The review of strategic alternatives can be a daunting task even for the most seasoned executives and directors of real estate companies and real estate investment trusts. This is particularly true in today’s real estate environment in which tax reform, concerns regarding the current stage of the real estate cycle, and political turmoil all must be taken into account. This is the third piece in a five-month series of the K&S REIT Advisor that provides a high-level overview of the advantages and disadvantages of individual strategic alternatives for private real estate portfolios. This month’s REIT Advisor focuses on IPO transactions.
The initial public offering transaction is often viewed as the pinnacle of success for a real estate company. In addition to the benefits of branding and other marketing exposure for an issuer in connection with an initial public offering, an IPO process offers the following additional benefits:
- Roll Up Opportunities. Moving to a public company platform permits a holder of an otherwise disparate portfolio to consolidate that portfolio. Consolidation of the portfolio offers an opportunity for cost savings, broader control over the real estate in the portfolio and streamlined messaging to the investment community and tenants/clients of the company.
- Access to Capital Markets. Access to capital markets for a formerly private portfolio is a significant benefit of becoming a public company. In addition to the equity markets, public REITs generally enjoy broader access to debt capital markets as well, including more flexibility in structuring/terms for securities issuances.
- Liquidity Opportunities for Existing Investors. Holders of shares in publicly traded companies have opportunities for increased liquidity through the public markets. Existing investors in companies seeking an IPO may negotiate for demand and piggyback registration rights as part of the transaction in order to further enhance these opportunities.
- Acquisition Currency. A public company enjoys the added benefit of having its own currency in connection with potential acquisition transactions – shares of its common stock and/or partnership units. The opportunity to close acquisitions through equity issuances enhances the ability of an owner of real estate to become a consolidator in its investment strategy.
While the public offering process is appealing for a number of reasons, there are many considerations that should be taken into account prior to embarking on a public offering.
- More Scrutiny. Public companies are subject to scrutiny from investors, analysts, and others that can be more intense than the scrutiny generally faced by private companies. The company will be expected to meet or exceed quarter-to-quarter performance expectations with little room for error. Any miss can be harshly received by these constituents.
- Activists. As outlined in this edition of the REIT Advisor, the landscape for public REITs has changed significantly in the last several years with the rise of activist hedge funds in the REIT space. These activists are more comfortable with REIT structures and understand the financial structuring of the industry.
- Regulation. The public company demands of meeting financial and other reporting obligations are significantly higher than those imposed on private companies. SEC review and reporting timeframes are all considerations in determining to pursue an IPO.