A forward sale of common shares is an offering that is agreed upon today with a settlement date in the future. Forward sale agreements allow companies to capitalize on current trading prices by locking in a price at which it can sell shares to a forward purchaser – typically an investment bank – in the future. The delayed issuance provides flexibility to the issuer without a “drag on” performance measures (e.g., funds from operations) or shareholders incurring immediate economic dilution (i.e., dividends and earnings per share). These agreements are typically used to fund transactions where the timing of the closing or capital need is uncertain, including funding a transaction over time, as yet unidentified acquisitions, or future development opportunities. The transactions can also be structured to permit repayment of borrowings and for general corporate purposes. In addition to the variety of ways to use a forward sale, these agreements have a number of benefits that may be particularly attractive for REITs. These benefits are particularly useful for REITs, where the need to fund capital expenditures usually takes place over time, as opposed, for example, to a onetime acquisition cost. Additionally, these agreements protect REIT shareholders by mitigating share dilution during periods in which the capital associated with the issuance would not otherwise be put to work.
A forward sale transaction is typically structured as a public offering that is a registered transaction with the Securities and Exchange Commission. The public offering closes “regular way,” with purchasers of shares settling with the underwriters on the usual T+2 schedule. If the transaction is not paired with a simultaneous primary issuance by the issuer, no shares are actually issued by the company at the time of closing. Instead, the forward purchasers in the transaction go into the market and borrow shares to be delivered to purchasers in connection with the registered public offering.