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mergers and aquisitions

Mergers, acquisitions and more, oh my While there were certainly more mergers in 1997, 1998 still remained a strong year as companies sought to acquire in order to move into new territories or strengthen their current positions.

"It's always a good climate for mergers," says Ronald A. Frankel, vice president of New Plan Excel Realty Trust. "You have to look at mergers and acquisitions if you feel the need to expand your business base. They accelerate growth and allow you to be more competitive on many fronts."

"I think in general, '98 was a busy year with the number of acquisitions closed," says Ric Campo, chairman and CEO of Camden Property Trust. "There's a current slowdown in the stock market, so that may slow down some mergers. It's a natural process -- you acquire or be acquired. If you do well, you acquire. If other people outperform you, you get bought."

Still all agree that, in addition to a good property, the key to a successful merger these days is, in the words of Francine Glandt, investment relations manager and senior analyst for United Dominion, "creative financing."

Equity Residential Properties Trust merges with Merry Land & Investment Co. Inc. By far the biggest merger this year was between the first- and seventh-largest multifamily property owners. Equity Residential of Chicago had a market cap of $7.6 billion with 120,000 units at the time of its merger with Augusta, Ga.-based Merry Land, which had a market cap of $1.1 billion. Merry Land, the largest owner and operator of upscale garden-styled apartments in the South, had 118 communities with 29,091 units at the time of the merger.

"We were the largest before the merger, and we are the largest by far now," says David Neithercut, executive vice president and chief financial officer of Equity. "It isn't about being No. 1. It's gaining a scale that we believe will most offer efficiencies to our operations."

The merger, which closed in October, increased Equity's market cap to $12 billion. Equity will assume Merry Land's outstanding debt of some $656 million and $370 million in preferred stock. At the time of the merger, Merry Land's value was approximately $2.2 billion.

Together, the new company, which kept the name Equity Residential, will have 656 properties consisting of 187,543 units. There will be 26 management offices across the country.

"We always felt that Merry Land would make a strategic fit for us," Neithercut says. "They had quality assets that fit with ours. Combining the two made sense. Besides, we had been runners-up to them in acquiring some acquisitions, and we figured that if we were interested in those properties on an individual basis, we'd be interested in them all together."

New Plan Realty Trust and Excel Realty Trust form New Plan Excel Realty Trust "Nothing ever falls in your lap," says New Plan Excel's Frankel. "We were looking for a property company to acquire, and we discovered Excel. They have exceedingly good people. They were doing the same things we were doing in the same areas and in the same responsible ways. And they, like us, were conservative in borrowing. It was a symbiotic pairing. It made sense, and the more we looked at each other, the more we liked what we saw."

New Plan, which is the company formed by the merger of New Plan Realty Trust of New York and Excel Realty Trust of San Diego, Calif., brought to the table 192 properties in 23 states -- 57% of which were shopping centers, 16% factory outlets and 27% were garden apartments in 14 states. New Plan had 54 properties with 13,000 apartment units located in 14 states, mostly in the eastern half of the country. The merger created a company with a total capitalization of more than $3 billion with 88 million outstanding common shares trading on the New York Stock Exchange under the symbol NXL.

Now based in New York, New Plan Excel owns and manages some 297 retail properties with more than 38 million sq. ft. of retail space in 31 states. Excel had no apartments in its portfolio, so the merger didn't add any new units. The company now has 750 employees and, in addition to its principal offices in New York and San Diego, will have 25 offices across the country.

"We wanted to broaden our market coast to coast," says Arnold Laubich, CEO of the merged company and former president of New Plan. "This merger gives us more clout in the marketplace."

"We only merged in late September, so it's a little early to tell how things are going," Laubich says. "But while there will be some changes, we will be sharing management duties. There will be no clearing out of people. We are combing the companies."

Security Capital Atlantic Inc. and Security Capital Pacific Trust establish Archstone Security Capital Atlantic Inc. (SCA) of Atlanta and Security Capital Pacific Trust (SCPT) of Englewood, Colo., merged in June to become the second-largest national multifamily company with a current total market capitalization of $5.3 billion. However, the two companies decided to start from scratch and metamorphosed into Archstone Communities, based in Denver.

"We viewed it as a merger of equals," says Connie Moore, co-chair and chief operating officer at Archstone. "Technically, Security Capital Atlantic was merged into Security Capital Pacific. We had similar capacities, policies and procedures on how we approached the business. It's been seamless. We were both aligned with the same majority shareholder, Security Capital Group (a global real estate investment company based in Santa Fe, N.M.). We decided a name change was necessary in order to create a new brand that is powerful and national."

Indeed, the merger is the one of largest multifamily REIT mergers this year. SCPT brought to the table a market cap of nearly $2.8 billion with 43,011 units and another 16,647 units in the pipeline. SCA had a market cap of more than $1.14 billion with 21,693 units developed and another 8,815 under way.

SCPT's properties were basically west of the Mississippi and SCA's in the Southeast, Mid-Atlantic and Midwest. "There was real national synergy," says Moore. "We needed Texas, the West and Northwest and they needed to go east. We both planned to expand. The merger allowed us to expand nationally together instead of separately."

The merger, inked in August, formed Archstone, which now boasts 315 properties, with 93,115 units in 19 states. Another 25,868 units are being developed. Properties are located in 29 of the country's 50 largest metropolitan areas. The merger combined the strong balance sheets of both companies, resulting in a long-term debt to long-term book capitalization ration of 32.7%, giving Archstone considerable financial flexibility.

The two companies pretty much kept all the personnel, with the exception of some back office personnel. R. Scot Sellers, former chairman of SCPT, now serves as co-chair and chief investment officer of Archstone.

All properties now carry the Archstone name. "We think the branding is vital," says Moore. "It helps build customer loyalty, which, in turn, means lower turnover and helps in providing excellent services to our customers. That's not to say that both companies weren't giving a superior level of customer service, but we were doing it under different names. We expect to roll out programs modeled after other service industries that have achieved high levels of customer satisfaction. We will create a new service standard in the multifamily industry. We want people to have a wonderful experience and relate it directly to Archstone."

The company is still on a growth path. It currently is looking at five new metropolitan areas in which to expand. Archstone disposed of some $842.3 million worth of properties during the past 30 months, providing internal funding for attractive investment opportunities. It currently owns or controls land for the development of $2.1 billion of multifamily communities -- $1.04 billion of which is located in California and the Pacific Northwest.

The company's five-largest investment markets are California, Atlanta, Phoenix, the Pacific Northwest and southeast Florida. The largest concentration of expected investment will be in California with $1.4 billion, or about 26%, of Archstone's portfolio.

United Dominion acquires ASR Investments Corp., American Apartment Communities

United Dominion Realty Trust of Richmond, Va., acquired ASR Investments Corp. of Tucson, Ariz., for $301 million, which included paying off $167 million of ASR's mortgage debt. ASR shareholders received some $134 million of United Dominion common stock. The merger combined ASR's 7,314 apartment homes (excluding three communities that were under contract to be sold) in the Southwest markets of Dallas, Houston, Phoenix, Tucson and Albuquerque along with those in Washington state with United Dominion's 62,106 completed apartment homes in the Mid-Atlantic, Southeast and Southwest. The company now owns some 70,000 apartment homes in 268 communities in 24 major markets.

"It was attractive because it built up our presence in the Southwest," says Glandt of United Dominion. "It strengthened our presence in areas so that we could efficiently operate and manage them."

In 1997, only about 25% of United Dominion's apartments were in the Southwest, with only one market being efficient in size. Following the merger, 40% of the apartments are in those markets. For instance, before the merger, United Dominion had three communities and 732 apartment units in Phoenix -- certainly not enough to have an operations presence in the city -- so the Phoenix apartments were managed from the Dallas regional office. "But with the merger, we have enough mass to set up an office and manage them locally," Glandt explains. "Another example is Albuquerque, where we had one project and managed it from Houston."

Another benefit was that it gave initial exposure and entered into areas where United Dominion had no presence, particularly the Pacific Northwest and Seattle.

John McCann, United Dominion's president and CEO, called ASR's assets a "solid B-grade portfolio with good upside potential in attractive markets that we have targeted. There is an opportunity for us to add value to the ASR communities through repositioning, revenue enhancing capital improvements, submetering water and sewer to residents and growing nonrental income."

United Dominion kept most of the operational and site personnel associated with ASR, Glandt says. The company certainly didn't quench its acquisition fever with the completion of ASR's merger and, in September, bought American Apartment Communities for $787 million from a fund managed by Lazard Freres Real Estate Investors LLC and other investors.

The transaction includes 54 properties with 14,141 apartment homes, bringing United Dominion's total to 86,000 completed apartments in 35 major U.S. cities. In addition to California, it adds more mass to United Dominion's holdings in Columbus, Ohio, Seattle, Tampa and South Florida and positions the company in Oregon, Colorado, Michigan and Indiana.

"It's a strategic merger," Glandt says. "It gives us five communities in California -- 5,240 apartments. We've never been in California, and there's no other way to enter California. You can't do it with individual properties, it's too inefficient."

Those California markets are expected to produce rent growth in excess of the national average and the average of United Dominion's current portfolio. Some of AAC's properties will be sold off to retire debt and acquire better-positioned properties.

United Dominion Realty Trust has record of providing its shareholders an average annual return of 20% during the past 15 years.

Currently, 34% of United Dominion's properties are in the Southeast, 25% in the Southwest, 13% in Florida, 12% in the West, 8% in the Midwest, 5% in the Mid-Atlantic and 3% in the Northwest.

Camden Property Trust acquires Oasis Residential Inc. When Camden Property Trust of Houston announced its acquisition with Oasis Residential Inc. of Las Vegas, it formed the third-largest apartment REIT in the United States, with 51,377 units and total assets in excess of $2.3 billion. The 51,377 units consisted of 15,116 apartments in Oasis' portfolio and 36,261 units under Camden's control. The company is now based in Houston with a regional property management and accounting office in Las Vegas.

"From our point of view, it gave us a quality portfolio and operations in Colorado, Nevada and California -- three important western states. The merger fit nicely with our super-regional, coast-to-coast Sunbelt expansion plan," Campo says. "For Oasis, it gave them diversification and enhanced shareholder value."

The company expects the merger to deliver some $2.5 million in administrative and operating cost savings in the first full year. Camden ended 1997 with an increase in revenues of 79% over 1996, rising from $111.6 million to $199.8 million. The same property net-operating income for the year increased by 6.2%, compared to 1996, with revenues increasing 4.3% and operating expenses growing 1.7%.

It ended 1997 with ownership of 37,012 operating apartments in 106 multifamily apartments after its merger with Paragon Group Inc., a Dallas-based multifamily REIT, in April 1997. The apartments are located in Texas, Florida, Missouri, North Carolina, Arizona and Kentucky. The properties had a weighted average occupancy rate of 94%. The strength of the combined portfolio was reflected in an increase in average monthly rental rates of 5.3%, rising from $508 in 1996 to $535 in 1997.

After that merger, the company's assets grew to $1.3 billion. At the time of its merger, Oasis had 52 completed multifamily properties with another one under construction.

"Oasis was the largest apartment owner in Las Vegas. It owned about 11% of the market," says Campo. "It added to us a branded product that was distinct, well-known, strong. Everyone in Las Vegas knows Oasis. You come to town and ask a cab driver to show you an apartment, and he'll take you to an Oasis property."

However, Campo says, the value in Las Vegas was down, thanks to a soft market and overbuilding. The company, even as it announced the merger, admitted it intended to spin off a new entity in which Camden will own a minority interest of 4,800 Las Vegas units.

Camden entered into a $248 million definitive agreement to form a real estate investment venture with a large corporate pension fund represented by Schroder Real Estate Associates. Under the terms of the agreement, the pension fund will own an 80% interest in the newly formed Sierra-Nevada Multifamily Investments LLC. Camden will be the managing member, owning 20%, and will provide property management and asset management services to the company for a fee.

Sierra-Nevada will own 19 apartment communities, primarily located in Las Vegas, representing 5,119 apartment homes. The assets are valued at $248 million and will be financed with approximately 20% equity and 80% debt. Camden will use the net-cash proceeds to reduce its outstanding short-term debt.

"The spin-off should provide us with the best of both worlds," he says. "Camden's effective exposure in Las Vegas will be a very manageable level of 14% of Camden's total units on a combined basis."

Campo says the Oasis merger, and mergers in general, are conducted for either strategic or tactical reasons. "Strategically, if we want to get into a market, we'll buy core assets," he says. "Tactically, we'll be willing to expand our position into existing markets so we can be more dominant. We also must believe that we can add value to the properties. Intrinsically, we must see value and be able to unlock those assets."

AIMCO acquires Insignia Properties Trust, Ambassador Apartments Inc. Denver-based Apartment Investment and Management Co. (AIMCO) acquired the multifamily operations and certain property holdings of Insignia Financial Group Inc. of Greenville, S.C., in October. At the time of the merger, Insignia was the nation's largest manager of multifamily residential properties in the United States. AIMCO issued about $310 million of equity by exchanging each outstanding share of Insignia common stock for 0.262 shares.

AIMCO assumed property management of about 191,000 multifamily units consisting of general and limited partnership investments in 122,000 units and third-party management of 69,000 units for aggregate consideration of about $910 million.

AIMCO also acquired Insignia Financial Group's 61% owned REIT subsidiary, Insignia Properties Trust, which owned a 32% weighted average general and limited partnership interest in 89,500 units in 398 apartment communities. AIMCO intends to pay no less than $100 million in cash, or $13.25 per share (or $13.28 per share in AIMCO's common stock or AIMCO's options), for the interest in IPT not owned by Insignia Financial Group.

More or less - some chunks of the units in question are owned by limited partners - those ownership interests were not included in the big Insignia deal, but AIMCO is trying to buy them out.

AIMCO is the largest private provider of rental housing in the country with more than 2,000 properties, including nearly 400,000 apartment units or one-third of all apartment units owned by the 23 publicly traded multifamily REITs. About 1 million people are housed in AIMCO properties.

Prior to the merger, AIMCO, which primarily serves the middle market, owned or controlled 39,769 units in 147 apartment communities and had an equity interest in 74,985 units in 480 apartment communities. In addition, it managed 69,181 units in 367 apartment communities for third parties and affiliates. AIMCO's properties are located in 42 states, Washington, D.C., and Puerto Rico.

Although AIMCO acknowledges that the merger results in sizable apartment holdings, Terry Considine, chairman and CEO of AIMCO, insists that being the biggest is not the company's goal. "AIMCO focuses in on profitability, not size. The transaction will increase AIMCO's 1999 profitability by more than $0.14 per share."

Acknowledging that local involvement is important; AIMCO will have 33 operating centers or regional hubs that will control between 10,000 to 15,000 apartment units. The company will employ about 16,000 people. The merger is consistent with AIMCO's plan to build a geographically diverse portfolio while maintaining its high rate of growth in a generally stable apartment market, Considine says.

Insignia wasn't AIMCO's only acquisition in 1998. In May, AIMCO acquired Ambassador Apartments Inc. of Chicago for $21 per share or $682 million - consisting of $269 million in equity, the assumption of about $380 million in mortgage indebtedness, $20 million in other net liabilities and $13 million in transaction costs. The transaction also includes approximately $23 million in unconsolidated joint venture indebtedness.

Prior to the merger, Ambassador owned and operated 15,728 units in 52 garden-styled apartment communities, primarily in the middle market. Most -- if not all -- were constructed or substantially renovated since 1983.

Ambassador's apartments were located in Arizona, Colorado, Florida, Georgia, Illinois, Tennessee and Texas. The merger was a good match. "Ambassador's apartment portfolio complements AIMCO's apartment portfolio," says AIMCO President Peter Kompaniez. "The style of the apartment buildings, the amenities package, the average age of the apartment and the 'middle income' market appeal are very similar to AIMCO's other apartments."

In addition, AIMCO already had a significant presence in Ambassador's market, increasing market penetration and brand awareness.

Bay Apartment Communities Inc. and Avalon Properties Inc. form Avalon Bay Bay Apartment Communities of San Jose, Calif., and Avalon Properties of Alexandria, Va., merged in June under the new name Avalon Bay Communities.

Avalon Bay assumed outstanding liabilities of Avalon of approximately $646 million. Avalon's preferred stockholders received one share of Avalon Bay preferred stock for each share of Avalon preferred stock, whose liquidation value was approximately $218 million.

The new company, based in Alexandria, combined two companies with similar cultures, goals and properties, says Mike Myers, chairman of Avalon Bay. The only difference was they were a continent apart.

"It made sense to join the companies," Myers says. "By coming together, we avoided being in competition with each other. It was clear that if who joined, we could enjoy economies of scale, learn from each other and avoid going into each other's territories, which would be difficult."

Avalon Properties was an East Coast firm that specialized in urban in-fill apartments, while Bay Coast specialized in the same thing -- except on the West Coast.

The merger is going well, Myers says. "About 90% of the staff has been integrated, and those we left did so of their own volition. Our corporate attitudes are very similar, but not exactly the same. What is interesting is that the different areas of the business -- acquisition, project operations -- are corporate cultures onto themselves. The corporate cultures were similar but reflected the differences between the two coasts."

At the time of the merger, Bay Apartment Communities had 59 communities containing 16,741 apartment homes in 37 communities in the San Francisco Bay area and Northern California, 19 communities in Southern California and three in the Pacific Northwest.

Combined, the company has a total market capitalization of about $3.7 billion with about 43,000 apartment homes, 140 communities in 29 distinct markets, many of which have a high barrier-to-entry. There are 17 communities currently under development. About 75% of the assets are in the top 10 apartment markets in the country. Simon says the merger puts Avalon Bay as the third-largest apartment owner in the country.

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