Who says you need the stock market, anyway?
When investment adviser ING Clarion teamed up with Lehman Brothers to purchase Gables Residential Trust this summer, the pair didn’t simply gain the real estate investment trust’s 21,000 apartment units in Atlanta, Dallas and Washington, among other cities. In buying the Boca Raton, Floridabased company from its shareholders and taking it private -- the $2.8 billion transaction closed at the end of September -- ING and Lehman also acquired something Wall Street does not always value properly: expertise at real estate development.
“Instead of going out and buying assets, you get a management team and you get ancillary assets,” says Frank Sullivan, private market portfolio manager and managing director of New York
based ING Clarion, which has $28.1 billion of real estate assets under management. “We get the ability to expand Gables, particularly in the area of development -- something that Wall Street doesn’t quite favor, but we like a lot. It adds value.”
ING Clarion and Lehman each ponied up $400 million of equity for the buyout, but they plan to bring in other institutional investors.
The prospect of buying a REIT and taking it private has growing appeal, for both the buyers and their targets: Since the Gables deal was announced in early June, three similar transactions have gotten under way. All involve relatively small REITs -- and premium payments to the shareholders.
Buyers see several attractions: They get properties in bulk -- a quicker and easier way to deploy a significant amount of capital than by buying assets one by one. They also get a management team and, in many cases, development know-how. What’s more, they get to operate without the headaches of complying with Sarbanes-Oxley and other strictures on public companies.
For their part, the REIT shareholders that sell out pocket a nice premium. Of course, the newly private REIT must make do without direct access to the stock market.
DRA Advisors, a New York City real estate investment firm with more than $3 billion in assets under management, agreed in mid-June to purchase another Boca Raton REIT, office building owner CRT Properties. Before that $1.7 billion transaction closed in late September, DRA had also inked a deal to acquire McLean, Virginiabased Capital Automotive REIT, which owns auto dealerships, for $3.4 billion. That deal is expected to close late this year or early next. In both cases, DRA is buying on behalf of unidentified clients. And in October the board of directors of another apartment REIT, Chicago’s AMLI Residential Properties Trust, accepted a $2.1 billion offer from Morgan Stanley Real Estate’s $4.5 billion Prime Property Fund. That deal is expected to close in the first quarter of 2006.
In each case, shareholders are pocketing significant sweeteners. The price offered for Gables represented a 14 percent premium over its stock market value; CRT shareholders got 15.4 percent extra; for Capital Automotive’s holders, the deal included a 9 percent bonus; and for AMLI’s, 20.7 percent.
“The board concluded that this merger allowed AMLI to take advantage of the strong private capital market demand for class-A multifamily communities,” AMLI CEO Gregory Mutz said in a conference call to analysts.
The time and money needed to comply with Sarbanes-Oxley disclosure requirements can be especially tough for smaller companies. “The increased burdens imposed by Sarbanes-Oxley made continuing as a public company more difficult and certainly more costly,” said Mutz.
Are more deals in the offing? Perhaps. “As long as Wall Street doesn’t properly value the assets or the earning power of a company,” concludes ING Clarion’s Sullivan, “the private market is going to take advantage of that.”
