17 October 2007
Singapore – Capital Markets Forum tdo-corp 7256234v1

“It’s almost autumn and what could be better than a fall sale? In the markdown aisle are publicly traded real estate investment trusts. Like most of the public market, REITs have been hammered during this frenzy over subprime mortgage defaults and the so-called credit crunch … The reality is … just about every REIT is finding it impossible to make an accretive acquisition, placing most of them in a holding pattern.”
G. Marr, Fin. Post, Aug. 27/07
“The private equity party may be over, but that news hasn’t yet made it to the real estate buyout funds, which are currently seeking $105billion (U.S.) in new capital, a sixfold increase from January, 2006…
This contrasts with the rest of the private equity market, which is expected to raise slightly less this year than it did in 2006 …”
Private
Equity Intelligence, October, 2007
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 REIT M&A Activity
 REIT Growth and Expansion
 Cross-Border Issues
 Defensive Measures and Responses unique to REITs and other forms of Income Trusts
 Going Private issues
 Tax considerations in acquiring REITs and REIT Property Portfolios
3

 Acquisition of REITs has been active recently in the U.S., Canada and
Europe. Economic fundamentals:
⇒
Access to cheap capital
⇒
Cash rich private equity funds
 Of the investors surveyed in the study, 78 per cent said they plan to increase their allocations to private equity real estate in the mid to long term.
Private Equity Intelligence, Oct/07
⇒
Targets may prefer private equity capital due to lower regulatory compliance costs
⇒
But, tightening of credit markets slowing growth activity
 REIT growth and related consolidation activity tends to be about yield/DPU, accretive considerations, potential for capital growth and diversification
 Synergies arising from entity acquisitions potentially less obvious than for other businesses – generally focused on reducing G&A Expenses
4

 Broad-based global consolidation trends a factor
 Accretive transactions may be more readily identifiable in the form of individual asset acquisitions
 Scale viewed as a contributing factor for organic growth 2
 Global reach of REITs increasingly a priority – diversify and reduce risk
5

 REIT-to-REIT acquisitions may be negatively affected by REIT foreign ownership rules in some countries
 REIT growth and expansion through portfolio acquisitions is often
“structured” to enable sellers to achieve positive tax results
 Potential for sponsorship of real estate funds and related management fees drawing growth and expansion into managing
⇒
ProLogis in Mexico, Asia and Europe
⇒
AMB in Asia and Europe
⇒
Archstone-Smith in Germany
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 REITS spun out of larger business can create immediate value –
⇒ higher multiples and future liquidity pipeline
⇒
OMERS creation of Primaris REIT
⇒
Fairmont creation of Legacy Hotel REIT
Institutional investors including pension funds have been drawn to the realty asset class including REIT owned and managed properties as part of the quest for stable returns to offset their long-term liabilities… (
Private Equity Intelligence Oct/07 )
 Significant untapped private equity commitments in the pipeline
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United States
 Blackstone $39B acquisition of EOP (February 2007)
⇒
Bidding war (deal initially signed in November 2006)
⇒
Purchase price increased by $3B
⇒
Properties “flipped” at or near closing
 Mission West Properties $1.8B transaction (July 2007)
⇒
U.S. private equity buyer
⇒
Agreement negotiated and lending commitment in place
⇒
Lenders walked from deal
 Declining numbers of REITs due to consolidation
8

Canada
 Canadian Markets – 36 REITs with most having been formed since
1993
 Canadian REITs - $15B transaction value so far in 2007 2 at aggressive NAV CAP rates and cash flow multiples
 Canadian M&A activity has been largely focused on consolidation of
Canadian REITs although GE has been a major buyer of REIT real estate underlying assets
 Acquisitions have tended to be dependent on AFFO multiples, accretion objections and limited synergies
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⇒
An active M&A environment for Canadian REITs (~$15 billion in Transaction
Value since beginning of 2007) has had a positive impact on valuations
Transaction acquisition of aquisition of acquisition of acquisition of acquisition of acquisition of acquisition of
Date Announced/
Closing Date
Transaction
Value
Bid Price
Price Prior to
Announcement
Bid Premium Over
Prior Day Price
Implied Cap Rate at Bid Price (1)
FFO Multiple (1,2)
AFFO Multiple (1,2)
8/14/2007 /
Pending
US$1.4 Billion
US$9.75
US$9.30
4.8%
7.5%
10.5x
16.0x
8/1/2007 /
Pending
$1.2 Billion
$19.10
$14.26
33.9%
6.7%
12.2x
15.2x
7/12/2007 /
09/13/07
$2.5 Billion
$12.60
$12.00
5.0%
6.5%
12.7x
19.6x
1/12/2007 /
04/26/07
$2.3 Billion
$16.50
$11.05
49.3%
5.8%
22.0x
22.6x
12/01/2006 /
05/22/2007
$1.0 Billion
$18.60
$14.89
24.9%
6.8%
13.6x
18.4x
(1) Implied cap rates and FFO/AFFO multiples are based on RBC research estimates, with the exception of IPC and Legacy, whose estimates are consensus street estimates
(2) Multiples are based on 1-year forward estimates
10/5/2006 /
2/2/2007
$2.8 Billion
$8.35
$6.79
23.0%
8.4%
12.3x
15.8x
8/30/2006 /
1/26/2007
$3.3 Billion
$30.00
$25.45
17.9%
6.0%
15.2x
18.3x
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Singapore
 18 REITs (only recently permitted in Singapore) with an aggregate portfolio of $8.5B+ have emerged since 2002
 No consolidation or takeover activity yet
 Strong annual growth performance attracting investors and making up values
 REIT dividends are taxed with non-residents paying about 10%
 CapitaMall Trust and CapitaCommercial Trust recently acquired
Raffles City for S$ 2B. Suntec and K-REIT buying 33% interest in
One Raffles Quay
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Australian Market
 69 REITs with combined market capitalisation of US$115 Bn
 Consolidation and takeover activity
 significant consolidation since early 1990s driven by desire for scale (to facilitate further growth and stock liquidity)
 both takeover bids and schemes of arrangement possible (takeover laws apply unlike some jurisdictions)
 numerous transactions, including hostile and contested and with/without payment for management rights
 some recent high profile transactions (Macquarie Prologis privatisation;
Centro trust merger; Multiplex takeover by Brookfield; Morgan Stanley takeover of Investa)
12

Australian Market (cont’d)
 Significant level of offshore acquisitions by Australian REITs:
⇒ particularly US and more recently Europe and Japan (now 40% of REIT asset base)
⇒ driven by scarcity of local investment grade property and strong supply of capital from compulsory pension scheme
 Move to set up funds management platforms/subsidiary wholesale funds:
⇒ allows REIT to spin-off assets which may not meet investment profile (eg, mature or new higher risk/return assets) to institutional investors
⇒ gives REIT alternative source of funds, allowing improved ROE for REIT, with scale maintained and additional fee income source
 Increase in foreign interest in Australian REITs including advent of private equity takeovers (Multiplex; Investa)
Hong Kong
 7 REITs with market capitalisation of US$8.7 Bn
⇒
No consolidation activity to date. Takeover provisions do not apply (with some resulting vulnerability for investors/managers)
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 Driven in part by asset scarcity, there has been ongoing consolidation activity amongst Australian Listed
Property Trusts (“LPTs”).
3 Australian LPTs are now becoming more active on the global front.
Global Acquisitions by Australian LPTs
Date Target Acquirer Deal Size (MM) Description
Sep-07
Apr-07
Sep-06
Aug-06
Jul-06
Mar-05
Dec-04
Sapporo Ai
New Plan Excel Realty
BNP Residential Properties Inc.
Summit REIT Canada
Heritage Property Investment Trust
Leisureworld Inc. (U.S. and Canada)
Merry Hill Shopping Centre
Babcock & Brown Japan
Centro Properties
Babcock & Brown
ING Industrial Fund
Centro Properties Group
Macquarie Bank Limited
Westfield Holdings Limited
Y28,000
U$6,800
US$778
US$3,367
US$3,204
C$528
GBP$3,200
Retail
Retail
Residential
Industrial
Retail
Healthcare / Seniors
Retail
Consolidation of Australian LPTs
Date
Jul-07
Aug-07
Target
Multiplex
Acquirer
Brookfield Asset Management
Centro Retail and Centro Shopping America Merger
Apr-07
Aug-07
Jan-05
Oct-04
Sep-04
Dec-04
Jul-04
Macquarie ProLogis
Investa Property Group
James Fielding Group
Various Deutsche Trusts (1)
Ronin Property Group
Various Westfield Trusts (2)
Principal America Office
ProLogis
Morgan Stanley
Mirvac Group
DB Rreef Trust
Multiplex Group
Westfield Holdings Limited
Macquarie Office Trust
Deal Size (MM)
A$7,300
A$10,000
A$1,240
A$6,600
AU$636
AU$4,989
AU$1,500
AU$6,476
AU$762
Description diversified
Retail
Industrial
Office
Diversified
Diversified
Office Buildings
Retail
US Office Buildings
1. Includes Deutsche Diversified Trust, Deutsche Industrial Trust & Deutsche Office Trust
2. Includes Westfield Holdings Limited, Westfield Trust & Westfield America Trust
3. Slide provided by Bank of Canada
Sources: Capital IQ, Bloomberg, Company press releases
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Benelux
 Lease Invest Real Estate’s acquisition of Dexia Immo Lux (March 2006)
⇒
Private transaction (transfer of controlling interest (51,13 %) by Dexia and
Ethias)
⇒
Public take over bid
⇒
Squeeze Out
 Launch of Government Property Sicav aborted (end 2006)
⇒
Public procurement issues
– Cofinimmo / Befimmo
⇒
Ended up with sale to Befimmo (capital increase to finance
 Take over battle for Immo Croissance (Luxembourg) (June/July 2007)
⇒
⇒
Higher bid by Leaseinvest Real Estate
⇒
Voluntary take over bid by Cofinimmo
Knock out bid by Baugur (Iceland)
 Various smaller Reits : consolidation to be expected (see also
Unibail/Rodamco deal) or otherwise easy take over targets ?
15

Belgium
 Access to capital markets to raise cash equity to purchase property portfolios : impracticable
⇒
Need to respect pre-emptive rights of existing shareholders (no lifting)
 Acquisitions of individual properties through contribution in kind
⇒
Impediments under Corporate Law (pricing of shares to be issued)
⇒
Tax considerations
 Net result : REITs tend to acquire additional property portfolios through mergers or split (issuance of new shares)
⇒
No roll over for vendors but in case of mergers/split (corporate) vendors benefit from exit tax regime of 16,995 % (final taxation)
⇒ prospectus (exemption) – block trading (underwriting agreement)
16

Belgium (cont’d)
 Pre Reits : real estate certificates : take over rules did not apply (law now changed to equally apply to them)
 Reits structured as corporates :
⇒ take over regulations (European Take Over Directive) applicable
–
⇒
30 % threshold triggers take over obligation (grandfathering)
⇒
Difficult to “lock in” the deal (issues around “irrevocables”)
 Issues with respect to acquiring control over Reit structured as CVA
( Commanditaire Vennootschap op Aandelen/Société en Commandite par
Actions )
 Squeeze out vs. Right for minority shareholders to request to be bought out
(under new take over regulations) – 95 %
 Insider dealing issues
17

Belgium
 Structural defenses
⇒
CVA-structure : need to pre-agree with shareholders of General Partner
⇒
NV-structure : right to designate majority of directors attached to specific class of shares
 Traditional take over defenses
⇒
Approval rights (tilting share)
⇒
Need to have prior shareholder approval in respect poison pill type structure (to be made public)
⇒
Opt in/Opt out under Take over Directive
 Consequences of loss of Reits status
⇒
Free float requirement
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 Using “MAC” clauses as closing condition
⇒
Does not generally cover
˿
General adverse economic conditions or matters affecting relevant industry
˿
Reaction to announcement of transaction
˿
Military actions/Acts of terrorism/Changes in law
⇒
Exception where disproportionate impact on party in question
⇒
Typically viewed as protecting against “unknown events that substantially threaten the overall earnings potential of the target in a durationallysignificant manner” 3
⇒
Burden to prove is on party asserting the clause
⇒
KKR/Goldman aborted acquisition of Harman
⇒
Genesco
19

 ProLogis acquisition of Macquarie ProLogis Trust (Australia) and
Parkridge (UK)
 Ventas acquisition of Sunrise Senior Living (U.S. to Canada)
 ING Real Estate acquisition of Summit REIT (Australia to Canada)
 Limitations on cross-border activity include restrictions in certain countries on REITs investing outside of the local jurisdiction
 Fund structures popular – ProLogis
⇒
REIT asset management strategy
20

 Recent slowdown
⇒
⇒
Tightening credit markets following sub-prime mortgage crisis
Limited access to leveraged financing and high yield markets as lenders retrench
⇒
Asset-backed commercial paper crisis in certain countries
 Significant backlog of committed bank bridge loans
 Compression of cap rates and higher borrowing costs are slowing acquisition activities in the short-term
⇒
Creates opportunities for aggressive buyers
⇒
May not affect REIT-to-REIT transactions
21

 REITs tend to buy additional property portfolios versus other REITs
⇒
Tax considerations
⇒
Can often use paper for transactions and create a rollover tax structure for vendors of real property assets
 REITs often also access capital markets to raise cash equity to purchase property portfolios
⇒
Tightening capital markets have substantially increased cost of capital
⇒
REITs turning to other sources of capital such as retained interest financings
22

 Retained interest financings 4
⇒
REIT subsidiary issues securities in exchange for property portfolio
˿
Securities exchangeable for units of parent public REIT
˿
Preserves tax deferral leaving taxable event to the holders of the exchangeable securities
˿
Sometimes accompanied by issuance of special voting units or rights
 Retained interests may impact on REIT-to-REIT M&A activity
⇒
Often unclear with respect to ability to squeeze-out holders of such securities
⇒
Rights of holders are generally governed by partnership agreement of subsidiary entity that may contain prohibitions or penalties on change of control
23

 US - statutory mergers are typical although tender offers may increase in popularity due to recent clarification of the law
 Canada – takeover bid or tender offer route available
⇒
No statutory compulsory acquisition or statutory amalgamation infrastructure available for REIT trusts
⇒
Acquiring 100% somewhat more difficult 5
 Roll-over tax treatment available for a REIT-to-REIT consolidations in countries like Canada and US
 Cross-border acquisitions can attract withholding tax on distributions
24

 Issues with respect to collapsing trusts after acquisition
⇒
Recent purchase of Legacy REIT take-over bid from to Caisse de dêpot and its partner and subsequent wind-up of trust
 Often related party disclosure and compliance issues around external management contracts
⇒
Need to treat all selling unitholders equally or identically
⇒
REIT external management arrangements can complicate transactions
˿ payments to terminate
25

 For REITs structured as trusts, may be no statutory squeeze-out provisions unless incorporated in Declaration of Trust
 Absent DOT squeeze-out provisions, other methods may be available such as a consent solicitation made in conjunction with a takeover bid entitling the acquiror to vote acquired units to amend DOT to enable a redemption
 Unitholders that do not tender may have no dissent and appraisal rights
 Going private transactions may attract additional regulatory requirements including valuation and majority of minority votes in certain countries 4
 It may be possible to avoid acquiring REIT entity by acquiring partnership interests or shares of subsidiaries leaving the REIT with cash to distribute
⇒
This type of a transaction will typically require approval of unitholders
⇒
Macquarie Infrastructure Partners acquisition of Halterm 6
26

 Tax deferred transaction structuring where both parties to the transaction are REITS
 Unit deals and retained interest structures on property portfolio transactions to preserve tax deferrals and facilitate portfolio acquisitions
 Acquisitions by tax exempt pension plans
 [NTD: Tax impact to partnerships – potential conflict with interest to public shareholders]
 ?? Scott/Pieter
 ??
27

 Use of shareholder rights plans or poison pills
 Australian LPT’s invested in real estate
⇒
Change in control of responsible entity
 Poison management contract structures
⇒
Termination fees on change of control
⇒
Termination rights on change of control
 In non-corporate jurisdictions, DOT terms may well restrict or affect the likely success of planned takeover bids or hostile transactions
⇒
No compulsory acquisition provisions for non-tendering unitholders
⇒
Restrictions on consent solicitations
28

 Convertible debt change of control acceleration and premium for early repayment
 Lack of iron clad guarantees that unitholders do not bear any risk of liability
 Shareholder protection statutes
29

REIT – M&A – Expansion & Growth – U.S. Tax Considerations
 Use of UPREIT Structures
 “Going Private” Transactions
⇒
Taxable Forward Merger of REIT into Acquiring Corporation
30

REIT – M&A – Cross-Border Tax Considerations
 P/E in foreign country where real estate assets situated --- exposure to direct corporate income tax on rental income and gains on sales of real estate
 Withholding taxes and branch profits taxes
 Use of intermediate holding companies (foreign or domestic such as taxable
REIT subsidiary) and “disregarded entities”
 Exemption from tax in jurisdiction where REIT formed on sales of real estate situated outside of such jurisdiction or intermediate holding companies incorporated outside of such jurisdiction to hold foreign real estate
 Step-up in basis of assets
31

REIT – M&A – Cross Border Tax Considerations
 Transfer, VAT taxes, stamp taxes etc.
* * *
32

1.
2.
3.
4.
5.
6.
RBC Dominion Securities, September 17, 2007.
RBC Dominion Securities, September 17, 2007.
IBP v. Tyson
Sometimes called “unit deals” for a variety of reasons.
In Canada, for example, amending the Declaration of Trust to permit redemption of unitholders not tendering to a takeover bid would be considered to be a going private transaction requiring special protections including a majority of the minority vote. The holding of a meeting may be supplanted by written resolution in certain circumstances which may require or include regulatory approval in countries like Canada.
See Reay, Blake, Cassels & Graydon, Innovative Financing, Federated Press, 2007.
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