BRE Sale Seen as Inevitable Given Lagging Value: Real M&A

BRE Properties Inc.’s dismissal of a $4.6 billion takeover offer has highlighted the apartment landlord’s discount valuation, showing it may behoove investors to push for a sale.

Land & Buildings revealed a bid for BRE in July, saying its undervaluation would be eliminated by a deal. The stock has returned about 71 percent including dividends since Chief Executive Officer Constance Moore took office in 2005, trailing closest rival Essex Property Trust Inc.’s 138 percent gain. BRE yesterday traded 13 percent below its properties’ value, worse than the 6.3 percent discount at Essex, according to the average of analysts’ estimates compiled by Bloomberg.

The divergence between BRE and Essex shows investors view BRE as poorly managed, and a sale -- even if Land & Buildings isn’t ultimately the buyer -- might help resolve the disparity, according to Bank of Montreal. While BRE said the takeover offer isn’t viable because Land & Buildings doesn’t have enough financial firepower, the bid has raised San Francisco-based BRE’s profile as a target and put pressure on the firm’s management to evaluate selling, Citigroup Inc. said.

“This has been a long process of underperformance,” said Richard Anderson, an analyst covering real estate investment trusts at BMO in New York. “At the end of the day, they are standing the risk of losing sponsorship of their investors. BRE needs to either improve operations or sell the company.”

Considering Alternatives

Land & Buildings, a Greenwich, Connecticut-based investment firm, said on July 31 that it was part of a group that offered to acquire BRE, whose stock closed at $47.23 yesterday, for $60 a share in June. BRE’s “consistent underperformance and persistent discount to net asset value is best resolved through strategic alternatives,” Land & Buildings CEO Jonathan Litt told BRE in a letter.

BRE, a real estate investment trust that owns and manages apartments in major cities in northern and southern California as well as Seattle, said in its response that Land & Buildings has neither the assets nor the expertise to complete the deal. Land & Buildings has less than $200 million in assets, Litt said. BRE’s market value was $3.6 billion yesterday.

Moore, the CEO of BRE, said during a July 31 earnings conference call that the company will consider any “legitimate proposals.” BRE has no further comment, John Selindh, a spokesman for the REIT, said yesterday.

Litt said BRE continues to ignore the bid from Land & Buildings, which owned almost 158,000 BRE shares at the end of June, or 0.2 percent of outstanding equity, according to data compiled by Bloomberg.

Bidder’s Disappointment

“We have tried to address their concerns about who our operating partner and capital partners are in the most pragmatic way that we can, and we continue to be disappointed they are not engaging with us to vet our proposal,” he said in a phone interview yesterday.

While BRE shares rose to a two-month high of $53.06 after Litt’s letter was released, the stock then declined 11 percent to $47.23 through yesterday. That price was 13 percent less than the company’s per-share net asset value, according to the average of analysts’ estimates compiled by Bloomberg. By comparison, Palo Alto, California-based Essex closed yesterday at $144.66, only 6.3 percent below the average NAV estimate.

“If BRE continues to trade at a larger discount to net asset value than their peers, they have to think about what other ways they can maximize value,” Michael Bilerman, a New York-based analyst at Citigroup, said in a phone interview. “There is a lot of interest in this space.”

Investor Uncertainty

Since the Bloomberg Apartment REIT Index bottomed in March 2009, the measure returned 267 percent including dividends through yesterday, beating BRE’s 221 percent return. Today, BRE added 3.6 percent to $48.92, the biggest gain in nine months.

The company is lagging behind peers in part because of investor uncertainty about its development plans, according to Dave Bragg, an analyst at Green Street Advisors Inc., a Newport Beach, California-based real estate research firm.

“The company has a large development pipeline relative to the size of the company,” he said in an interview. “Investors are patiently waiting to see if the company can execute their plans.”

BRE has $900 million in projects under way, exposing it to “enhanced execution risk and changing material and labor costs,” Vin Chao, a New York-based analyst at Deutsche Bank AG, said in a July 31 research note.

‘Poor’ Decisions

In his letter, Litt said “poor capital allocation has also marred the record of BRE management.” He cited BRE’s Wilshire La Brea community in Los Angeles, which is expected to return less than planned and open late.

Essex, with a market value of $5.5 billion yesterday, is among BRE’s closest peers, said Jeffrey Langbaum, an analyst at Bloomberg Industries. BRE’s implied capitalization rate was 6.1 percent on Aug. 16 versus 5.6 percent at Essex, according to data compiled by Stifel Financial Corp. That means investors are assigning less value to BRE’s cash flows, Langbaum said.

“The stock market is voting with its dollars that there’s potentially a more efficient way to be running” BRE’s assets and that “a different management team can extract more value out of these properties,” Langbaum said in an interview.

A takeover of BRE may be unlikely in the near future because its managers probably think they can turn the REIT around on their own, BMO’s Anderson said in a phone interview. The company operates on the U.S. West Coast, where renting is becoming more affordable in comparison with buying a home, boosting BRE’s prospects this year, said David Toti, a New York-based analyst at Cantor Fitzgerald LP.

BRE is likely to attract attention from activist investors until its stock returns improve, according to James Sullivan, an analyst at Cowen & Co.

“BRE as a potential activist target, that’s not a surprise,” he said in a phone interview. “Will there be others who get involved in BRE? It’s certainly possible.”

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