TOP TEN PRACTICE POINTS BY EXPERTS: REIT IPOS 36 Other disclosures need to be more fully refined from the beginning, including the primary business discussion, financial statements and related disclosure, the property tables, and the industry disclosure. Prioritize the right tasks, minimize false deadlines, and establish realistic timelines. 3. LEARN FROM PEERS AND PRECEDENT. You should understand which companies will be considered peers of your client. Fundamentally, your client is seeking to attract investor dollars that would otherwise be invested (or may already be invested) in peer companies. Having a good understanding of where your client will fit in the existing REIT market is critical in preparing the prospectus for the offering and helping your client make important structuring decisions. Peers are typically determined based on asset class (e.g., office, retail, residential, industrial, hotel, etc.), asset quality, market and sub-market focus, and the expected size of the company. Your client and its underwriters will likely have a good sense of the most relevant peers, but easily accessible public resources can also be helpful to point you in the right direction. These include the lists of REIT index constituents (organized by sector and subsector and market capitalization) and historical REIT IPO listings on NAREIT’s website. 4. MAKE ACCOUNTING ISSUES AN EARLY FOCUS. You should help make sure that the accounting analysis is an early focus. In a REIT IPO transaction involving the roll-up of separate private real estate funds or other pools of assets, it is not always straight forward to determine the accounting predecessor whose financial statements are required to be included in the registration statement. Often the first formal submission regarding the IPO will be a pre-clearance letter to the SEC’s accounting staff regarding the anticipated accounting presentation. This submission, if necessary, will first require a clear understanding of the formation transactions in the roll-up, discussed below. Understanding how the financial statements will appear also will inform other disclosures. Financial statements for pre-IPO periods are often very dissimilar from financial statements for post-IPO periods. Adjustments to create financial statements on a combined pro forma basis are commonplace in REIT IPOs. These can get extremely intricate and require extensive footnoting and sensitivity analysis. Supplemental information may be useful to provide investors with more coherent historical data to demonstrate positive trends. Joint ventures are also commonplace. Supplemental disclosures such as pro rata financial information may be important to help investors understand the true financial impact of these arrangements. You should review these supplemental disclosures carefully to comply with the SEC’s rules regarding non-GAAP financial measures. 5. ALSO FOCUS EARLY ON TAX STRUCTURING. The tax impact of pursuing various structures can significantly impact REIT roll-up transactions, including which assets may be rolled up in a tax efficient manner, whether certain operations need to be held in a taxable REIT subsidiary or completely separated from the REIT, and what type of equity should be issued in the roll-up transaction (e.g., common stock vs. units in an operating partnership). You should focus on tax structuring at the outset of the transaction concurrently with the initial accounting analysis. Tax effects can be a powerful undercurrent in pre-IPO planning. Miscues regarding which structural or economic features could motivate key pre-IPO constituent owners to change their behavior are dangerous, particularly when investors’ consent is required for the roll-up of material assets. 6. HELP MANAGE PRICING EXPECTATIONS. No one likes unpleasant surprises, especially when investing untold hours of time on a project. There is a natural tendency for clients to underestimate the differences between existing public companies focused on the same asset class (who may be trading at attractive prices) and their company. Additionally, the “IPO discount” is a real phenomenon in the REIT space. Clients should expect that they will have to articulate compelling post-IPO trends and strategies and offer valuation concessions to make the IPO attractive to institutional investors. Encourage your clients to obtain a realistic assessment of likely pricing and sensitivity analysis around key variables as early as possible to help minimize unhappy clients and busted deals. 7. CLOSELY COORDINATE ROLL-UP AND IPO. As noted above, REIT IPOs often involve the roll-up of separate private real estate funds or other pools of assets that the REIT will own following the IPO. As a result, a REIT IPO can effectively involve the structuring of multiple concurrent acquisition transactions in addition to the IPO. However, the structure of these transactions often differs from typical private real estate transactions. For example, roll-up transactions that require the REIT to acquire real estate assets for a fixed dollar amount in shares or cash (which are the norm for private real estate transactions) introduce levels of risk that are often unacceptable in a REIT IPO. This is particularly true for assets that are to be part of the REIT’s core portfolio.