Essex Property Said to Offer About $5 Billion to Buy BRE

Essex Property Trust Inc., an apartment landlord on the U.S. West Coast, has made an offer to acquire BRE Properties Inc. for about $5 billion, two people with knowledge of the matter said.

The offer, made this week, is higher than a $60 a share bid for BRE made by investment firm Land & Buildings and an investor group earlier this year, said one person, who asked not to be identified because the information is private.

In addition to bank financing, Essex will issue stock and sell assets to pay for the deal, the person said. San Francisco-based BRE has been working with Wells Fargo & Co. to evaluate options including a potential sale, two people said. BRE manages and develops apartments in Seattle, San Francisco, Los Angeles and San Diego.

A deal would bring together two West Coast apartment firms whose properties are almost exclusively based in California and the Seattle metropolitan area. For BRE, the largest share of its net operating income -- 28 percent -- was derived from apartments in the San Francisco Bay area, as of June 30, according to a company presentation last month. The real estate investment trust owned or had stakes in more than 21,000 apartments at the end of the third quarter.

“The world doesn’t need two West Coast apartment companies,” said Alexander Goldfarb, a REIT analyst at Sandler O’Neill & Partners in New York. “You’ve got two companies with basically the same properties, yet the public costs are elevated because you have two sets of management teams and you have two sets of property operations.”

Share Trading

BRE rose 11 percent to $59.11 today, its highest price since October 2007, giving the company a market value of $4.6 billion. Essex fell 2.2 percent to $150.65, making its market value about $5.7 billion.

This is the second time Essex has approached BRE, with an offer earlier this year rebuffed, two people said.

BRE Chief Executive Officer Constance B.Moore told investors in July that the company would consider “any legitimate proposal,” after releasing a statement that described Land & Buildings as an unviable suitor. Land & Buildings had offered $60 a share or about $4.6 billion.

‘Substantial Discount’

“We have been arguing for some time that this is a very valuable portfolio of apartments in California that has been trading at a substantial discount,” Jonathan Litt, founder and CEO of Land & Buildings, said in an interview today. “There is a lot of upside in the BRE portfolio with the right management. If they can get a number in the mid-$60s per share they should take it.”

Litt’s firm owned about 194,000 BRE shares as of Sept. 30.

Barb Pak, a spokeswoman for Essex, didn’t return phone calls and e-mail messages seeking comment. Stephanie Andre, a spokeswoman for BRE, declined to comment, as did Jessica Ong, a spokeswoman for Wells Fargo.

“You have a situation where BRE has got to make a public decision,” Goldfarb said. “It’s hard to find a more credible buyer than Essex and if they turn it down, they’ll have some explaining to do.”

REITs in the U.S. have announced more than $78 billion of acquisitions this year, a 41 percent increase over 2012, as rising share prices have given them currency to pay for deals and private-equity firms have begun seeking to exit investments. Since the Bloomberg Apartment REIT Index bottomed in March 2009, the gauge has gained 207 percent through yesterday.

Top Performer

Essex had the best performance among apartment REITs in the third quarter, posting the highest same-store revenue, growth in net operating income, and offering the most optimistic guidance among all publicly traded multifamily landlords, Rod Petrik, a REIT analyst at Stifel Nicolaus & Co. in Baltimore, said in a Nov. 13 note. He rates Essex as a hold.

With ownership stakes in more than 34,000 apartments, the Palo Alto, California-based REIT has about 46 percent of its portfolio concentrated in Southern California markets, including Los Angeles, Riverside and San Diego, according to a filing last month.

The largest U.S. REIT acquisition this year is American Realty Capital Properties Inc.’s $6.85 billion purchase of Cole Real Estate Investments Inc., which was announced in October.

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