The market cap of my publicly traded REIT is trading (and has been for a while) at about $5B less than our assets are worth. What's more, we are highly UNleveraged. I'm confused why a larger fund hasn't bought us out yet... it seems like it would be so easy to lever up, sell all the assets, liquidate the company, and come away $10B richer. I know it's more complicated than that, but still. I don't think my REIT is alone in being so undervalued. I'm just curious why companies don't buyout undervalued REITs more.
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Well, there are a couple of reasons I can think of. I'm not an expert on REIT tax law, but I know enough to be dangerous and I'm pretty sure that the only way they qualify for the tax benefit is they have to disburse 95% of the cash flows and there's some rule where a certain individual/entity can't own more than x% of the operating interest in the REIT. So those two attributes will scare off a lot of the players capable of putting down that much cash since it is very difficult to take a REIT private by way of legal proceedings and $ since you get screwed from a tax perspective, or so I've been told.
MonkeyWrench hit it right on the head. REITs must be owned by at least 100 people and 50% of the fund cannot be held by 5 or fewer people. This is a big deal because that kills the REIT status. No large investor will buy out an asset that has a regulation like that in place.
Second, REITs are subject to disbursement requirements (spot on with the 95% of cash flow call. The rule is that at least 90% needs to be distributed from Funds From Operations - essentially Net Income +D&A + Gains/Losses on Sale of Property - to qualify for a REIT provided they meet other criteria). Assuming that an LBO fund could buy a REIT and ignore rule number one, the question becomes how do they pay the debt down. As a result of rule the disbursement issue, traditional aspects of the LBO process, such as paying down debt with excess cash, don't work as readily here since the excess cash must be distributed to shareholders. Since the fund disbursement is key, how exactly would the fund pay down the debt at an accelerated rate? It wouldn't be able to.
The only way it could possibly work is if you had enough funds come together to buy out the REIT and divide the ownership in such a way that it could retain its REIT status. That becomes a very sticky thing to do and is definitely not an ideal situation.
It actually isn't as hard to take a REIT private if you have the cash.
Take CPP-IB's buyout of Parkway Properties last year. As far as I know it wasn't a leveraged buyout, but that is just a financing decision vs. the decision to take a company private.
Blackstone took Biomed private back in 2016.
All of the rules for a REIT are easy to bypass. There are literally hundreds of private REITs that do it.
The 100 owner rules is bypassed by creating a preferred shareholder class where each individual investor puts in 1000 and gets a return of ~10%. The rest of the shares are owned by your main investor.
The 5/50 rule is harder, but the 5/50 is actually a pass through requirement to individual investors. If your company is public, that ownership flows through, so as long as not more than 5 owners own more than 50% of your parent company, then you pass. For a pension firm or mutual fund, it goes down to the investor level, so to the 10,000 participants in your fund.
The reason I think you aren't seeing as many happen right now is because people feel like it is the top of the market and everyone would want a premium for the buyout. See, Brookfield's buyout of GGP.
This guy knows what he is talking about. All that other noise posted above is garbage.
You can take a REIT private pretty easily if you have the cash to do. Furthermore OP, you are basically stating that the public markets are not valuing REITs the same way private markets would (thus the huge trading discount to NAV).
Another way a REIT can basically "sell" itself in the private markets without an LBO and realize value is via a plan of liquidation and then entering into a liquidating trust. This get pretty detailed and there are rules for timing, disclosure etc. so if you have questions, shoot me a PM.