Over the past few months, the real estate investment trust (REIT) sector has experienced a great deal of merger and acquisition (M&A) activity. The M&A deals are motivated by various reasons, such as to expand market share, diversify products or services, increase revenue or earnings and reduce competition.
Ideally, the benefits of M&As should go directly to shareholders of the merging companies. But sometimes shareholders of the acquiring company may balk at the deal, thinking the company is paying too much. And more often, certain shareholders of the company being acquired may protest that their company is worth more than the price they're getting to be acquired or be critical that alternative takeover bids were never sought. Large shareholders may even try to delay or vote down the deal, claiming that insiders are being enriched at the expense of shareholders.
Take a look at three recent REIT mergers and some of the pushback among shareholders who are not happy with the proposals:
On July 13, AG Mortgage Investment Trust MITT announced it submitted an unsolicited, nonbinding offer to acquire Western Asset Mortgage Capital Corp. WMC for an implied price of $9.88 per share, an 18.2% premium to Western Asset's price at the time.
On July 18, the Western Asset Mortgage Capital board said it intends to engage in discussions with AG Mortgage related to the acquisition offer.
But AG Mortgage's offer would disrupt an all-stock deal for Western Asset Mortgage Capital to merge with Terra Property Trust Inc., another externally managed REIT. But one disadvantage of this deal, which Western Asset Mortgage Capital considered June 28, is that Terra Property's stock does not trade as a listed stock.
On the same day that AG Mortgage announced its offer, Terra Property Trust released a statement, reaffirming its commitment to merging with Western Asset Mortgage Capital, and pointing out the advantages of such a merger, as opposed to the one being proposed by AG Mortgage.
The drama is heating up and the result is still to be decided.
On May 23, Global Net Lease Inc. GNL announced it will acquire Necessity Retail REIT Inc. RTL in an all-stock transaction in which shareholders of Necessity Retail will receive 0.67 shares of Global Net Lease stock for each common share of Necessity Retail stock. Both companies agreed to terminate external management contracts with AR Global LLC and internally manage the properties themselves, with AR Global receiving a buyout as compensation. The transaction is expected to close during the third quarter of 2023.
The reason for the merger is to diversify the holdings of Global Net Lease, which prior to the proposed merger had 54% of its portfolio in industrial properties, 42% in office buildings and 4% in retail properties. Adding Necessity Retail substantially enlarges its retail holdings.
On July 20, Orange Capital Ventures, a New York-based investment firm, released a statement of concerns against both REITs' boards of directors, alleging that Global Net Lease's board is using coercive tactics to force its shareholders to approve the merger to gain access to a governance reform that would affect the board's structure. Orange Capital also stated it believes there are better value-creating alternatives than the proposed merger and that shareholders should be able to vote solely on the merits of the two REITs combining — not because of proposed corporate governance practices that should have been made before the merger was announced.
On April 11, Office Properties Income Trust OPI acquired Diversified Healthcare Trust DHC in an all-share transaction. Office Properties said it will change its name to Diversified Properties Trust and continue trading on the Nasdaq Stock Market. Under the terms of the agreement, shareholders of Diversified Healthcare Trust will receive 0.147 shares of Office Properties Income stock for each common share of Diversified Healthcare Trust.
On May 26, Office Properties announced it has begun implementing financing for its merger by closing a $30.7 million secured loan with a fixed interest rate of 7.21% with five-year interest-only payments, to be followed by five years of amortization on a 30-year amortization period. The property to be securitized is a 266,000-square-foot, 100% occupied property in Landover, Maryland.
On July 7, Office Properties Trust announced it had closed an additional three loans totaling $77.4 million to finance the merger. The loans are secured by three properties in New Jersey, Virginia and California.
Not all shareholders were happy with the proposed acquisition. In early June, Flat Footed LLC, a 9.8% shareholder of Diversified Healthcare Trust, said it intends to vote against the proposed merger as well as solicit proxies against the merger. Flat Footed said the merger dramatically undervalues Diversified Healthcare Trust and enriches RMR Group Inc. RMR, the external managing company of both REITs, at the expense of Diversified Healthcare's shareholders. Flat Footed was upset that the board of trustees had not responded to a May 23 letter in which the LLC expressed its discontent with the deal.
Another issue Flat Footed raised was a recent flurry of insider stock purchases of Diversified Healthcare at a 72% premium to the proposed merger consideration by Adam Portnoy, CEO of RMR Group and a member of both REITs' boards. Flat Footed alleged that the purchases were Portnoy's attempt to buy votes to push the transaction through and that given his insider stance in both companies, the purchases were inappropriate.
On July 19, Flat Footed issued another statement, saying it was encouraging that other significant shareholders had also expressed opposition to the proposed merger and that Flat Footed is interested in meeting with the board of Diversified Healthcare Trust to help it assess targeted asset sales and other credible alternatives to the merger.
The merger is somewhat in limbo, as Diversified has canceled meetings to officially approve it but has also not terminated the proposed deal.
Not all the proposed mergers have run into such opposition. A merger between Extra Space Storage Inc. EXR and Life Storage Inc. LSI was approved by shareholders on July 18. In May, Ellington Financial Inc. EFC announced its acquisition of Arlington Asset Investment Corp. AAIC and then on July 3, announced it is also acquiring Great Ajax Corp. AJX.
So far there hasn't been any opposition to these deals, but who knows what could happen the way things are going. Investors should stay tuned. REIT acquisitions and battles in the boardroom are heating up this summer.
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