NEWPORT BEACH — The Irvine Co., which intends to sell a third of its apartment business to outside investors the week before Thanksgiving, has revised its planned offering to give the new public company greater autonomy from Orange County's largest private landowner, analysts said.
Known as a real estate investment trust, or REIT, the proposed financing plan is expected to provide, after expenses, $204.5 million to the Irvine Co.
The trust's top two executives would each be awarded as many as 100,000 shares of common stock worth a minimum of $2 million--based on an initial price of about $21 a share--over a five-year period in addition to salary and other bonuses if certain unspecified performance requirements are met, according to a Securities and Exchange Commission filing made Monday.
T. Patrick Smith, president of Irvine Apartment Communities, will make $275,000 annually and Richard E. Moran, chief financial officer of the trust, will earn $270,000 per year. Smith was president of Irvine Pacific, the former name of the Irvine Co.'s apartment division; Moran was executive vice president of the Irvine Co.
Analysts suggest the stock awards will help keep management's interests aligned with those of other REIT shareholders. They also applauded a new provision that requires vacant land to be purchased from the parent company to eventually provide a minimum 10% return to the new public company.
"Based on the changes we've noted in the deal, it looks like they've taken steps to make it more attractive" to potential investors, said Jon Fosheim, a partner with Green Street Advisors, a real estate consulting company in Newport Beach.
The trust would use $180 million from the stock offering of 10.6 million shares to pay off or reduce the interest rates on various loans. After the offering, the REIT would still owe lenders $490 million. But, with lower debt payments, the 11,334 apartment units in Irvine, Newport Beach and Tustin are expected to generate enough revenue to attract investors, the Irvine Co. told the SEC.
REITs have recently been popular because investors like the higher returns offered by such securities and developers can often sell their properties on Wall Street for more than they would get on Main Street.
Given the depressed real estate climate in Southern California, developers and investors are closely scrutinizing the Irvine Apartment Communities Inc. REIT, which is slated to be sold through a team of investment bankers led by Morgan Stanley & Co., said sources close to the deal. The proposed financing deal is being presented to institutional investors worldwide.
Analysts said they were pleased to see that the top officers' stock bonuses would be tied to the REIT's performance.
"They really want management to be incentivized for the REIT itself, so there is no conflict of any kind," said Deborah Rogers, a partner with the real estate group of Price Waterhouse, an accounting firm. "You want management to grow the company for the shareholders, not for the Irvine Co."
According to analysts, the new filing includes more conservative cash flow estimates from rents. It also provides for a more arm's-length relationship between the REIT and the Irvine Co. in future land transactions by setting land purchase prices such that, after the apartment communities are built, the REIT will realize at least a 10% investment return, analysts said.
"All of these changes play to the same theme, trying to set up the independence of this new company from the Irvine Co.," said Craig Leupold, an analyst with Green Street Advisors.
After the offering, Irvine Apartment Communities is expected to appoint five high-profile directors to its nine-person board: Anthony M. Frank, former U.S. postmaster general and current chairman of the Independent Bancorp of Arizona; John F. Grundhofer, a former Wells Fargo executive; John Seymour, the former U.S. senator who is now the executive director of the California Housing Finance Agency; Jack W. Peltason, president of the University of California and former chancellor of UC Irvine, and Bowen H. McCoy, a real estate executive with Buzz McCoy Associates.