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December 10, 2013

Essex Property Enters into Exclusive Negotiations with BRE

 By Keith Loria, Contributing Editor

David Toti, of Cantor Fitzgerald

David Toti, of Cantor Fitzgerald

Essex Property Trust, Inc., has made a non-binding proposal to acquire BRE Properties, Inc., in a negotiated strategic business combination in which each outstanding share of BRE common stock would be exchanged for 0.2971 shares of Essex common stock and $12.33 in cash, resulting in about $4.5 billion in cash and stock changing hands.

Both companies are publicly traded REITs that primarily work in West Coast markets, particularly California and Seattle. Under the proposal, the companies are currently engaged in discussions and have agreed to an exclusivity period.

According to a report released by Cantor Fitzgerald, the long-rumored REIT courtship of an offer to merge was confirmed by both ESS and BRE and the firm sees it as positive news for both Essex, given greater West Coast concentration, as well as the multi-family REITs overall, as a revival of M&A within the sub-sector implies value arbitrage and possible pricing support.

“We don’t know what the transaction type is yet; a merger or acquisition, but I would expect because it’s Essex making the bid that it looks more like an acquisition with BRE being absorbed into Essex,” David Toti, senior managing director, REIT analyst and director of U.S. equity research at Cantor Fitzgerald, told Commercial Property Executive. “For Essex, it means a larger platform. One of the reasons why this merger makes more sense than most is they really have a very similar footprint in terms of portfolio experience and markets.”

Published reports claim earlier this year BRE rebuffed an unsolicited $4.6 billion offer from Connecticut-based investor Land & Buildings, with BRE CEO Connie Moore telling investors during a conference call that it has “always been committed to maximizing the value of the company and will consider any legitimate proposal that is in the best interest of shareholders.”

According to Toti, the three takeaways from the proposed deal are that the bid appears to be below market expectations of a six-handle offer; BRE is worth more to ESS given operational/footprint synergies; and this is an opening shot that could continue to fan the M&A conversation that has dominated the sector in recent weeks.

Currently, Essex owns more than 34,000 units in more than 160 communities and brought in $543.4 million in 2012. BRE Properties holds more than 21,000 units in about 75 properties in its portfolio and had revenue in 2012 of $411 million.

“Whilst not exactly a hostile takeover, the ESS acquisition of BRE is a rare example of successful REIT activism. Our investment philosophy is based on our experience that a critical ingredient to creating long-term value is the skill of management,” Scott Crowe, head of real estate securities for Resource Real Estate, told CPE. “With a lot of crossover in the composition of the portfolios but significant deviation in track records, we think this deal makes all the sense in the world and would like to see more like it.”