BRE Bid Joins Apartment Hunt Amid REIT Discount: Real M&A

BRE Properties Inc., a California real estate investment trust, is the latest target in a $22 billion apartment landlord spending spree that could swoop up Home Properties Inc. and Post Properties Inc. next.

Essex Property Trust Inc. this week offered about $5 billion for BRE, topping a rejected bid from Land & Buildings, said two people familiar with the matter. A deal for BRE would follow $22 billion in U.S. purchases completed by apartment REITs so far this year, according to data compiled by Bloomberg.

Even with rents rising and occupancy rates at a 12-year high, the Bloomberg Apartment REIT Index has fallen almost 7 percent this year. The share drop has created opportunities for buyers seeking high-quality assets such as BRE’s properties in the San Francisco Bay area. Before Essex disclosed its bid, BRE traded 13 percent below its net asset value, according to Sentry Investments. With Home Properties and Post Properties also estimated to be trading at discounts, Bloomberg Industries analyst Jeffrey Langbaum said stock gains this week show investors expect them to be next.

“It’s very hard to grow in size by doing one-off property acquisitions and one-off property developments,” Langbaum, a REIT analyst in Skillman, New Jersey, said in a phone interview. “If you want to grow in earnest, a big portfolio is one way to do that. You’ve had companies taking advantage of those opportunities.”

San Francisco-based 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.

Essex Approach

Essex also approached BRE earlier this year and was rebuffed, said two people familiar with the matter, who asked not to be identified because the information was private. The Palo Alto, California-based company’s latest offer for BRE equates to between $64 and $65 a share, implying a premium of about 22 percent to BRE’s average stock price on the 20 days prior to when the bid was reported.

The deal, which will probably be comprised of some stock, seems reasonable, said Sachin Shah, a special situations and merger-arbitrage strategist at New York-based Albert Fried & Co.

“Many of their peers’ stock, over the past three months, hasn’t traded very well and so when somebody offers you presumably a 19 to 20 percent premium, then you should probably take it,” Shah said.

BRE is a logical target because it offers attractive assets at a discounted valuation, said Michael Missaghie, a fund manager in Toronto at Sentry Investments who focuses on real estate securities.

Hot Market

The company’s properties in the San Francisco Bay area are located in one of the hottest markets for rent growth and occupancy in the U.S., according to data compiled by Axiometrics Inc.

Missaghie estimated the company’s net asset value at about $61 a share, compared with its $53.37 close on Dec. 3. Yesterday, BRE closed at $59.30.

“You’re getting high-quality assets that you can turn around and operate properly under a different platform,” Missaghie said in a phone interview. “They’ve operated at that discount valuation, but the quality of the assets are high and the locations are strong.”

Stock Declines

While BRE shares have been pressured in part because of criticism of management and operating results, the entire sector has been in decline. Apartment owners are the second-worst performers in the Bloomberg REIT Index this year, behind only landlords at health-care facilities. The broader REIT measure has lost about 1 percent, while the Standard & Poor’s 500 index is up 25 percent.

The drop reflects investor concern that a rebound in the single-family housing market and slowing job growth will sap demand for rentals and limit how much landlords can raise rents, said Calvin Schnure, senior economist with the National Association of Real Estate Investment Trusts, a Washington-based industry trade group.

The specter of rising interest rates has also contributed to the decline, Michael Bilerman, a New York-based analyst at Citigroup Inc., wrote in a Dec. 4 report.

Even so, the rental business remains strong. Apartment occupancy in the U.S. was 94.6 percent in October, the highest in 12 years, and rents are poised to climb 3 percent nationally through the end of 2014, according to Axiometrics data.

Valuation Mismatch

That opens up opportunities for potential acquirers, Schnure said.

“You have a lot of mismatch in the valuation of apartment buildings or apartment REITs,” he said. “Long-term factors here are still very stacked on the side of solid growth.”

Among apartment REITs trading at a discount, Post Properties, a $2.5 billion operator of buildings in the southeastern U.S., and Home Properties, a $3.2 billion REIT concentrated in the Northeast and mid-Atlantic markets, stand out, Citigroup analyst Bilerman wrote.

In a Nov. 22 report, Citigroup analysts put Atlanta-based Post Properties’ net asset value at $58.16 a share and Home Properties’ net asset value at $73.17. Yesterday, Post Properties closed 22 percent below their estimate at $45.50, while Rochester, New York-based Home Properties ended at $55.50, a 24 percent discount.

Next Up?

“Home Properties and Post Properties are the logical kind of next man up in terms of who is the potential takeout,” Langbaum of Bloomberg Industries said. “They always seem to outperform when M&A is driving the market. They’re smaller players in those markets that could potentially be absorbed by larger players.”

Post Properties climbed 5.8 percent in the two days after Essex’s bid was reported, while Home Properties rose 4.7 percent. Today, Post Properties gained 1.4 percent to $46.15, while Home Properties rose 1 cent to $55.51.

Besides Post Properties, Associated Estates Realty Corp. is a potential target, Alexander Goldfarb, a New York-based managing director at Sandler O’Neill & Partners LP, wrote in a Dec. 4 report. He estimated last month that the $940 million company’s net asset value was $21.90, compared with a stock price yesterday of $16.34.

Today, Associated Estates rose 1 cent to $16.35.

Representatives for Post Properties, Home Properties and Richmond Heights, Ohio-based Associated Estates didn’t respond to phone messages seeking comment.

Additional deals would follow the 34 U.S. acquisitions completed by apartment REITs this year, according to data compiled by Bloomberg.

‘Good Opportunity’

The biggest apartment deal this year was the $16 billion purchase of Archstone Inc. by Equity Residential and AvalonBay Communities Inc., 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.

“The REITs themselves are at a bit of a discount, so it’s not surprising” that somebody would want to invest in the companies or buy them out, said Schnure of NAREIT. “With fundamentals remaining fairly strong and the stock valuations being off, it really gives you a good opportunity for purchases.”

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