On-Demand: Beginners’ Guide to Real Estate SPACs

June 03, 2021

In Part I, we provided a brief history and overview of SPACs, then discussed some FAQs regarding real estate SPACs.


Transcript

Lisa Knee:Good afternoon, everyone. Thank you for attending today's session. First, I really need to thank our incredible marketing team at Hunton Andrews Kurth and Eisner Amper for pivoting and making sure we had a platform today. Thank you for a great effort. The show must go on as they say. My name is Lisa Knee and I am the co-chair of EisnerAmper Real Estate Services Group.

We're happy to welcome you to part one of our real estate SPAC webinar series. Today, we're going to focus specifically on the basics, our version of a beginner's guide to SPACs. We would love to thank our co-sponsors here today and co-presenters at Hunton Andrews Kurth for joining us here today.

Here at Eisner Amper, we're focused on helping clients respond to the overall market through a wide array of advisory and accounting services. Including property level accounting and constructing financial oversight. These webinars are designed to help keep you up to date on what's happening in the marketplace and what you should be thinking about as you refine and redefine those business strategies. Today, our expert panelists are going to explain and kind of demystify SPACs. And more importantly, the use of a SPAC in an untapped capital market for real estate. Joining me today at our Eisner Amper team is Angela Veal, Managing Director in our Technical Accounting and Advisory Practice. And Michael Torhan, Tax Partner in our Real Estate Services Group. With that, let me welcome everyone for joining us today and turn the program over to Laurie Grasso, partner and co-head of Global Real Estate and Hunton Andrews Kurth. Thank you again for joining us.

Laurie Grasso:Thank you, Lisa. I'm so excited. We're all so excited to be here from Hunton Andrews Kurth. Lisa and I have known each other a long time. We've been trying to come up with a way for us to join forces on a topic that we thought was timely and interesting. We're definitely raising the bar today talking about SPACs and demystifying them, as you say. Thank you to Eisner Amper for asking us to be a part of this. I am hopeful that this is one of many seminars that we're going to be doing together. I think it's such a great marriage. You guys get to talk about the tax and accounting aspects, and us legal experts get to talk about the legal aspects. Thank you again. This session is being recorded. We want questions from the audience.

There's a Q&A at the bottom. You can type in any questions that you may have and Lisa and I will field them to our panelists. The panelists, on the Hunton side, we have Michael O'Leary. Mike, who is my partner. He is the co-head of the corporate team at Hunton. We have Taylor Landry, who is my partner also on the corporate side. With that, I think we'll kick it off to Angela to dive right in. Thank you.

Angela Veal:Thank you, Laurie and Lisa, for the very nice introduction. SPACs have been a force to be reckoned with in the capital markets world and everyone is talking about SPACs. Before we start, I would like to share some interesting statistics. The concept of SPACs is not new. They have been around since the 1990s. There was a record $83 billion of fundraising activity through SPACs last year, which is five times more in capital raised compared to traditional IPOs.

There have been $100 billion raised in the first quarter of this year alone from SPACs fundraising, which is more than the whole of last year. This year, SPAC transactions start off strong, but that has taken a slight pause in April under some regulatory pressure from the SEC and also the congress, which we are going to elaborate a little bit more on in a later slide. From an SEC perspective, they recently issued a statement in SPAC, relating to and accounting for SPACs by accounting for warrants by SPACs. That test resulted in many SPACs having to revisit their accounting position and restating their public followings. This has spooked the SPAC community quite a little bit.

However, many in the community still anticipate the SPAC activity to pick up and ramp up over the rest of the year. From a real estate perspective, several prominent real estate firms, such as CBRE and Tishman, have launched their own SPACs. Pro-tech companies such as Open Door and Latch were actually acquired via these SPAC mergers. Another well-known transaction is WeWork that has successfully gone public via a SPAC merger as well. Another interesting item to note is that SPACs do have very limited time to identify a target and to go through a SPAC merger. Therefore, it is a significant untapped capital in the market.

Next, we'll move on to the history of SPACs. Like I mentioned earlier on, SPACs have been around for the past three decades. The idea of SPACs was first created in the 1990s. At that time, the focus was mainly on technology and media. In the 2000s, through 2019, the idea was legitimized over time and expended to other industries, such as consumer products and financial services. Raising capital through SPACs ultimately took over the more traditional IPOs last year with a total of 250 SPAC IPOs. This year and beyond, despite the stand still due to the SEC pressure, SPAC IPO transactions in Q1 itself have really outdone the whole of 2020, are lightly ramping up for the rest of the year.

Next, we'll move on to, what is a SPAC? I'm sure many of you on the call right now might be asking as to what exactly SPACs are. SPACs are categorized as blank check companies. There are three key players of a SPAC and they include sponsors, investors, and target companies. The sponsors then raise money from the public market investors through an IPO, specifically to take a target company public or to merge with it. The timeframe given to a SPAC is usually around 18 to 24 months of the IPO. The SPACs themselves do not necessarily need to have a target industry in mind. The IPO proceeds are then placed in a trust that invest in instruments that earn interest for the investors. But investors need to be careful because this might not necessarily be the case. When they are reviewing the prospectors, they want to make sure that they understand what is going to happen to their IPO proceeds.

If the merger does not materialize, the SPAC will be liquidated and the proceeds will be returned to the investors. This flexibility is seen very favorably by the investors themselves. You'll also hear the term de-SPAC a lot during this presentation. This is basically another term for the merger of the SPAC entity and its target company. Next, we'll move on to the first polling question, number one.

Lisa Knee:It helps if I have my glasses on. Okay, so here's the first polling question. Which category within a SPAC industry do you consider yourself to be in? A, existing potential SPAC. B, existing potential sponsor of a SPAC. C, existing potential investor in SPAC. D, real estate company or real estate fund. We're going to put REITs in that category. Or E, others. While we give you a minute to vote, Angela, I'm going to throw out a question there. I hope you don't mind. But who are usually the sponsors of real estate SPAC?

Angela Veal:Yeah, sponsors can be private equity firms or venture capital firms. Or they can be made up of experience management teams comprising of three or four members with power, PE, or MNE experience. Also, one interesting item to note is that post-IPO, the SPAC entity aspects consist mostly of cash. Therefore, instead of analyzing the assets of the SPAC, before making any investment decisions, investors would usually make the decisions by evaluating the background and strength of the sponsors themselves.

Lisa Knee:Okay, great. I think we still have a couple more minutes on this, so I'm just going to ask you another one. Earlier in the slides, you mentioned something about SPAC warrants. Can you just elaborate a little bit more on this topic?

Angela Veal:Sure, Lisa. This is a really popular question as well. We will elaborate more on this in our next session on June 10. At a high level, due to the recent SEC statement on April 12, 2021, existing SPACs would need to reevaluate their accounting position for public and private placement warrants. Instead of being classified as an equity which has been done historically, SPACs may now need to classify their warrants as liabilities. As liabilities, the warrant would need to be fair value every reporting period, with the change going through the income statement. This change may also be deemed to be a material statement that requires a restatement of the financials.

Lisa Knee:Great, now I know what people are talking about. I think our polling question is closed.

Laurie Grasso:That was my guess, Lisa.

Lisa Knee:Yeah.

Laurie Grasso:I thought D was going to be the winner.

Lisa Knee:There we go. We must have a lot of attorneys on the call and accountants.

Laurie Grasso: And a lot of clients. A lot of real estate clients. I looked at the list of participants.

Lisa Knee:Yeah.

Laurie Grasso:That's showing in category D.

Lisa Knee: D and E, yep.

Angela Veal:Next, we'll move on to the lifecycle of the SPAC. We're going to cover this at a really high level today just for an overview. Specifically for the first two phases of the lifecycle of a SPAC, we'll cover them in the June 10th session. For the next two phases, phase three and phase four, we'll cover them on our June 15th session. During those two sessions, we're going to discuss the legal, accounting, and tech implications as well. Overall, if you look at the graphic, the really interesting graphic here, a lifecycle of a SPAC consists of four phases.

The first phase is the formation and IPO of the SPAC itself. This process usually takes about eight weeks. Usually it starts with a selection of underwriters. Finalization of legal documents, and following a registration statement to initiate IPO code. Then a road show is being organized, and underwriting the IPO will take place. During this phase, SPACs should definitely evaluate the drop in warrant agreements to ensure that they are comfortable with their ultimate accounting position, with the hindsight of what is going on with SEC statement and what is going on in the marketplace right now.

The second phase consists of target search and periodic filings of 10Ks and 10Qs. It can be between 18 to 24 months, max of two years for the SPAC upon IPO to complete the de-SPAC transaction, which is basically the merger with the target company. Now, SPACs also have to revisit, so for the existing SPACs in the marketplace, they want to make sure that they also revisit their current accounting position for SPAC warrants. Also during this phase, if the SPAC needs additional capital to pursue the business combination or pay for its expenses, the SPAC would also arrange for committed debt or equity financing. Such as a private investment in public equity or a PIPE commitment to finance a portion of the purchase price for the business combination.

Next, we move on to the third phase, which is basically the de-SPAC phase or the most exciting phase where a lot of things are happening. This phase itself is pretty accelerated. It can take place between a few weeks to around five months. This phase involves the shareholders voting to approve of the target company or the business combination. The shareholders are also given an offer to redeem their proceeds as well if they choose to do so. The target company at this time would also need to make sure that once they have signed a letter of understanding with the SPAC itself, they want to be ready as a public company as well in terms of accounting, reporting, and internal controls. At the same time, they also need to get their financials audited under the PCOP standards. Once the de-SPAC process is completed, the new combined entity has officially gone public. We move on to the next phase, which is called the post-merger phase.

At this point, investors who have voted not to redeem would continue as investors in the new combined entity. At this point, there will be a lot of incubation of the two entities. Also as a public company, this new entity will continue to file the 10Ks and 10Qs. If we move on to the next slide, we are going to also discuss a little bit more on the pros and cons of SPAC IPOs.

Taylor Landry:On the difference between why do a SPAC IPO versus a traditional IPO? The SPAC IPO is significantly less time consuming because there's not really operations or meaningful financial statements that need to be included there. Normally you would have a longstanding operating history, at least a couple years of operating history and some financial statements that the SEC would then have to work through. Which brings me to the next point, there should be fewer SEC comments, significantly fewer SEC comments. Because the structure of the S1, it's really just laying out the management team and their plan. You're not describing a business or assets or anything like that. You're describing what you plan to do when you find a target entity for your de-SPAC transaction.

On the warrant point that Angela brought up earlier, that certainly has caused a little bit of a hard pause on some things. I know that she alluded to the fact that it spooked people. I know it's been a hot topic. The existing SPACs that are out there have gone through the effort of restating financials and getting that sorted. To the extent people are in the middle of a de-SPAC transaction, it's definitely slowing the deals down because they have to wait on that to get it done. But the SPAC IPOs that are going up now, they have the benefit of an SEC announcement and seeing how people are handling it to be able to press forward and get these IPOs done on a pretty expedited timeline.

Another benefit on a SPAC IPO versus a traditional IPO is at the IPO, the investors are buying units. Units consist of shares and fractional interest in warrants that eventually decouple. I think it's 50-ish days after they begin trading. As you approach the business combination, the de-SPAC transaction, the investors can redeem their shares if they're not in favor of the target company or the de-SPAC transaction. They'd obviously still have their warrants, but those are really tradable. Or at a later date if they wanted to exercise those and then have shares, and then sell shares. They could go that route as well.

Mike O’Leary:More about the benefits of SPACs and de-SPACs from a sponsor's perspective, target company perspective, and investor's perspective. From the sponsor's perspective, a SPAC is an alternative to raising a private fund or using a publicly traded RE or a non-publicly traded RE to raise money, to raise capital, to fund an operating real estate business. A SPAC provides the ability to raise capital all at once. You raise it upfront. Once you've gotten through the SEC with your IPO S1, you then go to the market, do your road show. You raise all your capital at once. Then the company and its management team go on, if you will, a hunt for an operating business to acquire. One other benefit from a sponsor's perspective is that the sponsor or founder typically gets a 20% stake in the business for very little investment, which can yield substantial returns upon the successful completion of a de-SPAC transaction and the operating business performing the way it says it's going to perform.

For target companies, why would a target company, an operating company, consider combining with a SPAC? Well, the benefit is a SPAC has already raised the money. You don't have to do your own IPO and prepare your own documentation. Assuming the SPAC stockholders don't elect to all have their investment redeemed, you've got the benefit of the money that's in the trust. If a PIPE was used also to raise additional capital, you've got the PIPE money to help fund the business. Then typically the operating companies will go out and seek a debt commitment. So that when they emerge following the business combination, they've got sufficient capital to operate the business on a go forward basis. Combining with a SPAC can be more simplified than the traditional IPO route. I say "can be" because you can obviously have some de-SPAC transactions where they elect to go a more complicated route, like electing an up-C structure.

That can really complicate your structure and take more, take significant time. It's not like the time it takes to do a new IPO, where the company planning its own IPO may take a year or a year and a half to really get to the point where they really feel like they're ready to go to market. It involves less time, often less energy and lower costs. Again, if you choose to go a more complex route, it's who can be expensive. Up-C structures, which have a real benefit for the target company's stockholders if they put in a tax receivable agreement, can take time and effort to put in place.

Then from the real estate investor's perspective, why would they consider investing in a company when they could be out seeking real estate target companies? Well, it gives them access to companies that are private. In other words, the SPAC is seeking a company that's not already public to combine with. And gets the benefit of assuming the management team or the sponsors are selective in picking good companies, then it gives them access to good companies in a public format. They get the benefit of owning shares in that public company.

Laurie Grasso:Hey Mike, I have a follow-up question to the slide if it's okay. The founders getting the 20% stake, is that market driven or negotiable I guess that's my first question. The second question is, I think you and Taylor have said it a few times, that it's less time and expense. Can you quantify time and expense differentials between a traditional IPO and a SPAC?

Mike O’Leary:The 20%, it's become the traditional stakes that sponsors get. There has been a lot of criticism about that stake among other criticisms of SPACs. There have been some SPACs where the founder's stake has been less. The founders, in some cases, not only do the founders get a 20% stake. Often they also get private, privately placed warrants. So, their stake can actually be larger than 20%. There have been a series of SPACs that have come out in response to some of the criticism where the 20% stake has been reduced.

In fact, there have been some SPACs where the size of the public warrants, the fractional warrants that Taylor mentioned just a few minutes ago. Typically you get half of a warrant with each share you buy. In some cases, they've had 25% of a warrant with the shares that you buy, with each share that you buy. Some SPACs are responding to some of the criticism. I would say far and away, if you look at the ones that have been recently filed, the new SPACs, most of them go ahead and retain the 20% stake. It's so attractive to the sponsors. It's hard for them not to want to take that.

In terms of quantifying the cost of a target operating company doing its own IPO versus doing a de-SPAC combination, what typically we see is the cost of an IPO, all in costs, from the time they first really begin working on it, building up the internal compliance side, getting their financial statements ready, and then going through the IPO process. It's $2 or $3 million at a minimum. Many of these de-SPAC transactions, if they don't have the complications, you can get one done. Now, you've got to negotiate your definitive purchase agreement. Definitive agreements for the business combination. There are incremental costs related to that. But once you get through that and go through the process of preparing the DS4, filling with the SEC, dealing with the SEC comments. Which you do have comments at that side because you've got a new target.

You've got a new operating company. You've just got to describe its business. You get a lot of SEC comments on particularly the description of the new business and the financial statements for the target operating company. That cost can be in magnitude anywhere from $2 million on up as well depending on the complexity, how long it takes you to get through the process, how long the negotiation with their de-SPAC.

Lisa Knee:Thank you. Next slide?

Taylor Landry:Yeah. One other thing I would add there to what Mike was just saying about the timing is in a traditional IPO, you hear the equity capital markets folks talking about hitting the window, hitting the IPO window. A lot of those things are out of the company's control, trying to time the market. If you're doing a traditional IPO, there's all this wind up to getting the S1 together, getting the auditors lined up. Getting everyone to stack hands. Then all of a sudden, the market falls out. And then a couple months later, the market comes back. Well, your financial statements are stale. Then you need to roll those forward. You can see a scenario where you can miss the window multiple times. But the SPAC IPOs get out pretty quickly. They usually file a draft registration statement with the SEC on a confidential basis. Then once they flip public, they can launch 15 days later.

It's a quick road show and they can get it done. But on the de-SPAC front, to Mike's point, once you sign up the business combination agreement, you can get rolling on that. You can get your merger proxy, your S4 on file. Sure, you might get a lot of SEC comments and have to roll financial statements forward. But the market concerns of a window closing are a lot less of a concern when you're in the middle of getting what's essentially a public M&A deal done, as opposed to getting a traditional IPO done.

Mike O’Leary: Okay, so we're going to talk about some down sides if you will with the de-SPAC transaction. Typically during a de-SPAC transaction, once you've raised your PIPE and got the commitments for the PIPE, during the de-SPAC transition from going through the SEC, you really don't raise any additional capital. You've got your capitalization set, what your hope for capitalization set. Subject to redemption that may occur from your public stockholders having the option to elect to have their shares redeemed, in conjunction with the approval of the de-SPAC. One thing to bear in mind, a lot of the initial investors in these SPACs are hedge funds.

When they make the investment, like we mentioned a minute ago, they get a warrant with their shares. They pay $10 for a combination of one share and half a warrant. Many of these hedge funds will elect. They'll vote for the de-SPAC because that means they are going to be able to keep their warrant, have their shares redeemed so they have the upside with the warrant. That's why you see in many of these de-SPAC approval transactions high redemption rates. They decide they'd rather retain that option upside but get their money back. They get their $10 from their initial investment.

We've talked about the accelerated timing to get to market. One of the things that many of these target operating companies are not prepared for is the scramble that is upon them to prepare to really be a public company. Many of them don't have their internal controls in place. They still have their private company financials. They've had to engage now a new auditing firm to prepare new financials. They haven't really ever described their business in a public company type way that has to be included in the S4, in the proxy statement. There's a scramble that goes on, and can sometimes be overwhelming for some of these private companies that have not staffed up to really have the number of people it takes to address these needs. You've got to get your financial statements audited under PCAOB standards. These private companies typically haven't, so you have to typically engage a new audit firm. Because of the rules all these accounting firms have for acceptance of a new client, it takes time. You've got to really begin this process and factor that into the overall timing of trying to pursue a potential transaction with a SPAC.

Some companies may have inexperienced management teams that result in them really not being prepared to be a public company and meeting the needs of what public company investors expect, which is they want to see consistent performance or out performance from what the forecast was that included the S4 and the proxy statement. One thing that we have found many times with the target companies is they're not prepared for the public disclosure that comes upon them. You have to describe to a lot of your customers, and a lot of your larger customers, some of the contractual terms. They don't like the idea of sharing that with some of their peer competitors out there, having to share that with some of the peer competitors. It's a whole new world that target companies need to be prepared for.

One of the things, and we can address this in more detail, is that shell companies have limitations under the SEC rules of what they can and can't do for the first few years following the de-SPAC transactions. Even though the combined company once they emerge is no longer really a SPAC, no longer a shell company, it is still subject to rules three years after your de-SPAC transaction that limit some of the flexibility that non-shell companies have as a public company. There is a focus now of both congress and the SEC on SPACs. We expect legislation to come, to be propagated by congress. They're focused on it. They had a hearing here last week with one of the senate financial committees and the SEC. I expect to see new regulations from the SEC that affect SPAC and de-SPAC transactions.

Laurie Grasso:Do we have an anticipated timeline of when we think that registration of legislation may come out? Any crystal ball at all?

Mike O’Leary:No, I don't have any crystal ball. I read some excerpts from some of the discussions and there were a lot of ideas thrown around. It's going to take somebody making a concerted push to get it through. We've got a pretty divided congress right now. I think we're more likely to see the regulations from the SEC before we see new legislation, but I do expect to see new legislation.

Angela Veal:Okay, Mike. To your point relating to the private companies getting ready to be a public company, over the next two sessions, we are also going to touch a lot on that. In terms of converting from a private company, accounting to a public company in terms of their consideration. We're going to do a deep dive over the next two sessions as well.

Mike O’Leary:Great.

Michael Torhan:Great. I'm going to talk a little bit about some of the background of the activity that has been taking place with SPACs. One of the goals of our session today are to educate how SPACs have really fit into the real estate industry. We've done a little bit of research and taken a look at what types of companies have been targeted in the real estate space. Just to share with you some more background as to how SPACs may play a role in your own company or in your own sector of the industry. Whenever somebody says "SPACs" and "real estate" in the same sentence, most people start thinking about proptech. I think if you Google real estate SPAC, proptech is going to be in most of the search results.

There's a reason for that. Not to say that proptech is the only sector of the industry, but it's one of the main talked about sectors so far just because of what underlying companies in the proptech sector are made up of and what their business plans are. I'm going to take a deep dive into each of these or most of these sectors. I'll give a little bit of background about what the sectors entail just in case anybody is not familiar with them. Then I'm going to talk about some examples of some of the recent transactions that have taken place. Again, starting with proptech, so property technology.

Prop tech really focuses on technology applied to real estate. These companies are looking to modernize and transform real estate transactions, whether that's in the acquisition of real estate, the operation of real estate, or the disposition of real estate. Examples are shared space managements, the processing of rental agreements, smart home technology has been a big one. There's a couple of examples. I'm going to talk about and focus on smart home technology. Research and analytics as it relates to real estate. Then general property management. All of these categories really fall under the category of proptech.

What are some of the examples of recent transactions? Smart Rent was a SPAC transaction that was valued at $2.2 billion. Smart Rent makes software and hardware to manage smart devices in multifamily communities. A similar one is Latch, which is an evaluation of $1.56 billion. Latch is commonly known for making smart locks, but they also are heavily involved in the technology space. In terms of allowing the landlords and residents to manage different devices. Think of thermostats, lighting, a lot of the functional components of real estate these days is smart technology.

I even have light bulbs I can control with my phone. Things like that, these proptech companies are really focusing on. How do they transform real estate companies? SPACs have taken an interest in these types of companies. A couple of other transactions are Porch and Open Door. Both of those companies are marketplace for real estate. For sales of real estate, rental of real estate, those have been used. WeWork, I think WeWork falls into a couple of categories, but we won't mention that here. I think Angela also spoke about WeWork earlier.

There's also a lot of ongoing SPACs, whether they've been announced, they've been launched already. Sam Zell launched a SPAC to target technology in the industrial sector. CBRE, RXR Realty, Simon Property Group. Just a couple of examples of SPACs that have been in the news lately in terms of launching SPACs to target companies, and specifically proptech applications. Moving out into other sectors of real estate, I want to touch on the industrial and distribution center sector of the industry. Here we're talking about real estate such as general distribution, manufacturing, code storage, which has been in the news lately. Data centers have also been quite popular. There's a recent example, Cyxtera Technologies. Cyxtera operates, it's actually one of the largest providers of retail co-location services globally. If anybody doesn't know what co-location is, co-location is essentially a third party data center that houses privately owned servers and networking equipment.

This company, Cyxtera Technologies, operates 61 data centers around the world in 29 different markets. Actually, the SPAC merger that is contemplated for Cyxtera applies a value of $3.4 billion for the entity. Also, another example I want to mention is Airspan Networks. I'm sure most of you have heard of 5G. A lot of cellphone providers are launching or have already launched 5G networks. Airspan Networks is a company that provides software and hardware for 5G. That also has been a target for SPACs. Infrastructure, that's kind of another industry that might be a good target for SPACs.

Going forward, we have vacation resorts on the slide. But I also really want to talk about just hospitality in general. There's been a number of examples of de-SPACs targeting hospitality. Whether it's resorts, hotels, or restaurants, and whether that's technology that targets these industries or the actual operations. One example, again, this is a couple years old. It's back from 2017, but Playa Hotels and Resorts, which owned 13 all-inclusive resorts in Mexico and the Caribbean. That was included in the SPAC introduction. That was valued at $1.75 billion back in 2017. I think Angela mentioned earlier that SPACs have been around for decades. They've really become hot in the news over the last year or two, but these transactions have been going on for many years already.

A couple of other examples in the hospitality industry, BurgerFi was part of a SPAC transaction. Sales holdings, which formed Sizzle acquisition. Sales holdings is looking to target restaurants, hospitality, and other similar businesses. They recently filed with SEC to raise a SPAC. Clearly, SPACs also targeting different companies in the hospitality industry.

Lisa Knee: Michael, why don't we stay on the subject of target companies? We just got a question in there asking about a value add real estate owner operator. Properties generally of a few years before the cashflow stabilize. Are they a good candidate for a SPAC as a target company when looking at operating real estate assets?

Michael Torhan:If you listen to these examples I've mentioned, who are SPACs targeting? They're looking for value adding growth companies. Those are the companies that they are looking for because part of the value with the SPAC is acquiring a company that has tremendous growth opportunities. I guess the question goes to, is it just operating businesses or is it also the real estate, operating real estate? What are SPACs looking for?

I think that there's a play for both. If you listen to some of these examples that I'm going to talk about, a big one that actually just was approved yesterday, Cano Health. It's closing today and it's going to start trading tomorrow. There's definitely a push for operating businesses. Proptech, if you think about that, that's an operating business. There's a lot of growth potential. Some of these examples, there is tremendous underlying real estate. There is an appetite for the underlying real estate as well. Like you mentioned, Sam Zell is targeting technology that solutions for the industrial sector. There's underlying real estate there.

Cyxtera, which I mentioned. The data centers, there's underlying real estate there. There's definitely an appetite for not only the operations, but also the underlying real estate. Moving forward, I also wanted to talk about mortgage financing. That's any kind of lending to consumers or other institutions, including loans for real estate. If you think of mortgages like we think of in the real estate space, there's been a number of examples of SPAC mergers in this sector. Better.com is probably one of the well known ones. $7.7 billion valuation. Better.com has become a really popular online mortgage vendor. That was taken public right through a stock merger. There's a lot of recent stock mergers which formed Blue Owl Capital. That had a valuation of $12.5 billion.

The resulting company is an alternative asset management company that provides access to direct lending and GP capital solutions. Again, SPACs have been looking at the mortgage and lending industry as well. Senior housing, this is one I mentioned briefly earlier about a large transaction that's actually closing. It was approved yesterday, closing today, training tomorrow. Cano Health. Cano Health was founded in 2009. It provides care to patients through a network of 72 medical centers. Again, senior housing, so not only medical centers, but also retirement communities. Assisted living communities and nursing homes.

It sounds like there's appetite out there for SPACs looking at these types of businesses and underlying real estate as well. I also want to talk a little bit about RETs, real estate investment trusts, which we have on the slide deck as well. There's been a number of RETs and affiliates of RETs that have been launching SPACs as well. For those of you on the call that don't know about RETs, RETs are real estate companies formed under specific tax laws and regulations. RETs generally own and operate real estate. There's very specific requirements that need to be met to create a RET and also to operate, to own and operate a RET, on an ongoing basis. There are certain income tests. There's asset tests.

For example, RETs can't own and operate a hotel directly. There's different structures that are formed, taxable RET subsidiaries that are put into a structure for RETs. RETs have been looking at the SPAC space as well, both on the acquisition perspective. Like I mentioned, there have been affiliates of RETs that have been forming RETs. There's also been talk in the industry about whether RETs are potential target companies. Definitely stay tuned. We're going to speak a little bit more about RETs in the next two sessions. Today was just meant to be a general background and informative session. We're going to get more into the technical tax and accounting details and legal in the next two sessions. But I did want to kind of throw that out there, that RETs could be more in the news in terms of SPACs in the future, so stay tuned for more on that. I think we have another polling question.

Lisa Knee:Great. Micheal, so then you just answered the question that came through live, so thank you, on the RETs. I don't see a poll. Oh, here we go. From whose perspective would you like to learn more about SPACs? The sponsor, the target company, or investors? Wow, pretty split. I think people just want to learn more.

Michael Torhan:I think we're going to move to the next slide. I had one other interesting example of a SPAC merger, Wheels Up. For those of you who don't know this company, that was recently announced that they're undergoing a stock merger. Wheels Up is a private aircraft provider, so similar to net jobs. That was actually recently announced, that is going to be valued at a $2 billion valuation. Again, it's a fixed asset, so it's kind of like an offshoot of real estate. But definitely a lot of interesting activity out there in the SPAC space.

Laurie Grasso:Okay, do we have anymore questions that can be funneled in through the chat or the Q&A function? Oh, okay. This is a good question that just came in, and actually one of the ones I was going to ask Mike and Taylor if we had a down moment, which perfect timing. What is your, Mike and Taylor, what is your expectations for the market in terms of activity let's say over the remaining part of this year into next year? What are your predictions on the SPAC market?

Mike O’Leary:My crystal ball is as cloudy as everyone else's. But I think that despite the slow down certainly created by the warrant issue, the SEC, congress. As well as I think what we've heard as PIPE investors have stepped back a little bit or did step back a little bit. Both because some of the uncertainty and some of the SPACS were not performing well once the de-SPAC transaction was done. Despite that uncertainty, I expect to see continued activity. I think the pace will pick back up. It has already started I think.

In late May, it picked back up. There were several new IPOs that got done, as well as a lot of new de-SPAC announced transactions. Given that, I do expect to see continued activity. I don't think we're going to see SPACs go away anytime soon. I think even though we are going to get some regulatory action and probably some legislative action, I don't think they're going to legislate them out of existence. They may just clarify some of the questions that have been created on the disclosure front with respect to whether or not they have a benefit of a particular safe harbor for projections that are available for companies that are up and operating, and aren't available for IPOs. For example, the SPACs, when they're IPOing, they project what they're going to do or how they're going to do.

I think I expect that that's going to be some of the clarification we get out of the SEC in the near term. That's also one of the focuses of the legislation they want to clarify from a legislative perspective, and not just a regulatory perspective. But I don't think they're going to legislate them out of existence. I think we'll continue to see them. There's so much capital that's been raised and so much money yet to be invested in target companies by existing SPACs.

Laurie Grasso:Taylor, do you concur?

Taylor Landry:Yeah, I think that's right. We're still working on SPAC IPOs and de-SPAC transactions. We're in front of the bankers and the sponsors. There still seems to be a good amount of deal flow. To Mike's point, there's a lot of SPACs that have IPO'd that are on the same shop clock, 18 to 24 months, that are looking for deals. Some of these, you're seeing they're doing an IPO and pretty quickly after doing the IPO find a deal, and get it done. There's a lot of examples on that timeline. You're not seeing people necessarily sit the full 24 months. Additionally, depending on what the mandate is in the IPO perspective, if it's really broad, you might have a management team that on paper looks like energy folks.

Then they end up buying a tech company or something. That's kind of the beauty of the SPAC. If it's a good company, it's a good company and they can buy it. If you've got a good sponsor with broad experience, they're going to do a good job of running it. I think there's still a lot of runway. I think rightfully or wrongfully so, people got pretty spooked by the warrant issue. But I think we're seeing that start to shake out the way it's supposed to. People are fixing their financial statements. They're looking at their warrant agreements and sorting through how these things need to be handled. There's a path forward. So yeah, I concur with what Mike said.

I think one other piece that's probably for a different day, but part of the benefit of the de-SPAC is in the S4, in the merger proxy, its comments include projections. For these companies that don't have long operating histories, they can project out. I don't know that the SEC has necessarily started to sniff around that or take issue with it, but that is something that SPAC investors and people seeking a de-SPAC like about the de-SPAC structure.

Laurie Grasso:One of the questions that just came in were legal in nature. I'm wondering if the Hunton corporate team can take this one for real estate focused SPACs. Their advantages or special considerations to incorporating in Delaware, which we normally do in real estate transactions, versus other jurisdictions including non-U.S. Is that something that you guys have looked at and can speak to, or should we speak to on the next webinar?

Mike O’Leary:We were both muted. Could you ask that question again? Sorry.

Laurie Grasso:Sure. The question was for real estate focused SPACs, are there any advantages or considerations to incorporating in Delaware, which we usually do in real estate transactions and corporate transactions, versus any other jurisdictions including non-U.S. jurisdictions? Is it something that we've looked at, at team Hunton? Or something we can talk about in the next webinar?

Mike O’Leary:We can briefly touch on it now and then address it later. Typically, you see SPACs formed as a Delaware corporation due to the ease of their corporate law. Both from the code, the Delaware corporate code, as well as the certainty you get with the judicial outcome there and the laws that are already on the books that benefit the company. It's a lot of certainty. If you're targeting a foreign company, you see some SPACs formed outside the U.S. as Cayman Island companies, typically in a tax favorable jurisdiction. Because they're raising their capital in the U.S. and they're subject to the same rules as a blank check company, they still have the same rules. They've got to put the money from the IPO with the public investors in trust and have the same 18 to 24 months to try to get their de-SPAC transaction completed before they have to give back their money out of the trust to the investors.

Lisa Knee:Yeah, and I think there was a question also about where the sponsor comes in. Do they invest alongside? What happens with the sponsor? If somebody wants to, Angela or somebody on the Hunton team want to jump in and respond to that.

Angela Veal:Sure, sure. Thanks, Lisa. Yeah, so in terms of the sponsors, at the point of IPO, the SPAC would issue units. The units would consist of class A shares as well as a fraction of the warrant. Those are sold as public warrants. At the same time concurrently, those warrants are also issued to the sponsors as private placement warrants. From that perspective, the sponsors do get to purchase the warrants through the private placement as well. Additionally, based on the latest SEC update, updated investor bulletin that just came out last week, one item that they had highlighted to investors is that they should also be aware that the interests or the rights of the sponsors may be different from the investors.

Sponsors generally would purchase equity in the SPAC in more favorable terms than the investors. At certain times, they also would provide additional financing to the SPAC to fund the merger itself. Certain securities may be issues to the sponsors with preferential rights as compared to the investors. As a precaution to the investors, they should definitely understand more about what the sponsor is getting and what the differences are in terms of their rights versus the investor's rights themselves.

Laurie Grasso:Just a reminder that we have two more webinars coming up. We have one next week on June 10th, where we're going to continue through the SPAC lifecycle, IPO and pre-merger. This link up here is a live link. You can just click it right on your screen to sign up. Then we have our third seminar on June 15th because you can't get enough of us, three partner, on the real estate SPAC lifecycle. That's the de-SPAC and phase four, which is the post merger. That's a real informative session for our third session. We're hoping that everyone will register. This is also a live link.

Lisa Knee:Feel free to send us the questions beforehand so we can incorporate them in as well. If you have any questions, we can incorporate them into the presentation so that we're making sure that we address everything timely that you have concerns or questions about.

Laurie Grasso:Okay, the question about minimum revenues and earnings. I think that's a good one. Of course everybody wants a larger deal, but is there valuation limitations that people are seeing in the marketplace with smaller deals? Anyone?

Mike O’Leary:I don't think there's any real size limitation in terms of how small can it be. But you want it to have an active trading market. That's why you tend to see these companies at a valuation of a billion or higher. There are certainly some that have been less, in the high $7 or $8 million valuations. But you've seen some ultra large ones, $12 billion and up, as well. I don't think there's not a given or set size limitation. But typically in the SPAC IPOs, you're now seeing most of the SPAC IPOs for a magnitude of $250 to $350 million. They're then looking for a company that would be a good investment for that size of capital to be put to work, even though there are going to be redemption at the end of the day.

Laurie Grasso:Okay, great. Any last questions? I think we can wrap it up, Lisa.

 Lisa Knee:I think we're good. Thank you everyone for attending. Thank you to everyone for speaking and joining us today, and pivoting to our new platform that we needed to do at the last minute. Thank you guys for joining and being very nimble.

Laurie Grasso:We'll see you on June 10th.

Lisa Knee:Have a great day, everyone. Stay safe.

About Lisa Knee

Lisa Knee is a Tax Partner and Co-Leader of the national Real Estate practice and leader for the national Real Estate Private Equity Group with expertise in the hotel, real estate, financial services, aviation and restaurant sectors and is a member of AICPA, New York State Society of Certified Public Accountants and the New York State Bar Association.

About Michael Torhan

Michael Torhan is a Tax Partner in the Real Estate Services Group. He provides tax compliance and consulting services to clients in the real estate, hospitality, and financial services sectors.

About Angela Veal

Angela Veal is a Managing Director in EisnerAmper. She has over 20 years of experience in both public and private accounting, with focus on financial services, SPACs, IPOs as well as mergers & acquisitions.

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