Essex Property Trust to acquire BRE Properties Trust

February 2014 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Prominent California real estate investment trust (REIT) Essex Property Trust Inc announced in December that it had agreed to acquire rival West Coast REIT BRE Properties Trust Inc in a deal worth approximately $4.3bn.

Under the terms of the deal each BRE common share will be converted into 0.2971 newly issued shares of Essex common stock plus $12.33 in cash. Based on the closing stock price for Essex on 18 December 2013, the day before the deal was announced, the value of the transaction is $56.21 per BRE share. In a statement announcing the signing of a definitive agreement with BRE, Essex noted that it has obtained committed financing of $1bn which will be made available to help fund the cash portion of the purchase price if required. Additionally, the company is said to be considering alternative sources of funding to help finance the cash needs of the transaction including asset sales, joint ventures or any new financing should it be required.

At the time of writing the deal is still subject to customary closing conditions, including obtaining the approval of shareholders of both Essex Property and BRE Properties. Nevertheless, both companies expect the deal to be completed in the first quarter of 2014. Once the two companies have merged the newly formed group will manage a substantial portfolio of apartment properties valued at approximately $15.4bn, making it the largest publicly traded apartment owner on the West Coast. The merged company will continue to operate under the Essex Property name with Essex chief executive Michael Schall remaining in his role, leading the new company. Three of BRE’s directors will join the Essex board, bringing the total to 13 directors.

The merger notwithstanding, Palo Alto, California based Essex Property Trust has an extensive portfolio in its own right. The group has ownership interests in 163 multifamily properties as well as in an additional 11 other properties in various stages of development. On the other hand BRE, which is based in San Francisco, own 75 multifamily communities consisting of 21,396 homes in total and has a joint venture interest in an additional apartment community totalling 252 homes. Overall, the combined company will own about 56,000 units in California and Seattle, two of the areas in the US that are among the top markets for rental growth. “The combination of Essex and BRE creates a stronger platform for sustainable growth and value creation going forward. The combined company will be the largest and only publicly traded pure play apartment REIT on the West Coast which we believe will provide a greater competitive advantage in our markets,” said Mr Schall. “In addition, by combining the strengths of the two platforms, which have a significant geographic overlap, we expect to realise operating efficiencies and further enhance our growth profile.”

Essex has been attempting to purchase BRE for some time. Earlier in 2013 BRE rejected an offer from the group. In July 2013, investment firm Land & Buildings, a BRE shareholder, urged the company to acquiesce and consider a sale. Land & Buildings was also part of a group that announced that it would pay $60 a share for the company. Following the announcement of the sale of BRE to Essex, Land & Buildings released a statement noting that although the agreed deal price with Essex does not wholly reflect the intrinsic value of BRE, the sale price does still provide BRE shareholders with clear, immediate value and attractive upside. “We are pleased to play an important role in helping to bring about this strategic move,” said Jonathan Litt, founder and chief executive officer of Land and Buildings. “The undervaluation of BRE Properties was clear over a year ago when shares were trading at $47. BRE is up almost 25 percent and has outperformed the apartment REITs by nearly 35 percent since October 2012 when it was first announced that BRE and Essex entered exclusive discussions, which demonstrates the substantial undervaluation and shareholder value created through the pursuit of strategic alternatives. We believe that BRE’s valuable assets in Essex’s hands create an opportunity for Essex to unlock significant value.”

UBS Investment Bank acted as the lead financial adviser to Essex and provided 50 percent of the committed bridge financing for the deal. Citigroup acted as financial adviser and as administrative agent of the bridge facility. Goodwin Procter LLP provided legal advice to Essex.

Wells Fargo Securities acted as financial adviser and Latham & Watkins LLP acted as legal adviser to BRE.

Richard Summerfield