Winter 2000
	Cover Story REITs at the Millennium Industry veterans look into their crystal balls. Where are REITs headed? Company Spotlight Can Crescent Get Its Groove Back? John Goff is working to restore Crescent Real Estate Equities’ reputation as a REIT that "gets it." Property Fundamentals Lack of Correlation J.P. Morgan’s Michael Giliberto provides answers to the age-old question, "Are REITs really real estate?" Awards Spotlight Best & Brightest Realty Stock Review’s eighth annual awards presentation recognized the top vote getters in a number of categories, including outstanding analysts, CEOs, and CFOs. Voters also chose the industry’s man of the year and men of the decade. Investment Analysis Applying MPT to REIT Portfolios Careful portfolio construction can make or break the performance of a pool of assets. Investment Fundamentals The High Cost of Real Estate Ownership Swapping net income for FFO might not be such a bad idea after all. By The Numbers A Fund Manager’s Worst Nightmare If it’s true that what doesn’t kill you makes you stronger, real estate fund managers may be some of the strongest folks around. Point Of View REITs and Rights Plans Criticism of REITs that adopt rights plans is simply misplaced. Investment Spotlight Spooked What happens when more than a dozen REIT UITs start unwinding in the midst of the worst bear market in a quarter of a century? The New Economy When Worlds Collide The Internet will provide investment opportunities for innovative office and retail real estate companies that embrace the changing landcape. Investment Insight LBO Math The market is beginning to understand that LBO valuation does not equal net asset value. Parting Shot Coming of Age REITs have evolved from pools of properties to focused real estate operating companies. Newsline Captec Wants to Shed REIT Status Investor's Guide Questions Back Issues Feedback

By Adam O. Emmerich and Robin Panovka
Illustration by Warren Gerbert

A growing number of REITs have joined much of the rest of corporate America in adopting shareholder rights plans (so-called poison pills). The trend has resulted in criticism from shareholder activists and commentators who have argued that the credibility of the REIT industry is being damaged by the adoption of "unnecessary" and "anti-shareholder" measures. Clearly, the concern that REITs unequivocally demonstrate that they are committed to shareholder value maximization - and that they have distanced themselves from the more unsavory management/ developer-centered viewpoint of the private real estate markets - is appropriate and an important focus as the public REIT marketplace matures. However, the criticism of REITs that adopt rights plans, which protect and ensure equal treatment for all REIT shareholders, is simply misplaced.

The simple facts about rights plans were clearly laid out in Georgeson’s November 1997 study (point your browser to the firm’s Web site at www.georgeson.com), which found that: (1) premiums paid to acquire target companies with poison pills were, on average, 8 percentage points higher than premiums paid for target companies that did not have poison pills; (2) the presence of a poison pill at a target company did not increase the likelihood of the defeat of a hostile takeover bid or the withdrawal of a friendly bid; and (3) poison pills did not reduce the likelihood that a company would become a takeover target. The takeover rate was similar for companies with and without pills.

These findings were confirmed by J.P. Morgan Securities in another 1997 study and, perhaps most impressive, in a 1995 study by Robert Comment and G. William Schwert, which was published in the Journal of Financial Economics. The results of that academic study were unequivocal:

"Poison pills … are reliably associated with higher takeover premiums for selling shareholders, both unconditionally and conditional on a successful takeover … . Anti-takeover measures increase the bargaining position of target firms, but they do not prevent many transactions."

Properly designed rights plans (and here we exclude "dead-hand" and other similar fringe innovations which do in fact have a profound impact on shareholders’ ultimate ability to act through their voting franchise) simply are not intended to, and will not, make a company takeover-proof. Rights plans protect against takeover abuses; give companies, their shareholders, and their boards of directors breathing room to make decisions on potential takeovers; and strengthen the ability of the board of directors of a target to fulfill its fiduciary duties.

Companies interested in maximizing value for their shareholders and preventing the improper manipulation or oppression of minority stockholders, but which do not adopt a rights plan, are confusing populist rhetoric with sound thinking.

LVMH’s creeping sneak attack on Gucci is only one recent example of the perils of allowing large stakes to be acquired in public companies with widely dispersed shareholdings without a mechanism in place to ensure that all shareholders are afforded the opportunity to participate in a takeover (See "Stealthy Takeover of Gucci Makes Poison Pill Look Good," The Wall Street Journal, January 29, 1999).

In connection with the Gucci situation, it is interesting to note that in its February 19, 1999 edition, The Financial Times endorsed Gucci’s adoption of a kind of post facto poison pill to neutralize LVMH’s creeping attempt to take control of Gucci without providing an equal opportunity to all shareholders to participate. Similarly, it is worth noting that other countries have developed a variety of legal or regulatory regimes with a similar purpose or effect, and are, in fact, generally perceived as pro-shareholder. The most prominent is the United Kingdom’s requirement that persons acquiring in excess of 30 percent of a target company’s stock must extend an offer to all of the remaining shareholders to purchase their shares for cash at not less than the highest price paid by the acquiror or any affiliate within the prior 12 months. The recent Olivetti offer for Telecom Italia illustrates a similar point in the Italian context. These regimes have a similar effect to rights plans - ensuring that all shareholders are treated fairly and preventing manipulative and abusive takeover tactics.

A number of specious arguments have been made against rights plans. Some have pointed out that many of the REITs that have come public over the past six or seven years are not in need of additional "shark repellent." Thinking of rights plans as "shark repellent" is erroneous because it misses their fundamental nature as tools to ensure equal treatment for all shareholders and to provide REIT boards with the leverage to create a level playing field in the event of a takeover situation. Moreover, it simply isn’t the case that REITS are overloaded with "shark repellents."

There is a lively and sometimes adversarial debate in the context of REIT initial public offerings between the issuer or controlling shareholder (who may often be inclined to favor a more "takeover-proof" REIT) and the investing community (who will insist, usually successfully, on a strict limit on the anti-takeover measures baked into the REIT). The institutional shareholder community is neither stupid nor ill-advised. REITs have come public after a careful process of scrutiny and with a reasonable balance between management-and-board continuity and stability and ultimate shareholder control. Clear evidence of this is the fact that many REITs do not have significant defenses, such as staggered boards.

In addition, as we have long noted (see "REIT Takeovers - Novel Issues Raised by Excess Share Provisions and UPREIT Structures," The M&A Lawyer, October 1997), the conventional wisdom that REITs are bulletproof because of REIT tax rules and corresponding charter provisions is simply wrong. The "excess share" defense is largely untested and vulnerable on several fronts. Third, even if commentators were correct in believing that REITs are "takeover-proof," what difference would it make then whether or not a rights plan is put in place?

The view that the "real harm" from the adoption of a rights plan is damage to the REIT industry’s credibility is, unfortunately, a circular argument, based on the fundamental misconception that rights plans are an absolute bar to hostile takeovers and a disservice to shareholder interests and value maximization. If that were true, which it is not, and if rights plans were useless surplusage in the REIT industry, which they are not, then it would be true that their adoption would be a stick in the eye of the investor community.

Rights plans are now a familiar part of the landscape in corporate America, having been adopted by over 2,300 public companies, including at least 45 percent of the Fortune 500 companies. While institutional shareholder acceptance of rights plans is certainly not universal, the issue is whether opposition is well-founded and if it promotes shareholder interests or whether it is premised on mistaken facts and a general distrust of boards’ and managements’ willingness to act in the best interests of all shareholders.

Hostile takeovers have occasionally been met by excessive or inappropriate responses, arguably motivated by self-interest (or in any event contrary to the wishes of shareholders). Rights plans (again, excluding dead-hand and similar fringe innovations) simply are not in that category. To demonize rights plans, which benefit and protect shareholders, and make their denunciation a sort of litmus for politically correct (i.e., shareholder friendly) thinking is simply a disservice to REITs and their shareholders.

If shareholder activists and commentators would take the time to dispassionately analyze the actual operation of rights plans and to evaluate the available evidence of their benefit to shareholders, well-intentioned REIT directors and CEOs would be spared unwarranted attacks for properly adopting rights plans for the benefit of all of their shareholders.

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