unusual among real estate investment trusts (REITs), so two large recently announced deals are drawing significant attention. REITs commonly adopt measures to avoid hostile takeovers, including “excess share” ownership restrictions that limit how much stock a single shareholder can own. They are designed to meet the Internal Revenue Service (IRS) restriction that prohibits five or fewer shareholders from owning more than 50 percent of a REIT’s shares, but also limit the ability of a shareholder to acquire enough stock to take over the company. The willingness of REIT managers to undertake these transactions reflects market conditions.

Simon Property Group (SPG) garnered headlines with its offer to acquire Macerich (MAC). The bid was expected, because Simon has been accumulating shares in the smaller regional mall REIT. In November, SPG had reported ownership of 5.71 million shares, or 3.6 percent, of MAC. The present offer is for $91 per share and includes the assumption of $6.4 billion of existing debt. It values the company at $22.4 billion, but investors seem to expect the price to rise higher before a transaction is completed.

The acquisition of Macerich offers Simon Property Group the opportunity to move the needle on earnings. With SPG’s market cap totaling more than $60 billion, only a large portfolio transaction like this could accomplish that goal.

However, Macerich’s excess share ownership restriction limits a shareholder’s ability to accumulate more than a 5 percent stake in the company without board approval. In addition, like many REITs, Macerich is incorporated in Maryland, where business-friendly laws could pose obstacles to a takeover.

In another deal, Gaming and Leisure Properties (GLPI), which was formed in 2013 when Penn National Gaming spun off its real estate assets, made a $4.1 billion offer to buy Pinnacle Entertainment’s real estate assets. Pinnacle had announced a plan in November to separate its operating and real estate assets into two publicly traded companies, including a REIT that would hold its real estate assets. Pinnacle is monetizing its assets by spinning off its real estate and also adopting the REIT structure to avoid taxes. For GLPI, the acquisition would grow and diversify its portfolio.

News of the offer drove up the price of Pinnacle’s shares by 20 percent on Monday, March 9. GLPI’s shares also rose. Despite the premium offered by GLPI, some believe that the offer values Pinnacle’s real estate assets at a significant discount to other triple-net assets, which have been popular with investors and have experienced strong valuations in recent years.

These proposed takeovers reflect the current market conditions where REITs have cash and can borrow at current low interest rates, making it a good time for acquisitions. In addition, real estate market fundamentals continue to strengthen, creating upside potential for buyers. Because both transactions are complicated, their completion is far from certain. What is more certain is the likelihood of more mergers and acquisitions among REITs.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.