Western real estate advisors case study: REIT roll-up

Real Estate Issues, Dec 1997 by McMahan, John

The valuation of Western also bothered him. He felt that $25 million was too much for a company whose only assets were management contracts, the vast majority of which were cancelable on 30 days notice. As he put it, if he were going to trade hard assets (real estate) for "elevator assets" (people), he would at least expect to receive shares with some form of preferential interest. Besides, if he wanted to convert his interest to REIT shares, he could trade his assets for the shares of a seasoned REIT, wellregarded in the public marketplace. He had been approached by several existing office REITs and believed that a workable asset trade could be arranged. Cami mentioned that such an approach would not provide the IPO "pop" in value inherent in the roll-up.

Tom countered that he was somewhat dubious about the true value of the IPO "pop" to the investors. He felt that much of the anticipated increase in value came from leveraging the portfolio and that the increased risk from leveraging had not been adequately considered by Western in its proposed plan. When asked by Cami if a lower level of portfolio leverage would ease his concerns, Tom did not think it would make much difference.

Finally, Tom was upset with the relatively short amount of time that he and his Board had been given to make a decision. BURP had been systematically considering its strategy for securitized real estate for some time, and the Western roll-up put them under pressure to make a decision much faster than they desired. Tom felt that they needed more time to analyze their overall portfolio strategy and suggested to Cami that the decision on participating in the roll-up be extended until after the first of the year. He also stated that he felt Western should pay for the major portion of the $6 million in underwriting costs.

Cami finally gathered up her courage, and asked Tom if, despite his concerns he would vote for the roll-up. Tom said that if the proposal was the same as the package he received, he would vote "no" and, if asked, would encourage other investors to do the same. He did say, however, that he would consider a revised proposal which addressed his concerns. In a state of shock, Cami thanked Tom for being candid and said she would get back to him in the next few days.

THE MANAGEMENT MEETING

Before Cami had a chance to catch her breath, Jim interrupted the management meeting to ask what had happened in her phone conversation with BURP. As Cami related her conversation, an enveloping cloud of gloom settled over the meeting. When she finished, the mood of the meeting changed abruptly to heated debate as the whole concept of the roll-up was back on the table and latent wounds reopened.

One group of managers led by Jim, wanted to proceed with the roll-up as it had been proposed. Western had generally good relations with its clients and, with the exception of BURP, all contacted so far had indicated support. Western's investment banker believed that a successful public issue could be completed once Western had $1 billion of assets in its portfolio.