The bidding war between Sam Zell and Berry Sternlicht -- who are battling it out over industrial REIT (real estate investment trust) Monmouth Real Estate Investment (NYSE: MNR) -- is intensifying. Zell is upping the ante in his bid to acquire Monmouth by increasing his offer and adding a cash option.
That new wrinkle will allow Monmouth investors to either cash out or participate in the upside Zell sees ahead as he combines Monmouth with his soon-to-be-former office REIT Equity Commonwealth (NYSE: EQC).
Here's a closer look at the new proposal and why Monmouth is such a hot property these days.
Tweaking the offer
Zell, the chairman of Equity Commonwealth and one of the richest real estate investors in the country, had an all-stock deal in place to acquire Monmouth, valuing it at $3.4 billion. That would give his company a platform to transition into the red-hot industrial real estate sector. However, Sternlicht's Starwood Capital has been trying to break up that merger with an all-cash deal.
And Starwood sweetened its all-cash offer last month. It's now offering a net $18.88 per share: $19.51 per share minus the $62.2 million, or $0.63 per share, termination fee Monmouth will owe Equity Commonwealth if it walks away from their deal. That's a slight increase from its previous offer of $18.70 per share and surpasses the value of Equity Commonwealth's all-stock transaction, given the recent decline in its stock price.
While Monmouth's board favored Equity Commonwealth's deal, proxy advisory firm Institutional Shareholder Services recommended that investors vote against that transaction in favor of Starwood's proposal due to its greater value and certainty. That led Equity Commonwealth and Monmouth to amend their merger agreement.
The new deal would see Equity Commonwealth exchange 0.713 shares for each Monmouth share, up from the initial exchange rate of 0.67. That 6.4% premium values Monmouth 23.1% above where it traded in late December. Further, it's giving Monmouth investors the option to receive cash valued at $19 a share.
They also increased the termination fee to $72 million. Equity Commonwealth hopes that the higher offer, inclusion of a cash component, and increased termination fee will enable it to emerge victorious over Starwood.
Why the fuss over Monmouth?
Zell and Sternlicht are fighting over Monmouth because it owns a high-quality portfolio of logistics properties. The company has more than 120 strategically located properties net leased to high-quality tenants; FedEx (NYSE: FDX) leads that list at more than 50% of Monmouth's annual rent. This portfolio generates stable cash flow with embedded upside as rental rates rise due to the currently robust market conditions.
CEO Hamid Moghadam of industry-leader Prologis (NYSE: PLD) noted that "demand for logistics space is robust and diverse, and operating conditions remain the healthiest in our 38-year history." Because of that, Moghadam stated, "vacancies in our markets are at all-time lows, contributing to record rent growth."
Those trends aren't likely to fade anytime soon. The U.S. needs a lot more warehouse space but will struggle to expand capacity, given the challenges of developing new warehouse space.
Because of those factors, existing warehouse properties are increasingly more valuable, leading investors to pay a hefty premium for control of large portfolios. For example, leading non-traded REIT Blackstone Real Estate Income Trust (BREIT) recently agreed to take Canadian industrial REIT WPT Industrial Realty Trust (TSX: WIR.UN) private in a $3.1 billion deal.
The all-cash transaction is at a 17.1% premium to WPT's prior closing price and a lofty 32.1% premium to the net asset value (NAV) of its U.S.-focused portfolio. Of note, FedEx is WPT's largest tenant at 13.5% of its annual rent. With logistics being one of Blackstone's highest conviction themes, it was more than willing to pay a big premium to add WPT's high-quality U.S. portfolio to its existing logistics properties.
Raising the stakes
Equity Commonwealth is pulling out all the stops to ensure it wins the bidding for Monmouth. It's boosting its offer, including a cash component, and increasing the termination fee. That puts the ball back in Starwood's court, which must now increase its all-cash bid enough to entice investors to take its deal.
If it doesn't, Equity Commonwealth could close its merger with Monmouth early next month, giving it a high-quality, scalable platform as it looks to take advantage of the fast-growing industrial real estate sector.