BRE Properties Inc. (BRE) is in talks to be acquired by Essex Property Trust Inc. (ESS) for about $4.5 billion in cash and stock, a deal that would create the largest publicly traded apartment landlord on the U.S. West Coast.
Essex has made a nonbinding offer of 0.2971 shares and $12.33 in cash, and the two sides are in exclusive negotiations, San Francisco-based BRE said today in a statement. The bid values the real estate investment trust at about $58.08 a share based on Essex’s last closing price.
Buying BRE would expand Essex’s portfolio in California, particularly in the San Francisco Bay area, one of the hottest U.S. rental markets. Essex has been interested in acquiring the company for “some time,” and investors had been frustrated by BRE’s refusal to entertain a buyout offer, Anthony Paolone, a REIT analyst at JPMorgan Chase & Co., wrote in a note last week.
“BRE stock has lagged over a number of years, and the company has had a weak operational history despite being in some of the most attractive and fastest rent-growth markets in the country,” New York-based Paolone wrote in a Dec. 5 note. Essex “has been exemplary over the years in navigating its core West Coast markets and being a steward of capital.”
The offer price represents an 8.8 percent premium to BRE’s stock on Dec. 3, the day before Bloomberg News reported that Essex had made a bid. Shares of BRE fell 2.3 percent today to $57.99 in New York trading. Essex, based in Palo Alto, California, was little changed at $154.26.
BRE rejected a $4.6 billion offer in July from a consortium of bidders that included Land & Buildings, an investment firm focused on real estate securities. Land & Buildings, which owns about 194,000 BRE shares, last week urged the company to consider a sale and said it plans to nominate a slate of directors to the company’s board.
BRE owned or had stakes in more than 21,000 apartments at the end of the third quarter. The largest share of BRE’s net operating income -- 28 percent -- was derived from apartments in the San Francisco region as of June 30, according to a company presentation last month. The Bay area is one of the top markets for rent growth and occupancy in the U.S., according to data compiled by Axiometrics Inc.
A combined company would own more than 53,000 apartments on the West Coast, and would be the largest publicly traded apartment landlord in that region, ahead of Equity Residential and AvalonBay Communities Inc. (AVB), according to Axiometrics.
BRE said it has hired Wells Fargo & Co. as a financial adviser and Latham & Watkins LLP as legal counsel as it explores strategic options. Essex is the most logical acquirer for the company, according to a note today from Richard Anderson, an analyst at BMO Capital Markets Corp. in New York.
“BRE will be looking for a larger number, of course, and that may require the involvement of private investors of some form,” he wrote. “We don’t see a good fit with another public U.S. REIT.”
A deal for BRE at $4.5 billion would follow $22 billion in purchases completed by apartment real estate investment trusts so far in 2013, according to data compiled by Bloomberg. The Bloomberg Apartment REIT Index fell 6.2 percent this year through Dec. 6, creating opportunities for acquirers.
The biggest apartment deal completed this year was the $16 billion purchase of Archstone Inc. by Equity Residential (EQR) and AvalonBay, the two largest apartment REITs, from Lehman Brothers Holdings Inc. In October, Mid-America Communities Inc. completed a $4 billion acquisition of Colonial Properties Trust, a landlord focused on the Southeast U.S.
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