REIT Roll-up Transactions: How Much is YourManager Worth?
By Sherry Cefali of the Duff & Phelps Opinions Practice of Kroll, LLC
July 6, 2023

In REIT roll-up transactions, the value of contributed realmanager. Therefore, REITs are strongly advised to internalize

estate assets is generally understood, as investors are usually

their management company prior to, or concurrent with, its

comfortable with the well-established methodologies under-IPO. REIT investors are generally very focused on making surelying real estate appraisals. The value of the management

their interests are fully aligned with management’s interest

company is less straightforward, however, and often becomeswhen it comes to buying stock and pricing an IPO. To achieve

an area of inordinate focus in roll-up transactions. So why ismaximum investor demand and optimum pricing, the under-

the management company a source of value and how is thatwriters typically recommend REITs internalize management

value best determined?

and be fully integrated, self-managed and self-advised.

This article is an update to our studies performed in 2014,

Under most external management agreements, the manag-2016 and 2019 that explores management company valua-ers are paid a base fee on assets under management. This

tions from the following perspectives:means that the external managers may be incentivized tobuild larger portfolios, even at the expense of quality or prof-•

Why it is important to convert to internal manage-

its. Furthermore, a number of managers hold board seatsment prior to a REIT going public

on multiple managed companies’ boards, resulting in further•

The reasons why a manager has value in a roll-up

potential conflicts of interest. As a result, even if an externally•

Historical trends regarding management company

advised REIT is successful in completing its IPO, we foundvaluations in REIT roll-up and internalization transac-

that it will often trade at a discount to its internally managed

tions

peers.

••The use of a discounted cash flow analysis to value
management companies

Given the market’s preference for internally managed REITs,

Factors that impact the values of management com-the path to achieving the highest returns for investors in apanies

REIT roll-up IPO often includes converting to an internalized
management company.4 To do this, the investors in the funds

The Need to Convert to Internal Management

and the owners of the management company must agree on

Many private real estate entities operate as a series of limited
life partnerships or LLCs, with an “external”1 management

the valuation of the manager interest, and that often createssome of the most significant issues in the roll-up.

company overseeing each of them in exchange for an asset
management fee and a carried interest participation in theWhat Value Should be Assigned to the Management

ultimate profits of each entity (also known as a promote inter-Company?

est). Many of today’s noteworthy publicly traded REITs were

So why does a management company actually have value andformed as a result of roll-up transactions in which a series

how is that value best determined?

of these finite-life funds are reorganized into a newly formed
REIT at the closing of the IPO.2

In the world of privately-owned real estate investments,
the manager has a contractual right to property and asset

It can be very difficult to generate sufficient investor interest
to go public if an equity REIT3 continues to use an externalmanagement fees, generally for the term of the fund.

Inthe typical roll-up, the manager exchanges these contractual

July 6, 2023

future rights, any carried interest, and (where applicable) its

consideration in the transaction. In addition to the consid-

operating platform for shares or units of the newly formed

eration paid to the manager at closing, there may also be aREIT. After the roll-up transaction with the management com-contingent component if certain targets are achieved, as waspany, the newly formed REIT will no longer incur fees payable

the case in the acquisition of the respective management

to the manager for property management, asset manage-companies by Cole Credit Property Trust III, American Homes

ment, and other services under the advisory agreement.

4 Rent, Broadstone Net Lease, and SmartStop Self Storage
REIT. While these “earn-out” payments may be difficult toThe number of REIT shares allocated to each partnership isquantify, they often represent a meaningful portion of the total

typically based on third-party appraisals of the real estate

price paid for the manager.

properties, adjusted for other assets and liabilities contributed to the REIT, such as mortgage debt and cash, to determine

There are three valuation ratios that are readily calculated

each partnership’s contributed net asset value (“NAV”). The

based on the sale of other management companies. The

number of REIT shares allocated to the management com-

first is the Manager Value relative to the REIT’s Market Valueof Equity5. The second is the Manager Value relative to thepany is estimated using generally accepted valuation methodologies, including an analysis of management company
values in REIT roll-up and internalization transactions, as well

REIT’s Invested Capital6. The final metric is the Manager
Value relative to the manager’s trailing 12-month EBITDA7.

as a discounted cash flow analysis.
As shown in the chart below, the price paid for management
While the participants can use real estate appraisals to get

companies relative to the size of the REIT appears to fluctu-

comfortable with the relative value of contributed real estateate from year to year based on the ratios of Manager Valueassets, the value of the management company is much lessto the Market Value of Equity and Invested Capital. This istransparent.

primarily due to the fact there are relatively few REIT roll-up
and internalization transactions that occur each year, making“Investors easily understand that their properties are valuable

it important to not focus on the data from any single year,

but tend to forget that internalized REIT management requires

which may be driven by very few transactions.

the management entity giving up future property and asset
management fees,” added Peter Linneman, CEO and founderThe ratio of Manager Value relative to the REIT’s Investedof American Land Fund and KL Realty, CEO of Linneman

Capital is considered one of the most important metrics, as

Associates and Affiliates and current board member ofit adjusts for the impact of varying amounts of debt within

Equity CommonWealth REIT, Regency Centers and Paramount

REITs, and more closely approximates the ratio of ManagerGroup.

Value to assets under management (AUM).

Analyzing Other Management Company Transactions

Manager Value to Invested Capital over the entire period analyzed8 had a mean of 3.2% and a median of 3.0%.

The ratio ofOne of the best ways to estimate the value of a managementcompany is to analyze other REIT roll-up and internalization

The ratio of Manager Value to Market Value of Equity of thetransactions. The market price paid for the management

REIT is higher than the ratio of Manager Value to Invested

company (the “Manager Value,” also sometimes referred to as

Capital. This is due to the fact that Market Value of Equity

the “Internalization Fee”) is analyzed relative to the manage-

is net of debt (similar to NAV), whereas Invested Capital isment company’s profitability, as well as relative to the value

calculated before subtracting out debt. The ratio of Managerof the REIT.

Value to Market Value of Equity of the REIT over the period
analyzed had a mean of 6.3% and a median of 5.3%.

Most of the time, the manager is acquired just before, orconcurrent with, the REIT going public. Therefore, there may

The trailing 12-month EBITDA multiples paid for management

not be any disclosure requirements regarding the manager’s

companies in REIT roll-up and internalization transactions

profitability or price paid for the management company.

ranged from 1.6x to 15.0x, with a mean of 7.5x and a medianHowever, the value received by the management company

of 6.8x. As shown in the chart below, over 67% of the EBITDA

can be determined if the REIT disclosure documents include

multiples implied by the transactions analyzed were at or

the number of REIT shares or units the manager received asbelow 8.0x trailing EBITDA.

July 6, 2023

*Excludes transactions where the external advisor was internalized for no fee. See footnote 8 on next page.
Source: Kroll database of 102 internalization transactions compiled using publicly disclosed information and proprietary deal intelligence.

Discounted Cash Flow Analysis

percentage of their REIT than others? Kroll's experience andA discounted cash flow analysis of the net management fees

research reveals that higher valuation multiples are typicallyrepresents the other generally accepted methodology used toassociated with management companies with: (1) a provenvalue the management company.

track record of delivering high IRRs to investors, resulting invalue to carried interests and follow-on funds, (2) a focus on

A discounted cash flow analysis estimates the net present

lucrative niche markets with a unique strategy, (3) a talented

value of the projected after-tax cash flows generated by themanagement team able to execute on that strategy, and (4)management company. The projections are typically devel-a history of generating strong profits. Conversely, manage-

oped assuming that the manager continues to operate as anment companies that underperform and also have a short

independent company and is not internalized into the REIT.

duration remaining in their management agreement and a

If the management company has a history of raising new

low or no termination fee, tend to be acquired for little to nocapital or funds, the projections will often reflect future newInternalization Fee.

funds anticipated to be raised. The projections also generally include asset and property management fees, along withThe investors in the real estate partnerships and the owners of

any acquisition, disposition and financing fees in a manner

the management company ultimately need to reach an agree-

consistent with the manager’s existing agreement, historicalment as to the appropriate valuation of the manager for theactivity and expected future fundraising activity. The projec-transaction to move forward and for the management com-

tions typically do not include any carried interest participationpany to be internalized. The partnership investors do not want(promotes) on existing or new investments. The in-the-money

to pay an excessive Internalization Fee for fear that the inter-promotes at IPO are typically handled separately from thenalization transaction will be dilutive to their property interests

manager valuation in accordance with the waterfall calcula-when they become REIT shareholders after the roll-up.

tions in the management company agreements.
“The valuation of the manager is complicated by the ineviWhat Factors Create Differentiated Value for Management

table fear that the current management fee is too high,” says

Companies?

Linneman.

“However, without an aligned and incentivized

What creates greater value in a management company andmanagement team, which requires management internaliza-

why do some managers end up with a larger ownershiption, the contributed properties will not obtain full valuation.”

July 6, 2023

forConclusion

2 For example, four of the largest REIT IPOs to date, Paramount Group, Empire

One of the most important and debated aspects of a REIT

State Realty Trust, Douglas Emmett and Invitation Homes, were all formed inroll-up transaction is the value of the management company.
There is often concern among the investors about the pitfalls of paying an overly generous price for the managementcompany, which could be dilutive to their investment. Themanagement company should be valued using appropriate,
generally accepted methodologies that capture the future
expected cash flows of the manager and result in a value thatcan withstand scrutiny when compared to the managementcompany values in other REIT roll-up and internalization transactions. Given the market’s preference for internally managed
REITs, the path to achieving the highest returns for investors
in a REIT roll-up IPO includes an internalized managementcompany.

roll-up transactions.
3 Equity REITs refer to companies that hold real property. There are more externally managed mortgage REITs than equity REITs due to the fact that morethan one mortgage REIT will often hold paper in the same investment, creating
economies of scale if the manager analyzes the same investment for multiple
mortgage REIT clients.
4 When a REIT internalizes the management services provided by an externaladvisor, this transaction is often referred to as an “internalization” transaction.
5 Closing price per share multiplied by shares and units issued and outstanding
plus the value of any preferred stock
6 Market Value of Equity plus interest bearing debt
7 Earnings before depreciation expense, interest income and expense and taxes
8 Kroll analyzed transactions that occurred from 1997 through 2022. Kroll did
not include the periods from 2001 through 2003 or 2008 through 2009, due tothe paucity of REIT IPO activity and the lack of internalization transactions that
could be identified by Kroll immediately following the economic downturns of

1An entity is externally managed when its management team is employed by

2001 and 2008.

separate business on a fee-for-service. Often an external manager will provide

identified that occurred in each of 2021 and 2022 with publicly available dataservices to a series of different entities. An entity which employs its own man-to include in this study, compared with 2020 that included 10 internalization

agement team is “internally managed.”transactions.

Furthermore, there was only one internalization transaction

This original article was published on www.globest.com on September 2, 2014, under the title “REIT Roll-Up Transactions: How Much is Your Manager Worth!” It has been updated by Kroll with the intention of including current data and other relevant changes since its original publication. © 2014-2023 ALM Global, LLC. All Rights Reserved. Further
duplication without permission is prohibited, contact 877-256-2472 or asset-and-logo-licensing@alm.com. #096-04-19-05 updated 2023.

July 6, 2023

About the Author

Sherry Cefali, Managing Director
Sherry Cefali is a Managing Director in the Duff & Phelps Opinions
Practice of Kroll, LLC. Kroll is the global leader in providing independent
fairness opinions. Kroll rendered relative fairness opinions in numerous
roll-up transactions, including four of the largest REIT IPO transactions todate–Paramount Group, Douglas Emmett, Empire State Realty Trust andInvitation Homes. To learn more, visit www.kroll.com

10100 Santa Monica Boulevard
Suite 1100
Los Angeles, CA 90067
Sherry.cefali@kroll.com
424-249-1660

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