By Howard Rudnitsky
May 2001
Institutional Investor Magazine

When their shares in a real estate investment trust are depressed and trading below net asset value, shareholders would be expected to welcome a buyout at a substantial premium to the market price. After all, a decent payout can help ease the pain of an investment that has generated subpar returns. And then there's the deal offered to Westfield America investors.

On February 15, 2001, Australia's Westfield Trust and its affiliate, Westfield Holdings, the parents and 77.5 percent owners of Los Angeles-based Westfield America, the fifth-largest U.S. mall REIT, tendered for the stock they didn't already own. The offer was $16.25 a share, a meager 12 percent above Westfield's then market price of $14.50. (In February 1998 the stock had traded at an all-time high of $18.375.) Worse, the offer was well below Westfield America's net asset value, estimated by its lead U.S. investment banker, Merrill Lynch & Co., at $18 a share.


Still, in a press release Westfield Trust chairman Frank Lowy insisted, "We believe this transaction . . . provides a premium for WEA shareholders not currently available in the U.S. equity market." He also said that the offer had received a fairness opinion from Lehman Brothers. (Lowy declined to be interviewed.)


The Westfield chairman may be correct, but the tight terms of the sale would make any investor think twice about buying shares in a company whose external manager and adviser is also its majority shareholder. And Westfield's bid isn't as generous as other recent REIT buyouts.

In September Rodamco North America, a Dutch company, made a tender offer of $48 a share for Urban Shopping Centers, a whopping 39 percent premium to its share price. A few days later U.S. Retail Partners made a tender offer for retail REIT First Washington Realty Trust 25 percent above the level at which it was then trading. In both cases the offering price was more than the estimated NAV. And on February 23 of this year, Samuel Zell's Equity Office Properties Trust, in a $4.48 billion cash-and-stock deal, offered a 22 percent premium over market to the stockholders of Menlo Park, California-based Spieker Properties, about equal to its NAV. In this case, the Spieker family is the major shareholder and the inside adviser.

Although Westfield's minority investors pocket only a modest premium for their shares, the REIT's Australian parent walks away with a better deal.

Salomon Smith Barney's retail REIT analyst Ross Nussbaum points out that Australian real estate firms rarely pay below NAV at home. Nussbaum has long refused to cover Westfield America because, he contends, the conflicting roles of the majority shareholder make arm's-length negotiation impossible.

Newport Beach, California-based real estate research firm Green Street Advisors declines to track Westfield for the same reason. Says Mike Kirby, a founding partner of the firm: "Several years ago a shortchanging of REIT investors occurred when the external adviser of a modest-size REIT took it private. The deal was lousy. The adviser came out a month or so before the tender offer and said business wasn't good. The stock plummets and - surprise - the adviser made a tender offer. He got the stock at a low price even though he offered a premium to a much lower market price."

Another company could have stepped in with a competing bid, Kirby adds, because the adviser didn't own most of the REIT's stock. But ultimately, no other buyer emerged. In Westfield's case, however, there appears to be no chance of that happening, because the parent owns 77.5 percent of the shares. As a result, Kirby says, "there's no way another mall REIT could ever gain control. So why bother to bid?" No one has.

Not all buyouts by external advisers with majority voting control are done so cheaply. In late 1999 Donald Bren, chairman of Newport Beach, California-based Irvine Apartment Communities, offered a 24 percent premium to purchase the 37 percent of the shares he didn't already own. That price was at the estimated NAV.

Of course, that's scant comfort to Westfield shareholders, who have little choice but to swallow hard and sell.