In the largest multifamily REIT merger so far this year, Security Capital Atlantic Inc. (SCA) and Security Capital Pacific Trust (SCPT), based in Atlanta and Englewood, Colo., respectively, have agreed to join together and create a dominant multifamily REIT with a national presence. The new REIT, called Archstone Communities, is scheduled to begin operations in August after a shareholder vote and the closing of the transaction. The company will be based in Denver. The two REITs are operating companies aligned with its majority shareholder, Security Capital Group, a global real estate investment company based in Santa Fe, N.M.
SCPT is ranked as the second largest multifamily REIT with a market cap of nearly $2.8 billion, according to ASSETrac Inc., a Bloomfield, N.J.-based real estate information service. SCPT has 43,011 units presently with 16,647 units in the pipeline. SCA has a market cap of more than $1.14 billion with 21,693 units and 8,815 units in the development pipeline. SCPT's properties are located in the western United States and SCA is concentrated in the Southeast, Mid-Atlantic and Midwest regions of the nation. After the closing in August, Archstone's operating and development pipeline will have a market cap of more than $5.4 billion.
The merger received board approval in April when SCA and SCPT filed a joint proxy statement with the Securities and Exchange Commission. Upon completion of the transaction, Archstone will have 304 properties, consisting of 90,166 units in 19 states, including 25,642 units in the development pipeline.
"Archstone Communities will have an exceptionally strong foundation for continued internal growth. The combined strength of our operating communities and well-located development pipelines will allow Archstone to grow without the need for incremental acquisitions," says R. Scot Sellers, co-chair and CIO of Archstone Communities and former chairman of SCPT. "As for internal growth, I am referring to two main areas - the performance of our existing communities and the value of the combined companies."
"The rating for SCPT right now is at an A- level and should not come down, and we have SCA at a BBB rating currently," says Bill Haley, director of New York-based Standard & Poor's Corp. "All the business issues we usually consider in a merger toward a rating look good. I think the positives going forward in the combined company could be possibly lower leverage which would maintain more comfortable ratings."
When SCA and SCPT announced their first quarter funds from operation (FFO) ending March 31, 1998, SCPT reported basic FFO of $0.44 per share, representing a $15.8% increase from the same period in 1997. SCA reported basic FFO of $0.48 per share, a 91% increase above the first quarter of 1997. After the August vote, each SCA shareholder will receive one share of SCPT common stock. In addition, SCPT will assume approximately $527 million of SCA's debt. The transaction will be structured as a tax-free merger.
"We view the merger definitely as a positive, and it basically has a tremendous increase in diversification to launch a national effort," says Paul D. Tartak, assistant vice president of New York-based Duff & Phelps Credit Rating Co. "Given the affiliation, we don't see any integration issues. We see the geographic diversification as a definite plus to the merger."
The two companies share a similar corporate culture. "SCA and SCPT share a common approach to operating practices, systems and financial structures. Our similar cultures will assure a seamless integration, providing the shareholders with an added element of stability and growth potential," says Constance B. Moore, co-chair and COO of Archstone Communities and former co-chair of SCA. "Our similarities give us a tremendous opportunity to realize significant overhead savings, which we estimate will be nearly $5 million in 1999. We will have superior financial strength, providing more efficient access to capital, which further positions us to have significant growth opportunities in our markets."
Archstone's national development platform is a powerful component for its long-term growth. Expected development activity this year is more than $650 million of new starts and a $1.03 billion development pipeline in California and the Pacific Northwest. During each of the next four years, an average of $450 million in new communities is expected to be completed and stabilized by Archstone.
"We will continue our proven strategy of investing capital in markets with strong economic fundamentals and high barriers to entry against new multifamily development in order to create long-term value for our shareholders," says Sellers. "We have already identified five new metropolitan areas that meet our stringent investment criteria."
One of the main points of consideration for Archstone is customer service, and the company will focus on resident satisfaction heavily through its branding philosophy - a philosophy SCPT has been practicing independently for more than four years.
"SCPT's research provides an outstanding platform to enhance the brand development initiatives and amenities we already have in place," says Moore. "Providing our residents with the amenities and services they value presents our new company with a tremendous opportunity to generate additional revenue and minimize turnover, which will ultimately translate into greater cashflow growth for our shareholders. This will reflect value to our shareholders and residents in all our communities nationwide."
Archstone'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 25.78% of Archstone's portfolio.
With more than $5.4 billion in market capitalization, what's next for Archstone?
"Our objective is to produce the best growth for our shareholders on a continuing long-term basis. Like many other businesses, we believe the multifamily industry is ultimately a commodity business, so we will use branding to help identify our product," says Sellers. "This provides our company with some significant advantages, including an increased market share, customer loyalty resulting in lower turnover, the ability to offer incremental products and excellent services to our customer base."
For the balance of this year, Archstone plans more acquisitions and is presently moving ahead with projects in many markets. "Basically at all times we're looking for acquisition opportunities that produce returns and create value for our shareholders," adds Sellers. "We currently have a number of communities that we have active negotiations under way on, and expect to close in the next few months."
All the properties will be called Archstone at (market's name) to identify the brand name nationwide. "One of the things that is driving the branding is a superior level of customer service, and that is not to say we're doing that today, but right now we're doing it under a few different names," says Moore. "To the extent that people have a good experience with Archstone is what we're focusing on. We want the experience to be a wonderful one and relate it directly to Archstone. Our residents will know Archstone's outstanding services."