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REIT Spin-Off Advisory

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Unlocking the True Value of Real Estate


Green Street works with publicly traded operating companies that own and control significant portfolios of real estate – as well as the shareholders of those companies – in exploring strategies for maximizing shareholder value through REIT spin-offs and other real estate monetization alternatives. Companies in the restaurant, retailing, gaming, telecom, utility, and energy businesses are prime candidates to consider REIT spin-offs. Green Street is uniquely positioned to provide an independent assessment of the merits of executing a REIT spin-off. A big part of the appeal of a REIT spin-off is that REITs trade at significantly higher multiples than the average S&P company. Moreover, the public market often undervalues real estate assets when embedded within a larger operating business. Spin-Offs may also be appropriate for companies with real estate holdings in more traditional sectors that seek to carve out properties in a distinct segment or geographic region for strategic reasons. Green Street is uniquely positioned to provide an independent assessment of the value of the real estate and offer guidance on the different transaction alternatives to unlock the embedded value of the real estate.

A REIT spin-off can involve an operating business distributing a real estate-intensive segment of its business (PropCo) as a stand-alone company to its existing shareholders. Generally, in an OpCo/PropCo structure, all of the initial rent from the REIT (PropCo) comes from the operating company (OpCo). Boards and management teams are experts in their operating business, but often are less informed about the specialized world of REITs. Green Street’s Advisory & Consulting group helps boards, management teams, and shareholders think through the pros and cons of the PropCo/OpCo structure and sale/leaseback transactions.

Green Street’s approach to advising companies and investors on REIT spin-offs begins with our proprietary framework for strategic, valuation, and investor positioning for real estate entities borne out of a spin-off from its parent.

Key considerations for any company considering a REIT spin-off:

  1. 1. What are the most important drivers of REIT share prices?
  2. 2. What REIT spin-off transactions have been completed and how have they performed?
  3. 3. How has the emergence of the "net lease" sector impacted investor appetite for the property company (PropCo)?
  4. 4. How important is tenant diversification?
  5. 5. How does a spin-off impact the operating flexibility of the operating company (Opco)?
  6. 6. What are the key lease terms that impact value?
  7. 7. How much rent can Opco afford to pay before impacting covenants and credit ratings?
  8. 8. What are the best public comparables for the PropCo?
  9. 9. What are the REIT “best practices” that should be considered to maximize valuation?
  10. 10. How can management enhance the appeal of PropCo for dedicated REIT investors?

REIT Spin-Off Advisory Case Study


The client

Windstream (OpCo) & Communications Sales and Leasing (PropCo)

Property Sector: Communications Network


Asset Size (est.)

OpCo: $8.6 billion; PropCo: $8.1 billion

Situation

The client recently announced its intentions to spin off its communications network into a Real Estate Investment Trust (REIT). The split would create two independently traded public companies; the REIT (PropCo) would lease the network assets back to Windstream (OpCo). Management sought to gain an understanding of the REIT market and the preferences of REIT dedicated investors to optimally structure the REIT. Additionally, management wanted to understand how REIT investors would approach the valuation of PropCo and the likely range of concluded value.

Our solution

Results

Green Street worked closely with management on the following:

  • Provided a valuation of the proposed REIT, incorporating Green Street’s proprietary REIT valuation methodologies to highlight the value in the initial lease with OpCo, the estimated residual value of the network, and the potential impact of accretive acquisitions
  • Advised management on REIT best practices including:
    • Capital allocation strategy
    • Balance sheet management
    • Corporate governance
    • Executive compensation
  • Prepared a supplemental disclosure package targeted to both REIT and tech investors
  • Advised management on investor communications best practices

In February 2015, the client successfully executed the spin out of its network assets into a REIT, a pioneering transaction in the telecommunications industry.

Completed REIT Conversions & Spin-Offs

Company Ticker Industry Equity Market
Cap ($Mil)
Initial
Announcement
Conversion
Date
Status
Weyerhaeuser WY Timber $14,739 2008-09-16 2010-01-01 Conversion Completed
American Tower AMT Cell Towers $29,349 2011-12-31 Conversion Completed
W.P. Carey WPC Corporate Leased RE $2,021 2012-02-21 2012-09-28 Conversion Completed
Cyrus One CONE Data Centers $1,200 2013-01-18 Spin-off Completed
Crown Castle International CCI Cell Towers $18,887 2010-07-29 2014-01-01 Conversion Completed
Corrections Corp. of America CXW Prisons $3,519 2012-04-05 2013-01-01 Conversion Completed
GEO Group GEO Prisons $1,773 2012-05-07 2013-01-01 Conversion Completed
Gaming & Leisure Properties GLPI Gaming $3,500 2012-11-15 2013-11-04 Spin-off Completed
Lamar Advertising LAMR Billboards $3,655 2012-08-08 2014-01-01 Conversion Completed
CBS Outdoor CBSO Billboards $3,600 2013-01-16 2014-07-17 Spin-off Completed
Iron Mountain IRM Document Storage $6,599 2011-03-09 2014-01-01 Conversion Completed
Ryman Hospitality Properties RHP Hotels $2,459 2012-05-31 2013-01-01 Conversion Completed
Sabra Health Care SBRA Health Care $1,522 2010-05-25 2010-11-15 Spin-off Completed
Equinix EQIX Data Centers $8,804 2012-02-15 2015-01-01 Conversion Completed
Windstream WIN Telecom $6,250 2014-07-29 2015-02-20 Spin-off Completed
Sertiage Growth Properties SRG Retail, Single-Tenant $990 2014-11-07 2015-07-06 Spin-off Completed
CareTrust REIT CTRE Health Care $524 2013-11-07 2014-06-03 Spin-off Completed

Announced Intentions to Convert or Spin-Off to a REIT

Company Ticker Industry Equity Market
Cap ($Mil)
Initial
Announcement
Conversion
Date
Lifetime Fitness LTM Fitness Centers $2,130 2014-08-25
Pinnacle Entertainment PNK Gaming $1,533 2014-11-06 2016
Caesar's Entertainment Corp CZR Gaming $2,250 2014-11-19
Boyd Gaming Corp BYD Gaming $1,360 2014-10-30
Forest City FCEA Diversified $4,300 2015-01-13 2016
MGM Resorts International MGM Gaming $10,878 2015-03-17
Darden Restaurants DRI Full Service Restaurants $9,000 2015-06-23