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Lawyers, guns and accounting: Scenes from day 1 of NAREIT's REITWise 2016 event

Lawyers, accountants and REITexecutives gathered March 30 in Washington, D.C., for the first day of NAREIT'sREITWise 2016 conference. Topics ranged from the arcane — "ILM 201606027:'Bad Boy' guarantees and partnership allocations," per one agenda item —to the practical, with much of one panel focused on the details of REITs'directors and officers liability insurance policies. Below are some highlightsfrom the conference's opening panels.

Better foot forward

Onan accounting panel, NAREIT's senior vice president for financial standards,George Yungmann, said the organization has been exploring whether REITs'financial performance would be easier for non-dedicated investors to understandif they emphasized more familiar metrics than FFO.

Themethodology for calculating such popular REIT-related metrics as same-store NOIand the various adjusted forms of FFO varies widely from company to company,Yungmann said. Many REITs now report some bespoke FFO variations alongsideNAREIT-defined FFO, and a vocal contingent of and other of the space have criticizedthe practice.

Asidefrom variations among the metrics, Yungmann argued, the measures' relativeobscurity, and their emphasis, present problems.

"Wetook a report to the executive board in February and said let's think aboutwhat we're doing here," he said. "FFO, NOI, even EBITDA to someextent, kind of focus on property operating profitability rather thanenterprise-level probability. Is there an enterprise metric that may be morefamiliar to generalist investors, rather than the dedicated REIT investors?"

Ascompanies prepare for an August change that will put public real estatecompanies into their ownsector  under the Globalindustry Classification System, and presumably bring in more generalistinvestors, Yungmann suggested that REITs should look for better reportingmetrics, rather than seeking to improve the existing ones.

"We'renot near a proposal at this point," he said. "We are stillinvestigating, is there a metric that would be more familiar to generalistinvestors, and still report the economic performance of a portfolio ofinvestment properties? That's the question that we're into."

The way of the gun

In apresentation on another panel, Greenberg Traurig LLP real estate practiceshareholder Carey Gunn Venditti laid out the implications for landlords ofstate laws — like one in her home state of Texas that allow for the open carrying of handguns.

Vendittilisted a series of questions property owners should consider, including whetherto forbid guns verbally or with a sign; whether to hire security guards orcreate procedures for dealing with armed customers; and whether to take aposition on guns at all. She also detailed the characteristics that signsbanning guns from a given property must have under state law, includingspecific language, one-inch-tall letters and admonitions in both English andSpanish. Property owners may want to consider whether to keep or eliminateemployee parking spots, she said, since the Texas law expressly permitsemployees of businesses to keep guns in their cars even at properties that donot allow them.

Anaudience member asked whether open carry laws permit weapons in studenthousing, adding, "I just had a horrible thought about a bunch of drunk22-year-olds, 21-year-olds, with handguns."

"Well,you're not supposed to do it intoxicated," Venditti replied, laughing."They're going to follow that law."

TheTexas law permits residents aged 18 and over to openly carry guns, she added.

Best behavior

Executivesat Arch Insurance said in a panel appearance that securities class-actionlawsuits have remained flat in the real estate industry in recent years, evenas they have risen in the broader market. In past years, he added, manycomplaints in the REIT space focused on IPOs and rollups.

Morerecently, he said, the focus has shifted to claims of accounting and financialimproprieties, shareholder objections to changes in bylaws and allegations ofself-dealing around the evaluation of M&A transactions.

"Aswe underwrite M&A and look at transactions, we typically want to understandthe two parties' rationale and motivation for entering into thetransaction," Arch Vice President Michael Chu said. "We want tounderstand the forms of consideration, whether it's a complete cash buyout or acombination of cash, stock and OP units. … We're going to ask about thereaction from analysts, investors and other market participants, and also justkind of understanding some other factors that might come into play, such aschange in control agreements or golden parachutes, or other compensationagreements that might provide some motivation to either reject or propose adeal."

Basedon a study of past deals, he added, "What we've noticed is that thosecompanies with the most benign types of M&A litigation are generally thosethat can fully demonstrate that they've conducted a fair and full process, allthe efforts were well-documented, and that they adequately explored all optionsavailable to them."