Healthy M&A Volume Expected in 2012

Although REIT deal activity slowed as the year ended, the range of deals done in 2011 was impressive, according to partners in the REIT M&A department at the law firm of Watchtell, Lipton, Rosen & Katz (WLRK).

Approximately $70 billion in assets changed hands in REIT deals in 2011 and ranged from large-scale public-to-public mergers to private-to-public acquisitions. The firm pointed out that while the economic uncertainty has created some hesitancy in many boardrooms, it anticipates that the conditions that made for impressive deal volume during the first half of 2011 will drive a healthy volume of deals in 2012.

Robin Panovka and Adam Emmerich head the REIT M&A team at WLRK and offered REIT.com their insights into the deal market for 2012.

REIT.com: Do you expect overall deal activity to continue into this year and possibly surpass 2011?

Robin Panovka: We certainly expect deal activity to continue—the drivers remain strong—but it's hard to predict the volume, given the "lumpiness" of large deals and the uncertainties that slowed things down towards the end of last year. The balance sheets of most of the larger REITs remain strong, dry powder is still plentiful and opportunities continue to arise, especially given the low supply of new development product, strong investor appetite and the distressed pools possibly coming on line as the first big wave of pre-financial crisis 2007 debt matures in 2012.

REIT.com: Why do you think that deal activity may have slowed down toward the end of 2011, and will that impact the first half of 2012?

Adam Emmerich: The uncertainty caused by the European crisis and questions about future economic conditions created a wait-and-see attitude in many boardrooms. But underlying economic activity and results, particularly for the larger and better-positioned U.S. REITs, are quite strong.

Our sense is that things are warming up and that the conditions that generated impressive deal volume in the first half of 2011 will again drive a healthy volume of deals in 2012. Many boards and CEOs who hit "pause" in the last few months have their fingers hovering over the "play" button, ready for action when the time is right on the lineup of deals that have been percolating for some time.

REIT.com: Do you expect deal volume to be higher in some sectors than others? If so, which ones and why?

Panovka: It's too soon to tell. We're seeing things warm up in different sectors, often for different reasons.

REIT.com: If you could pick just three, what would be your top issues for REITs be this year?

Panovka: One, given the volatility in the market, we expect to see a continuation of the trend towards using stock as acquisition currency rather than cash, as a way to eliminate financing risk and help to address the equity-raising risks posed by volatile stock prices. We also expect buyers and sellers to continue to explore collars, caps and similar mechanisms where stock is used as currency as a compromise allowing buyers to sidestep bank financing while providing sellers some protection against unexpected levels of market volatility.

Two, the path for gaining control by buying strategic debt positions continues to show promise. We expect to see more deals involving the distressed pools that are likely coming on line as the first big wave of pre-financial crisis 2007 debt matures in 2012. Fulcrum debt positions in several of the loan pools that mature in 2012 are already in the hands of opportunistic players, who are positioned to lead recapitalizations if and when refinancing options fail to materialize. Moving pools of private assets—distressed or otherwise—into REIT hands also provides liquidity and transparency, which are fundamental to the strength shown by the REIT sector since the financial crisis.

Emmerich: Three, the courts continue to reject the "one size fits all" sale process as a fiduciary requirement, even while the scrutiny to which boardroom deal decisions are subjected has remained thoroughgoing and intense, with several notable knuckle rappings for controlling shareholders, target boards and bankers in 2011. We therefore expect continued focus on how best to structure major transactions to ensure that they are respected by the courts and avoid excessive exposure to the all too common strike suits. Careful, sensible decisions will be respected by the courts, but they must be based on an appropriate record and well documented. Deal protection measures and fiduciary out provisions must equally be specifically tailored for the particular circumstance of each company and transaction.