Saying Wall Street and banks have written off real estate investment trusts, billionaire developer Donald L. Bren offered Tuesday to buy the shares of Irvine Apartment Communities Inc. that he doesn't already own for $540 million.
Bren's Irvine Co. is offering $32.50 in cash for each of the 16.6 million common shares of IAC it doesn't own--about 19% above Tuesday's closing price.
The move to take IAC private was announced after the stock market closed. IAC shares closed at $27.37, up 56 cents in trading on the New York Stock Exchange.
Irvine Apartment Communities is Orange County's largest landlord. As of Sept. 30, it owned or had under development 62 apartment communities with 18,758 units, mostly in the county.
The Irvine Co., 100% owned by Bren, converted its apartment holdings into publicly held IAC in 1993 and now wants to take them private again.
Through stock and partnership interests, Irvine Co. already owns 63% of IAC. Bren also has been a big buyer of IAC stock this year, believing that it is undervalued by Wall Street standards. The Irvine Co. has purchased 1.74 million IAC shares since January, nearly 10% of its shares outstanding, according to Securities and Exchange Commission filings.
Irvine Co. said it can better finance the capital-intensive development and operation of apartments through its own lenders instead of the bank and Wall Street sources available to IAC as a public real estate investment trust.
IAC in recent years has expanded beyond its core business on Orange County's Irvine Ranch by buying and developing high-end apartments in Silicon Valley, northern San Diego County and Los Angeles.
Bren plans no changes in IAC's operations after it is merged back into his private empire, McKee said. "We don't anticipate in any way cutting back on the development opportunities presently available."
A committee of IAC directors unaffiliated with Irvine Co. will consider the offer. The final terms of the deal, including when shareholders vote on it, will be worked out later.
IAC is among the most successful REITs specializing in apartments. Like all REITs, it is required to hand over 95% of its net income to shareholders in the form of dividends.
For Bren that dividend stream has amounted to more than $43 million a year.
However, the big mutual funds and other institutions that are the chief holders of REIT stocks have been cashing out of late, fearing that the REITs' recent buying spree has driven prices too high. So selling additional stock is not an option for IAC.
Issuing bonds to raise money is also problematic. Investors worried about global economic woes have been demanding sharply higher yields on REIT bonds when they are willing to buy them at all, McKee said.
And regulators mindful of the savings and loan debacles of the 1980s have warned banks about over-lending to REITs, drying up that financing as well.
"Right now REITs are in the penalty box," McKee said.
By contrast, the Irvine Co., as a broadly focused private real estate company with a high credit rating, is little affected by those trends, McKee said. He said Irvine Co.'s bank and insurance company lenders remain a solid source of funds.
"In this environment, we believe that a private company is better suited to undertake the risks associated with real estate development," he said.
IAC's initial offering of common stock was priced at $17.50 a share in December 1993. The stock peaked at $33.05 a share in October 1997, then fell to the $25 range last summer as the fortunes of REITs turned sour.
McKee said that counting dividends, shareholders in IAC will have received a compounded annual return through Nov. 30 of 19.8% based on the price of the buyout offer.
"We are proud that all shareholders have received a substantial return on their investment since the initial public offering," he said.