National Association of Real Estate Investment Trusts
1875 I St., NW, Suite 600
Washington, DC 20006
February 18, 2003
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-6009
Re: Rule 10b-18 and Purchases of Certain Equity Securities by the Issuer and Others (S7-50-02)
Dear Mr. Katz:
The National Association of Real Estate Investment Trusts® ("NAREIT") welcomes this opportunity to respond to the request for comments from the Securities and Exchange Commission ("Commission") on certain proposals contained in Release Nos. 33-8160 and 34-46980 ("Release") with respect to amending Rule 10b-18 of the Securities Exchange Act of 1934, as amended.
NAREIT is the national trade association for real estate investment trusts ("REITs") and other publicly traded real estate companies. Members of NAREIT include REITs and other businesses that own, operate and finance income-producing real estate, as well as those firms and individuals who advise, study and service those businesses. NAREIT estimates that over 95% of publicly traded REITs, as measured by equity market capitalization are active members of NAREIT.
NAREIT generally supports the Commission's efforts to simplify, update and modernize Rule 10b-18 in light of recent market developments. We especially applaud the fact that the proposed amendments to Rule 10b-18 call for increased transparency of issuer repurchases by requiring disclosure of all such repurchases, regardless of whether such repurchases fall within the Rule 10b-18 safe harbor.
However, we disagree with the Commission's proposal to eliminate the block trade exception to the volume condition of Rule 10b-18. As further discussed below, we are concerned that the proposed elimination of the block trade exception would severely limit the Rule 10b-18 safe harbor for many publicly traded real estate companies. We also do not believe that the block trade exception results in manipulation of issuer stock prices in contravention of the meaning and spirit of Rule 10b-18. Additionally, NAREIT supports conforming the definition of "block" for purposes of Rule 10b-18 to the definition used by the New York Stock Exchange. Finally, we believe that increasing the size of "blocks," while retaining the current block trade exception and thus not including block trades in the calculation of Average Daily Trading Volume ("ADTV"), could alleviate some of the concerns raised by the Commission regarding the block trade exception.
Importance of Stock Repurchase Programs
Stock repurchase programs serve an important function by allowing issuers to manage the amount of capital available to fund capital requirements. At some points in the business cycle, issuers require more capital than at other times. Accordingly, issuers use a variety of strategies to increase or decrease their capital base depending on their needs at any given time, including issuances and repurchases of equity securities. Stock repurchase programs are a flexible and cost-efficient mechanism for managing capital. While other mechanisms, such as self-tender offers, are alternative ways to reduce an issuer's capital base, repurchase programs are less time-consuming and expensive to implement and to operate. An ongoing repurchase program, coupled with periodic disclosure of purchases made through the program as contemplated by the Release, serves as the most efficient way for an issuer to distribute wealth to its public stockholders.
As of December 31, 2002, more than 25% of publicly traded REITs had announced issuer stock repurchase programs. REITs sometimes trade below their net asset value ("NAV") as determined by investors and analysts. When this occurs, analysts and investors frequently urge REIT managers to use the REIT's capital to repurchase those shares they perceive to be undervalued, instead of buying additional properties. As Green Street Advisors noted in an October 10, 2000 special report, REITs have "created meaningful value for their shareholders by aggressively repurchasing shares." In addition, the attached research piece by Morgan Stanley dated December 4, 2001 concludes that a company's stock price increases over the long-term when a REIT buys back its stock when it is trading below its net asset value. Such long-term results belie any concern that real estate companies have used stock buybacks to manipulate prices.
Elimination of the Block Trade Exception
Publicly traded REITs would be harmed by the proposal to eliminate the block trade exception to the volume condition of Rule 10b-18. The block trade exception is frequently used by REITs to implement Rule 10b-18 stock repurchases. The only way for many small or mid-cap issuers, including many REITs, to repurchase any significant amount of shares in a cost effective and timely manner is through block trades. Issuers use block trades to reduce brokerage expenses and to ensure that the desired number of shares are repurchased in a timely manner. Many stock repurchases made by REITs under Rule 10b-18 repurchase programs during 2002 were successfully achieved through block trades. NAREIT believes that elimination of the block trade exception would have significantly reduced the amount of Rule 10b-18 repurchases by REITs during 2002 and prior years.
The Commission expressed concern in the Release that the block exception may allow issuers to "dominate the market for their securities in a way not originally contemplated by the safe harbor." NAREIT recognizes that block trades may, particularly in the case of small- to mid-cap issuers, account for significantly more than 25% of an issuer's ADTV on a given day. However, despite this significant volume from time to time, we believe there is nothing inherently manipulative about block trades. In its 1980 proposing release (Release Nos. 33-6248 and 34-17222) regarding Rule 13e-2 (the effective predecessor to Rule 10b-18), the Commission noted that the market impact of block purchases was less than that of a series of smaller purchases, which in the aggregate were equal in size to a block purchase. We believe that the same analysis used by the Commission in originally adopting Rule 10b-18 with the block trade exception holds true today. Although we recognize that the number of block trades may have increased in recent years, we do not believe this increase alters the reasoning that smaller repurchases might more inaccurately indicate an enhanced buying interest in an issuer's securities. We believe that the current block trade exception represents an appropriate balance between the Commission's concern about manipulation and the practicalities of issuer repurchase programs.
Increase the Size of Blocks
The Commission also requested comment on whether the amount of shares constituting a block should be raised. NAREIT supports the Commission's suggestion in the Release to conform the definition of "block" for purposes of Rule 10b-18 to the definition used by the New York Stock Exchange. We believe that increasing the size of "blocks," while retaining the current block trade exception and thus not including block trades in the calculation of ADTV, could alleviate some of the concerns raised by the Commission regarding the block trade exception.
Proposed Disclosure Requirements
The disclosure obligations proposed by the Commission in the Release, together with the timing and price conditions contained in Rule 10b-18, will provide the necessary transparency to the markets about the volume levels and price of block trade repurchases. These disclosure obligations should adequately address the Commission's concerns regarding the potential abuse of the block trade exception.
NAREIT applauds the Commission in its efforts to revise and update the Rule 10b-18 safe harbor to reflect current market and economic developments, and to enhance the transparency of all issuer repurchases. Clear and concise disclosure regarding issuer repurchase programs is important for investors and is an initiative which we strongly support. NAREIT believes, however, that the elimination of the block trade exception from the Rule 10b-18 safe harbor would disadvantage stockholders of REITs and other small- to mid-cap issuers generally. The proposed disclosure requirements in issuers' periodic filings will provide adequate information to the marketplace about the incidence, frequency and impact of repurchase programs on such issuer's publicly traded securities
NAREIT thanks the Commission for this opportunity to comment on the Release. Please contact Rob Cohen, National Policy Counsel, at 202-739-9415 or me at 202-739-9408, if you would like to discuss our comments in more detail.
Attachment: Morgan Stanley PDF (http://www.nareit.com/sec/MorganStanley.pdf)
Tony M. Edwards
Senior Vice President & General Counsel