Share Price/NAV Disconnects in Current Markets

The last several weeks generated a dislocation in the capital markets not seen since the Great Recession or, in many instances, ever. REIT stocks as a group have been hit hard with the RMZ down approximately 34.41% over the course of the last two weeks. Further, the retail, senior housing and hospitality REITs have carried an even heavier part of the pain based on industry impacts and assumptions arising from the outbreak. At a macro level, initial estimates of GDP destruction quarter-over-quarter for 2020 are coming in at double digits.

Unlike many other industries, the underlying value of a portfolio of assets held by a REIT is subject to valuation comparisons through appraisals and other methodologies. Investors and analysts use these metrics in comparing the value of the real estate assets held by the REIT against its trading price. Simultaneously with the market disruption in the capital markets, investors, analysts and other market participants, including appraisers, are re-calibrating how to assess underlying real estate values during this chaotic period.

This period of unprecedented uncertainty opens the door to a number of important considerations for a public REIT. In particular:

  • The NAV/Trading Displacement is in uncharted territory. While the Great Recession certainly saw a displacement in valuations of NAV, the current level of uncertainty in determining underlying NAVs is unprecedented. Public REITs are often aware of, and tracking, their own NAV because it is a focus for investors. The spread between a share price and estimated NAV can serve as the canary in the coal mine of trouble on the way if the spread becomes too wide.
  • Thriving in the Chaos. The uncertainty opens the door for hedge funds interested in taking positions to agitate for change or potential transactions for these clients. Positions can now be accumulated at depressed prices and with little or no warning based on current reporting requirements for purchasers of the stock. See our note on hedge fund activity here.
  • Going Private Interactions. While likely to wait for some direction on underlying intrinsic values, many private equity sponsors have an affinity for taking aggressive positions in specific sectors that align with a long-term investment thesis. Real estate supported by strong demographic and growth trends will remain attractive even in the midst of significant short-term dislocation. The NAV/share price disconnect has long been a driver of going private transactions.
  • Make sure there is an ability to control a situation. With share prices as depressed as they are in the current market it is important to ensure that the board and the management team have the ability to control an unwanted advance. The ability to press pause and get a counterparty to the bargaining table is of paramount importance. Stock price drops in excess of 40% were often not contemplated in analyzing corporate governance and strategy. REITs should consider re-examining the possibility of putting a poison pill “on the shelf” which could be quickly put in place in the event it was needed. In times like these, it’s also a good idea to review your Company’s charter and bylaws, including share ownership limitations, in looking at your Company’s wholistic governance profile.

All of these factors point to ensuring that the REIT and the board have the appropriate tools in place to protect shareholder value. Being able to limit the advance of unwanted overtures when stock prices are in this chaotic of an environment is critical.

Written by:

King & Spalding
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