Public REITs Arrange Joint Ventures

By Jonathan Morris, Jones Lang LaSalle

Much has been written about the heroic rebound of REIT share prices since the dark days of spring 2009. REIT executives watched in shock as their stocks were at prices lower than they had been in decades. In response, enormous amounts of equity was raised, share prices rallied and REITs were quickly back in favor, executing significant transactions and generally getting busy quickly.

Much has been written about the heroic rebound of REIT share prices since the dark days of spring 2009. REIT executives watched in shock as their stocks were at prices lower than they had been in decades. In response, enormous amounts of equity was raised, share prices rallied and REITs were quickly back in favor, executing significant transactions and generally getting busy quickly.

Recently I attended the NAREIT Law, Accounting and Finance conference in San Francisco. The mood was, as you might suspect, ebullient compared to any conference in the spring of 2009. One interesting topic discussed was the formation of joint-ventures by public REITs. These partnerships are structured for several purposes.

This JV structure comes in many forms, has multiple objectives along with interesting, and unique, combinations of players on both sides. Along with satisfying the requirements of the JV partners, it also confirms the flexibility of the REIT and UPREIT structure.

Let’s look at a few examples and reasons why a REIT forms a JV and with whom.

During flat stock market lulls some public REITs still have structural access to fresh equity through issuing common stock but have elected to wait and not issue more shares, although they have a current need for new equity.

To raise equity without tapping the public markets, several REITs have structured JV’s with pension funds, The REIT contributes an asset – more typically a set of assets – with an agreed upon value with the new JV partner.

EXAMPLE: REIT identifies and values an asset(s) currently owned by the REIT – we’ll assume $200mm with $100mm in existing debt. Pension fund agrees with value and the partners arrange a 50/50 JV whereupon the REIT contributes the asset to a new JV and the Pension Fund assumes 50% of the indebtedness liability and funds $50mm to the REIT in cash (50% of the net equity). This provides the REIT with $50mm in new equity to use for debt reduction, new acquisitions or other purposes (and reduces the REIT’s contingent liabilities by $50mm). Following this example, the partners may agree to selectively use this template to acquire additional assets. Hence, a new source of equity for the public REIT and a new source of real estate for the PF.

The need for capital and the need for product is felt by real estate companies, public or private. Where those two requirements intersect can form the basis of the latest JV structures. Another interesting example is where the public REIT has plenty of current liquidity and access to more but has a desire to find unique real estate deals that are controlled by others and not available to acquire outright.

EXAMPLE: A private developer in a metropolitan area is thinly capitalized but owns a terrific land site ready for development. A public REIT likes the site and wants more exposure in particular metro. The REIT attempts to negotiate the purchase of the site from developer but gets no traction. REIT and private developer agree to form a JV to develop the site. Using their bank line to refund pre-development costs, the REIT agrees to allow the private developer to build the project and earn fees. The REIT is a 51%+ owner of the JV and once stable, purchases the 49% at a pre-negotiated cap rate with proceeds of permanent loan

These are summaries of recent real-time transactions. Several REITs have the resources and balance sheets to take the structure further. Vornado (NYSE: VNO) recently closed on an $800mm fund, Vornado Capital Partners. VNO (the REIT) contributed $200mm – 25% and have closed on their initial deal.

In a unique JV between two public REITs, SL Green (NYSE: SLG) and Vornado teamed up to own the debt on 280 Park Avenue, a 1.23mm square foot office tower in midtown Manhattan purchased at the peak of the market by Broadway Partners at $1,000+ per square foot. The two REITs combined now hold $400mm in debt against the asset and may be approached by Broadway to infuse equity which, depending upon the structure, would bring the REITs into the ownership stack (at a basis lower than the acquisition pricing).

To summarize, the REIT structure allows many unique combinations to create deal flow and make real estate investments for investors with varying objectives.