NAV Ratios and REIT Takeovers: The Role of Public and Private Deal Premiums

Abstract

We investigate how net asset values (NAVs) impact equity real estate investment trusts (REITs) in the market for corporate control. REITs trading at discounts to NAV are more likely to be acquired than those trading at premiums to NAV. For each acquisition, there is a public deal premium (the deal value relative to stock price) and a private deal premium (the deal value relative to NAV). REITs trading at discounts to NAV command larger public deal premiums and smaller private deal premiums. Shareholders of targets respond more favorably if the REIT is trading at a discount to NAV. Three-day cumulative abnormal returns (CARs) around acquisition announcements are 11% higher for targeted REITs that are trading below a price-to-NAV ratio of 0.95 than those trading at a price-to-NAV ratio above 1.05. The sale of a REIT trading at a discount to NAV appears to be a productive transaction for both acquirers and targets.