Real estate moguls Sam Zell and Barry Sternlicht's battle for industrial real estate investment trust (REIT) Monmouth Real Estate Investment (NYSE: MNR) has ended. Monmouth shareholders rejected a sweetened cash-and-stock merger proposal from Zell's Equity Commonwealth (NYSE: EQC). As a result, Equity Commonwealth terminated its merger agreement with Monmouth.
Here's a look at what this development means for these industrial REITs.
Zell walks away
Equity Commonwealth and Monmouth held special meetings of their shareholders on the last day of August to vote on the proposed merger. While Equity Commonwealth investors approved the transaction, not enough Monmouth shareholders voted in support of the deal. As a result, Equity Commonwealth terminated the merger agreement and requested that Monmouth reimburse it for fees and expenses, including paying a $72 million termination fee.
This rejection puts Equity Commonwealth in a predicament. The office REIT had been selling off its portfolio since Zell and his team took control a few years ago. The company is now down to four office properties with 1.5 million square feet of space. It had planned to sell those remaining properties after completing its merger with Monmouth. In addition to those office buildings, Equity Commonwealth has more than $3 billion of cash and no debt.
The company now must decide its next step. Zell and Equity Commonwealth's CEO David Helfand recently penned an open letter to Monmouth shareholders, detailing the rationale behind the decision to pivot to investing in industrial real estate. They wrote:
We have spent the last few years reviewing numerous opportunities across a range of sectors in the real estate industry. When we started, we were looking for bargains. Over time, with the tremendous amount of capital looking for a home and no bargains to be found, we shifted our focus to something we have been doing for decades - base building. The Equity group of companies has built a base in each of the residential, manufactured housing and office sectors, and we are now looking to do so in the industrial sector.
While they believed they found the right partner in Monmouth, that company's shareholders thought otherwise. Now, Equity Commonwealth needs to find another way to get into the sector. According to Helfand's comments on the company's second-quarter conference call, it's already reviewing additional opportunities, including mergers and acquisitions (M&A), large portfolio acquisitions, and development opportunities.
Given that, it seems likely Equity Commonwealth will continue to pursue a transition to the industrial sector.
Where does this leave Monmouth?
After rejecting Equity Commonwealth's proposal, Monmouth is also facing some uncertainty. The company put out a press release following the vote, stating that it "remains open to all available options to maximize long-term stockholder value and realize the full potential of the Company's high quality industrial portfolio."
Further, the company stated that it "will remain disciplined and flexible in our consideration of potential strategic and financial alternatives to maximize long-term value for stockholders."
Those statements suggest it isn't a foregone conclusion that Monmouth will now accept the all-cash offer from Sternlicht's Starwood Capital. That deal is for a net $19.20 per share in cash, including paying the termination fee to Equity Commonwealth.
It's a slightly higher offer than the $19 in cash that shareholders could have received from Equity if they opted for the cash component. However, choosing to receive Equity Commonwealth shares limits their upside and the ability to continue collecting dividends.
Since Monmouth already ran an extensive sales process, it seems likely that it will accept this deal. The only other option is to remain a publicly traded company, which doesn't seem to be what shareholders want. Given their rejection of Equity Commonwealth's proposal, they appeared to favor the certainty of cash versus the optionality of staying public.
You can't win them all
While Sam Zell has an extensive history of creating value for REIT investors, Monmouth shareholders rejected his proposal, preferring the certainty of cash to his upside-value proposition. While Zell's company will walk away with some money, he now must find a new target. Given the fierce competition among investors and high prices investors are paying for industrial real estate these days, that will likely take time.