<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
SCHEDULE 13E-3
RULE 13e-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
------------------
IRVINE APARTMENT COMMUNITIES, INC.
(NAME OF ISSUER)
------------------
TIC ACQUISITION LLC
THE IRVINE COMPANY
(NAME OF PERSON(S) FILING STATEMENT)
------------------
463606-10
(CUSIP NUMBER OF CLASS OF SECURITIES)
------------------
COMMON STOCK, $ .01 PAR VALUE
(TITLE OF CLASS OF SECURITIES)
------------------
MICHAEL D. MCKEE, ESQ.
TIC ACQUISITION LLC
550 NEWPORT CENTER DRIVE
NEWPORT BEACH, CA 92660
(949) 720-2000
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSONS AUTHORIZED TO RECEIVE NOTICES
AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT)
Copies to:
<TABLE>
<S> <C>
THOMAS W. DOBSON, ESQ. WILLIAM J. CERNIUS, ESQ.
LATHAM & WATKINS LATHAM & WATKINS
633 WEST FIFTH STREET 650 TOWN CENTER DRIVE
SUITE 4000 TWENTIETH FLOOR
LOS ANGELES, CA 90071 COSTA MESA, CA 92626
(213) 485-1234 (714) 540-1235
</TABLE>
This statement is filed in connection with (check the appropriate box):
a. [X] The filing of solicitation materials or an information statement subject
to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the Securities
Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of 1933.
c. [ ] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting material or information statement
referred to in checking box (a) are preliminary copies: [X]
<TABLE>
<CAPTION>
CALCULATION OF FILING FEE
================================================================================
TRANSACTION VALUATION* AMOUNT OF
FILING FEE
<S> <C>
$685,980,362...........................................................$137,197
================================================================================
</TABLE>
* This amount is based upon a merger involving the cancellation of
20,175,893 Shares at $34.00 cash per Share. Pursuant to, and as provided
by, Rule 0-11(b)(1), the amount required to be paid with the filing of
this Schedule 13E-3 is $137,197.
Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid: $137,197
Form or Registration No.: Preliminary Schedule 14A
Filing Party: Irvine Apartment Communities, Inc.
Date Filed: February 25, 1999
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Page 1 of 9 Pages
Exhibit Index on Page 10
<PAGE> 2
This Rule 13e-3 Transaction Statement on Schedule 13E-3 (the
"Schedule 13E-3") is being filed jointly by TIC Acquisition LLC, a Delaware
limited liability company (the "Acquiror"), and The Irvine Company, a Delaware
corporation ("TIC"), in connection with the proposed merger (the "Merger") of
Irvine Apartment Communities, Inc., a Maryland corporation (the "Company"), with
and into the Acquiror pursuant to an Agreement and Plan of Merger, dated as of
February 1, 1999 (the "Merger Agreement"), by and between the Company and the
Acquiror. TIC is the managing member of the Acquiror and the sole shareholder of
the only other member of the Acquiror. By filing this Schedule 13E-3, neither of
the joint signatories concedes that Rule 13e-3 under the Securities Exchange Act
of 1934, as amended, is applicable to the Merger or the other transactions
contemplated by the Merger Agreement.
In the Merger, the Company will merge with and into the Acquiror,
with the Acquiror as the surviving company. Upon the effectiveness of the Merger
(the "Effective Time"), each share of common stock, par value $.01 per share, of
the Company (the "Shares"), issued and outstanding immediately prior to the
Effective Time will be converted into and represent the right to receive $34.00
in cash, without interest, subject to applicable back-up withholding taxes.
This Schedule 13E-3 is being filed with the Securities and
Exchange Commission concurrently with a preliminary proxy statement filed by the
Company pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Proxy Statement"). A copy of the Proxy Statement is attached
hereto as Exhibit 99.1. The following cross reference sheet is being supplied
pursuant to General Instruction F to Schedule 13E-3 and shows the location in
the Proxy Statement of the information required to be included in this Schedule
13E-3. The information contained in the Proxy Statement, including all
appendices thereto, is expressly incorporated herein by reference and the
responses to each item are qualified in their entirety by reference to the
information contained in the Proxy Statement and the appendices thereto.
Capitalized terms used herein and not otherwise defined herein shall have the
meanings ascribed to such terms in the Proxy Statement.
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
ITEM NUMBER AND CAPTION LOCATION IN THE
IN SCHEDULE 13E-3 PROXY STATEMENT
- ----------------- ---------------
<S> <C>
1. Issuer and Class of Security Subject to the
Transaction
(a) "SUMMARY;" and "GENERAL -- The Company"
(b) "SUMMARY -- Voting;" and "INFORMATION
CONCERNING THE SPECIAL MEETING -- Record Date;
Quorum; Outstanding Common Stock Entitled to
Vote"
(c) "COMMON STOCK MARKET PRICE INFORMATION;
DIVIDEND INFORMATION"
(d) "COMMON STOCK MARKET PRICE INFORMATION;
DIVIDEND INFORMATION"
(e) "CERTAIN RELATIONSHIPS AND TRANSACTIONS"
(f) "CERTAIN RELATIONSHIPS AND TRANSACTIONS"
2. IDENTITY AND BACKGROUND "SUMMARY;" "GENERAL -- The Acquiror;" and
"MANAGEMENT OF THE ACQUIROR AND ITS MEMBERS"
3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS
(a)(1) "SPECIAL FACTORS -- Background of the Merger;"
and "CERTAIN RELATIONSHIPS AND TRANSACTIONS"
(a)(2) "SPECIAL FACTORS -- Background of the Merger;"
"SPECIAL FACTORS -- The Acquiror's Purpose;
Structure of the Merger;" and "CERTAIN
RELATIONSHIPS AND TRANSACTIONS"
(b) "CERTAIN RELATIONSHIPS AND TRANSACTIONS"
4. TERMS OF THE TRANSACTION
(a) "SUMMARY;" "SPECIAL FACTORS;" and "THE MERGER"
(b) "SUMMARY;" "SPECIAL FACTORS;" and "THE MERGER"
5. PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE
(a) - (g) "SPECIAL FACTORS -- Background of the Merger;"
"SPECIAL FACTORS -- The Acquiror's Purpose;
Structure of the Merger;" "SPECIAL FACTORS --
Certain Consequences of the Merger;" and "SPECIAL
FACTORS -- Plans for the Company After the Merger"
6. SOURCE AND AMOUNT OF FUNDS OR OTHER
CONSIDERATION
(a) - (c) "SUMMARY -- Financing; Source of Funds;"
"THE MERGER -- Financing; Source of Funds;"
and "THE MERGER -- Fees and Expenses"
(d) *
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN THE
IN SCHEDULE 13E-3 PROXY STATEMENT
- ----------------------- ----------------
<S> <C>
7. PURPOSE(S), ALTERNATIVES, REASONS AND
EFFECTS
(a) - (c) "SPECIAL FACTORS -- Background of the
Merger;" "SPECIAL FACTORS -- The Acquiror's
Purpose; Structure of the Merger;"
"SPECIAL FACTORS -- Recommendation
of the Special Committee and the Board of
Directors; Fairness of the
Merger;" "SPECIAL FACTORS -- Opinion of the
Financial Advisor for the Special Committee;"
and "SPECIAL FACTORS -- Position of the
Acquiror and The Irvine Company"
(d) "SUMMARY -- Purpose, Structure and Effects
of the Merger;" "SUMMARY -- Federal Income Tax
Consequences;" "SPECIAL FACTORS -- The Acquiror's
Purpose; Structure of the Merger;"
"SPECIAL FACTORS -- Recommendation of the
Special Committee and the Board of Directors;
Fairness of the Merger;" "SPECIAL FACTORS -- Interests of
Certain Persons in the Merger; Certain Company Benefit Plans;"
"SPECIAL FACTORS -- Certain Consequences of
the Merger;" "SPECIAL FACTORS -- Plans for
the Company After the Merger;" "SPECIAL FACTORS --
Certain Tax Considerations;" "SPECIAL FACTORS --
Accounting Treatments;" "THE MERGER;" and "CERTAIN RELATIONSHIPS
AND TRANSACTIONS -- Agreement Relating to Thompson
Residential, Inc."
8. FAIRNESS OF THE TRANSACTIONS
(a) - (e) "INFORMATION CONCERNING THE SPECIAL
MEETING -- Vote Required;" "SPECIAL FACTORS --
Background of the Merger;" "SPECIAL FACTORS --
The Acquiror's Purpose; Structure of the Merger;"
"SPECIAL FACTORS -- Recommendation of the Special
Committee and the Board of Directors;
Fairness of the Merger;" "SPECIAL
FACTORS -- Position of the Acquiror and The
Irvine Company;" "SPECIAL FACTORS -- Opinion of the Financial
Advisor for the Special Committee;" "APPENDIX B --
OPINION OF MORGAN STANLEY;" and
"APPENDIX D -- SUMMARY OF THE NATIONSBANC MONTGOMERY
REPORTS"
(f) *
9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN
NEGOTIATIONS
(a) - (c) "SPECIAL FACTORS -- Background of the
Merger;" "SPECIAL FACTORS -- The Acquiror's
Purpose; Structure of the Merger;"
"SPECIAL FACTORS -- Recommendation of
the Special Committee and the Board of Directors;
Fairness of the Merger;"
"SPECIAL FACTORS -- Position of the Acquiror
and The Irvine Company;" "SPECIAL FACTORS -- Opinion of
the Financial Advisor for the Special Committee;"
"APPENDIX B -- OPINION OF MORGAN STANLEY;"
and "APPENDIX D -- SUMMARY OF THE NATIONSBANC
MONTGOMERY REPORTS"
10. INTEREST IN SECURITIES OF THE ISSUER
(a) "SECURITIES OWNERSHIP"
(b) "SPECIAL FACTORS -- Background of the Merger;"
"THE MERGER;" and
"CERTAIN RELATIONSHIPS AND
TRANSACTIONS"
11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS
WITH RESPECT TO THE ISSUER'S SECURITIES "SUMMARY;" "SPECIAL FACTORS -- Background of
the Merger;" "SPECIAL FACTORS -- The Acquiror's
Purpose; Structure of the Merger;"
"THE MERGER;" "CERTAIN RELATIONSHIPS AND TRANSACTIONS"
and "SECURITIES OWNERSHIP"
12. PRESENT INTENTION AND RECOMMENDATION OF
CERTAIN PERSONS WITH REGARD TO THE TRANSACTION
(a) - (b) "SUMMARY;" "INFORMATION CONCERNING THE
SPECIAL MEETING -- Vote Required;" "SPECIAL
FACTORS -- Background of the Merger;" "SPECIAL
FACTORS -- The Acquiror's Purpose; Structure
of the Merger;" "SPECIAL FACTORS -- Recommendation
of the Special Committee and the Board of Directors;
Fairness of the Merger;"
and "SPECIAL FACTORS -- Position
of the Acquiror and The Irvine Company"
13. OTHER PROVISIONS OF THE TRANSACTION
(a) "SUMMARY -- No Appraisal Rights;" and "THE
MERGER -- No Appraisal Rights"
(b) *
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN THE
IN SCHEDULE 13E-3 PROXY STATEMENT
- ----------------------- ----------------
<S> <C>
(c) *
14. FINANCIAL INFORMATION
(a) "SELECTED FINANCIAL DATA OF THE COMPANY;"
and the Consolidated Financial Statements of
the Company included in the Company's Annual
Report on Form 10-K for the year ended December
31, 1998 mailed to Shareholders with the Proxy
Statement.
(b) *
15. PERSONS AND ASSETS EMPLOYED, RETAINED OR
UTILIZED
(a) "INFORMATION CONCERNING THE SPECIAL MEETING --
Proxy Solicitation;"
"SPECIAL FACTORS -- Background of the Merger;"
"SPECIAL FACTORS -- The Acquiror's
Purpose; Structure of the Merger;"
"SPECIAL FACTORS -- Certain Consequences of
the Merger;" "SPECIAL FACTORS -- Plans for the
Company After the Merger;" "THE MERGER --
Financing; Source of Funds;" and "THE MERGER
-- Fees and Expenses"
(b) "SPECIAL FACTORS -- Position of the Acquiror and
The Irvine Company;"
"THE MERGER -- Fees and Expenses;" and
"APPENDIX D -- SUMMARY OF THE NATIONSBANC MONTGOMERY
REPORTS"
16. ADDITIONAL INFORMATION *
17. MATERIAL TO BE FILED AS EXHIBITS
(a)-(f) Separately filed with this Schedule 13E-3.
</TABLE>
* The Item is inapplicable or the answer thereto is in the negative.
4
<PAGE> 5
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) The information set forth in "SUMMARY;" and "GENERAL -- The Company"
in the Preliminary Proxy Statement filed pursuant to Regulation 14A by the
Company concurrently herewith (the "Proxy Statement") is hereby incorporated
herein by reference.
(b) The information set forth in "SUMMARY -- Voting;" and "INFORMATION
CONCERNING THE SPECIAL MEETING -- Record Date; Quorum; Outstanding Common Stock
Entitled to Vote" in the Proxy Statement is hereby incorporated herein by
reference.
(c) The information set forth in "COMMON STOCK MARKET PRICE INFORMATION;
DIVIDEND INFORMATION" in the Proxy Statement is hereby incorporated herein by
reference.
(d) The information set forth in "COMMON STOCK MARKET PRICE INFORMATION;
DIVIDEND INFORMATION" in the Proxy Statement is hereby incorporated herein by
reference.
(e) The information set forth in "CERTAIN RELATIONSHIPS AND
TRANSACTIONS" in the Proxy Statement is hereby incorporated herein by reference.
(f) The information set forth in "CERTAIN RELATIONSHIPS AND
TRANSACTIONS" in the Proxy Statement is hereby incorporated herein by reference.
ITEM 2. IDENTITY AND BACKGROUND.
This Schedule 13E-3 is being filed by the Acquiror and TIC. The Company
is the issuer of the Common Stock which is the subject of the Rule 13e-3
transaction. The information set forth in "SUMMARY;" "GENERAL -- The Acquiror;"
and "MANAGEMENT OF THE ACQUIROR AND ITS MEMBERS" in the Proxy Statement is
hereby incorporated herein by reference.
During the last five years, none of the Acquiror, TIC, ICDC, nor any
person controlling the Acquiror, TIC, ICDC, nor, to the best of their knowledge,
any of the persons set forth in "MANAGEMENT OF THE ACQUIROR AND ITS MEMBERS" in
the Proxy Statement has (i) been convicted in a criminal proceeding (excluding
traffic violations or similar misdemeanors) or (ii) been a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and as
a result of such proceeding was or is subject to a judgment, decree, or final
order enjoining further violations of, or prohibiting activities subject to,
federal or state securities laws or finding any violation of such laws.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a)(1) The information set forth in "SPECIAL FACTORS -- Background of
the Merger;" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS" in the Proxy Statement
is hereby incorporated herein by reference.
(a)(2) The information set forth in "SPECIAL FACTORS -- Background of
the Merger;" "SPECIAL FACTORS -- The Acquiror's Purpose; Structure of the
Merger;" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS" in the Proxy Statement is
hereby incorporated herein by reference.
(b) The information set forth in "CERTAIN RELATIONSHIPS AND
TRANSACTIONS" in the Proxy Statement is hereby incorporated herein by reference.
ITEM 4. TERMS OF THE TRANSACTION.
(a) The information set forth in "SUMMARY;" "SPECIAL FACTORS;" and "THE
MERGER" in the Proxy Statement is hereby incorporated herein by reference.
(b) The information set forth in "SUMMARY;" "SPECIAL FACTORS;" and "THE
MERGER" in the Proxy Statement is hereby incorporated herein by reference.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
(a) - (g) The information set forth in "SPECIAL FACTORS -- Background of
the Merger;" "SPECIAL FACTORS -- The Acquiror's Purpose; Structure of the
Merger;" "SPECIAL FACTORS -- Certain Consequences of the Merger;" and "SPECIAL
FACTORS -- Plans for the Company After the Merger" in the Proxy Statement is
hereby incorporated herein by reference.
5
<PAGE> 6
ITEM 6. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) - (c) The information set forth in "SUMMARY -- Financing; Source of
Funds;" THE MERGER -- Financing; Source of Funds;" and "THE MERGER -- Fees and
Expenses" in the Proxy Statement is hereby incorporated herein by reference.
(d) Not Applicable.
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) - (c) The information set forth in "SPECIAL FACTORS -- Background of
the Merger;" "SPECIAL FACTORS-- The Acquiror's Purpose; Structure of the
Merger;" "SPECIAL FACTORS -- Recommendation of the Special Committee and the
Board of Directors; Fairness of the Merger;" "SPECIAL FACTORS -- Opinion of the
Financial Advisor for the Special Committee" and "SPECIAL FACTORS -- Position of
the Acquiror and The Irvine Company" in the Proxy Statement is hereby
incorporated herein by reference.
(d) The information set forth in "SUMMARY -- Purpose, Structure and
Effects of the Merger;" "SUMMARY -- Federal Income Tax Consequences;" "SPECIAL
FACTORS -- The Acquiror's Purpose; Structure of the Merger;" "SPECIAL FACTORS --
Recommendation of the Special Committee and the Board of Directors; Fairness of
the Merger;" "SPECIAL FACTORS -- Interests of Certain Persons in the Merger;
Certain Company Benefit Plans;" "SPECIAL FACTORS -- Certain Consequences of the
Merger;" "SPECIAL FACTORS -- Plans for the Company After the Merger;" "SPECIAL
FACTORS -- Certain Tax Considerations;" "SPECIAL FACTORS -- Accounting
Treatment;" "THE MERGER" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS --
Agreement Relating to Thompson Residential, Inc." in the Proxy Statement is
hereby incorporated herein by reference.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) - (e) The information set forth in "INFORMATION CONCERNING THE
SPECIAL MEETING -- Vote Required;" "SPECIAL FACTORS -- Background of the
Merger;" "SPECIAL FACTORS -- The Acquiror's Purpose; Structure of the Merger;"
"SPECIAL FACTORS -- Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger;" "SPECIAL FACTORS -- Position of the
Acquiror and The Irvine Company;" "SPECIAL FACTORS -- Opinion of the Financial
Advisor for the Special Committee;" "APPENDIX B -- OPINION OF MORGAN STANLEY;"
and "APPENDIX D -- SUMMARY OF THE NATIONSBANC MONTGOMERY REPORTS" in the Proxy
Statement is hereby incorporated herein by reference.
(f) Not Applicable.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) - (c) The information set forth in "SPECIAL FACTORS --Background of
the Merger;" "SPECIAL FACTORS -- The Acquiror's Purpose; Structure of the
Merger;" "SPECIAL FACTORS -- Recommendation of the Special Committee and Board
of Directors; Fairness of the Merger;" "SPECIAL FACTORS -- Position of the
Acquiror and The Irvine Company;" "SPECIAL FACTORS -- Opinion of the Financial
Advisor for the Special Committee;" "APPENDIX B -- OPINION OF MORGAN STANLEY;"
and "APPENDIX D -- SUMMARY OF THE NATIONSBANC MONTGOMERY REPORTS" in the Proxy
Statement is hereby incorporated herein by reference.
ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) The information set forth in "SECURITIES OWNERSHIP" in the Proxy
Statement is hereby incorporated herein by reference.
(b) The information set forth in "SPECIAL FACTORS -- Background of the
Merger;" "THE MERGER;" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS" in the Proxy
Statement is hereby incorporated herein by reference.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUER'S
SECURITIES.
The information set forth in "SUMMARY;" "SPECIAL FACTORS -- Background
of the Merger;" "SPECIAL FACTORS -- The Acquiror's Purpose; Structure of the
Merger;" "THE MERGER;" "CERTAIN RELATIONSHIPS AND TRANSACTIONS;" and "SECURITIES
OWNERSHIP" in the Proxy Statement is hereby incorporated herein by reference.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO
THE TRANSACTION.
(a) - (b) The information set forth in "SUMMARY;" "INFORMATION
CONCERNING THE SPECIAL MEETING -- Vote Required;" "SPECIAL FACTORS -- Background
of the Merger;" "SPECIAL FACTORS -- The Acquiror's Purpose; Structure of the
Merger;" "SPECIAL FACTORS -- Recommendation of the Special Committee and the
Board of Directors; Fairness of the Merger;" and "SPECIAL FACTORS -- Position of
the Acquiror and The Irvine Company" in the Proxy Statement is hereby
incorporated herein by reference.
6
<PAGE> 7
ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) The information set forth in "SUMMARY -- No Appraisal Rights" and
"THE MERGER -- No Appraisal Rights" in the Proxy Statement is hereby
incorporated herein by reference.
(b) Not applicable.
(c) Not applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) The information set forth in "SELECTED FINANCIAL DATA OF THE
COMPANY" in the Proxy Statement and the Consolidated Financial Statements of the
Company included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 mailed to Shareholders with the Proxy Statement are hereby
incorporated herein by reference.
(b) Not applicable.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) The information set forth in "INFORMATION CONCERNING THE SPECIAL
MEETING -- Proxy Solicitation;" "SPECIAL FACTORS -- Background of the
Merger;" "SPECIAL FACTORS -- The Acquiror's Purpose; Structure of the Merger;"
"SPECIAL FACTORS -- Certain Consequences of the Merger;" "SPECIAL FACTORS --
Plans for the Company after the Merger;" "THE MERGER -- Financing; Source of
Funds;" and "THE MERGER -- Fees and Expenses" in the Proxy Statement is hereby
incorporated by reference.
(b) The information set forth in "SPECIAL FACTORS -- Position of the
Acquiror and The Irvine Company;" "THE MERGER -- Fees and Expenses;" and
"APPENDIX D -- SUMMARY OF THE NATIONSBANC MONTGOMERY REPORTS" in the Proxy
Statement is hereby incorporated by reference.
ITEM 16. ADDITIONAL INFORMATION.
The information set forth in the Proxy Statement and the Appendices
thereto and the Exhibits hereto is incorporated herein by reference.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
2.1 -- Agreement and Plan of Merger, dated February 1, 1999, between
Irvine Apartment Communities, Inc. and the Acquiror, which is
incorporated herein by reference to Appendix A to the Proxy
Statement.
10.1 -- Form of $350 million Irrevocable Letter of Credit from Bank
of America National Trust and Savings Association.
10.2 -- Form of $88 million Irrevocable Letter of Credit from Bank of
America National Trust and Savings Association.
10.3 -- Second Amended and Restated Agreement of Limited Partnership
of Irvine Apartment Communities, L.P., dated January 20, 1998,
which is incorporated herein by reference to Exhibit 3.5 of
Irvine Apartment Communities, Inc. Form 10-K for the fiscal year
ended December 31, 1997.
10.3.1 -- Amendment No. 1 dated as of October 30, 1998 to the Second
Amended and Restated Agreement of Limited Partnership of the
Operating Partnership dated as of January 20, 1998, which is
incorporated herein by reference to Exhibit 3.5.1 of Irvine
Apartment Communities, Inc. Form 10-K for the fiscal year ended
December 31, 1998.
10.4 -- Miscellaneous Rights Agreement dated March 20, 1996 among
Irvine Apartment Communities, Inc., the Operating Partnership
and The Irvine Company, which is incorporated herein by
reference to Exhibit 10.4 of Irvine Apartment Communities, Inc.
Form 8-B filed April 30, 1996.
10.4.1 -- Amendment No. 1 to the Miscellaneous Rights Agreement, which
is incorporated herein by reference to Exhibit 10.4.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
10.4.2 -- Amendment No. 2 to the Miscellaneous Rights Agreement, which
is incorporated herein by reference to Exhibit 10.4.2 of the
Company's Form 10-K for the fiscal year ended December 31, 1997.
10.5 -- Exclusive Land Rights and Non-Competition Agreement entered
into between Irvine Apartment Communities, Inc., The Irvine
Company, the Operating Partnership and Mr. Bren dated as of
November 21, 1993, which is incorporated herein by reference to
Exhibit 10.6 of Irvine Apartment Communities, Inc. Form 10-K for
the fiscal year ended December 31, 1993.
7
<PAGE> 8
10.5.1 -- Amendment No. 1 to the Exclusive Land Rights and
Non-Competition Agreement, which is incorporated herein
by reference to Exhibit 10.6.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1995.
10.5.2 -- Amendment No. 2 to the Exclusive Land Rights and
Non-Competition Agreement, which is incorporated herein
by reference to Exhibit 10.6.2 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 1995.
10.5.3 -- Amendment No. 3 to the Exclusive Land Rights and
Non-Competition Agreement, which is incorporated herein
by reference to Exhibit 10.6.3 of the Company's Form 8-B
filed April 30, 1996.
10.5.4 -- Amendment No. 4 to the Exclusive Land Rights and
Non-Competition Agreement, which is incorporated herein
by reference to Exhibit 10.6.4 of the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
10.5.5 -- Amendment No. 5 to the Exclusive Land Rights and
Non-Competition Agreement, which is incorporated herein
by reference to Exhibit 10.6.5 of the Company's Form
10-K for the fiscal year ended December 30, 1997.
99.1 -- Preliminary Proxy Statement filed by the Company with
the Commission on even date hereof and hereby
incorporated by reference.
99.2 -- Letter to Shareholders of Irvine Apartment
Communities, Inc. from William H. McFarland, President
and Chief Executive Officer of Irvine Apartment
Communities, Inc., filed by the Company with the
Commission on even date hereof and hereby incorporated
by reference.
99.3 -- Notice of Special Meeting of the Shareholders of
Irvine Apartment Communities, Inc. filed by the Company
with the Commission on even date hereof and hereby
incorporated by reference.
99.4 -- Fairness opinion, dated February 1, 1999, of Morgan
Stanley & Co., Incorporated, financial advisor to the
Special Committee of Irvine Apartment Communities, Inc.,
which is incorporated herein by reference to Appendix B
to the Proxy Statement.
99.5 -- Written Presentation, dated November 25, 1998, of
NationsBanc Montgomery Securities LLC to the Acquiror.
99.6 -- Written Presentation, dated December 30, 1998, of
NationsBanc Montgomery Securities LLC to the Acquiror.
99.7 -- Letter from NationsBanc Montgomery Securities LLC to
Morgan Stanley Dean Witter, dated January 12, 1999.
99.8 -- Letter Agreement between The Irvine Company and
Irvine Apartment Communities, Inc. dated as of February
1, 1999, which is incorporated herein by reference to
Appendix C to the Preliminary Proxy Statement.
8
<PAGE> 9
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: February 24, 1999
TIC ACQUISITION LLC
BY /s/ MICHAEL D. MCKEE
------------------------------
NAME: Michael D. McKee
TITLE: Executive Vice
President, Chief
Financial Officer and
Secretary
THE IRVINE COMPANY
BY /s/ MICHAEL D. MCKEE
------------------------------
NAME: Michael D. McKee
TITLE: Executive Vice
President, Chief
Financial Officer and
Secretary
9
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Page No.
- ------ --------
<S> <C>
2.1 -- Agreement and Plan of Merger, dated February 1, 1999, between Irvine
Apartment Communities, Inc. and the Acquiror, which is incorporated
herein by reference to Appendix A to the Proxy Statement.
10.1 -- Form of $350 million Irrevocable Letter of Credit from Bank of
America National Trust and Savings Association.
10.2 -- Form of $88 million Irrevocable Letter of Credit from Bank of America
National Trust and Savings Association.
10.3 -- Second Amended and Restated Agreement of Limited Partnership of
Irvine Apartment Communities, L.P., dated January 20, 1998, which is
incorporated herein by reference to Exhibit 3.5 of Irvine Apartment
Communities, Inc. Form 10-K for the fiscal year ended December 31, 1997.
10.3.1 -- Amendment No. 1 dated as of October 30, 1998 to the Second Amended
and Restated Agreement of Limited Partnership of the Operating
Partnership dated as of January 20, 1998, which is incorporated herein
by reference to Exhibit 3.5.1 of Irvine Apartment Communities, Inc. Form
10-K for the fiscal year ended December 31, 1998.
10.4 -- Miscellaneous Rights Agreement dated March 20, 1996 among Irvine
Apartment Communities, Inc., the Operating Partnership and The Irvine
Company, which is incorporated herein by reference herein to Exhibit
10.4 of Irvine Apartment Communities, Inc. Form 8-B filed April 30,
1996.
10.4.1 -- Amendment No. 1 to the Miscellaneous Rights Agreement, which is
incorporated herein by reference to Exhibit 10.4.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
10.4.2 -- Amendment No. 2 to the Miscellaneous Rights Agreement, which is
incorporated by reference to Exhibit 10.4.2 of the Company's Form
10-K for the fiscal year ended December 31, 1997.
10.5 -- Exclusive Land Rights and Non-Competition Agreement entered into
between Irvine Apartment Communities, Inc., The Irvine Company, the
Operating Partnership and Mr. Bren dated as of November 21, 1993, which
is incorporated herein by reference to Exhibit 10.6 of Irvine Apartment
Communities, Inc. Form 10-K for the fiscal year ended December 31, 1993.
10.5.1 -- Amendment No. 1 to the Exclusive Land Rights and Non-Competition
Agreement, which is incorporated herein by reference to Exhibit 10.6.1
of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995.
10.5.2 -- Amendment No. 2 to the Exclusive Land Rights and Non-Competition
Agreement, which is incorporated herein by reference to Exhibit 10.6.2
of the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995.
10.5.3 -- Amendment No. 3 to the Exclusive Land Rights and Non-Competition
Agreement, which is incorporated herein by reference to Exhibit 10.6.3 of
the Company's Form 8-B filed April 30, 1996.
10.5.4 -- Amendment No. 4 to the Exclusive Land Rights and Non-Competition
Agreement, which is incorporated herein by reference to Exhibit 10.6.4
of the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
10.5.5 -- Amendment No. 5 to the Exclusive Land Rights and Non-Competition
Agreement, which is incorporated herein by reference to Exhibit 10.6.5
of the Company's Form 10-K for the fiscal year ended December 30, 1997.
99.1 -- Preliminary Proxy Statement filed by the Company with the Commission
on even date hereof and hereby incorporated by reference.
99.2 -- Letter to Shareholders of Irvine Apartment Communities, Inc. from
William H. McFarland, President and Chief Executive Officer of Irvine
Apartment Communities, Inc., filed by the Company with the Commission on
even date hereof and hereby incorporated by reference.
99.3 -- Notice of Special Meeting of the Shareholders of Irvine Apartment
Communities, Inc. filed by the Company with the Commission on even date
hereof and hereby incorporated by reference.
99.4 -- Fairness opinion, dated February 1, 1999, of Morgan Stanley & Co.,
Incorporated, financial advisor to the Special Committee of Irvine
Apartment Communities, Inc., which is incorporated herein by reference
to Appendix B to the Proxy Statement.
99.5 -- Written Presentation, dated November 25, 1998, of NationsBanc
Montgomery Securities LLC to the Acquiror.
99.6 -- Written Presentation, dated December 30, 1998, of NationsBanc
Montgomery Securities LLC to the Acquiror.
99.7 -- Letter from NationsBanc Montgomery Securities LLC to Morgan Stanley
Dean Witter, dated January 12, 1999.
99.8 -- Letter Agreement between The Irvine Company and Irvine Apartment
Communities, Inc. dated as of February 1, 1999, which is incorporated
herein by reference to Appendix C to the Preliminary Proxy Statement.
</TABLE>
10
<PAGE> 1
EXHIBIT 10.1
FORM OF LETTER OF CREDIT
Irrevocable Standby Letter of Credit Number:_________________________
___________________ , 1999
Beneficiary Applicant
----------- ---------
TIC Acquisition LLC The Irvine Company
550 Newport Center Drive 550 Newport Center Drive
Newport Beach, CA 92660 Newport Beach, CA 92660
Attn: Thomas B. Rogers, SVP & Treasurer Attn: Thomas B. Rogers,
SVP & Treasurer
Amount
------
USD $350,000,000.00
Three Hundred Fifty Million
and 00/100 U.S. Dollars
Expiration
----------
_________, 1999, At Our
Counters
We hereby issue our Irrevocable Letter of Credit in your favor for the account
of: The Irvine Company, 550 Newport Center Drive, Newport Beach, California
92660, for a sum or sums not exceeding the aggregate sum of Three Hundred
Fifty Million and 00/100 U.S. Dollars (U.S. $350,000,000.00) available by your
sight drafts drawn on Bank of America NT & SA, 333 South Beaudry, 19th Floor,
Los Angeles, California 90017, accompanied by the following documents:
Beneficiary's signed certificate stating the following:
"TIC Acquisition LLC ("TICALLC") certifies that the proceeds
obtained upon funding of the draft presented hereby will be
applied by TICALLC only to the merger consideration payable by
TICALLC to Nonaffiliated Shareholders (as defined in the
Preliminary Proxy Statement of Irvine Apartment Communities,
Inc. filed with the Securities and Exchange Commission on
February 25, 1999) in connection with the merger
between Irvine Apartment Communities, Inc. and TICALLC."
Partial drawings are permitted.
We hereby agree with you that drafts drawn under and in compliance with this
credit shall be duly honored upon presentation to our office as specified above.
This credit is subject to the Uniform Customs and Practice for documentary
credits (1993 revision), International Chamber of Commerce Publication No. 500.
- ---------------------------- ----------------------------
Authorized Signer Authorized Signer
<PAGE> 1
EXHIBIT 10.2
FORM OF LETTER OF CREDIT
Irrevocable Standby Letter of Credit Number:_________________________
__________________ , 1999
Beneficiary Applicant
----------- ---------
TIC Acquisition LLC The Irvine Company
550 Newport Center Drive 550 Newport Center Drive
Newport Beach, CA 92660 Newport Beach, CA 92660
Attn: Thomas B. Rogers, SVP & Treasurer Attn: Thomas B. Rogers,
SVP & Treasurer
Amount
------
USD $88,000,000.00
Eighty-Eight Million and
00/100 U.S. Dollars
Expiration
----------
_________, 1999, At Our
Counters
We hereby issue our Irrevocable Letter of Credit in your favor for the account
of: The Irvine Company, 550 Newport Center Drive, Newport Beach, California
92660, for a sum or sums not exceeding the aggregate sum of Eighty-Eight Million
and 00/100 U.S. Dollars (U.S. $88,000,000.00) available by your sight drafts
drawn on Bank of America NT & SA, 333 South Beaudry, 19th Floor, Los Angeles,
California 90017, accompanied by the following documents:
Beneficiary's signed certificate stating the following:
"TIC Acquisition LLC ("TICALLC") certifies that the proceeds
obtained upon funding of the draft presented hereby will be
applied by TICALLC only to the merger consideration payable by
TICALLC to Nonaffiliated Shareholders (as defined in the
Preliminary Proxy Statement of Irvine Apartment Communities, Inc.
filed with the Securities and Exchange Commission on February 25,
1999) in connection with the merger between Irvine Apartment
Communities, Inc. and TICALLC."
Partial drawings are permitted.
We hereby agree with you that drafts drawn under and in compliance with this
credit shall be duly honored upon presentation to our office as specified above.
This credit is subject to the Uniform Customs and Practice for documentary
credits (1993 revision), International Chamber of Commerce Publication No. 500.
- ---------------------------- ----------------------------
Authorized Signer Authorized Signer
<PAGE> 1
EXHIBIT 99.5
NATIONSBANC MONTGOMERY SECURITIES
PROJECT PRIVATE EYE DISCUSSION
NOVEMBER 25, 1998
NATIONSBANC MONTGOMERY SECURITIES LLC
<PAGE> 2
2
TABLE OF CONTENTS
I. Strategic Rationale
II. Probable Valuation and Approaches
III. Financing and Ratings Impact Discussion
IV. Interloper Discussion
V. Appendix
A. Shareholder Analysis
B. Capital Markets Discussion
<PAGE> 3
3
STRATEGIC RATIONALE
<PAGE> 4
4
STRATEGIC RATIONALE
BENEFITS FOR IRVINE APARTMENT COMMUNITIES SHAREHOLDERS
- - Since February 1998, institutional REIT investors have been faced with
net funds outflows in REIT sector mutual funds and need liquidity.
* Given limited REIT trading volume, selling shares to meet cash
requirements negatively impacts share price and therefore fund
performance.
* Given 1998 poor fund performance, a premium to current share
price will be well received.
- - Lack of access to public capital markets will make it difficult for IAC
to continue to achieve its development and growth goals.
- - There is an overabundance of REIT investment choices for investors.
Mergers, management buyouts, etc. are actively being discussed and
viewed favorably by investors.
- - Investors are concerned about IAC management turnover.
- - The real estate market is softening. Public buyers of real estate have
left the market. Cap rates are rising.
<PAGE> 5
5
STRATEGIC RATIONALE
BENEFITS FOR IRVINE APARTMENT COMMUNITIES SHAREHOLDERS
- - Public equity and public debt have become increasingly more expensive
and inaccessible
* FFO multiples have decreased by roughly 15%-25% over the past
year.
* After market performance of REIT equity offerings in 1998 has
been down over 20%.
* The cost of debt/equity is increasing as evidenced by the
pricing on IAC's most recent perpetual preferred offering.
<PAGE> 6
6
BENEFITS FOR THE IRVINE COMPANY
- - Regain 100% control of IAC and receive the entire benefit of projected
earnings and cash flow growth.
- - Run IAC more compatibly with TIC's overall growth and capitalization
objectives.
- - Access less expensive and more available sources of capital.
- - Run the apartment portfolio with significantly less (and possibly
without) public scrutiny.
- - Reduced overhead from elimination of public market reporting
requirements.
- - Buy at a time when REIT's in general are out of favor.
- - Pay cash at a time when REIT mutual funds have share redemptions.
- - Retain Proposition 13 assessments of IAC properties.
- - Buy back 100% of the right to develop apartments at the Irvine Ranch.
- - Obtain 100% of the right to manage IAC properties.
<PAGE> 7
7
PROBABLE VALUATION AND APPROACHES
<PAGE> 8
8
PROBABLE VALUATION AND APPROACHES
OVERVIEW
The independent committee of the Board of Directors, management and financial
advisors of IAC will review several alternatives as a means of determining a
value for IAC.
- - These will include:
* Public market valuations
* Private market valuations
* Market test: limited or broad marketing/auction
- Other public entities
- Institutional investors
- International investors
<PAGE> 9
9
PROBABLE VALUATION AND APPROACHES
PUBLIC MARKETS APPROACHES TO VALUE
- - IAC Stock Price
* Today's price
* 30, 60, 90-day average prices
* 52-week high
* All-time high
* Trading volume at various prices
* Historical IAC FFO multiples
- - Comparable Company Analysis
* Trading parameters, FFO, price per apartment unit for
comparable apartment companies
<PAGE> 10
10
PROBABLE VALUATION AND APPROACHES
PUBLIC MARKETS APPROACHES TO VALUE
- - Selected M&A Comparable Transaction Analysis
* Premiums paid in selected REIT mergers and acquisitions
* FFO multiples paid
* EBITDA multiples paid
* Premiums paid in non-REIT comparable mergers and acquisitions
* Valuations will include control premiums
- - Research Analyst Share Price Models
* Price Targets
* NAV Analysis
<PAGE> 11
11
PROBABLE VALUATION AND APPROACHES
PRIVATE MARKET APPROACHES TO VALUE
- - Net Asset Value
* More aggressive net asset value calculations
* Recent local comparable apartment sales
- - Discounted Cash Flow Analysis
* Existing portfolio plus development pipeline valuation
* Aggressive growth estimates
* Institutional investor discount rates
- - Exclusive Land Rights Valuations
* Emotional and financial valuations
* Recent local comparable land sales
<PAGE> 12
12
PROBABLE VALUATION AND APPROACHES
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
VALUATION SUMMARY MATRIX
<TABLE>
<S> <C> <C>
Stock Trading History $25.95 -- $33.50
Public Comparables $23.68 -- $25.43
M&A Comparables $19.96 -- $30.37
Research Analyst Valuations $26.57 -- $32.00
Net Asset Value $30.76 -- $32.50
Discounted Cash Flow $29.94 -- $33.46
</TABLE>
<PAGE> 13
13
PROBABLE VALUATION AND APPROACHES
IAC STOCK PRICE
<TABLE>
<S> <C> <C>
Current stock price $ 27.13
Average stock price over the last:
30 days $ 26.81
60 days $ 26.21
90 days $ 25.95
52-week high $ 32.44
All-time high $ 33.50
Offering prices for:
IPO:
11.8 million shares 12/1/93 $ 17.50
Follow-ons:
4.5 million shares 8/3/95 $ 17.25
1.15 million shares 2/14/97 $ 27.50
</TABLE>
<PAGE> 14
14
PROBABLE VALUATION AND APPROACHES
SHARES TRADED AT VARIOUS PRICES SINCE IPO
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
Volume Traded at Various Prices
<TABLE>
<CAPTION>
Price Range Shares Traded %
------------- ------------- -----
<S> <C> <C>
$14.00-$16.00 2,357,900 3.8%
$16.00-$18.00 17,227,100 27.5%
$18.00-$20.00 8,578,400 13.7%
$20.00-$22.00 6,827,700 10.9%
$22.00-$24.00 1,948,900 3.1%
$24.00-$26.00 3,295,200 5.3%
$26.00-$28.00 7,848,300 12.5%
$28.00-$30.00 7,481,800 11.9%
$30.00-$32.00 6,182,500 9.9%
$32.00-$34.00 930,400 1.5%
----------
Total Volume Traded 62,678,200 100.0%
</TABLE>
Cumulative Volume Traded
<TABLE>
<CAPTION>
Price Shares Traded %
------- ------------- -----
<S> <C> <C>
<$16.00 2,357,900 3.8%
<$18.00 19,585,000 31.2%
<$20.00 28,163,400 44.9%
<$22.00 34,991,100 55.8%
<$24.00 36,940,000 58.9%
<$26.00 40,235,200 64.2%
<$28.00 48,083,500 76.7%
<$30.00 55,565,300 88.7%
<$32.00 61,747,800 98.5%
<$34.00 62,678,200 100.0%
</TABLE>
- ---------------------------------------------------------------------------
Source: Stock price and volume traded figures from FactSet Research Systems
<PAGE> 15
15
PROBABLE VALUATION AND APPROACHES
SHARES TRADED AT VARIOUS PRICES LTM
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
Volume Traded at Various Prices
<TABLE>
<CAPTION>
Price Range Shares Traded %
------------- ------------- -----
<S> <C> <C>
$23.00-$25.00 786,000 5.9%
$25.00-$27.00 3,611,000 27.3%
$27.00-$29.00 1,828,500 13.8%
$29.00-$31.00 4,075,800 30.8%
$31.00-$33.00 2,944,100 22.2%
--------- ----
Total Volume Traded 13,245,400 100.0%
</TABLE>
Cumulative Volume Traded
<TABLE>
<CAPTION>
Price Shares Traded %
------- ------------- -----
<S> <C> <C>
<$25.00 786,000 5.9%
<$27.00 4,397,000 33.2%
<$29.00 6,225,500 47.0%
<$31.00 10,301,300 77.8%
<$33.00 13,245,400 100.0%
</TABLE>
- ---------------------------------------------------------------------------
Source: Stock price and volume traded figures from FactSet Research Systems
<PAGE> 16
16
PROBABLE VALUATION AND APPROACHES
IAC STOCK PRICE: ANALYSIS AT VARIOUS PRICES
<TABLE>
<CAPTION>
Current Unrealistic Realistic
---------- -------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
IAC Stock Price $ 27.13 $ 28.00 $ 29.00 $ 30.00 $ 31.00 $ 32.00
Premium Over Current 0.0% 3.2% 6.9% 10.6% 14.3% 18.0%
Premium Over 52 wk High of $32.44 (16.4%) (13.7%) (10.6%) (7.5%) (4.4%) (1.3%)
Percentage of Shares Traded Below (1) 41.1% 47.0% 61.0% 77.8% 97.2%
Shares Outstanding (2) 17.1 17.1 17.1 17.1 17.1 17.1
---------- ---------- ---------- ---------- ---------- ----------
Equity Consideration for Remaining $ 463.3 $ 478.2 $ 495.3 $ 512.4 $ 529.5 $ 546.6
---------- ---------- ---------- ---------- ---------- ----------
Net Debt Attributed to Transaction (3) $ 373.3 $ 373.3 $ 373.3 $ 373.3 $ 373.3 $ 373.3
---------- ---------- ---------- ---------- ---------- ----------
Implied Aggregate Value of Remaining Stake $ 836.6 $ 851.6 $ 868.6 $ 885.7 $ 902.8 $ 919.9
---------- ---------- ---------- ---------- ---------- ----------
Price/ FFO: (4)
1998E $2.25 12.1x 12.4x 12.9x 13.3x 13.8x 14.2x
1999E $2.56 10.6x 10.9x 11.3x 11.7x 12.1x 12.5x
<CAPTION>
Aggressive
------------------------------------
<S> <C> <C> <C>
IAC Stock Price $ 33.00 $ 34.00 $ 35.00
Premium Over Current 21.7% 25.3% 29.0%
Premium Over 52 wk High of $32.44 1.7% 4.8% 7.9%
Percentage of Shares Traded Below (1) 100.0% 100.0% 100.0%
Shares Outstanding (2) 17.1 17.1 17.1
---------- ---------- ----------
Equity Consideration for Remaining $ 563.6 $ 580.7 $ 597.8
---------- ---------- ----------
Net Debt Attributed to Transaction (3) $ 373.3 $ 373.3 $ 373.3
---------- ---------- ----------
Implied Aggregate Value of Remaining Stake $ 937.0 $ 954.0 $ 971.1
---------- ---------- ----------
Price/ FFO: (4)
1998E $2.25 14.7x 15.1x 15.6x
1999E $2.56 12.9x 13.3x 13.7x
</TABLE>
(1) Based on last twelve months' trading. Source: FactSet.
(2) Includes only shares not currently owned by Donald Bren or affiliates.
(3) Includes recent $50MM preferred stock offering and $100MM unsecured
debt as of 11/23/98. Only includes percentage of net debt not currently
assumed by Donald Bren.
(4) Estimates from First Call.
<PAGE> 17
17
PROBABLE VALUATION AND APPROACHES
HISTORICAL PRICE/FFO ANALYSIS
Historical Price/FFO Analysis
<TABLE>
<S> <C>
Min 9.1x
Max 15.2x
Median 12.2x
Mean 12.1x
</TABLE>
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
<CAPTION>
RANGE OF
DATE RANGE FFO/SHARE MEDIAN
- ----------------- ----------- -----
<S> <C> <C>
01/02/96-01/31/96 10.3x-11.0x 12.5x
02/01/96-02/29/96 10.9x-11.5x 12.5x
03/01/96-03/29/96 10.5x-11.3x 12.5x
04/01/96-04/30/96 10.1x-10.6x 12.5x
05/01/96-05/30/96 10.4x-10.7x 12.5x
06/03/96-06/28/96 10.6x-10.9x 12.5x
07/01/96-07/31/96 10.3x-10.7x 12.5x
08/01/96-08/30/96 10.8x-11.6x 12.5x
09/03/96-09/30/96 11.2x-11.8x 12.5x
10/01/96-10/31/96 11.1x-11.6x 12.5x
11/01/96-11/29/96 11.5x-12.5x 12.5x
12/02/96-12/31/96 12.1x-12.5x 12.5x
01/02/97-01/31/97 12.1x-13.5x 12.5x
02/03/97-02/28/97 13.0x-13.5x 12.5x
03/03/97-03/31/97 13.5x-14.3x 12.5x
04/01/97-04/30/97 12.6x-13.6x 12.5x
</TABLE>
<PAGE> 18
18
<TABLE>
<CAPTION>
RANGE OF
DATE RANGE FFO/SHARE MEDIAN
- ----------------- ----------- -----
<S> <C> <C>
05/1/97-05/30/97 12.1x-13.4x 12.5x
06/02/97-06/30/97 13.2x-14.2x 12.5x
07/01/97-07/31/97 13.2x-13.7x 12.5x
08/01/97-08/29/97 12.8x-13.6x 12.5x
09/02/97-09/30/97 12.9x-15.2x 12.5x
10/01/97-10/31/97 13.1x-14.8x 12.5x
11/03/97-11/28/97 13.5x-14.0x 12.5x
12/01/97-12/31/97 13.6x-14.1x 12.5x
01/02/98-01/30/98 13.2x-13.5x 12.5x
02/02/98-02/27/98 12.7x-13.4x 12.5x
03/02/98-03/31/98 12.7x-13.2x 12.5x
04/01/98-04/30/98 12.3x-12.9x 12.5x
05/01/98-05/29/98 11.9x-12.3x 12.5x
06/01/98-06/30/98 11.5x-12.1x 12.5x
07/01/98-07/31/98 11.2x-11.8x 12.5x
08/03/98-08/31/98 10.1x-11.2x 12.5x
09/01/98-09/30/98 9.3x-10.7x 12.5x
10/01/98-10/30/98 9.1x-10.3x 12.5x
11/02/98-11/20/98 10.2x-10/8x 12.5x
</TABLE>
<TABLE>
<S> <C> <C> <C>
1999E FFO/SHARE $ 2.56
Range of historical price/FFO multiples: 9.1x -- 15.2x
Mean - Median 12.1x -- 12.2x
IMPLIED PRICE/SHARE $23.38 -- $38.34
MEAN - MEDIAN $30.97 -- $31.20
</TABLE>
Methodology: FFO/share estimate equals four quarters after current quarter share
price. Valuation price range is calculated by multiplying 1999E FFO per share by
the range of historical forward multiples.
(1) Source: First Call.
<PAGE> 19
19
PROBABLE VALUATION AND APPROACHES
TRADING COMPARABLES
<TABLE>
<CAPTION>
12-Month Range
Stock Price --------------------- % Above % Below Indicated Current
Company Ticker 11/23/98 Low High Low High Annual Div. Yield
- ----------------------------- ------ ----------- --------- --------- ------- -------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVALON BAY COMMUNITIES, INC. AVB $ 33.38 $ 30.50 $ 40.50 9.4% (21.3%) $ 2.04 6.1%
Apartment Investment and Mgmt. AIV 34.94 30.00 41.00 16.5% (17.4%) 2.25 6.4%
BRE PROPERTIES BRE 23.88 21.50 30.00 11.0% (25.7%) 1.44 6.0%
EQUITY RESIDENTIAL PPTS TRUST EQR 42.75 34.69 52.56 23.2% (23.0%) 2.68 6.3%
POST PROPERTIES, INC. PPS 38.69 35.81 42.00 8.0% (8.6%) 2.60 6.7%
ARCHSTONE COMMUNITIES ASN 20.50 17.88 25.13 14.7% (22.6%) 1.42 6.9%
Charles E. Smith Residential SRW 29.13 28.31 35.75 2.9% (22.7%) 2.14 7.3%
UNITED DOMINION REALTY TRUST UDR 10.56 10.44 14.94 1.2% (41.4%) 1.05 9.9%
- -------------------------------------------------------------------------------------------------------------------------
MEAN 10.9% (22.8%) 7.0%
MEDIAN 10.2% (22.7%) 6.6%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities IAC $ 27.13 $ 23.00 $ 32.44 17.9% (19.6%) $ 1.54 5.7%
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Est. CY FFO/Share
--------------------------------- Implied FFO 1998 Payout
Company 1997A 1998E 1999E Est. CAGR (2) Ratio
- ----------------------------- --------- --------- -------- ------------- -----
<S> <C> <C> <C> <C> <C>
AVALON BAY COMMUNITIES, INC. $ 2.45 $ 2.88 $ 3.29 15.9% 70.8%
Apartment Investment and Mgmt. 2.78 3.42 3.95 19.2% 65.8%
BRE PROPERTIES 1.84 2.11 2.34 12.8% 68.2%
EQUITY RESIDENTIAL PPTS TRUST 3.69 4.05 4.44 9.7% 66.2%
POST PROPERTIES, INC. 3.03 3.37 3.66 9.9% 77.2%
ARCHSTONE COMMUNITIES 1.61 1.80 2.03 12.3% 78.9%
Charles E. Smith Residential 2.65 2.91 3.16 9.2% 73.5%
UNITED DOMINION REALTY TRUST 1.36 1.38 1.46 3.6% 76.1%
- --------------------------------------------------------------------------------------------
MEAN 11.6% 72.1%
MEDIAN 11.1% 72.2%
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Irvine Apartment Communities $ 2.01 $ 2.25 $ 2.56 12.9% 68.4%
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Price/FFO
------------------------------------- Shares Market Cap. Net LTD
Company Ticker 1997A 1998E 1999E O/S(mm)(3) ($ mm) ($ mm)
- ---------------------------- ------ --------- -------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
AVALON BAY COMMUNITIES, INC. AVB 13.6 X 11.6 X 10.1 X 69.1 $ 2,305.2 $ 1,524.5
Apartment Investment and Mgmt. AIV 12.6 10.2 8.8 52.4 1,829.6 1,623.0
BRE PROPERTIES BRE 13.0 11.3 10.2 50.0 1,193.2 699.6
EQUITY RESIDENTIAL PPTS TRUST EQR 11.6 10.6 9.6 133.5 5,708.2 4,830.2
POST PROPERTIES, INC. PPS 12.8 11.5 10.6 44.4 1,717.9 773.1
ARCHSTONE COMMUNITIES ASN 12.7 11.4 10.1 104.6 2,144.7 2,328.9
Charles E. Smith Residential SRW 11.0 10.0 9.2 34.0 989.3 890.7
UNITED DOMINION REALTY TRUST UDR 7.8 7.7 7.2 103.8 1,096.8 1,775.4
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN 11.9 x 10.5 x 9.5 x
MEDIAN 12.7 x 10.9 x 9.9 x
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities IAC 13.5 x 12.1 x 10.6 x 45.2 $ 1,224.9 $ 987.0
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Firm Debt/ Moody S&P Total Implied Value
Company Value Firm Value Rating Rating Units Per Unit
- ---------------------------- --------- ---------- ------ ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
AVALON BAY COMMUNITIES, INC. $ 3,829.7 39.8% BAA2 BBB 42,564 $ 89,975
Apartment Investment and Mgmt. 3,452.6 47.0% NR NR 58,495 59,023
BRE PROPERTIES 1,892.9 37.0% BAA2 BBB 23,301 81,236
EQUITY RESIDENTIAL PPTS TRUST 10,538.3 45.8% A3 BBB+ 192,558 54,728
POST PROPERTIES, INC. 2,491.0 31.0% BAA1 BBB+ 32,514 76,614
ARCHSTONE COMMUNITIES 4,473.6 52.1% NR NR 93,170 48,015
Charles E. Smith Residential 1,880.0 47.4% NR NR 23,400 80,342
UNITED DOMINION REALTY TRUST 2,872.2 61.8% BAA1 BBB+ 73,000 39,345
- ------------------------------------------------------------------------------------------------------------------------
MEAN 45.2% 66,160
MEDIAN 46.4% 67,819
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities $ 2,211.9 44.6% Baa2 BBB- 18,758 117,915
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Implied Valuation based on Comparable Trading Multiples:
<TABLE>
<CAPTION>
Price/FFO
---------------------------------------
1997A 1998E 1999E
--------- --------- ---------
<S> <C> <C> <C>
Mean Multiples $ 23.87 $ 23.68 $ 24.30
Median Multiples $ 25.43 $ 24.60 $ 25.25
</TABLE>
(1) FFO Estimates derived from First Call and NationsBanc Montgomery
Securities research.
(2) Est. CAGR derived from percentage change between 1997 and 1999 estimates.
(3) Includes OP Units
Companies in BOLD are covered by Montgomery Securities research.
<PAGE> 20
20
PROBABLE VALUATION AND APPROACHES
SELECTED COMPARABLE M&A TRANSACTIONS
<TABLE>
<CAPTION>
Aggregate Premium Paid to
Date Value Share Price
Announced Target Name Acquiror Name ($mil) 1 Day Before
- ---------- ----------------------------------- ------------------------------- ----------- ---------------
<S> <C> <C> <C> <C>
11/17/98 Meridian Industrial Trust ProLogis Trust $ 1,472.6 12.7%
09/10/98 American Apartment Communities United Dominion Trust 787.0 NA
07/08/98 Merry Land & Investment Co Inc Equity Residential Pptys Trust 2,228.7 12.0%
04/02/98 Security Capital Atlantic Inc Security Capital Pacific Trust 1,627.0 14.9%
03/08/98 Avalon Properties Inc Bay Apartment Communities 1,967.7 (1.3%)
12/22/97 ASR Investments Corp United Dominion Realty Trust Inc 281.6 3.2%
12/17/97 Oasis Residential Inc Camden Property Trust 947.9 9.4%
12/16/97 Ambassador Apartments Inc Apartment Investment & Mgmt Co 629.8 4.0%
08/28/97 Evans Withycombe Residential Equity Residential Pptys Trust 957.4 14.2%
08/25/97 Arbor Property Trust Vornado Realty Trust 234.2 3.2%
08/04/97 Columbus Realty Trust Post Properties Inc 590.9 4.2%
02/20/97 NHP Inc Apartment Investment & Mgmt Co 284.0 NM
01/17/97 Wellsford Residential Property Trust Equity Residential Pptys Trust 996.0 7.9%
----------------------------------------------------------------------
Average 7.7%
Median 7.9%
----------------------------------------------------------------------
Private Eye Data $ 27.13
Implied Valuation - Average $ 29.20
Implied Valuation - Median $ 29.27
<CAPTION>
Premium Paid to
Date Share Price Agg Value/ Equity Value/
Announced 30 Days Before LTM EBITDA LTM FFO
- ---------- --------------- ---------- -------------
<S> <C> <C> <C>
11/17/98 9.0% 13.1x 14.5x
09/10/98 NA NA NA
07/08/98 14.5% 15.1x 14.9x
04/02/98 14.2% 15.2x 13.3x
03/08/98 (4.4%) 17.9x 19.7x
12/22/97 2.0% 15.7x 13.9x
12/17/97 10.1% 12.9x 10.9x
12/16/97 4.3% 13.0x 10.6x
08/28/97 18.9% 13.6x 12.4x
08/25/97 4.8% 11.3x 13.6x
08/04/97 4.5% 17.5x 15.0x
02/20/97 NM 8.1x NM
01/17/97 10.1% 13.7x 14.0x
------------------------------------------------
8.0% 13.9x 13.9x
9.0% 13.6x 13.9x
------------------------------------------------
$ 27.13 $138.4 $ 98.7
$ 29.29 $20.79 $30.37
$ 29.57 $19.96 $30.35
</TABLE>
<PAGE> 21
21
PROBABLE VALUATION AND APPROACHES
CONTROL PREMIUM SUMMARY
<TABLE>
<CAPTION>
Premium Over Stock Price
Prior to Announcement
----------------------------------------------
One Day One Week One Month
------- -------- ---------
<S> <C> <C> <C>
Median Premium - All Transactions 17.8% 23.0% 28.2%
Implied Value based on 11/23/98 Price of $27.13 $31.96 $33.36 $34.77
Median Premium - Purchase Transactions Only 18.8% 23.5% 30.7%
Implied Value based on 11/23/98 Price of $27.13 $32.21 $33.51 $35.46
Median Premium - Pooling Transactions Only 17.2% 22.0% 24.1%
Implied Value based on 11/23/98 Price of $27.13 $31.78 $33.09 $33.66
----------------------------------------------------------------------------------------------
Implied Valuation Range $31.78 -- $35.46
----------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
22
PROBABLE VALUATION AND APPROACHES
CONTROL PREMIUM ANALYSIS
<TABLE>
<CAPTION>
ACQUISITION
ANN. PRICE
TARGET ACQUIROR DATE PER SHARE
- ------------------------------- -------------------------------------- -------- -----------
<S> <C> <C> <C>
POOLING TRANSACTIONS:
Meridian Industrial Trust Inc Prologis Trust 11/17/98 $ 25.00
CalMat Co Vulcan Materials Co 11/16/98 31.00
Essex International Superior Telecom Inc 10/22/98 32.00
Greyhound Lines Inc Laidlaw Inc 10/16/98 6.50
Triarc Cos Inc Investor Group 10/12/98 18.00
Envirotest Systems Corp Stone Rivet Inc 08/13/98 17.25
Zeigler Coal Holding Co AEI Resources Inc 08/03/98 21.25
Sports Authority Inc Gart Sports Co 07/02/98 20.00
XTRA Corp Investor Group 06/19/98 65.00
McDonald & Co Investments Inc KeyCorp, Cleveland, Ohio 06/12/98 31.34
Triangle Pacific Corp Armstrong World Industries Inc 06/12/98 55.50
Capstone Capital Corp Healthcare Realty Trust Inc 06/08/98 24.17
Orange & Rockland Utilities Consolidated Edison Inc 05/11/98 58.50
Nevada Power Co Sierra Pacific Resources Corp 04/30/98 23.92
Vitalink Pharmacy Services Inc Genesis Health Ventures Inc 04/27/98 22.50
Sumitomo Bank of California Zions Bancorp, Utah 03/26/98 38.25
American General Hospitality CapStar Hotel Co 03/16/98 42.18
Metromail Corp Great Universal Stores PLC 03/12/98 34.50
White River Corp Fund AM Enterprises Hldgs 03/10/98 90.00
John Alden Financial Corp Fortis BV (Fortis AG, AMEV) 03/09/98 22.50
Handy & Harman WHX Corp 01/23/98 35.25
Thermadyne Holdings Corp DLJ Merchant Bkg Partners II 01/21/98 34.50
Regal Cinemas Inc Investor Group 01/20/98 31.00
CitFed Bancorp Inc, Dayton, OH Fifth Third Bancorp,OH 01/14/98 51.69
Bay State Gas Co NIPSCO Industries Inc 12/18/97 40.00
Ambassador Apartments Inc Apartment Investment & Mgmt Co 12/16/97 21.08
Piper Jaffray Cos US Bancorp, Minneapolis, MN 12/15/97 37.25
Lukens Inc Bethlehem Steel Corp 12/12/97 30.00
TriMas Corp MascoTech Inc 12/11/97 34.50
White River Corp Harvard Private Capital Group 12/11/97 90.67
Telemundo Group Inc Investor Group 11/19/97 44.13
Horizon Group Inc Prime Retail Inc 11/13/97 12.90
ONBANCorp Inc, Syracuse, NY First Empire State Corp, NY 10/28/97 69.50
HomeSide Inc National Australia Bank Ltd 10/27/97 27.83
International Dairy Queen Inc Berkshire Hathaway Inc 10/21/97 27.00
Santa Fe Pacific Pipeline Kinder Morgan Energy Partners 10/20/97 54.21
Greenfield Industries Inc Kennametal Inc 10/10/97 38.00
Coast Savings Financial Inc, CA HF Ahmanson & Co, Irwindale, CA 10/06/97 46.17
All American Communications Pearson PLC 09/16/97 25.50
Great Financial Corp, Kentucky Star Banc Corp, Cincinnati, OH 09/15/97 44.00
Western National Corp American General Corp 09/12/97 30.82
Fieldcrest Cannon Inc Pillowtex Corp 09/11/97 34.00
Hudson Foods Inc Tyson Foods Inc 09/04/97 21.23
<CAPTION>
MARKET PRICE MARKET PREMIUM
PRIOR TO ANNOUNCEMENT PRIOR TO ANNOUNCEMENT
-------------------------------------- ----------------------------------------
TARGET ONE DAY ONE WEEK 30 DAYS ONE DAY ONE WEEK 30 DAYS
- ------------------------------- -------- -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
POOLING TRANSACTIONS:
Meridian Industrial Trust Inc $ 22.19 $ 21.75 $ 22.94 12.7% 14.9% 9.0%
CalMat Co 27.19 26.56 23.31 14.0% 16.7% 33.0%
Essex International 23.19 15.50 18.88 38.0% 106.5% 69.5%
Greyhound Lines Inc 4.75 3.63 4.56 36.8% 79.3% 42.5%
Triarc Cos Inc 13.19 14.88 17.50 36.5% 21.0% 2.9%
Envirotest Systems Corp 15.00 17.00 20.75 15.0% 1.5% -16.9%
Zeigler Coal Holding Co 16.00 16.25 17.63 32.8% 30.8% 20.6%
Sports Authority Inc 15.13 14.00 14.75 32.2% 42.9% 35.6%
XTRA Corp 46.06 50.19 55.50 41.1% 29.5% 17.1%
McDonald & Co Investments Inc 31.13 30.50 29.19 0.7% 2.8% 7.4%
Triangle Pacific Corp 44.00 43.88 44.75 26.1% 26.5% 24.0%
Capstone Capital Corp 23.00 23.13 23.94 5.1% 4.5% 1.0%
Orange & Rockland Utilities 42.25 41.63 43.31 38.5% 40.5% 35.1%
Nevada Power Co 24.25 24.31 26.75 -1.4% -1.6% -10.6%
Vitalink Pharmacy Services Inc 19.81 20.06 21.13 13.6% 12.1% 6.5%
Sumitomo Bank of California 40.63 36.00 46.75 -5.8% 6.3% -18.2%
American General Hospitality 26.94 26.63 27.75 56.6% 58.4% 52.0%
Metromail Corp 26.00 26.88 26.50 32.7% 28.4% 30.2%
White River Corp 80.50 80.50 78.00 11.8% 11.8% 15.4%
John Alden Financial Corp 22.63 22.50 21.75 -0.6% 0.0% 3.4%
Handy & Harman 32.44 30.75 34.69 8.7% 14.6% 1.6%
Thermadyne Holdings Corp 28.88 28.50 29.13 19.5% 21.1% 18.5%
Regal Cinemas Inc 27.13 28.00 23.00 14.3% 10.7% 34.8%
CitFed Bancorp Inc, Dayton, OH 37.75 39.25 39.38 36.9% 31.7% 31.3%
Bay State Gas Co 31.63 30.31 28.88 26.5% 32.0% 38.5%
Ambassador Apartments Inc 20.19 20.00 20.00 4.4% 5.4% 5.4%
Piper Jaffray Cos 29.75 30.00 24.19 25.2% 24.2% 54.0%
Lukens Inc 15.63 15.44 17.69 92.0% 94.3% 69.6%
TriMas Corp 30.63 31.38 29.00 12.7% 10.0% 19.0%
White River Corp 78.00 72.75 74.00 16.2% 24.6% 22.5%
Telemundo Group Inc 36.88 34.19 35.31 19.7% 29.1% 25.0%
Horizon Group Inc 12.56 13.19 14.00 2.7% -2.2% -7.9%
ONBANCorp Inc, Syracuse, NY 58.88 61.56 57.25 18.0% 12.9% 21.4%
HomeSide Inc 24.25 24.81 25.94 14.8% 12.2% 7.3%
International Dairy Queen Inc 24.13 24.75 24.69 11.9% 9.1% 9.4%
Santa Fe Pacific Pipeline 41.13 40.69 39.13 31.8% 33.2% 38.6%
Greenfield Industries Inc 31.75 30.00 26.38 19.7% 26.7% 44.1%
Coast Savings Financial Inc, CA 54.00 52.75 49.63 -14.5% -12.5% -7.0%
All American Communications 22.63 18.00 18.50 12.7% 41.7% 37.8%
Great Financial Corp, Kentucky 42.75 35.63 32.88 2.9% 23.5% 33.8%
Western National Corp 28.13 28.69 26.94 9.6% 7.4% 14.4%
Fieldcrest Cannon Inc 33.50 31.31 25.81 1.5% 8.6% 31.7%
Hudson Foods Inc 17.19 16.13 16.50 23.5% 31.7% 28.7%
</TABLE>
<PAGE> 23
23
PROBABLE VALUATION AND APPROACHES
CONTROL PREMIUM ANALYSIS
<TABLE>
<CAPTION>
Acquisition
Ann. Price
Target Acquiror Date Per Share
- ------------------------------- -------------------------------------- -------- -----------
<S> <C> <C> <C>
Evans Withycombe Residential Equity Residential Pptys Trust 08/28/97 25.19
Savannah Foods & Industries Imperial Holly Corp 08/26/97 20.25
Monterey Resources Inc Texaco Inc 08/18/97 21.00
Envirodyne Industries Inc Heico Holding Inc 08/11/97 8.50
Columbus Realty Trust Post Properties Inc 08/04/97 24.56
Freeport-McMoRan Inc IMC Global Inc 07/28/97 30.38
Regency Health Services Inc Sun Healthcare Group Inc 07/28/97 22.00
Kinetic Concepts Inc Investor Group 07/10/97 19.25
RoTech Medical Corp Integrated Health Services Inc 07/07/97 22.61
Wyle Electronics Raab Karcher AG(VEBA AG) 07/03/97 50.00
Integon Corp General Motors Acceptance(GM) 06/23/97 26.00
Multicare Cos Inc Genesis Eldercare 06/16/97 28.00
Giddings & Lewis Inc Thyssen AG 06/12/97 21.00
Jefferson Bankshares Inc,VA Wachovia Corp,Winston-Salem,NC 06/10/97 38.83
Prime Service Inc Atlas Copco North America Inc 06/09/97 32.00
Fibreboard Corp Owens Corning 05/28/97 55.00
Palmer Wireless Inc Price Communications Corp 05/23/97 17.50
Living Centers of America Inc Apollo Management LP 05/08/97 40.50
Transitional Hospitals Corp Vencor Inc 05/07/97 16.00
Goulds Pumps Inc ITT Industries Inc 04/21/97 37.00
National Education Corp Harcourt General Inc 04/21/97 21.00
Total Petroleum(North Amer)Ltd Ultramar Diamond Shamrock Corp 04/15/97 9.94
APL Ltd Neptune Orient Lines Ltd 04/14/97 33.50
Wyndham Hotel Corp Patriot Amer Hosp/Wyndham Intl 04/14/97 30.53
Stant Corp Tomkins PLC 04/09/97 21.50
Mesa Inc Parker & Parsley Petroleum Co 04/07/97 4.26
Foodbrands America Inc IBP Inc (Occidental Petroleum) 03/25/97 23.40
Falcon Building Products Inc InvestCorp 03/20/97 17.75
Heritage Media Corp News Corp Ltd 03/17/97 20.50
Greenwich Air Services Inc General Electric Co 03/10/97 31.00
Allwaste Inc Philip Environmental Inc 03/06/97 10.01
Petrolite Corp Baker Hughes Inc 02/26/97 61.00
Security-Connecticut Corp ReliaStar Financial Corp,MN 02/24/97 53.87
Chancellor Broadcasting Co Evergreen Media Corp 02/18/97 29.77
Destec Energy Inc NGC Corp 02/18/97 21.65
Amphenol Corp Kohlberg Kravis Roberts & Co 01/23/97 26.00
Dauphin Deposit Corp,PA First Maryland Bancorp,MD 01/21/97 46.93
Wellsford Residential Ppty Equity Residential Pptys Trust 01/16/97 27.03
Value Health Inc Columbia/HCA Healthcare Corp 01/15/97 20.50
Oxford Resources Corp Barnett Banks,Jacksonville,FL 01/14/97 37.14
American Medical Response Inc MedTrans Inc(Laidlaw Inc) 01/07/97 40.00
<CAPTION>
Market Price Market Premium
Prior to Announcement Prior to Announcement
-------------------------------------- ----------------------------------------
Target One Day One Week 30 Days One Day One Week 30 Days
- ------------------------------- -------- -------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Evans Withycombe Residential 22.06 20.75 21.19 14.2% 21.4% 18.9%
Savannah Foods & Industries 18.69 17.63 17.25 8.4% 14.9% 17.4%
Monterey Resources Inc 15.06 15.06 13.63 39.4% 39.4% 54.1%
Envirodyne Industries Inc 7.25 7.38 6.63 17.2% 15.3% 28.3%
Columbus Realty Trust 23.56 23.56 23.50 4.2% 4.2% 4.5%
Freeport-McMoRan Inc 26.56 26.75 28.88 14.4% 13.6% 5.2%
Regency Health Services Inc 16.38 14.63 15.38 34.4% 50.4% 43.1%
Kinetic Concepts Inc 18.00 17.88 17.63 6.9% 7.7% 9.2%
RoTech Medical Corp 18.88 20.06 18.50 19.8% 12.7% 22.2%
Wyle Electronics 42.81 36.13 37.00 16.8% 38.4% 35.1%
Integon Corp 9.50 13.50 14.88 173.7% 92.6% 74.8%
Multicare Cos Inc 25.63 24.63 20.75 9.3% 13.7% 34.9%
Giddings & Lewis Inc 19.00 19.13 20.88 10.5% 9.8% 0.6%
Jefferson Bankshares Inc,VA 30.00 29.00 28.50 29.4% 33.9% 36.2%
Prime Service Inc 24.88 24.63 24.38 28.6% 29.9% 31.3%
Fibreboard Corp 47.50 45.00 36.75 15.8% 22.2% 49.7%
Palmer Wireless Inc 12.06 11.25 10.63 45.1% 55.6% 64.7%
Living Centers of America Inc 34.38 33.00 28.63 17.8% 22.7% 41.5%
Transitional Hospitals Corp 10.00 10.00 8.63 60.0% 60.0% 85.5%
Goulds Pumps Inc 22.88 23.50 23.00 61.7% 57.4% 60.9%
National Education Corp 17.13 13.63 15.00 22.6% 54.1% 40.0%
Total Petroleum(North Amer)Ltd 10.13 10.00 9.88 -1.8% -0.6% 0.7%
APL Ltd 21.50 20.25 23.50 55.8% 65.4% 42.6%
Wyndham Hotel Corp 20.63 21.13 20.50 48.0% 44.5% 48.9%
Stant Corp 16.63 14.50 14.38 29.3% 48.3% 49.6%
Mesa Inc 5.63 6.13 5.88 -24.3% -30.4% -27.5%
Foodbrands America Inc 15.88 15.50 14.50 47.4% 51.0% 61.4%
Falcon Building Products Inc 12.38 11.88 11.63 43.4% 49.5% 52.7%
Heritage Media Corp 12.13 11.88 12.13 69.1% 72.6% 69.1%
Greenwich Air Services Inc 25.50 23.25 23.00 21.6% 33.3% 34.8%
Allwaste Inc 6.75 6.13 5.13 48.3% 63.4% 95.3%
Petrolite Corp 37.50 33.25 34.25 62.7% 83.5% 78.1%
Security-Connecticut Corp 37.50 37.13 39.50 43.7% 45.1% 36.4%
Chancellor Broadcasting Co 29.25 31.44 26.25 1.8% -5.3% 13.4%
Destec Energy Inc 11.88 12.00 13.25 82.3% 80.4% 63.4%
Amphenol Corp 23.13 22.25 20.63 12.4% 16.9% 26.1%
Dauphin Deposit Corp,PA 35.50 32.75 31.50 32.2% 43.3% 49.0%
Wellsford Residential Ppty 25.13 24.75 24.63 7.6% 9.2% 9.8%
Value Health Inc 20.25 20.38 20.50 1.2% 0.6% 0.0%
Oxford Resources Corp 33.75 30.06 29.00 10.0% 23.5% 28.1%
American Medical Response Inc 33.00 32.50 29.25 21.2% 23.1% 36.8%
-----------------------------------------------------------------------------
Mean - Purchase 25.1% 28.7% 29.3%
Median - Purchase 18.8% 23.5% 30.7%
-----------------------------------------------------------------------------
</TABLE>
<PAGE> 24
24
PROBABLE VALUATION AND APPROACHES
CONTROL PREMIUM ANALYSIS
<TABLE>
<S> <C> <C> <C>
PURCHASE TRANSACTIONS:
Vanstar Corp InaCom Corp 10/09/98 10.76
Eastern Environmental Services Waste Management Inc 08/17/98 33.75
American Disposal Services Inc Allied Waste Industries Inc 08/10/98 44.76
Rio Hotel & Casino Inc Harrah's Entertainment 08/10/98 20.13
Equity Corp International Service Corp International 08/06/98 27.00
PMT Services Inc NOVA Corp 06/18/98 25.16
US Rentals Inc United Rentals Inc 06/16/98 32.12
ALBANK Financial Corp,NY Charter One Finl,Cleveland,OH 06/15/98 58.73
T R Financial Corp,NY Roslyn Bancorp Inc,Roslyn,NY 05/26/98 56.63
Mid Am Inc,Bowling Green,Ohio Citizens Bancshares Inc,OH 05/21/98 25.60
National Surgery Centers Inc HealthSouth Corp 05/06/98 32.92
Medusa Corp Southdown Inc 03/18/98 61.22
Avalon Properties Inc Bay Apartment Communities Inc 03/09/98 28.43
Zurn Industries Inc US Industries Inc 02/17/98 44.30
Arbor Drugs Inc CVS Corp 02/09/98 23.11
Culligan Water Technologies United States Filter Corp 02/09/98 59.45
Firstbank of IL,Springfield,IL Mercantile Bancorp,St Louis,MO 02/02/98 41.96
Price REIT Inc Kimco Realty Corp 01/14/98 47.88
Fort Wayne Natl Corp,Indiana National City,Cleveland,Ohio 01/09/98 44.44
United Meridian Corp Ocean Energy Inc 12/23/97 27.78
Continental Homes Holding DR Horton Inc 12/19/97 44.28
Gulf South Medical Supply Inc Physician Sales & Service Inc 12/15/97 40.25
Mac Frugal's Bargains Consolidated Stores Corp 11/05/97 38.66
Oregon Metallurgical Corp Allegheny Teledyne Inc 11/03/97 34.10
CapMAC Holdings Inc MBIA Inc 10/29/97 31.00
Carson Pirie Scott & Co Proffitt's Inc 10/29/97 52.06
CFX Corp,Keene,New Hampshire Peoples Heritage Finl Group,ME 10/27/97 28.76
Pinnacle Financial Svcs Inc,MI CNB Bancshares Inc,Indiana 10/15/97 46.38
New York Bancorp,Douglaston,NY North Fork Bancorporation,NY 10/07/97 37.11
Morningstar Group Inc Suiza Foods Corp 09/29/97 45.85
Rykoff-Sexton Inc JP Foodservice Inc 06/30/97 24.41
RCSB Finl Inc,Rochester,NY Charter One Finl,Cleveland,OH 05/21/97 42.32
Keystone International Inc Tyco International Ltd 05/20/97 38.22
First Finl,Stevens Point,WI Associated Banc,Green Bay,WI 05/15/97 28.88
BW/IP Inc Durco International Inc 05/06/97 18.55
First Michigan Bank Corp,MI Huntington Bancshares Inc,OH 05/05/97 41.87
VeriFone Inc Hewlett-Packard Co 04/23/97 50.50
Security Capital,Milwaukee,WI Marshall & Ilsley,Milwaukee,WI 03/14/97 111.06
Collective Bancorp,New Jersey Summit Bancorp,Princeton,NJ 02/27/97 44.08
Production Operators Corp Camco International Inc 02/27/97 56.23
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
PURCHASE TRANSACTIONS:
Vanstar Corp 8.38 8.19 8.63 28.5% 31.4% 24.8%
Eastern Environmental Services 32.00 32.50 34.38 5.5% 3.8% -1.8%
American Disposal Services Inc 38.50 38.94 46.75 16.3% 15.0% -4.3%
Rio Hotel & Casino Inc 18.88 17.56 17.69 6.6% 14.6% 13.8%
Equity Corp International 22.13 20.75 22.88 22.0% 30.1% 18.0%
PMT Services Inc 20.63 18.56 19.06 22.0% 35.5% 32.0%
US Rentals Inc 30.56 32.13 31.63 5.1% 0.0% 1.6%
ALBANK Financial Corp,NY 51.50 52.00 52.75 14.0% 12.9% 11.3%
T R Financial Corp,NY 38.63 35.81 34.88 46.6% 58.1% 62.4%
Mid Am Inc,Bowling Green,Ohio 27.00 26.50 27.56 -5.2% -3.4% -7.1%
National Surgery Centers Inc 28.00 28.38 25.50 17.6% 16.0% 29.1%
Medusa Corp 52.25 49.25 45.25 17.2% 24.3% 35.3%
Avalon Properties Inc 28.81 28.81 29.75 -1.3% -1.3% -4.4%
Zurn Industries Inc 37.06 36.31 32.56 19.5% 22.0% 36.0%
Arbor Drugs Inc 22.69 20.25 19.56 1.9% 14.1% 18.1%
Culligan Water Technologies 37.75 36.50 46.69 57.5% 62.9% 27.3%
Firstbank of IL,Springfield,IL 38.00 36.84 39.00 10.4% 13.9% 7.6%
Price REIT Inc 42.19 41.88 40.50 13.5% 14.3% 18.2%
Fort Wayne Natl Corp,Indiana 42.38 45.50 42.00 4.9% -2.3% 5.8%
United Meridian Corp 32.25 30.81 30.75 -13.9% -9.8% -9.7%
Continental Homes Holding 35.06 34.69 32.56 26.3% 27.7% 36.0%
Gulf South Medical Supply Inc 29.06 33.00 34.69 38.5% 22.0% 16.0%
Mac Frugal's Bargains 37.56 32.63 31.31 2.9% 18.5% 23.5%
Oregon Metallurgical Corp 23.44 21.09 24.25 45.5% 61.7% 40.6%
CapMAC Holdings Inc 30.75 33.00 32.13 0.8% -6.1% -3.5%
Carson Pirie Scott & Co 37.50 37.38 39.50 38.8% 39.3% 31.8%
CFX Corp,Keene,New Hampshire 22.69 21.38 20.88 26.8% 34.5% 37.8%
Pinnacle Financial Svcs Inc,MI 40.13 36.50 35.00 NA 27.1% 32.5%
New York Bancorp,Douglaston,NY 32.75 29.94 30.50 13.3% 24.0% 21.7%
Morningstar Group Inc 40.00 41.13 29.88 14.6% 11.5% 53.5%
Rykoff-Sexton Inc 19.63 19.38 19.13 24.4% 26.0% 27.6%
RCSB Finl Inc,Rochester,NY 34.75 33.50 29.75 21.8% 26.3% 42.3%
Keystone International Inc 20.75 20.63 18.88 84.2% 85.3% 102.5%
First Finl,Stevens Point,WI 27.50 27.25 25.75 5.0% 6.0% 12.2%
BW/IP Inc 19.63 16.25 15.63 -5.5% 14.2% 18.7%
First Michigan Bank Corp,MI 30.75 28.50 29.13 36.2% 46.9% 43.8%
VeriFone Inc 30.13 33.63 35.13 67.6% 50.2% 43.8%
Security Capital,Milwaukee,WI 84.50 83.75 79.38 31.4% 32.6% 39.9%
Collective Bancorp,New Jersey 38.13 35.88 34.00 15.6% 22.9% 29.6%
Production Operators Corp 45.75 49.75 48.50 22.9% 13.0% 15.9%
-----------------------------------------------------------------------------
Mean - Pooling 20.5% 23.4% 24.5%
Median - Pooling 17.2% 22.0% 24.1%
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Mean - All 23.7% 27.0% 27.7%
Median - All 17.8% 23.0% 28.2%
-----------------------------------------------------------------------------
</TABLE>
<PAGE> 25
25
PROBABLE VALUATION AND APPROACHES
RESEARCH ANALYSTS' VIEWS
<TABLE>
<CAPTION>
Report Date Firm Analyst Rating Target Price Target Date
- ----------- ------------------------ ------------------ ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
8/19/98 CIBC Oppenheimer Roxana Zirakzadeh Buy Not in report
10/28/97 Donaldson, Lufkin & Lawrence D. Raiman Market Not in report
Jenrette Performance
2/1/98 EVEREN Securities Burland B. East
1/1/98 Goldman Sachs David A. Feit No report
David Kostin since 1/98
9/1/98 JP Morgan Lee Schalop Buy Not in report
11/3/98 Jefferies & Co., Inc. James F. Wilson Buy $32.00 was $35-36 in
June 1998
11/4/98 Merrill Lynch Eric I. Hemel Long Term Not in report
Accumulate
10/7/98 Morgan Stanley Dean Witter Steven G. Bloom Outperform $34.00
11/3/98 NationsBanc Montgomery Christopher Hartung Buy $32.00 12 month
Securities
8/28/98 Painewebber Susan Kaupie Neutral Not in report
Jonathan Litt
Prudential Securities Louis W. Taylor
10/24/97 Solomon Smith Barney Michael Sgro Outperform $33.00 12 month
David M. Sherman (2nd highest (estimate over
rating) 1 year old)
10/5/98 Sutro & Co. Craig M. Silvers Accumulate/ $30.00 12 month
Buy
<CAPTION>
Report Date Firm NAV Estimate NAV Methodology
- ----------- ------------------------ ------------- ---------------------------------------------------
<S> <C> <C> <C>
8/19/98 CIBC Oppenheimer $28.46 Cap rate used: 8.0% on Q2 98 annualized NOI; NAV
increased by $100MM for "under-market debt."
10/28/97 Donaldson, Lufkin & Not in report
Jenrette
2/1/98 EVEREN Securities
1/1/98 Goldman Sachs
9/1/98 JP Morgan $28.71 Q2 98 annualized property cash flow; capped at 8.0%
(states in report that a 7.5% cap equates to a $32
NAV; development is based on 10.5% return on cost
and an 8.0% cap rate
11/3/98 Jefferies & Co., Inc. $24.00 No basis for analysis was given
11/4/98 Merrill Lynch $27.18 NAV estimate is from July 24, 1997 report;
no NAV was stated in the most recent report
10/7/98 Morgan Stanley Dean Witter Not in report
11/3/98 NationsBanc Montgomery $24.50 Cap rate of 8.0% with estimated 99 NOI of $148mm
Securities based upon a 3% growth rate.
8/28/98 Painewebber Not in report
Prudential Securities
10/24/97 Solomon Smith Barney Not in report
10/5/98 Sutro & Co. Not in report
</TABLE>
Source: Research Bank, Bloomberg, Investex
(1)Excludes reports over six months old.
<PAGE> 26
26
PROBABLE VALUATION AND APPROACHES
NAV ANALYSIS
METHODOLOGY:
* For existing portfolio, on a property-by-property basis, determine
the appropriate capitalization rate and NOI
* Add value of construction projects in process
* Subtract outstanding net debt
* Will be more aggressive than research analysts
* Will look at portfolio premium, not discount
ASSUMPTIONS:
* Existing portfolio 1999 NOI: $162.9 mm
* Operating apartment projects: 54
* Units: 15,768
* $250MM of assets currently under construction (1,773 units)
* $987MM of net debt outstanding
SUMMARY NAV ANALYSIS:
<TABLE>
<S> <C> <C> <C> <C>
Blended Cap Rate: 7.95% 7.85% 7.75% 7.65%
------ ------ ------ ------
NAV Per Share: $30.76 $31.31 $31.91 $32.50
</TABLE>
<PAGE> 27
27
PROBABLE VALUATION AND APPROACHES
DISCOUNTED CASH FLOW
METHODOLOGY:
* Value existing and development pipeline using discounted cash flow
analysis
* Institutional investors will seek unlevered investment returns of
10% - 12% using exit cap rates of 8.5% - 9.0%
ASSUMPTIONS:
* Use most recent TIC estimates for cash flow and development pipeline
* Very rough analysis at this point
* Need substantial information from IAC to be accurate
CONCLUSIONS:
* Given development pipeline, cash flow is negative in years one and
two
<TABLE>
<CAPTION>
Present Value
-------------------------------- Total Value
Discount Rate Cash Flow (MM) Terminal (MM) Present Value Per Share
------------- -------------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
10.0% $ 91 $1,416 $1,508 $33.46
11.0% $ 85 $1,341 $1,427 $31.62
12.0% $ 79 $1,271 $1,351 $29.94
</TABLE>
<PAGE> 28
28
PROBABLE VALUATION AND APPROACHES
EXCLUSIVE LAND RIGHTS VALUATIONS
OVERVIEW:
- IAC has the exclusive right to acquire apartment land on the Irvine
Ranch at 95% of fair market value
- The value of this right to IAC can be calculated by discounting the
5% benefit over a twenty year land acquisition schedule
ASSUMPTIONS:
- Projected five year land sales are repeated for a twenty year
forecast
- Scenario assumes $123MM in land sales over a five year period
($492MM over 20 yrs)
* Annual value of benefit to IAC; $2.274MM, $0MM, $1.737MM,
$1.032MM, $1.432MM
- Aggressive scenario assumes $171MM in land sales over a five year
period ($686MM over twenty years)
* Annual value of benefit to IAC; $2.695MM, $.642MM, $1.737MM,
$1.547MM, $2.411MM
- Assume value of benefit increases 4.0% annually
SUMMARY:
<TABLE>
<CAPTION>
Conservative Aggressive
----------------------------- ----------------------------
Discount Rate Total Value Per Share Total Value Per Share
------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
10.0% $11.82 $ 0.26 $16.24 $ 0.36
11.0% $12.70 $ 0.28 $17.47 $ 0.39
12.0% $13.69 $ 0.30 $18.86 $ 0.42
</TABLE>
<PAGE> 29
29
FINANCING AND RATINGS IMPACT DISCUSSION
<PAGE> 30
FINANCING AND RATINGS IMPACT DISCUSSION
FINANCING SUMMARY
- - Bank of America is pursuing an underwriting of up to $465 million to
finance the contemplated transaction composed of:
* A new $350 million five-year term loan; and
* A reserve of $115 million under the existing $475 million TIC line
of credit
- - To complete the capitalization, ICDC or TIC will contribute an additional
$150 million
- - The Bank of America proposal contemplates no additional debt at IAC in
order to preserve IAC's investment grade ratings:
* A conservative mortgageability test against available unencumbered
assets supports a term loan of up to $350 million
* Support for an ongoing investment grade rating at IAC is centered in
the following:
* Strong ongoing cash flow and coverage ratios
* Low leverage and substantial unencumbered pool of high quality
assets
* Continued source of liquidity for ongoing development through
ICDC
* Due to the size and complexity of the transaction, rating agencies
may place TIC (Fitch) and IAC on credit watch pending their review
of the transaction and
<PAGE> 31
31
subsequent ratings conclusion. During this time, TIC may have an opportunity to
meet with the agencies to explain its operational and business strategies
<PAGE> 32
32
FINANCING AND RATINGS IMPACT DISCUSSION
CONCLUSION AND RECOMMENDATION
- - We would recommend that as soon as reasonably practical, TIC meet with the
rating agencies and present its financial intentions with regard to IAC's
ongoing capital structure as well as with Fitch concerning TIC
- - Access to future capital will be essential to the rating agencies'
conclusions
- - Depending on the rating agencies' response to the above capital structure,
additional leverage may be placed at IAC but in order to preserve
investment grade status, leverage would generally be limited to no higher
than 40%. Currently, IAC's leverage is 29% (calculated as Total Debt/
Total Assets) allowing for an additional leverage amount of $240 million
(maximum 40% leverage level).
<PAGE> 33
33
INTERLOPER DISCUSSION
<PAGE> 34
34
INTERLOPER DISCUSSION
- - An interloper faces several hurdles
* Hostile business partner and future competitor
* Super-majority votes are difficult with TIC's three BOD seats
* Potential loss of exclusive right to purchase Irvine Ranch land
* Access to and amount of capital required for acquisition and future
development
- - An interloper would have many benefits
* The highest possible class of multi-family property
* Potential to acquire and develop future Irvine Ranch land
* Ability to leverage assets and reduce equity investment
* Possibly view investment along with TIC as very beneficial
- - Public companies have little access to capital and are unlikely to be a
competitive threat at this point in the capital markets cycle
- - Institutional and international investors may be interested parties
* Core property portfolio
* Relatively low investment hurdle rates
* Deep capital availability
* Non tax payers
- - However, investing in IAC could create significant ongoing negative or
zero cash flow and substantial management oversight, i.e., not a passive
investment
<PAGE> 35
35
APPENDIX
<PAGE> 36
36
SHAREHOLDER ANALYSIS
<PAGE> 37
37
SHAREHOLDER ANALYSIS
IAC OWNERSHIP PROFILE
<TABLE>
<CAPTION>
% of Shares % of Shares/
Currently L.P. Units
Insiders (1) Holdings Outstanding L.P. Units Outstanding
- ------------ -------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Donald Bren 183,325 0.9% - 0.4%
Richard E. Lamprecht 52,012 0.3% - 0.1%
Carl E. Reichardt 60,000 0.3% - 0.1%
James E. Mead(*) 13,000 0.1% - 0.0%
Steven P. Albert 35,333 0.2% - 0.1%
Thomas H. Nielson 25,000 0.1% - 0.1%
William H. McFarland 21,761 0.1% - 0.0%
Raymond L. Watson 20,000 0.1% - 0.0%
Scott A. Reinert 17,333 0.1% - 0.0%
Richard F. Alden 17,303 0.1% - 0.0%
Peter V. Ueberroth 13,628 0.1% - 0.0%
Bowen H. McCoy 13,000 0.1% - 0.0%
William W. Thompson 11,666 0.1% - 0.0%
Anthony M. Frank 10,000 0.0% - 0.0%
John F. Grundhofer 9,000 0.0% - 0.0%
Jack Peltason 8,600 0.0% - 0.0%
John F. Seymour Jr 8,100 0.0% - 0.0%
William T. White, III 6,000 0.0% - 0.0%
Joseph D. Davis 5,300 0.0% - 0.0%
Michael D. McKee 5,000 0.0% - 0.0%
Donn B. Miller 975 0.0% - 0.0%
Gary H. Hunt 300 0.0% - 0.0%
- --------------------------------------------------------------------------------------------------
Total Insiders 536,636 2.7% - 1.2%
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
% of Shares % of Shares/
Currently L.P. Units
5% Holders Holdings Outstanding L.P. Units Outstanding
- ------------------------ --------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
The Irvine Company 3,247,088 16.1% 24,646,705 61.8%
Cohen & Steers Cap. Mgmt 1,283,400 6.4% -- 2.8%
ABKB/La Salle Securities 1,235,200 6.1% -- 2.7%
Morgan Stanley D Witter 1,126,459 5.6% -- 2.5%
- ---------------------------------------------------------------------------------------------------------------------
Total 5% Holdings 6,892,147 34.2% 24,646,705 69.8%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
% of Shares % of Shares/
Currently L.P. Units
Institutions (2) Holdings Outstanding L.P. Units Outstanding
- ------------------------ ------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Lend Lease Rosen R E Sec 798,200 4.0% -- 1.8%
Prudential Ins Co/Amer 787,400 3.9% -- 1.7%
Capital Guardian Trust 715,750 3.6% -- 1.6%
Travelers Inc 681,700 3.4% -- 1.5%
Franklin Resources Inc 604,842 3.0% -- 1.3%
Abn Amro Asset Mgmt Usa 534,900 2.7% -- 1.2%
Merrill Lynch Asset Mgmt 507,480 2.5% -- 1.1%
Barclays Bank Plc 441,625 2.2% -- 1.0%
Ohio State Teach Ret Sys 324,300 1.6% -- 0.7%
Vanguard Group Inc 307,895 1.5% -- 0.7%
Pioneering Mgmt Corp 300,000 1.5% -- 0.7%
United States Trust/N Y 247,000 1.2% -- 0.5%
Other 2,025,864 10.1% -- 4.5%
Total 8,276,956 41.1% -- 18.3%
--------- ------- ------- -------
Retail Float 4,424,134 22.0% -- 9.8%
--------- ------- ------- -------
Total Shares Currently Outstanding (3) 20,129,873 44.6%
Total Shares and L.P. Units Outstanding 45,156,808
</TABLE>
(1) Source: DEF 14A (2/28/98), SC 13D/A (9/8/98)
(2) Source: CDA Spectrum.
(3) Shares outstanding as of 9/30/98.
(*) Shares registered for sale 11/6/98
<TABLE>
<CAPTION>
Shares/
Donald Bren's Ownership Breakdown: Units % Total
---------- -------
<S> <C> <C>
Bren's Held Shares 183,325
TIC's Shares (of which Bren is sole general partner) 3,247,088
TIC's convertible L.P. Units (of which Bren is sole general partner) 24,646,705
Stonecrest Village Company, LLC L.P. Units (of which Bren is sole general partner) 305,707
----------
Total Shares and Convertible L.P. Units Owned 28,382,825 62.9%
========== ======
</TABLE>
<PAGE> 38
38
SHAREHOLDER ANALYSIS
HISTORICAL IAC OWNERSHIP ANALYSIS
<TABLE>
<S> <C> <C> <C> <C> <C>
COHEN & STEERS CAP. MGMT 1,283,400 -- 1,283,400 1,283,400 --
ABKB/LA SALLE SECURITIES 1,235,200 -- 1,235,200 214,600 1,020,600
MORGAN STANLEY D WITTER 1,126,459 328,259 798,200 350,800 447,400
LEND LEASE ROSEN R E SEC 804,500 88,750 715,750 54,900 660,850
PRUDENTIAL INS CO/AMER 787,400 -- 787,400 300 787,100
CAPITAL GUARDIAN TRUST 681,700 -- 681,700 (97,600) 779,300
TRAVELERS INC 604,842 -- 604,842 (84,181) 689,023
FRANKLIN RESOURCES INC 590,017 82,537 507,480 90,810 416,670
ABN AMRO ASSET MGMT USA 534,900 -- 534,900 209,000 325,900
MERRILL LYNCH ASSET MGMT 441,625 -- 441,625 -- 441,625
BARCLAYS BANK PLC 307,895 -- 307,895 914 306,981
OHIO STATE TEACH RET SYS 300,000 -- 300,000 -- 300,000
VANGUARD GROUP INC 296,800 (27,500) 324,300 2,100 322,200
PIONEERING MGMT CORP 237,000 (10,000) 247,000 6,000 241,000
UNITED STATES TRUST/N Y 226,938 (12,900) 239,838 -- 239,838
FIDELITY MGMT & RES CORP 192,200 -- 192,200 (70,200) 262,400
NORTHWESTERN MUTUAL LIFE 190,800 -- 190,800 -- 190,800
MCSTAY JOHN INVT COUNSEL 168,500 -- 168,500 52,300 116,200
EQUITABLE COMPANIES INC 161,500 -- 161,500 153,700 7,800
MERRILL LYNCH & CO INC 142,000 (72,975) 214,975 (138,625) 353,600
STATE STREET CORP 121,025 -- 121,025 (43,000) 164,025
MELLON BANK CORPORATION 109,234 20,900 88,334 (2,200) 90,534
COLORADO PUBLIC EMPL RET 105,800 105,800 -- (58,200) 58,200
DUFF & PHELPS INVT MGMT 81,100 -- 81,100 -- 81,100
UNIVERSITY OF TEXAS INVT 70,000 70,000 -- -- --
BANKERS TRUST N Y CORP 65,699 (3,300) 68,999 8,900 60,099
COLLEGE RETIRE EQUITIES 60,490 4,144 56,346 146 56,200
STAR BANK N A,CINCINNATI 40,700 -- 40,700 (11,000) 51,700
CALIF STATE TEACHERS RET 34,747 -- 34,747 -- 34,747
WELLS FARGO BANK N A 32,835 -- 32,835 (250,000) 282,835
WESTCAP INVESTORS 30,560 (10,200) 40,760 (200) 40,960
TIRSCHWELL & LOEWY INC 29,325 -- 29,325 -- 29,325
SENECA CAPITAL MGMT LLC 27,900 -- 27,900 (13,436) 41,336
TEACHERS ADVISORS INC 27,200 -- 27,200 27,200 --
EHRLICH MEYER ASSOCS INC 26,200 -- 26,200 -- 26,200
DIMENSIONAL FUND ADVS 24,500 -- 24,500 -- 24,500
KAYNE ANDERSON INVT MGMT 24,360 -- 24,360 -- 24,360
WILSHIRE ASSOC INC 20,650 -- 20,650 5,150 15,500
FIRST UNION CORPORATION 20,045 -- 20,045 (355) 20,400
DRIEHAUS CAPITAL MGMT 20,000 -- 20,000 10,000 10,000
BEAR STEARNS & CO 18,540 6,600 11,940 7,040 4,900
BANC ONE CORPORATION 17,466 -- 17,466 (22,262) 39,728
ROGER ENGEMANN & ASSOCS 16,000 -- 16,000 -- 16,000
RUSSELL FRANK CO INC 15,700 (156,100) 171,800 (4,000) 175,800
NORTHERN TRUST CORP 15,597 397 15,200 2,200 13,000
U S BANCORP 15,450 -- 15,450 15,450 --
WOOD ISLAND ASSOCS. INC 15,200 -- 15,200 -- 15,200
WEISBERG & FIELDS INC 14,100 -- 14,100 -- 14,100
PAINEWEBBER GROUP INC 13,158 -- 13,158 13,158 --
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
COHEN & STEERS CAP. MGMT (1,957,300) 1,957,300 (33,000) 1,990,300
ABKB/LA SALLE SECURITIES (27,000) 1,047,600 (84,300) 1,131,900
MORGAN STANLEY D WITTER 157,400 290,000 241,890 48,110
LEND LEASE ROSEN R E SEC 55,000 605,850 314,300 291,550
PRUDENTIAL INS CO/AMER (300) 787,400 -- 787,400
CAPITAL GUARDIAN TRUST 16,400 762,900 -- 762,900
TRAVELERS INC 23,825 665,198 (675,057) 1,340,255
FRANKLIN RESOURCES INC 420 416,250 29,420 386,830
ABN AMRO ASSET MGMT USA 21,500 304,400 (7,900) 312,300
MERRILL LYNCH ASSET MGMT (75) 441,700 441,700 --
BARCLAYS BANK PLC (2,917) 309,898 (7,340) 317,238
OHIO STATE TEACH RET SYS -- 300,000 -- 300,000
VANGUARD GROUP INC (39,800) 362,000 6,400 355,600
PIONEERING MGMT CORP 6,000 235,000 5,000 230,000
UNITED STATES TRUST/N Y 2,238 237,600 39,550 198,050
FIDELITY MGMT & RES CORP (285,800) 548,200 26,000 522,200
NORTHWESTERN MUTUAL LIFE -- 190,800 -- 190,800
MCSTAY JOHN INVT COUNSEL (42,600) 158,800 67,700 91,100
EQUITABLE COMPANIES INC -- 7,800 -- 7,800
MERRILL LYNCH & CO INC 9,500 344,100 (3,900) 348,000
STATE STREET CORP (6,300) 170,325 3,925 166,400
MELLON BANK CORPORATION (12,366) 102,900 (800) 103,700
COLORADO PUBLIC EMPL RET 29,200 29,000 -- 29,000
DUFF & PHELPS INVT MGMT -- 81,100 -- 81,100
UNIVERSITY OF TEXAS INVT -- -- -- --
BANKERS TRUST N Y CORP (4,500) 64,599 (700) 65,299
COLLEGE RETIRE EQUITIES 42,000 14,200 14,200 --
STAR BANK N A,CINCINNATI -- 51,700 -- 51,700
CALIF STATE TEACHERS RET -- 34,747 -- 34,747
WELLS FARGO BANK N A (19,400) 302,235 (700) 302,935
WESTCAP INVESTORS 10,435 30,525 7,500 23,025
TIRSCHWELL & LOEWY INC -- 29,325 -- 29,325
SENECA CAPITAL MGMT LLC -- 41,336 -- 41,336
TEACHERS ADVISORS INC -- -- -- --
EHRLICH MEYER ASSOCS INC 2,900 23,300 23,300 --
DIMENSIONAL FUND ADVS -- 24,500 (6,800) 31,300
KAYNE ANDERSON INVT MGMT (550) 24,910 360 24,550
WILSHIRE ASSOC INC (1,800) 17,300 (1,700) 19,000
FIRST UNION CORPORATION 400 20,000 -- 20,000
DRIEHAUS CAPITAL MGMT (1,200) 11,200 200 11,000
BEAR STEARNS & CO 3,550 1,350 (625) 1,975
BANC ONE CORPORATION 39,728 -- -- --
ROGER ENGEMANN & ASSOCS -- 16,000 -- 16,000
RUSSELL FRANK CO INC -- 175,800 -- 175,800
NORTHERN TRUST CORP 1,700 11,300 3,600 7,700
U S BANCORP -- -- -- --
WOOD ISLAND ASSOCS. INC -- 15,200 -- 15,200
WEISBERG & FIELDS INC (250) 14,350 14,350 --
PAINEWEBBER GROUP INC -- -- -- --
</TABLE>
<PAGE> 39
39
SHAREHOLDER ANALYSIS
HISTORICAL IAC OWNERSHIP ANALYSIS
<TABLE>
<S> <C> <C> <C> <C> <C>
AON CORPORATION 10,285 (1,100) 11,385 (200) 11,585
CRESTAR BANK/VIRGINIA 7,500 -- 7,500 -- 7,500
PANAGORA ASSET MGMT INC 7,000 (400) 7,400 -- 7,400
PACIFIC CENTURY TRUST 6,700 -- 6,700 -- 6,700
AMERICAN GENERAL CORP 4,900 800 4,100 -- 4,100
INVESCO CAPITAL MGMT INC 4,245 2,150 2,095 (44,857) 46,952
BANK OF NEW YORK 4,000 -- 4,000 -- 4,000
ANB INVESTMENT MGMT & TR 3,977 3,977 -- -- --
CIBC OPPENHEIMER CORP 2,327 -- 2,327 128 2,199
FLEET FINL GROUP INC 2,000 -- 2,000 500 1,500
INDEPENDENCE INVT ASSOC 1,300 -- -- -- --
TCW GROUP INC 1,200 -- 1,200 -- 1,200
MECHANICS BANK/CA 1,000 -- 1,000 -- 1,000
MANUFACTURERS ADVISER CP 449 (25,251) 25,700 -- 25,700
LEGG MASON WOOD WALKER 400 -- 400 400 --
AMERICAN NATL B&T/CHICAG -- -- -- -- --
BNP/COOPER NEFF ADVISORS -- -- -- (11,700) 11,700
BRANDYWINE ASSET MGMT -- -- -- (7,600) 7,600
CAPITAL GROWTH MGMT -- -- -- -- --
CAPITAL INTL. LIMITED -- -- -- -- --
CHASE MANHATTAN CORP -- -- -- -- --
DAVIS SELECTED ADVS LP -- (105,000) 105,000 2,500 102,500
EUROPEAN INVESTORS INC -- -- -- -- --
FIRST QUADRANT LP -- -- -- -- --
GE INVESTMENT MGMT INC -- -- -- -- --
GRANTHAM MAYO VAN OTTER -- (29,900) 29,900 3,200 26,700
INVESCO MGMT & RES INC -- -- -- -- --
INVESTMENT COUNSELORS/MD -- -- -- -- --
JURIKA & VOYLES INC -- -- -- -- --
KEYCORP -- -- -- -- --
LAIDLAW GLOBAL SECUR -- -- -- (7,000) 7,000
LEVIN, JOHN A & CO. INC -- -- -- -- --
MONTGOMERY SECURITIES -- -- -- -- --
MORGAN J P & CO INC -- -- -- -- --
MUNDER CAPITAL MGMT. INC -- -- -- (76,300) 76,300
MUTUAL LIFE INS CO N.Y -- (168,500) 168,500 -- 168,500
NATIONSBANK CORPORATION -- -- -- -- --
NEUBERGER&BERMAN MGMT -- -- -- -- --
NORWEST CORPORATION -- -- -- -- --
PHOENIX HOME LIFE MUTUAL -- -- -- -- --
PIMCO ADVISORS L P -- -- -- (1,100) 1,100
PRUDENTIAL SECS. INC -- -- -- -- --
PUTNAM INVESTMENT MGMT -- -- -- -- --
RAYMOND JAMES & ASSOCS -- -- -- (285) 285
STICHTING PENSIOENFONDS -- -- -- -- --
STRONG CAPITAL MGMT INC -- -- -- -- --
WCM INVESTMENT MGMT -- -- -- -- --
WESTWOOD MGMT CORP/TX -- -- -- -- --
ZURICH KEMPER INVTS INC -- -- -- -- --
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
AON CORPORATION (8,900) 20,485 1,600 18,885
CRESTAR BANK/VIRGINIA -- 7,500 -- 7,500
PANAGORA ASSET MGMT INC -- 7,400 -- 7,400
PACIFIC CENTURY TRUST -- 6,700 6,700 --
AMERICAN GENERAL CORP -- 4,100 -- 4,100
INVESCO CAPITAL MGMT INC 13,947 33,005 405 32,600
BANK OF NEW YORK -- 4,000 (765) 4,765
ANB INVESTMENT MGMT & TR (3,977) 3,977 (1,423) 5,400
CIBC OPPENHEIMER CORP 27 2,172 2,172 --
FLEET FINL GROUP INC 450 1,050 200 850
INDEPENDENCE INVT ASSOC -- -- --
TCW GROUP INC -- 1,200 -- 1,200
MECHANICS BANK/CA -- 1,000 -- 1,000
MANUFACTURERS ADVISER CP (5,000) 30,700 (57,800) 88,500
LEGG MASON WOOD WALKER -- -- -- --
AMERICAN NATL B&T/CHICAG -- -- -- --
BNP/COOPER NEFF ADVISORS 500 11,200 2,000 9,200
BRANDYWINE ASSET MGMT 700 6,900 -- 6,900
CAPITAL GROWTH MGMT -- -- -- --
CAPITAL INTL. LIMITED -- -- (17,000) 17,000
CHASE MANHATTAN CORP -- -- -- --
DAVIS SELECTED ADVS LP -- 102,500 4,600 97,900
EUROPEAN INVESTORS INC -- -- -- --
FIRST QUADRANT LP -- -- -- --
GE INVESTMENT MGMT INC -- -- -- --
GRANTHAM MAYO VAN OTTER (29,000) 55,700 (13,900) 69,600
INVESCO MGMT & RES INC (21,000) 21,000 (28,600) 49,600
INVESTMENT COUNSELORS/MD -- -- -- --
JURIKA & VOYLES INC -- -- -- --
KEYCORP -- -- (22,080) 22,080
LAIDLAW GLOBAL SECUR 7,000 -- -- --
LEVIN, JOHN A & CO. INC -- -- -- --
MONTGOMERY SECURITIES -- -- -- --
MORGAN J P & CO INC (14,400) 14,400 700 13,700
MUNDER CAPITAL MGMT. INC 4,100 72,200 -- 72,200
MUTUAL LIFE INS CO N.Y -- 168,500 -- 168,500
NATIONSBANK CORPORATION -- -- -- --
NEUBERGER&BERMAN MGMT -- -- -- --
NORWEST CORPORATION -- -- (449) 449
PHOENIX HOME LIFE MUTUAL -- -- -- --
PIMCO ADVISORS L P -- 1,100 -- 1,100
PRUDENTIAL SECS. INC -- -- -- --
PUTNAM INVESTMENT MGMT -- -- (181,600) 181,600
RAYMOND JAMES & ASSOCS 285 -- -- --
STICHTING PENSIOENFONDS (81,400) 81,400 61,900 19,500
STRONG CAPITAL MGMT INC -- -- -- --
WCM INVESTMENT MGMT -- -- (39,350) 39,350
WESTWOOD MGMT CORP/TX (6,900) 6,900 (1,600) 8,500
ZURICH KEMPER INVTS INC -- -- -- --
</TABLE>
<PAGE> 40
40
CAPITAL MARKETS DISCUSSION
<PAGE> 41
41
CAPITAL MARKETS DISCUSSION
MONTHLY NET FLOWS INTO REAL ESTATE SECTOR FUNDS SINCE 1/1/96
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
<S> <C> <C>
Recent net Jan-96 125.1
outflows reflect Feb-96 53.8
current market Mar-96 60.0
sentiment Apr-96 13.0
May-96 47.2
Jun-96 218.9
Jul-96 123.6
Aug-96 238.5
Sep-96 349.8
Oct-96 273.4
Nov-96 467.5
Dec-96 786.3
Jan-97 1197.4
Feb-97 530.6
Mar-97 649.0
Apr-97 -38.4
May-97 134.1
Jun-97 168.1
Jul-97 272.6
Aug-97 110.4
Sep-97 565.7
Oct-97 239.5
</TABLE>
<PAGE> 42
42
<TABLE>
<S> <C>
Nov-97 248.8
Dec-97 678.5
Jan-98 552.5
Feb-98 290.4
Mar-98 -300.5
Apr-98 -8.6
May-98 -66.1
Jun-98 -72.1
Jul-98 -78.3
Aug-98 -283.7
Sep-98 2.7
Oct-98 -105.3
</TABLE>
<TABLE>
<CAPTION>
% Change % Change
1994 1995 1996 1997 97 vs 96 1998 98 vs 97
- ------------------- ----------------- ----------------- ------------------ ------ ---------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Q1 ($ 39.30) Q1 ($ 27.10) Q1 $ 238.90 Q1 $2377.00 895% Q1 $542.40 -77%
Q2 ($ 54.44) Q2 $ 142.50 Q2 $ 279.10 Q2 $ 263.80 -5% Q2 ($146.83) -156%
1H94 ($ 93.74) 1H95 $ 115.40 1H96 $ 518.00 1H97 $2640.80 410% 1H98 $395.57 -85%
Q3 ($ 39.80) Q3 $ 207.10 Q3 $ 711.90 Q3 $ 555.00 -22% Q3TD ($362.10)
9 Mos ($133.54) 9 Mos $ 322.50 9 Mos $1229.90 9 Mos $3195.80 160% 9 Mos $ 33.48
Q4 $ 169.20 Q4 $ 155.87 Q4 $ 271.60 Q4 $1166.80 330% Q4 $ .00
- ------------------- ----------------- ----------------- ------------------ ------ ----------------
1994 $ 35.66 1995 $ 478.37 1996 $1501.50 1997 $4362.60 191% 1998 TD $ 33.48
- ------------------- ----------------- ----------------- ------------------ ------ ----------------
</TABLE>
<PAGE> 43
43
CAPITAL MARKETS DISCUSSION
WEEKLY TOTAL ASSETS OF REAL ESTATE SECTOR FUNDS FROM 4/1/98 TO 10/28/98
(BILLIONS)
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
<S> <C> <C>
4/1/98 12.4 Total Assets of Real
4/8/98 12.4 Estate Sector Funds
4/15/98 12.4 has diminished over
4/22/98 12.3 the past six months
4/29/98 12.1
5/6/98 12.0
5/13/98 12.0
5/20/98 11.9
5/27/98 11.8
6/3/98 11.7
6/10/98 11.6
6/17/98 11.4
6/24/98 11.4
7/1/98 11.7
7/8/98 11.9
7/15/98 11.8
7/22/98 11.6
7/29/98 11.2
8/5/98 10.4
8/12/98 10.6
8/19/98 10.6
8/26/98 10.4
</TABLE>
<PAGE> 44
44
<TABLE>
<S> <C>
9/2/98 9.5
9/9/98 9.3
9/16/98 9.2
9/23/98 9.9
9/30/98 9.7
10/7/98 9.2
10/14/98 9.2
10/21/98 9.5
10/28/98 9.5
</TABLE>
<PAGE> 45
45
CAPITAL MARKETS DISCUSSION
Market Barometer
THE REIT INDEX
IS AT THE SAME
LEVEL AS IT WAS
ON JANUARY 1,
1997
<TABLE>
<CAPTION>
Market Indices Historical % Change Price On 52-Week Close
---------------------------------------------------------------- Change -------------------------
1995 1996 1997 12/31/97 10/29/98 YTD High Low
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500 34.1% 20.3% 31.0% 970.43 1,085.93 11.9% 1,190.58 900.61
NASDAQ 39.9% 22.7% 21.6% 1,570.35 1,757.19 11.9% 2,028.06 1,357.09
Russell 2000 26.2% 14.8% 20.5% 437.02 374.48 (14.3%) 492.28 303.87
Dow Jones Industrial 33.5% 26.0% 22.6% 7,908.25 8,495.03 7.4% 9,412.64 7,329.61
NMS Growth Index -- -- 6.2% 106.19 108.88 2.5% 78.28 132.27
REIT Index 12.9% 35.9% 18.6% 363.83 298.83 (17.9%) 365.60 270.40
</TABLE>
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
YEAR TO DATE RETURNS OF MARKET INDICES
<TABLE>
<S> <C>
REIT Index (17.9%)
NMS Growth Index 2.5%
Dow Jones 7.4%
Industrials
Russell 2000 (14.3%)
NASDAQ 11.9%
S&P 11.9%
</TABLE>
<TABLE>
<CAPTION>
LAST TWELVE MONTHS U.S. TREASURY BOND YIELDS (%)
------------------------------------------------------
DATE RANGE RANGE OF 10 YEAR RANGE OF 30
BOND YIELD YEAR BOND
YIELD
----------------- ---------------- -----------
<S> <C> <C>
10/27/92-10/31/97 5.71-5.86 6.14-6.28
11/03/97-11/28/97 5.70-5.84 6.03-6.24
12/01/97-12/31/97 5.66-5.87 5.84-6.14
01/02/98-01/30/98 5.34-6.06 5.70-5.97
02/02/98-02/27/98 5.43-5.67 5.80-5.97
03/02/98-03/31/98 5.53-5.77 5.85-6.07
04/01/98-04/30/98 5.45-5.80 5.77-6.07
05/01/98-05/29/98 5.55-5.77 5.80-6.04
06/01/98-06/30/98 5.37-5.58 5.60-5.81
07/01/98-07/31/98 5.48-5.57 5.57-5.76
03/03/98-08/31/98 5.15-5.49 5.30-5.67
09/01/98-09/30/98 4.46-5.18 4.98-5.34
10/01/98-10/29/98 4.28-4.79 4.71-5.16
</TABLE>
<PAGE> 46
46
CAPITAL MARKETS DISCUSSION
IPO PERFORMANCE
1998 IPOs have
underperformed
1997 in terms of
the IPO "pop"
and aftermarket
performance
<TABLE>
<CAPTION>
1998 IPOs Shares Shares
Company Ticker IPO Date Filed Offered
- ---------------------------------- ------ -------- ------ -------
<S> <C> <C> <C> <C>
1 Resource Asset Investment RAS 1/9/98 7.50 2.83
2 ElderTrust ETT 1/26/98 6.05 6.05
3 Cabot Industrial Trust CTR 1/30/98 7.50 8.63
4 Capital Automotive REIT CARS 2/13/98 20.00 20.00
5 United Investors Realty Trust UIRT 3/10/98 7.60 7.60
6 Anworth Mortgage Asset Corp. ANH 3/11/98 3.00 2.20
7 Anthracite Mortgage Capital AHR 3/24/98 20.00 20.00
8 Wilshire Real Estate Inv. Trust WREI 3/31/98 10.00 10.00
9 Correctional Properties Trust CPV 4/22/98 6.20 6.20
10 Chastain Capital CHAS 4/23/98 9.80 7.38
11 LaSalle Hotel Properties LHO 4/23/98 14.20 14.20
12 Amresco Capital Trust AMCT 5/6/98 15.00 9.00
13 Philips International Realty PHR 5/7/98 7.20 7.20
14 Equity One EQY 5/13/98 5.36 4.70
15 Clarion Commercial Hldg. Inc. CLR 5/28/98 4.00 4.00
- ------------------------------------------------------------------------------------------------------------------------
Average
Median
- ------------------------------------------------------------------------------------------------------------------------
1997 IPOs
16 Kilroy Realty Corporation KRC 1/28/97 11.30 12.50
17 Golf Trust of America GTA 2/6/97 2.78 3.40
18 Conerstone Properties CPP 4/15/97 14.00 14.00
19 Cornerstone Realty Income Trust TCR 4/18/97 4.50 4.50
20 Great Lakes REIT GL 5/8/97 5.70 5.70
21 Ocwen Asset Investment OAC 5/14/97 12.50 15.00
22 Westfield America WEA 5/15/97 18.00 18.00
23 Alexandria Real Estate Eqs ARE 5/27/97 6.83 6.75
24 Boston Properties BXP 6/17/97 29.50 31.40
25 Equity Office Properties Trust EOP 7/7/97 15.00 25.00
26 CCA Prison Realty Trust PZN 7/15/97 17.00 18.50
27 Pan Pacific Retail Properties PNP 8/7/97 6.60 7.00
28 SL Green Realty SLG 8/14/97 9.32 10.10
29 Tower Realty Trust TOW 10/9/97 10.10 12.02
30 Imperial Credit Com'l Mortgage ICMI 10/16/97 25.00 30.00
31 American Residential Invst. Trust INV 10/28/97 5.00 6.50
32 Prime Group Realty Trust PGE 11/11/97 14.25 12.38
33 Captec Net Lease Realty CRRR 11/13/97 11.33 8.00
34 Entertainment Properties Trust EPR 11/18/97 13.70 13.80
35 AMB Property AMB 11/21/97 12.00 14.00
36 Laser Mortgage Management LMM 11/26/97 15.00 15.00
- --------------------------------------------------------------------------------------------------------------------------
Average
Median
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 IPOs Filing % Change
Company % Change IPO Price Price(1) from Filing Price
- ---------------------------------- -------- --------- -------- -----------------
<S> <C> <C> <C> <C>
1 Resource Asset Investment (62.2%) $ 15.00 $ 15.00 0.0%
2 ElderTrust 0.0% $ 18.00 $ 20.00 (10.0%)
3 Cabot Industrial Trust 15.0% $ 20.00 $ 20.00 0.0%
4 Capital Automotive REIT 0.0% $ 15.00 $ 15.00 0.0%
5 United Investors Realty Trust 0.0% $ 10.00 $ 10.50 (4.8%)
6 Anworth Mortgage Asset Corp. (26.7%) $ 9.00 $ 10.00 (10.0%)
7 Anthracite Mortgage Capital 0.0% $ 15.00 $ 15.00 0.0%
8 Wilshire Real Estate Inv. Trust 0.0% $ 16.00 $ 15.00 6.7%
9 Correctional Properties Trust 0.0% $ 20.00 $ 20.00 0.0%
10 Chastain Capital (24.7%) $ 15.00 $ 15.00 0.0%
11 LaSalle Hotel Properties 0.0% $ 18.00 $ 20.00 (10.0%)
12 Amresco Capital Trust (40.0%) $ 15.00 $ 20.00 (25.0%)
13 Philips International Realty 0.0% $ 17.50 $ 20.00 (12.5%)
14 Equity One (12.3%) $ 11.00 $ 14.75 (25.4%)
15 Clarion Commercial Hldg. Inc. 0.0% $ 20.00 $ 20.00 0.0%
- ---------------------------------------------------------------------------------------------------------------------------
Average (10.1%) (6.1%)
Median 0.0% 0.0%
- ---------------------------------------------------------------------------------------------------------------------------
1997 IPOs
16 Kilroy Realty Corporation 10.6% $ 23.00 $ 20.00 15.0%
17 Golf Trust of America 22.5% $ 21.00 $ 20.00 5.0%
18 Conerstone Properties 0.0% $ 14.00 $ 16.00 (12.5%)
19 Cornerstone Realty Income Trust 0.0% $ 10.50 $ 11.75 (10.6%)
20 Great Lakes REIT 0.0% $ 15.50 $ 16.00 (3.1%)
21 Ocwen Asset Investment 20.0% $ 16.00 $ 16.00 0.0%
22 Westfield America 0.0% $ 15.00 $ 16.75 (10.4%)
23 Alexandria Real Estate Eqs (1.2%) $ 20.00 $ 21.00 (4.8%)
24 Boston Properties 6.4% $ 25.00 $ 25.00 0.0%
25 Equity Office Properties Trust 66.7% $ 21.00 $ 20.00 5.0%
26 CCA Prison Realty Trust 8.8% $ 21.00 $ 20.00 5.0%
27 Pan Pacific Retail Properties 6.1% $ 19.50 $ 20.00 (2.5%)
28 SL Green Realty 8.4% $ 21.00 $ 20.00 5.0%
29 Tower Realty Trust 19.0% $ 26.00 $ 25.00 4.0%
30 Imperial Credit Com'l Mortgage 20.0% $ 15.00 $ 14.00 7.1%
31 American Residential Invst. Trust 30.0% $ 15.00 $ 15.00 0.0%
32 Prime Group Realty Trust (13.1%) $ 20.00 $ 20.00 0.0%
33 Captec Net Lease Realty (29.4%) $ 18.00 $ 15.00 20.0%
34 Entertainment Properties Trust 0.7% $ 20.00 $ 20.00 0.0%
35 AMB Property 16.7% $ 21.00 $ 21.00 0.0%
36 Laser Mortgage Management 0.0% $ 15.00 $ 15.00 0.0%
- ------------------------------------------------------------------------------------------------------------------------
Average 9.2% 1.1%
Median 6.4% 0.0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 IPOs First Day Price as of
Company Close IPO "Pop" 11/02/98 % Change
- ---------------------------------- ----- --------- -------- --------
<S> <C> <C> <C> <C>
1 Resource Asset Investment $ 15.00 0.0% $ 12.38 (17.5%)
2 ElderTrust $ 18.56 3.1% $ 11.88 (34.0%)
3 Cabot Industrial Trust $ 22.50 12.5% $ 20.00 0.0%
4 Capital Automotive REIT $ 16.69 11.3% $ 13.91 (7.3%)
5 United Investors Realty Trust $ 9.75 (2.5%) $ 7.38 (26.3%)
6 Anworth Mortgage Asset Corp. $ 8.94 (0.7%) $ 4.13 (54.2%)
7 Anthracite Mortgage Capital $ 15.00 0.0% $ 6.00 (60.0%)
8 Wilshire Real Estate Inv. Trust $ 16.00 0.0% $ 3.00 (81.3%)
9 Correctional Properties Trust $ 23.00 15.0% $ 19.69 (1.6%)
10 Chastain Capital $ 15.00 0.0% $ 3.50 (76.7%)
11 LaSalle Hotel Properties $ 17.75 (1.4%) $ 11.63 (35.4%)
12 Amresco Capital Trust $ 14.63 (2.5%) $ 7.88 (47.5%)
13 Philips International Realty $ 17.50 0.0% $ 14.50 (17.1%)
14 Equity One $ 10.75 (2.3%) $ 9.13 (17.0%)
15 Clarion Commercial Hldg. Inc. $ 18.38 (8.1%) $ 4.25 (78.8%)
- ------------------------------------------------------------------------------------------------------------------------
Average 1.6% (37.0%)
Median 0.0% (34.0%)
- ------------------------------------------------------------------------------------------------------------------------
1997 IPOs
16 Kilroy Realty Corporation $ 25.25 9.8% $ 22.38 (2.7%)
17 Golf Trust of America $ 23.25 10.7% $ 26.00 23.8%
18 Conerstone Properties $ 14.50 3.6% $ 15.44 10.3%
19 Cornerstone Realty Income Trust $ 10.50 0.0% $ 10.81 3.0%
20 Great Lakes REIT $ 16.00 3.2% $ 15.88 2.4%
21 Ocwen Asset Investment $ 18.25 14.1% $ 4.56 (71.5%)
22 Westfield America $ 15.63 4.2% $ 17.31 15.4%
23 Alexandria Real Estate Eqs $ 21.00 5.0% $ 27.69 38.4%
24 Boston Properties $ 26.75 7.0% $ 29.00 16.0%
25 Equity Office Properties Trust $ 26.88 28.0% $ 24.63 17.3%
26 CCA Prison Realty Trust $ 28.88 37.5% $ 23.00 9.5%
27 Pan Pacific Retail Properties $ 20.31 4.2% $ 18.63 (4.5%)
28 SL Green Realty $ 25.00 19.0% $ 18.75 (10.7%)
29 Tower Realty Trust $ 27.75 6.7% $ 17.50 (32.7%)
30 Imperial Credit Com'l Mortgage $ 18.44 22.9% $ 8.63 (42.5%)
31 American Residential Invst. Trust $ 15.13 0.8% $ 5.06 (66.3%)
32 Prime Group Realty Trust $ 20.00 0.0% $ 16.38 (18.1%)
33 Captec Net Lease Realty $ 17.00 (5.6%) $ 12.75 (29.2%)
34 Entertainment Properties Trust $ 19.50 (2.5%) $ 16.25 (18.8%)
35 AMB Property $ 23.00 9.5% $ 22.63 7.7%
36 Laser Mortgage Management $ 14.50 (3.3%) $ 5.75 (61.7%)
- ------------------------------------------------------------------------------------------------------------------------
Average 8.3% (10.2%)
Median 5.0% (2.7%)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 IPOs 1998 FFO 1998 FFO 1999 FFO 1999 FFO
Company Estimate(2) Multiple Estimate(2) Multiple
- ---------------------------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
1 Resource Asset Investment $ 1.99 6.2x $ 2.90 4.3x
2 ElderTrust $ 1.70 7.0x $ 2.01 5.9x
3 Cabot Industrial Trust $ 1.80 11.1x $ 2.04 9.8x
4 Capital Automotive REIT $ 1.00 13.9x $ 1.65 8.4x
5 United Investors Realty Trust $ 1.02 7.2x $ 1.14 6.5x
6 Anworth Mortgage Asset Corp. $ 0.35 11.8x $ 0.40 10.3x
7 Anthracite Mortgage Capital $ 0.94 6.4x $ 1.21 5.0x
8 Wilshire Real Estate Inv. Trust $ 1.19 2.5x $ 2.47 1.2x
9 Correctional Properties Trust $ 1.11 17.7x $ 1.73 11.4x
10 Chastain Capital $ 0.67 5.2x $ 1.31 2.7x
11 LaSalle Hotel Properties $ 2.14 5.4x $ 2.31 5.0x
12 Amresco Capital Trust $ 0.67 11.8x $ 1.61 4.9x
13 Philips International Realty $ 1.57 9.2x $ 1.95 7.4x
14 Equity One $ 1.13 8.1x $ 1.36 6.7x
15 Clarion Commercial Hldg. Inc. NA NA $ 2.18 1.9x
- --------------------------------------------------------------------------------------------------------------
Average 8.8x 6.1x
Median 7.7x 5.9x
- --------------------------------------------------------------------------------------------------------------
1997 IPOs
16 Kilroy Realty Corporation $ 2.30 9.7x $ 2.50 9.0x
17 Golf Trust of America $ 2.28 11.4x $ 2.61 10.0x
18 Conerstone Properties $ 1.46 10.6x $ 1.57 9.8x
19 Cornerstone Realty Income Trust $ 1.17 9.2x $ 1.26 8.6x
20 Great Lakes REIT $ 1.69 9.4x $ 1.86 8.5x
21 Ocwen Asset Investment $ 1.33 3.4x $ 1.58 2.9x
22 Westfield America $ 1.62 10.7x $ 1.73 10.0x
23 Alexandria Real Estate Eqs $ 2.36 11.7x $ 2.66 10.4x
24 Boston Properties $ 2.49 11.6x $ 2.88 10.1x
25 Equity Office Properties Trust $ 2.28 10.8x $ 2.46 10.0x
26 CCA Prison Realty Trust $ 2.25 10.2x $ 2.75 8.4x
27 Pan Pacific Retail Properties $ 2.08 9.0x $ 2.27 8.2x
28 SL Green Realty $ 1.94 9.7x $ 2.24 8.4x
29 Tower Realty Trust $ 2.28 7.7x $ 2.45 7.1x
30 Imperial Credit Com'l Mortgage $ 1.11 7.8x $ 1.25 6.9x
31 American Residential Invst. Trust $ 0.50 10.1x $ 0.74 6.8x
32 Prime Group Realty Trust $ 1.84 8.9x $ 2.14 7.7x
33 Captec Net Lease Realty $ 1.84 6.9x $ 2.00 6.4x
34 Entertainment Properties Trust $ 1.88 8.6x $ 2.20 7.4x
35 AMB Property $ 1.90 11.9x $ 2.10 10.8x
36 Laser Mortgage Management $ 1.52 3.8x $ 2.00 2.9x
- --------------------------------------------------------------------------------------------------------------
Average 9.2x 8.1x
Median 9.7x 8.4x
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Filing price taken at mid-point of the filing range.
(2) FFO estimates derived from First Call as of 11/2/98
<PAGE> 47
47
CAPITAL MARKETS DISCUSSION
1998 FOLLOW-ON PERFORMANCE
Declining stock
prices limit the
ability to raise
additional
equity
<TABLE>
<CAPTION>
1998 Follow-Ons(1) Shares Shares
Company Ticker Offer Date Filed Offered % Change Offer Price
- --------------------------------------- ------ ---------- ----- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 Liberty Property Trust LRY 1/14/98 2.3 2.3 0.0% $ 27.75
2 Public Storage PSA 1/15/98 2.9 2.9 0.0% $ 31.00
3 Highwoods Properties HIW 1/21/98 1.5 1.5 0.0% $ 36.00
4 Equity Residential Properties EQR 1/22/98 4.0 4.0 0.0% $ 50.44
5 CRIIMI MAE CMM 1/22/98 2.1 2.1 0.0% $ 15.13
6 Boston Properties BXP 1/26/98 15.0 20.0 33.3% $ 35.13
7 Brandywine Realty Trust BDN 1/29/98 10.0 10.0 0.0% $ 24.00
8 Cornerstone Properties CPP 2/2/98 16.3 12.5 (23.3%) $ 18.25
9 Capstone Capital Corporation CCT 2/3/98 5.0 5.0 0.0% $ 24.44
10 Sunstone Hotels SSI 2/5/98 4.5 4.5 0.0% $ 16.38
11 Chateau Properties CPJ 2/10/98 1.9 1.9 0.0% $ 30.69
12 Arden Realty ARI 2/12/98 20.0 20.0 0.0% $ 28.31
13 Mack Cali Realty Corp. CLI 2/19/98 2.5 2.5 0.0% $ 38.50
14 Post Properties PPS 2/26/98 3.0 3.5 16.7% $ 39.00
15 Merry Land & Investment MRY 3/10/98 3.0 3.0 0.0% $ 22.69
16 CRIIMI MAE CMM 3/19/98 2.6 2.6 0.0% $ 15.31
17 Burnham Pacific Properties BPP 3/24/98 5.5 6.5 18.2% $ 14.13
18 Colonial Properties Trust CLP 4/21/98 3.0 3.0 0.0% $ 30.13
19 Corporate Office Properties OFC 4/22/98 7.5 7.5 0.0% $ 10.50
20 Arden Realty ARI 4/27/98 1.1 1.1 0.0% $ 28.38
21 SL Green Realty SLG 5/12/98 10.0 10.0 0.0% $ 22.25
22 Pan Pacific Retail Properties PNP 5/12/98 2.0 2.0 0.0% $ 21.13
23 Health & Retirement Property Trust HRP 5/27/98 25.0 25.0 0.0% $ 18.88
24 Home Properties of New York HME 6/15/98 4.5 2.0 (55.6%) $ 25.13
25 Malan Realty Investors MAL 6/23/98 1.5 1.5 0.0% $ 17.76
26 Resource Asset Investment RAS 6/24/98 2.8 2.8 0.0% $ 15.75
- -------------------------------------------------------------------------------------------------------------------------
Average (0.4%)
Median 0.0%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 Follow-Ons (1) Filing % Change from Price as of
Company Price Filing Price 10/15/98 % Change
- --------------------------------------- ----- ------------ -------- --------
<S> <C> <C> <C> <C>
1 Liberty Property Trust $ 28.44 (2.4%) $ 22.38 (19.8%)
2 Public Storage $ 27.63 12.2% $ 25.38 (16.7%)
3 Highwoods Properties $ 36.81 (2.2%) $ 25.81 (26.0%)
4 Equity Residential Properties $ 50.94 (1.0%) $ 41.63 (16.4%)
5 CRIIMI MAE $ 15.00 0.9% $ 1.31 (91.3%)
6 Boston Properties $ 33.19 5.8% $ 28.69 (14.6%)
7 Brandywine Realty Trust $ 26.38 (9.0%) $ 16.63 (27.3%)
8 Cornerstone Properties $ 19.06 (4.2%) $ 15.06 (16.1%)
9 Capstone Capital Corporation $ 24.19 1.0% $ 20.06 (99.8%)
10 Sunstone Hotels $ 16.94 (3.3%) $ 8.50 (46.6%)
11 Chateau Properties $ 31.75 (3.3%) $ 28.31 (7.5%)
12 Arden Realty $ 28.50 (0.7%) $ 21.38 (24.1%)
13 Mack Cali Realty Corp. $ 38.50 0.0% $ 29.38 (20.0%)
14 Post Properties $ 39.25 (0.6%) $ 38.25 1.4%
15 Merry Land & Investment $ 23.38 (3.0%) $ 21.94 (1.4%)
16 CRIIMI MAE $ 15.31 0.0% $ 1.31 (91.4%)
17 Burnham Pacific Properties $ 14.06 0.5% $ 12.94 (7.1%)
18 Colonial Properties Trust $ 31.88 (5.5%) $ 25.88 (13.7%)
19 Corporate Office Properties $ 11.75 (10.6%) $ 7.50 (28.6%)
20 Arden Realty $ 27.94 1.6% $ 21.38 (24.2%)
21 SL Green Realty $ 23.56 (5.6%) $ 18.44 (16.3%)
22 Pan Pacific Retail Properties $ 21.88 (3.4%) $ 18.94 (11.3%)
23 Health & Retirement Property Trust $ 20.19 (6.5%) $ 16.25 (11.9%)
24 Home Properties of New York $ 26.81 (6.3%) $ 25.38 1.2%
25 Malan Realty Investors $ 17.63 0.7% $ 15.38 (13.8%)
26 Resource Asset Investment $ 18.75 (16.0%) $ 10.38 (32.5%)
- ------------------------------------------------------------------------------------------------
Average (2.3%) (26.0%)
Median (2.3%) (16.5%)
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 Follow-Ons (1) 1998 FFO 1998 FFO 1999 FFO 1999 FFO
Company Estimate(2) Multiple Estimate(2) Multiple
- --------------------------------------- ------------ -------- ------------ --------
<S> <C> <C> <C> <C>
1 Liberty Property Trust $ 2.53 8.8x $ 2.78 8.0x
2 Public Storage $ 2.23 11.6x $ 2.72 9.5x
3 Highwoods Properties $ 3.24 8.2x $ 3.64 7.3x
4 Equity Residential Properties $ 4.05 10.4x $ 4.47 9.4x
5 CRIIMI MAE $ 1.61 0.8x $ 1.91 0.7x
6 Boston Properties $ 2.50 12.0x $ 2.94 10.2x
7 Brandywine Realty Trust $ 2.16 8.1x $ 2.43 7.2x
8 Cornerstone Properties $ 1.45 10.6x $ 1.58 9.7x
9 Capstone Capital Corporation $ 2.16 0.0x $ 2.29 0.0x
10 Sunstone Hotels $ 1.61 5.4x $ 1.81 4.8x
11 Chateau Properties $ 2.27 12.5x $ 2.50 11.4x
12 Arden Realty $ 2.38 9.0x $ 2.66 8.1x
13 Mack Cali Realty Corp. $ 3.07 10.0x $ 3.47 8.9x
14 Post Properties $ 3.35 11.8x $ 3.67 10.8x
15 Merry Land & Investment $ 2.18 10.3x $ 2.35 9.5x
16 CRIIMI MAE $ 1.61 0.8x $ 1.91 0.7x
17 Burnham Pacific Properties $ 1.40 9.4x $ 1.56 8.4x
18 Colonial Properties Trust $ 2.96 8.8x $ 3.25 8.0x
19 Corporate Office Properties $ 0.83 9.0x $ 1.34 5.6x
20 Arden Realty $ 2.38 9.0x $ 2.66 8.1x
21 SL Green Realty $ 1.94 9.6x $ 2.24 8.3x
22 Pan Pacific Retail Properties $ 2.06 9.1x $ 2.26 8.3x
23 Health & Retirement Property Trust $ 1.75 9.5x $ 1.86 8.9x
24 Home Properties of New York $ 2.43 10.5x $ 2.72 9.4x
25 Malan Realty Investors $ 1.75 8.8x $ 1.91 8.0x
26 Resource Asset Investment $ 2.01 5.3x $ 2.90 3.7x
- ----------------------------------------------------------------------------------------
Average 8.4x 7.4x
Median 9.1x 8.2x
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Offering information derived from Securities Data Corporation.
(2) FFO estimates derived from First Call as of 8/5/98
<PAGE> 48
48
CAPITAL MARKETS DISCUSSION
CURRENT REIT INVESTMENT ENVIRONMENT
Since many public REITs are trading at a discount to NAV, they no longer have
the competitive advantage of a highly valued stock to use as an acquisition
currency
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
<S> <C>
Industrial 8.7%
Shopping Centers 6.2%
Multifamily 1.6%
Self Storage 1.0%
Office (2.0%)
Lodging (32.2%)
</TABLE>
<PAGE> 1
EXHIBIT 99.6
- --------------------------------------------------------------------------------
NATIONSBANC MONTGOMERY SECURITIES
- --------------------------------------------------------------------------------
IRVINE APARTMENT COMMUNITIES
VALUATION DISCUSSION
DECEMBER 30, 1998
NATIONSBANC MONTGOMERY SECURITIES LLC
<PAGE> 2
2
TABLE OF CONTENTS
<TABLE>
<S> <C>
I. Valuation Summary
II. Public Markets Valuation
III. Private Markets Valuation
</TABLE>
<PAGE> 3
3
VALUATION SUMMARY
<PAGE> 4
4
VALUATION SUMMARY
AFTER CAREFUL CONSIDERATION OF THE PUBLIC AND PRIVATE MARKET VALUATION FOR
IRVINE APARTMENT COMMUNITIES ("IAC"), THE IRVINE COMPANY ARRIVED AT THE OFFER
PRICE OF $32.50. SOME OF THE KEY ELEMENTS OF THIS VALUATION ARE AS FOLLOWS:
SUMMARY OF THE PUBLIC MARKETS ANALYSIS (PRIOR TO PREEMPTIVE OFFER)
- - Strong and consistent support at approximately $27 per share for IAC was
evident in the market for the 90 days prior to the offer.
- - This market value anticipated the 1999 earnings estimates, apartments under
construction, future development, and the Land Rights Agreement, all of
which were known in the market and well addressed by IAC and the Research
Analyst community.
- - This value included the high quality nature of the existing portfolio; in
fact, IAC traded with the highest FFO multiple in the apartment sector.
- - The Research Analyst community views the net asset value of IAC on average
at $26.57 per share.
SUMMARY OF THE PRIVATE MARKETS ANALYSIS
- - The Irvine Company reviewed the private markets value from both a going
concern valuation and a liquidation value.
<PAGE> 5
5
VALUATION SUMMARY
- - The going concern value assumes that IAC continues to operate generally as
before with a corporate staff and overhead and looks at value of the
existing, under construction and pipeline of properties on a cap rate and
discounted cash flow basis. Conclusions $19.30 to $24.12 per share.
- - The plan of liquidation value assumes that IAC is liquidated in an orderly
fashion over a reasonable period of time. No corporate overhead is
projected, however, buyers of the assets would recognize a Proposition 13
tax reassessment. Conclusions from this analysis show values of $21.70 to
$24.34 per share (excluding any income tax liabilities due upon sale).
- - Both of these private market analyses are consistent with the net valuations
calculated by independent Research Analysts.
THE PREEMPTIVE PROPOSAL
- - The offer made by The Irvine Company was well in excess of the public and
private market valuations for IAC.
* The offer of $32.50 per share includes a 19% premium to the stock price,
well in excess of comparable company acquisitions.
* The approximate $5.50 per share premium covers all intangible areas of
value, such as control, franchise, and market perception.
<PAGE> 6
6
VALUATION SUMMARY
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
PUBLIC MARKET METHODOLOGIES
<S> <C> <C>
Research Analyst 12-18 Mo. Price Targets(1)(2) 25.95 33.50
Public Comparables(1) 23.68 25.43
M&A Comparables(1) 20.00 30.50
Stock Trading History(1)(3) 27.00 32.44
PRIVATE REAL ESTATE METHODOLOGIES
Research Analyst NAV Estimates 24.00 28.71
Going Concern NAV Cap Rate Analysis 21.54 24.12
Going Concern Present Value Analysis 19.30 21.68
Replacement Cost Analysis 23.00 24.00
LIQUIDATION METHODOLOGIES
Liquidation Value 21.70 24.34
</TABLE>
(1) Analysis as of November 23, 1998.
(2) Target share price for 12 to 18 month period.
(3) Based on last twelve months
<PAGE> 7
7
PUBLIC MARKETS VALUATION
<PAGE> 8
8
PUBLIC MARKETS VALUATION
IAC STOCK PRICE - AS OF NOVEMBER 23, 1998
<TABLE>
<S> <C> <C>
Current stock price $ 27.13
Average stock price over the last:
30 days $ 26.81
60 days $ 26.21
90 days $ 25.95
52-week high $ 32.44
All-time high $ 33.50
Offering prices for:
IPO:
11.8 million shares 12/1/93 $ 17.50
Follow-ons:
4.5 million shares 8/3/95 $ 17.25
1.15 million shares 2/14/97 $ 27.50
</TABLE>
<PAGE> 9
9
PUBLIC MARKETS VALUATION
SHARES TRADED AT VARIOUS PRICES LTM
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
<CAPTION>
Volume Traded at Various Prices Cumulative Volume Traded
- ---------------------------------------------------------------------- ------------------------------------------------------
Price Range Shares Traded % Price Shares Traded %
- -------------------------- ------------------- ----------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$23.00-$25.00 786,000 5.9% <$25.00 786,000 5.9%
$25.00-$27.00 3,611,000 27.3% <$27.00 4,397,000 33.2%
$27.00-$29.00 1,828,500 13.8% <$29.00 6,225,500 47.0%
$29.00-$31.00 4,075,800 30.8% <$31.00 10,301,300 77.8%
$31.00-$33.00 2,944,100 22.2% <$33.00 13,245,400 100.0%
------------------- -----------------
TOTAL VOLUME TRADED 13,245,400 100.0%
</TABLE>
- -------------------------------------------------------------------
Source: Stock price and volume traded from FactSet Research Systems
<PAGE> 10
10
PUBLIC MARKETS VALUATION
HISTORICAL PRICE/FFO ANALYSIS
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
<CAPTION>
RANGE OF FFO TRADING OFFER FFO RANGE OF TRADING PRICE OFFER PRICE
DATE RANGE MULTIPLE MULTIPLE
- ------------------------ ---------------------- --------------- ------------------------ --------------
<S> <C> <C> <C> <C>
01/02/96-01/31/96 10.3x-11.0x 12.7x 18.7500-20.000 32.5
02/01/96-02/29/96 10.9x-11.2x 12.7xs 19.8750-21.000 32.5
03/01/96-03/29/96 10.5x-11.3x 12.7x 19.1250-20.5000 32.5
04/01/96-04/30/96 10.1x-10.6x 12.7x 19.0000-20.1250 32.5
05/01/96-05/31/96 10.4x-10.7x 12.7x 19.7500-20.2500 32.5
06/03/96-06/28/96 10.6x-10.9x 12.7x 20.1250-20.6250 32.5
07/01/96-07/31/96 10.3x-10.7x 12.7x 20.2500-21.000 32.5
08/01/96-08/30/96 10.8x-11.6x 12.7x 21.1250-22.7500 32.5
09/03/96-09/30/96 11.2x-11.9x 12.7x 22.0000-23.3750 32.5
10/01/96-10/31/96 11.1x-11.6x 12.7x 22.1250-23.2500 32.5
11/01/96-11/29/96 11.5x-12.5x 12.7x 23.0000-25.0000 32.5
12/02/96-12/31/96 12.0x-12.5x 12.7x 24.0000-25.0000 32.5
01/02/97-01/31/97 12.1x-13.5x 12.7x 25.2500-27.5000 32.5
02/03/97-02/28/97 13.0x-13.5x 12.7x 26.7500-27.7500 32.5
03/03/97-03/31/97 13.3x-14.3x 12.7x 27.2500-28.6250 32.5
04/01/97-04/30/97 12.6x-13.6x 12.7x 26.5000-28.6250 32.5
05/1/97-05/30/97 12.1x-13.4x 12.7x 25.6250-28.3750 32.5
06/02/97-06/30/97 13.2x-14.2x 12.7x 28.0000-30.0000 32.5
07/01/97-07/31/97 13.2x-13.7x 12.7x 29.0625-30.1875 32.5
08/01/97-08/29/97 12.8x-13.6x 12.7x 28.2500-29.8750 32.5
09/02/97-09/30/97 13.0x-15.2x 12.7x 28.4375-33.3750 32.5
10/01/97-10/31/97 12.7x-14.8x 12.7x 29.7500-33.5000 32.5
11/03/97-11/28/97 13.6x-14.0x 12.7x 30.7500-31.6875 32.5
</TABLE>
<PAGE> 11
11
<TABLE>
<CAPTION>
RANGE OF FFO TRADING OFFER FFO RANGE OF TRADING PRICE OFFER PRICE
DATE RANGE MULTIPLE MULTIPLE
- ------------------------ ---------------------- --------------- ------------------------ --------------
<S> <C> <C> <C> <C>
12/01/97-12/31/97 13.6x-14.1x 12.7x 30.8750-32.0000 32.5
01/02/98-01/30/98 13.2x-13.5x 12.7x 31.5625-32.1875 32.5
02/02/98-02/27/98 12.7x-13.4x 12.7x 30.3125-32.0000 32.5
03/02/98-03/31/98 12.7x-13.2x 12.7x 30.4375-31.1250 32.5
04/01/98-04/30/98 12.3x-12.9x 12.7x 30.5000-31.8750 32.5
05/01/98-05/29/98 11.9x-12.3x 12.7x 29.5000-30.4375 32.5
06/01/98-06/30/98 11.5x-12.1x 12.7x 28.3125-29.9375 32.5
07/01/98-07/31/98 11.2x-11.8x 12.7x 28.2500-29.7500 32.5
08/03/98-08/31/98 10.1x-11.2x 12.7x 25.5000-28.1875 32.5
09/01/98-09/30/98 9.3x-10.7x 12.7x 23.5000-27.0000 32.5
10/01/98-10/30/98 9.1x-10.4x 12.7x 23.3750-26.4375 32.5
11/02/98-11/20/98 10.2x-10/8x 12.7x 26.1875-27.7500 32.5
- ------------------------ ---------------------- --------------- ------------------------ --------------
</TABLE>
<TABLE>
<CAPTION>
MEAN MEDIAN
---- ------
<S> <C> <C>
Forward FFO Multiple since 1/1/96 12.1x 12.2x
1999E FFO per Share $2.56 $2.56
---------------------- -------------------------
IMPLIED PRICE PER SHARE $30.97 $31.20
</TABLE>
Methodology: FFO/share estimate equals four quarters after current quarter share
price. Valuation price range is calculated by multiplying 1999E FFO per share by
range of historical forward multiples.
<PAGE> 12
12
PUBLIC MARKETS VALUATION
TRADING COMPARABLES
<TABLE>
<CAPTION>
12-Month Range
Stock Price ------------------------ % Above % Below
Company Ticker 11/23/98 Low High Low High
- ---------------------------- ------ ----------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Avalon Bay Communities, Inc. AVB $ 33.38 $ 30.50 $ 40.50 9.4% (21.3%)
Apartment Investment and Mgmt AIV 34.94 30.00 41.00 16.5% (17.4%)
BRE Properties BRE 23.88 21.50 30.00 11.0% (25.7%)
Equity Residential Ppts Trust EQR 42.75 34.69 52.56 23.2% (23.0%)
Post Properties, Inc. PPS 38.69 35.81 42.00 8.0% (8.6%)
Archstone Communities ASN 20.50 17.88 25.13 14.7% (22.6%)
Charles E. Smith Residential SRW 29.13 28.31 35.75 2.9% (22.7%)
United Dominion Realty Trust UDR 10.56 10.44 14.94 1.2% (41.4%)
MEAN 10.9% (22.8%)
MEDIAN 10.2% (22.7%)
IAC - Current IAC $ 27.13 $ 23.00 $ 32.44 17.9% (19.6%)
IAC - Offer IAC $ 32.50 41.3%
</TABLE>
<TABLE>
<CAPTION>
Est. CY FFO/Share
Indicated Current ----------------------------------------- Implied FFO 1998 Payout
Company Annual Div. Yield 1997A 1998E 1999E Est. CAGR(2) Ratio
- ---------------------------- ----------- ----- --------- --------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Avalon Bay Communities, Inc. $ 2.04 6.1% $ 2.45 $ 2.88 $ 3.29 15.9% 70.8%
Apartment Investment and Mgmt 2.25 6.4% 2.78 3.42 3.95 19.2% 65.8%
BRE Properties 1.44 6.0% 1.84 2.11 2.34 12.8% 68.2%
Equity Residential Ppts Trust 2.68 6.3% 3.69 4.05 4.44 9.7% 66.2%
Post Properties, Inc. 2.60 6.7% 3.03 3.37 3.66 9.9% 77.2%
Archstone Communities 1.42 6.9% 1.61 1.80 2.03 12.3% 78.9%
Charles E. Smith Residential 2.14 7.3% 2.65 2.91 3.16 9.2% 73.5%
United Dominion Realty Trust 1.05 9.9% 1.36 1.38 1.46 3.6% 76.1%
MEAN 7.0% 11.6% 72.1%
MEDIAN 6.6% 11.1% 72.2%
IAC - Current $ 1.54 5.7% $ 2.01 $ 2.25 $ 2.56 12.9% 68.4%
IAC - Offer 4.7%
</TABLE>
<TABLE>
<CAPTION>
Price/FFO
-------------------------------- Shares Market Cap. Net LTD
Company Ticker 1997A 1998E 1999E O/S(mm)(3) ($ mm) ($ mm)
- ----------------------------- ------ ----- ----- ----- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Avalon Bay Communities, Inc. AVB 13.6x 11.6x 10.1x 69.1 $ 2,305.2 $ 1,524.5
Apartment Investment and Mgmt AIV 12.6 10.2 8.8 52.4 1,829.6 1,623.0
BRE Properties BRE 13.0 11.3 10.2 50.0 1,193.2 699.6
Equity Residential Ppts Trust EQR 11.6 10.6 9.6 133.5 5,708.2 4,830.2
Post Properties, Inc. PPS 12.8 11.5 10.6 44.4 1,717.9 773.1
Archstone Communities ASN 12.7 11.4 10.1 104.6 2,144.7 2,328.9
Charles E. Smith Residential SRW 11.0 10.0 9.2 34.0 989.3 890.7
United Dominion Realty Trust UDR 7.8 7.7 7.2 103.8 1,096.8 1,775.4
MEAN 11.9x 10.5x 9.5x
MEDIAN 12.7x 10.9x 9.9x
IAC - Current IAC 13.5x 12.1x 10.6x 45.2 $ 1,224.9 $ 987.0
IAC - Offer 16.2x 14.4x 12.7x $ 1,467.6 $ 987.0
</TABLE>
<TABLE>
<CAPTION>
Firm Debt/ Moody S&P Total Implied Value
Company Value Firm Value Rating Rating Units Per Unit
- ----------------------------- ----- ------------ ------ ------ ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Avalon Bay Communities, Inc. $ 3,829.7 39.8% Baa2 BBB 42,564 $ 89,975
Apartment Investment and Mgmt 3,452.6 47.0% NR NR 58,495 59,023
BRE Properties 1,892.9 37.0% Baa2 BBB 23,301 81,236
Equity Residential Ppts Trust 10,538.3 45.8% A3 BBB+ 192,558 54,728
Post Properties, Inc. 2,491.0 31.0% Baa1 BBB+ 32,514 76,614
Archstone Communities 4,473.6 52.1% NR NR 93,170 48,015
Charles E. Smith Residential 1,880.0 47.4% NR NR 23,400 80,342
United Dominion Realty Trust 2,872.2 61.8% Baa1 BBB+ 73,000 39,345
MEAN 45.2% 66,160
MEDIAN 46.4% 67,819
IAC - Current $ 2,211.9 44.6% Baa2 BBB- 18,758 117,915
IAC - Offer $ 2,454.6 130,855
</TABLE>
IMPLIED VALUATION BASED ON COMPARABLE TRADING MULTIPLES:
<TABLE>
<CAPTION>
Price/FFO
-----------------------------
1997A 1998E 1999E
----- ----- -----
<S> <C> <C> <C>
Mean Multiples $23.87 $23.68 $24.30
Median Multiples $25.43 $24.60 $25.25
</TABLE>
(1) FFO Estimates derived from First Call and NationsBanc Montgomery
Securities research.
(2) Est. CAGR derived from percentage change between 1997 and 1999 estimates.
(3) Includes OP Units.
<PAGE> 13
13
PUBLIC MARKETS VALUATION
SELECTED COMPARABLE M&A TRANSACTIONS
<TABLE>
<CAPTION>
Date
Announced Target Name Acquiror Name
- --------- ----------- -------------
<S> <C> <C>
11/17/98 Meridian Industrial Trust ProLogis Trust
09/10/98 American Apartment Communities United Dominion Trust
07/08/98 Merry Land & Investment Co Inc Equity Residential Pptys Trust
04/02/98 Security Capital Atlantic Inc Security Capital Pacific Trust
03/08/98 Avalon Properties Inc Bay Apartment Communities
12/22/97 ASR Investments Corp United Dominion Realty Trust Inc
12/17/97 Oasis Residential Inc Camden Property Trust
12/16/97 Ambassador Apartments Inc Apartment Investment & Mgmt Co
08/28/97 Evans Withycombe Residential Equity Residential Pptys Trust
08/25/97 Arbor Property Trust Vornado Realty Trust
08/04/97 Columbus Realty Trust Post Properties Inc
02/20/97 NHP Inc Apartment Investment & Mgmt Co
01/17/97 Wellsford Residential Property Trust Equity Residential Pptys Trust
Average
Median
Private Eye Data
Implied Valuation - Average
Implied Valuation - Median
</TABLE>
<TABLE>
<CAPTION>
Aggregate Premium Paid to Premium Paid to
Date Value Share Price Share Price Agg Value/ Equity Value/
Announced ($mil) 1 Day Before 30 Days Before LTM EBITDA LTM FFO
- --------- ------ ------------ -------------- ---------- -------
<S> <C> <C> <C> <C> <C>
11/17/98 $ 1,472.6 12.7% 9.0% 13.1x 14.5x
09/10/98 787.0 NA NA NA NA
07/08/98 2,228.7 12.0% 14.5% 15.1x 14.9x
04/02/98 1,627.0 14.9% 14.2% 15.2x 13.3x
03/08/98 1,967.7 (1.3%) (4.4%) 17.9x 19.7x
12/22/97 281.6 3.2% 2.0% 15.7x 13.9x
12/17/97 947.9 9.4% 10.1% 12.9x 10.9x
12/16/97 629.8 4.0% 4.3% 13.0x 10.6x
08/28/97 957.4 14.2% 18.9% 13.6x 12.4x
08/25/97 234.2 3.2% 4.8% 11.3x 13.6x
08/04/97 590.9 4.2% 4.5% 17.5x 15.0x
02/20/97 284.0 NM NM 8.1x NM
01/17/97 996.0 7.9% 10.1% 13.7x 14.0x
7.7% 8.0% 13.9x 13.9x
7.9% 9.0% 13.6x 13.9x
$ 27.13 $ 27.13 $ 138.4 $ 98.7
$ 29.20 $ 29.29 $ 20.79 $30.37
$ 29.27 $ 29.57 $ 19.96 $30.35
</TABLE>
(*) Source: Public Filings, SDC, and Factset.
<PAGE> 14
14
PUBLIC MARKETS VALUATION
RESEARCH ANALYSTS' VIEWS
<TABLE>
<CAPTION>
REPORT DATE FIRM ANALYST RATING TARGET PRICE
------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
11/4/98 Merrill Lynch Eric I. Hemel Long Term Not in report
Accumulate
-------------------------------------------------------------------------------------------------------
11/3/98 NationsBanc Montgomery Christopher Hartung Buy $32.00
Securities
-------------------------------------------------------------------------------------------------------
11/3/98 Jefferies & Co., Inc. James Wilson Buy $32.00
-------------------------------------------------------------------------------------------------------
10/7/98 Morgan Stanley Steve G. Bloom Outperform $34.00
Dean Witter
-------------------------------------------------------------------------------------------------------
10/5/98 Sutro & Co. Craig M. Silvers Accumulate/ $30.00
Buy
-------------------------------------------------------------------------------------------------------
9/1/98 JP Morgan Lee Schalop Buy Not in report
-------------------------------------------------------------------------------------------------------
8/28/98 Painewebber Susan Kaupie Neutral Not in report
Jonathan Litt
-------------------------------------------------------------------------------------------------------
8/19/98 CIBC Oppenheimer Roxana Zirakzadeh Buy Not in report
-------------------------------------------------------------------------------------------------------
2/1/98 EVEREN Securities Burland B. East
-------------------------------------------------------------------------------------------------------
1/1/98 Goldman Sachs David A. Feit No report
David Kostin since 1/98
-------------------------------------------------------------------------------------------------------
10/24/97 Salomon Smith Barney Micheal Sgro Outperform $33.00
David M. Sherman (2nd highest
rating)
-------------------------------------------------------------------------------------------------------
10/28/97 Donaldson, Lufkin Lawrence D. Raiman Market Not in report
& Jenrette Perform
-------------------------------------------------------------------------------------------------------
Prudential Securities Louis W. Taylor
------------------------------------------------------------
Average (1) $32.00
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
REPORT DATE TARGET DATE NAV ESTIMATE NAV METHODOLOGY
------- ---------------- ------------ --------------------------------------
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------
11/4/98 $27.18 NAV estimate is from July 24, 1997: no
NAV was stated in the most recent report
-------------------------------------------------------------------------------------------------------
11/3/98 12 month $24.50 Cap rate of 8.0% with estimated 99 NOI of
148mm based upon a 3% growth rate
-------------------------------------------------------------------------------------------------------
11/3/98 was $35-36 in $24.00 No basis for analysis was given
June 1998
-------------------------------------------------------------------------------------------------------
10/7/98 Not in Report
-------------------------------------------------------------------------------------------------------
10/5/98 12 month Not in report
-------------------------------------------------------------------------------------------------------
9/1/98 $28.71 Q2 98 annualized property cash flow;
capped at 8.0% (states in report that a 7.5%
cap equates to a $32 NAV; development is
based on 10.5% return on cost and an 8.0%
cap rate
-------------------------------------------------------------------------------------------------------
8/28/98 Not in Report
-------------------------------------------------------------------------------------------------------
8/19/98 $28.46 Cap rate used: 8.0% on Q2 98 annualized
NOI; NAV increased by $100MM for "under
market debt."
-------------------------------------------------------------------------------------------------------
2/1/98
-------------------------------------------------------------------------------------------------------
1/1/98
-------------------------------------------------------------------------------------------------------
10/24/97 12 month Not in report
(estimate over 1
year old)
-------------------------------------------------------------------------------------------------------
10/28/97
-------------------------------------------------------------------------------------------------------
----------------------------------
$26.57
----------------------------------
</TABLE>
Source: Research Bank (Investtext), and Bloomberg.
(1) Excludes reports over six months old.
<PAGE> 15
15
PRIVATE MARKETS VALUATION
<PAGE> 16
16
PRIVATE MARKETS VALUATION
SUMMARY DISCUSSIONS
NMS APPROACHED THE PRIVATE MARKETS VALUATION USING TWO METHODS:
GOING CONCERN VALUATION
- - Valued IAC as a going concern using two methodologies: (1) capitalization
rate, and (2) present value of future cash flows.
- - NMS applied a 10% discount to the Total Enterprise Value to account in
part for:
* The lack of property control in that the purchaser would only obtain
a 45% minority interest in the properties,
* The lack of corporate control over IAC due to provisions of the IPO
agreement (e.g., supermajority voting requirements, current and
continuing TIC representation on IAC board, etc.), and
* The illiquidity due to the large size of the transaction.
LIQUIDATION VALUATION
- - Valued IAC in an orderly plan of liquidation using the same cap rates as
above.
- - NMS assumed that the buyer would need to account for a Proposition 13 Real
Estate Tax Reassessment, which would impact price.
- - NMS applied a 10% discount to the Total Enterprise Value in part for:
* Brokerage and legal fees associated with the selling of the assets,
* The time value of money, and
* The cost of overhead and operations during the liquidation.
<PAGE> 17
17
PRIVATE MARKETS VALUATION
GOING CONCERN CAPITALIZATION RATE ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
VALUATION RANGE
-----------------------------------
LOW HIGH
----------- -----------
<S> <C> <C> <C>
Stabilized Portfolio Valuation: 56 assets, 16,317 units
(Methodology: Cap Rate)(1) $ 2,026,086 $ 2,158,598
Unallocated Corporate G&A (TIC Estimate) (118,613) (121,578)
----------- -----------
Stabilized Portfolio Valuation after Allocation of Corporate G&A $ 1,907,473 $ 2,037,020
Lease Up Portfolio: 3 assets, 927 units
(Methodology: Cost plus 10% Developers Profit) 75,359 75,359
Under Construction: 5 assets, 2,030 units (Methodology: Cost) 114,180 114,180
Land Rights Agreement (Methodology: Present Value) 10,651 10,651
Value of Tax - Exempt Debt(2) 58,000 58,000
----------- -----------
TOTAL ENTERPRISE VALUE PRE BULK DISCOUNT $ 2,165,663 $ 2,295,210
Bulk Discount @ 10% of Enterprise Value(3) (216,566) (229,521)
----------- -----------
TOTAL ENTERPRISE VALUE $ 1,949,097 $ 2,065,689
Total Debt
Existing Net Debt Outstanding(4) (776,527) (776,527)
Preferred Securities Outstanding (200,000) (200,000)
----------- -----------
TOTAL EQUITY VALUE $ 972,570 $ 1,089,162
Total Shares Outstanding 45,157 45,157
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE(5) $ 21.54 $ 24.12
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of this analysis, stabilized portfolio value based on cap
rate analysis.
(2) Present value of interest expense savings (discounted at 7.15%) assuming
7.15% normalized interest rate.
(3) Discount due to lack of control, illiquidity and the size of the
investment.
(4) Net Debt as of November 30, 1998 adjusted for Other Assets and Other
Liabilities.
(5) This analysis does not include prepayment penalties and premiums required
to retire existing debt and preferred stock.
<PAGE> 18
18
PRIVATE MARKETS VALUATION
GOING CONCERN PRESENT VALUE ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
VALUATION RANGE
---------------------------------
LOW HIGH
----------- -----------
<S> <C> <C>
Stabilized Portfolio Valuation: 56 assets, 16,317 units (Methodology: Present Value)(1) $ 1,795,236 $ 1,914,638
Unallocated Corporate G&A (Included Above) -- --
----------- -----------
Stabilized Portfolio Valuation after Allocation of Corporate G&A $ 1,795,236 $ 1,914,638
Lease Up Portfolio: 3 assets, 927 units (Methodology: Cost plus 10% Developers Profit) 75,359 75,359
Under Construction: 5 assets, 2,030 units (Methodology: Cost) 114,180 114,180
Land Rights Agreement (Methodology: Present Value) 10,651 10,651
Value of Tax - Exempt Debt(2) 58,000 58,000
----------- -----------
TOTAL ENTERPRISE VALUE PRE BULK DISCOUNT $ 2,053,426 $ 2,172,828
Bulk Discount @10% of Enterprise Value(3) (205,343) (217,283)
----------- -----------
TOTAL ENTERPRISE VALUE $ 1,848,083 $ 1,955,545
Total Debt
Existing Net Debt Outstanding(4) (776,527) (776,527)
Preferred Securities Outstanding (200,000) (200,000)
----------- -----------
TOTAL EQUITY VALUE $ 871,556 $ 979,018
Total Shares Outstanding 45,157 45,157
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE(5) $ 19.30 $ 21.68
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of this analysis, stabilized portfolio value based on present
value analysis.
(2) Present value of interest expense savings (discounted at 7.15%) assuming
7.15% normalized interest rate.
(3) Discount due to lack of control, illiquidity and the size of the
investment.
(4) Net Debt as of November 31, 1998 adjusted for Other Assets and Other
Liabilities.
(5) This analysis does not include prepayment penalties and premiums required
to retire existing debt and preferred stock.
<PAGE> 19
19
PRIVATE MARKETS VALUATION
LIQUIDATION ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Valuation Range
-----------------------------
Low High
----------- -----------
<S> <C> <C>
Stabilized Portfolio Valuation: 56 assets, 16,317 units (Methodology: Cap Rate) (1) $ 2,026,086 $ 2,158,598
Effect of Property Tax Reassessment (Proposition 13) (110,531) (110,531)
----------- -----------
Stabilized Portfolio Valuation after Property Tax Reassessment $ 1,915,554 $ 2,048,066
Lease Up Portfolio: 3 assets, 927 units (Methodology: Cost plus 10% Developers Profit) 75,359 75,359
Under Construction: 5 assets, 2,030 units (Methodology: Cost) 114,180 114,180
Land Rights Agreement (Methodology: Present Value) 10,651 10,651
Value of Tax - Exempt Debt (2) 58,000 58,000
----------- -----------
Total Enterprise Value - Pre Bulk Discount $ 2,173,744 $ 2,306,256
Bulk Discount @ 10% of Enterprise Value (3) (217,374) (230,626)
----------- -----------
Total Enterprise Value $ 1,956,370 $ 2,075,631
Total Debt
Existing Net Debt Outstanding (4) (776,527) (776,527)
Preferred Securities Outstanding (200,000) (200,000)
----------- -----------
Total Equity Value $ 979,843 $ 1,099,104
Total Shares Outstanding 45,157 45,157
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value Per Share (5) $ 21.70 $ 24.34
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of this analysis, stabilized portfolio value based on cap
rate analysis.
(2) Present value of interest expense savings (discounted at 7.15%) assuming
7.15% normalized interest rate.
(3) Discount for brokerage commission, legal fees, and overhead during
liquidation and time value of money.
(4) Net Debt as of November 30, 1998 adjusted for Other Assets and Other
Liabilities.
(5) This analysis does not include prepayment penalties and premiums required
to retire existing debt and preferred stock.
<PAGE> 20
20
PRIVATE MARKETS VALUATION
STABILIZED PORTFOLIO VALUATION
CAP RATE ANALYSIS
- - NMS conducted site due diligence on approximately 45 of the subject
multifamily complexes and 20 comparable multifamily complexes. In
addition, NMS conducted interviews with TIC management, appraisers, and
industry experts.
- - NMS assigned a 1, 2 or 3 rating (i.e., 1 = highest quality, lowest cap
rate, etc.) to each asset.
- - In an effort to derive 1999E property level operating cash flow, NMS
started with IAC's 1998E amounts (based on 10 month actuals and a 2 month
forecast) and consistent with the IAC Preliminary 1999 Business Plan made
the following assumptions:
<TABLE>
<CAPTION>
1999 Assumptions
-------------------------------
<S> <C>
Revenue:
Irvine Ranch 5.0% Growth
San Diego 4.0% Growth
Silicon Valley 5.0% Growth
West L.A. 5.0% Growth
Operating Expenses: 2.5% Growth on All Assets
FF&E Reserve: Normalized to 3.0% of Revenues
</TABLE>
- - Using comparable transactions, NMS assigned the following cap rates to
each asset:
<TABLE>
<CAPTION>
Asset: Cap Rate Range:
- -------------- ---------------
<S> <C>
Tier 1 Assets: 7.25%
Tier 2 Assets: 7.70%
Tier 3 Assets: 8.00%
</TABLE>
<PAGE> 21
21
PRIVATE MARKETS VALUATION
STABILIZED PORTFOLIO VALUATION
CAP RATE ANALYSIS
- - The appraisers and local brokers indicate that these cap rates should be
applied to run rate cash flow or last twelve months cash flow, and are not
forward-looking cap rates. NMS derived a value for each stabilized asset
by applying the appropriate cap rate to the 1998E and 1999E cash flows.
GOING CONCERN VALUATION
- - Going concern corporate overhead is not allocated at the property level,
and is estimated to be $9,041,000 in 1998 and projected to grow at 2.5% in
1999.
- - Corporate overhead deducted from the NAV valuation is derived by capping
the annual estimate at the blended portfolio cap rate of 7.62%.
- - Assumes a bulk discount of 10% to enterprise value due to the size of the
investment.
LIQUIDATION VALUATION
- - Liquidation Valuation deducts a property tax reassessment (Proposition 13)
- - Assumes a bulk discount of 10% to account for brokerage commissions, legal
fees, overhead during liquidation and time value of money.
<PAGE> 22
22
PRIVATE MARKETS VALUATION
STABILIZED PORTFOLIO VALUATION
CAP RATE ANALYSIS
<TABLE>
<CAPTION>
Year 1998 1998E
Prop # Property Name Location Built # Units Cash Flow
- ------ ------------- -------- ----- ------- ---------
<S> <C> <C> <C> <C>
Tier 1
1 Baypointe Newport 1997 300 4,174
2 Newport Ridge Newport 1996 512 6,657
3 One Park Place (1)(2) Irvine 1997 216 --
4 Promontory Point Newport 1974 520 7,100
5 Santa Clara Irvine 1996 378 4,106
6 Santa Rosa I Irvine 1996 368 3,703
7 Santa Rosa II (1) Irvine 1997 207 --
8 The Colony (1) Newport 1997 245 --
9 Villas at Renaissance (1)(2) San Diego 1997 923 --
----- --------
Tier 1 Total 3,669 $ 25,740
Tier 2
10 Amherst Court Irvine 1991 162 1,116
11 Berkeley Court Irvine 1986 152 1,290
12 Cedar Creek Irvine 1985 176 1,466
13 Cross Creek Irvine 1985 136 1,198
14 Dartmouth Court Irvine 1986 294 2,392
15 Newport North Newport 1986 570 5,330
16 Northwood Park Irvine 1985 168 1,353
17 Northwood Place Irvine 1986 604 5,007
18 Rancho Alisal Tustin 1988 356 2,898
19 Rancho Maderas Tustin 1989 266 2,442
20 Rancho Mariposa Tustin 1992 238 2,059
21 Rancho Monterey Tustin 1996 436 4,823
22 Rancho San Joaquin Irvine 1976 368 3,211
23 Rancho Santa Fe (1) Tustin 1997 316 --
24 Rancho Tierra Tustin 1989 252 2,497
25 San Carlo Irvine 1989 354 3,578
26 San Leon Irvine 1987 248 2,152
27 San Marco Irvine 1988 426 3,415
28 San Marino Irvine 1986 200 1,599
29 San Mateo Irvine 1990 283 2,143
30 San Paulo Irvine 1993 382 3,023
31 San Remo Irvine 1986 248 1,927
32 Santa Maria Irvine 1997 227 2,856
33 Sierra Vista Tustin 1992 306 2,736
34 Stanford Court Irvine 1985 320 2,659
35 The Parklands Irvine 1983 121 1,092
</TABLE>
<TABLE>
<CAPTION>
1999E Value Range Implied Value
Prop # Property Name Cash Flow Cap Rate 1998 CFLO 1999 CFLO Per Unit
- ------ ------------- --------- -------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1
1 Baypointe 4,255 7.25% 57,572 58,695 192 196
2 Newport Ridge 6,850 7.25% 91,819 94,488 179 185
3 One Park Place (1)(2) 784 7.25% 28,000 10,814 130 --
4 Promontory Point 7,505 7.25% 97,936 103,524 188 199
5 Santa Clara 4,215 7.25% 56,637 58,139 150 154
6 Santa Rosa I 3,788 7.25% 51,075 52,244 139 142
7 Santa Rosa II (1) 2,591 7.25% 26,631 35,741 129 173
8 The Colony (1) 4,032 7.25% 45,633 55,614 186 227
9 Villas at Renaissance (1)(2) 9,455 7.25% 127,000 130,414 138 141
-------- ---- -------- -------- -------- --------
Tier 1 Total $ 43,476 7.25%(3) $582,303 $599,673 $ 159 $ 163
Tier 2
10 Amherst Court 1,281 7.70% 14,494 16,640 89 103
11 Berkeley Court 1,343 7.70% 16,751 17,441 110 115
12 Cedar Creek 1,534 7.70% 19,041 19,925 108 113
13 Cross Creek 1,248 7.70% 15,555 16,208 114 119
14 Dartmouth Court 2,606 7.70% 31,068 33,847 106 115
15 Newport North 5,789 7.70% 69,225 75,180 121 132
16 Northwood Park 1,439 7.70% 17,577 18,691 105 111
17 Northwood Place 5,328 7.70% 65,024 69,201 108 115
18 Rancho Alisal 3,213 7.70% 37,637 41,722 106 117
19 Rancho Maderas 2,571 7.70% 31,710 33,393 119 126
20 Rancho Mariposa 2,135 7.70% 26,741 27,732 112 117
21 Rancho Monterey 4,926 7.70% 62,643 63,973 144 147
22 Rancho San Joaquin 3,363 7.70% 41,701 43,670 113 119
23 Rancho Santa Fe (1) 3,742 7.70% 38,409 48,598 122 154
24 Rancho Tierra 2,595 7.70% 32,426 33,695 129 134
25 San Carlo 3,761 7.70% 46,472 48,838 131 138
26 San Leon 2,279 7.70% 27,953 29,594 113 119
27 San Marco 3,669 7.70% 44,349 47,644 104 112
28 San Marino 1,691 7.70% 20,761 21,967 104 110
29 San Mateo 2,249 7.70% 27,833 29,206 98 103
30 San Paulo 3,198 7.70% 39,258 41,529 103 109
31 San Remo 2,041 7.70% 25,022 26,507 101 107
32 Santa Maria 2,941 7.70% 37,087 38,193 163 168
33 Sierra Vista 2,980 7.70% 35,527 38,702 116 126
34 Stanford Court 2,819 7.70% 34,539 36,611 108 114
35 The Parklands 1,317 7.70% 14,182 17,098 117 141
</TABLE>
(1) 1998 value based on total project costs.
(2) Year built reflects acquisition dates.
(3) Based on 1999 Cash Flow.
<PAGE> 23
PRIVATE MARKETS VALUATION
STABILIZED PORTFOLIO VALUATION
CAP RATE ANALYSIS
<TABLE>
<CAPTION>
Year 1998 1998E 1999E
Prop # Property Name Location Built # Units Cash Flow Cash Flow
- ------ ------------------ -------- ----- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
36 Turtle Rock Canyon Irvine 1991 217 2,479 2,593
37 Turtle Rock Vista Irvine 1976 252 2,623 2,801
38 Villa Coronado Irvine 1996 513 5,454 5,643
39 Windwood Glen Irvine 1985 196 1,713 1,795
40 Windwood Knoll Irvine 1983 248 1,959 2,122
41 Woodbridge Oaks Irvine 1983 120 1,138 1,198
42 Woodbridge Pines Irvine 1976 220 1,546 1,812
43 Woodbridge Villas Irvine 1982 258 1,603 2,103
44 Woodbridge Willows Irvine 1984 200 1,632 1,717
----- ---------- ----------
Tier 2 Total 9,833 $ 84,408 $ 93,842
Tier 3
45 Bayport Newport 1971 104 984 1,026
46 Bayview Newport 1971 64 677 744
47 Baywood Newport 1973 388 3,604 4,044
48 Columbia Court Irvine 1984 58 479 524
49 Cornell Court Irvine 1984 109 1,056 1,101
50 Deerfield Irvine 1975 288 1,944 2,301
51 Harvard Court Irvine 1986 112 961 1,000
52 Mariner Square Newport 1969 114 972 1,089
53 Orchard Park Irvine 1982 60 536 567
54 Park West Irvine 1970 880 7,113 7,537
55 Parkwood Irvine 1974 296 2,255 2,448
56 The Hamptons (1) Silicon Valley 1998 342 -- 4,835
----- ---------- ----------
Tier 3 Total 2,815 $20,579 $ 27,216
Total Portfolio 16,317 $130,728 $164,534
</TABLE>
<TABLE>
<CAPTION>
Value Range Implied Value
Prop # Property Name Cap Rate 1998 CFLO 1999 CFLO Per Unit
- ------ ------------------ -------- --------- --------- --------------------------
<S> <C> <C> <C> <C> <C>
36 Turtle Rock Canyon 7.70% 32,193 33,676 148 155
37 Turtle Rock Vista 7.70% 34,063 36,379 135 144
38 Villa Coronado 7.70% 70,833 73,288 138 143
39 Windwood Glen 7.70% 22,241 23,317 113 119
40 Windwood Knoll 7.70% 25,435 27,553 103 111
41 Woodbridge Oaks 7.70% 14,778 15,562 123 130
42 Woodbridge Pines 7.70% 20,080 23,538 91 107
43 Woodbridge Villas 7.70% 20,819 27,307 81 106
44 Woodbridge Willows 7.70% 21,188 22,301 106 112
---- ---------- ---------- ---------- ----------
Tier 2 Total 7.70%(3) $1,134,617 $1,218,728 $115 $124
Tier 3
45 Bayport 8.00% 12,296 12,830 118 123
46 Bayview 8.00% 8,457 9,304 132 145
47 Baywood 8.00% 45,049 50,545 116 130
48 Columbia Court 8.00% 5,988 6,552 103 113
49 Cornell Court 8.00% 13,204 13,757 121 126
50 Deerfield 8.00% 24,297 28,758 84 100
51 Harvard Court 8.00% 12,010 12,503 107 112
52 Mariner Square 8.00% 12,152 13,608 107 119
53 Orchard Park 8.00% 6,696 7,085 112 118
54 Park West 8.00% 88,907 94,214 101 107
55 Parkwood 8.00% 28,186 30,597 95 103
56 The Hamptons (1) 8.00% 51,923 60,443 152 177
---- ---------- ---------- ---------- ----------
Tier 3 Total 8.00%(3) $ 309,166 $ 340,197 $110 $121
Total Portfolio 7.62%(3) $2,026,086 $2,158,598 124 132
</TABLE>
(1) 1998 value based on total project costs.
(2) Year built reflects acquisition dates.
(3) Based on 1999 Cash Flow.
<PAGE> 24
24
PRIVATE MARKETS VALUATION
STABILIZED PORTFOLIO VALUATION
PRESENT VALUE ANALYSIS
- - NMS projected cash flows for the stabilized portfolio through 2008 and
calculated a present value.
- - NMS used the same assumptions for the future as found in the IAC 1999
Business Plan (dated October 1998)
<TABLE>
<CAPTION>
1999 2000 2001-2008
<S> <C> <C> <C>
Revenue: Irvine Ranch 5.0% growth 4.0% growth 3.0% growth
San Diego 4.0% 4.0% 3.0%
Silicon Valley 5.0% 4.0% 3.0%
West L.A. 5.0% 4.0% 3.0%
Operating Expenses and Corporate G&A: 2.5% 2.8% 2.8%
</TABLE>
<TABLE>
<S> <C>
Other Assumptions:
FF&E Reserve 3.0% of revenues
Exit Cap Rate 1.0% higher than "going-in" cap rates
Discount Rates 11.0%, 12.0%, 13.0%
</TABLE>
<PAGE> 25
25
PRIVATE MARKETS VALUATION
STABILIZED PORTFOLIO VALUATION
PRESENT VALUE ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Period 1 2 3 4 5
Year 1999 2000 2001 2002 2003
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Cashflows (1) $ 164,534 $ 171,907 $ 177,310 $ 182,882 $ 188,630
Terminal Value (2)
----------------------------------------------------------------------
Total Cashflows $ 164,534 $ 171,907 $ 177,310 $ 182,882 $ 188,630
Corporate Overhead (2.8% Growth/Year) (9,041) (9,294) (9,554) (9,822) (10,097)
Terminal Effect of Corporate Overhead
----------------------------------------------------------------------
Cashflow After Effect of Reassessment 155,493 162,613 167,755 173,060 178,533
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Period 6 7 8 9 10
Year 2004 2005 2006 2007 2008
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Cashflows (1) $ 194,559 $ 200,675 $ 206,984 $ 213,492 $ 220,206
Terminal Value (2) 2,615,341
--------------------------------------------------------------------
Total Cashflows $ 194,559 $ 200,675 $ 206,984 $ 213,492 $ 2,835,546
Corporate Overhead (2.8% Growth/Year) (10,380) (10,670) (10,969) (11,276) (11,592)
Terminal Effect of Corporate Overhead (138,242)
--------------------------------------------------------------------
Cashflow After Effect of Reassessment 184,180 190,005 196,015 202,216 2,685,712
</TABLE>
<TABLE>
<S> <C>
Total Asset Value
PV @11.00% $1,914,638
PV @12.00% $1,795,236
PV @13.00% $1,685,715
</TABLE>
(1) After management fee and FF&E reserve.
(2) Terminal values calculated using cap rates on each asset that are 100
basis points greater than the "going-in" cap rates.
<PAGE> 26
26
PRIVATE MARKETS VALUATION
STABILIZED PORTFOLIO VALUATION
REPLACEMENT COST ANALYSIS
($ IN THOUSANDS)
- - Based on IAC's experience with recently developed assets and assets under
construction on the Irvine Ranch, NMS applied the range of costs to the
total units in the stabilized portfolio.
<TABLE>
<CAPTION>
Property First Stabilized Total Total
Name Location Units Occupancy Occupancy Cost ($000) Cost/Unit
- ----------------------- ----------- ------ --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sonoma (Oak Creek I) Irvine, CA 198 Aug-98 Mar-99 $ 25,361 $128,086
Britanny I (Oak Creek II) Irvine, CA 393 Jan-99 May-00 44,607 113,504
Baypointe Newport, CA 300 1997 1998 32,928 109,760
Santa Rosa II Irvine, CA 207 1997 1998 26,631 128,652
Santa Maria Irvine, CA 227 1997 1998 22,613 99,617
Rancho Santa Fe Tustin, CA 316 1997 1998 38,409 121,547
----- -------- --------
1,641 $190,549 $116,118
</TABLE>
<TABLE>
<CAPTION>
Cost/Unit Aggregate Value ($000)
------------------------- --------------------------
Complexes Units Average Median Low High
--------- ------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stabilized IAC Portfolio 57 16,317 $ 116,118 $ 117,526 $ 1,894,691 $ 1,917,666
</TABLE>
(1) This analyis considers constructing new assets with greater amenities
(compared to the average age of the stabilized assets of 12 years with
less amenities)
<PAGE> 27
27
PRIVATE MARKETS VALUATION
LEASE-UP PORTFOLIO VALUATION
($ IN THOUSANDS)
- - NMS valued the lease-up portfolio at costs incurred through November plus
10.0% profit increment.
<TABLE>
<CAPTION>
Property First Stabilized Total Total
Name Location Units Occupancy Occupancy Cost Cost/Unit
- --------------------- ------------- ----- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sonoma Irvine, CA 198 Aug-98 Mar-99 $ 25,361 $128,086
Arcadia at Stonecrest San Diego, CA 336 Jan-99 Oct-99 42,340 126,012
Britanny I Irvine, CA 393 Jan-99 May-00 44,607 113,504
--- -------- --------
927 $112,308 $121,152
Less: Unincurred Cost To Complete 43,800
--------
Cost Incurred To Date $ 68,508
Plus: 10.0% Developer's Profit 6,851
--------
Aggregate Value $ 75,359
========
</TABLE>
<PAGE> 28
28
PRIVATE MARKETS VALUATION
VALUATION OF ASSETS UNDER CONSTRUCTION
($ IN THOUSANDS)
- - Since these assets were recently purchased in a competitive market
process, NMS valued these assets at costs incurred to date.
<TABLE>
<CAPTION>
Property First Stabilized Total Total
Name Location Units Occupancy Occupancy Cost Cost/Unit
- ------------------- ------------------ ----- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Champagne Towers (1) Santa Monica, CA 119 Sep-99 Jan-00 73,900 621,008
Olson Site Silicon Valley, CA 298 Mar-00 Dec-00 40,947 137,406
Park Place Land (1) Irvine, CA 1,226 May-00 Sep-02 204,272 166,617
Bair Island Silicon Valley, CA 155 Jun-99 Nov-99 35,756 230,684
Avventura San Diego, CA 232 Aug-99 Jan-00 44,170 190,388
----- ---------- ------------
2,030 $ 399,045 $ 196,574
Less: Unincurred Cost
To Complete 284,865
----------
Aggregate Value $ 114,180
==========
</TABLE>
(1) Champagne Towers and Park Place represent 81% of the total and were both
recently purchased in a competitive market process.
<PAGE> 29
29
PRIVATE MARKETS VALUATION
LAND RIGHTS VALUATION METHODOLOGY
OVERVIEW:
- - IAC has the exclusive right to acquire apartment land on the Irvine Ranch
at 95% of fair market value. However, TIC is not obligated to offer land
for development to IAC.
- - The value of this right to IAC can be calculated by discounting the 5%
benefit over the total existing inventory of multi-family land intended to
be designated by TIC on the Irvine Ranch.
ASSUMPTIONS:
- - Projected five year apartment development pipeline and therefore projected
five year land sales are taken from the IAC 1999 Business Plan (dated
October 1998).
- - Assumes $177MM in land sales over a five year period.
* Assumes the following units per year-- Year 1: 1,476; Year 2: 559;
Year 3: 1,075; Year 4: 1,558; Year 5: 1,220.
* Average land cost per unit assumed to be $47,000 based on recent
Irvine Ranch land appraisals.
* Annual value of benefit to IAC; $3.5MM, $1.3MM, $2.5MM, $3.7MM,
$3.0MM.
- - A discount rate of 12% was used to calculate present value.
<PAGE> 30
30
PRIVATE MARKETS VALUATION
LAND RIGHTS VALUATION
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Units Acquired (1) 1,476 559 1,075 1,558 1,220
Average Land Value Per Unit (2) 47 49 51 53 55
Appraised Value $69,372 $27,324 $54,648 $82,369 $67,080
Land Cost to IAC (3) 65,903 25,958 51,915 78,251 63,726
------- ------- ------- ------- -------
Annual Savings to IAC $ 3,469 $ 1,366 $ 2,732 $ 4,118 $ 3,354
</TABLE>
<TABLE>
<CAPTION>
Discount Per
Rate Value Share
-------- ----- -----
<S> <C> <C> <C>
12.0% $10,651 $0.24
14.0% $10,119 $0.22
16.0% $ 9,627 $0.21
</TABLE>
(1) Per IAC Business Plan.
(2) Based on recent Irvine Ranch land appraisals, including Bonita Canyon (2
and 3) and Park Place.
(3) Assumes 5% discount to Appraised Value.
<PAGE> 31
31
PRIVATE MARKETS VALUATION
ANALYSIS OF OTHER ASSETS AND LIABILITIES
($ IN THOUSANDS)
<TABLE>
<CAPTION>
November 30,
1998 (1)
------------
<S> <C>
Other Assets
Cash and Cash Equivalents $ 19,049
Other Assets 14,396
---------
Total Other Assets $ 33,445
Other Liabilities
Accounts Payable and Accrued Liabilities $ 44,985
Security Deposits 9,446
Dividends and Distributions Payable 3,403
---------
Total Other Liabilities $ 57,834
Total Debt
Tax-Exempt Mortgage Bond Financings $ 18,000
Conventional Mortgage Financings 129,775
Mortgage Notes Payable to The Irvine Company 49,592
Tax-Exempt Assessment District Debt 21,306
Unsecured Tax-Exempt Bond Financings 334,190
Unsecured Term Loan 100,000
Unsecured Notes Payable 99,275
---------
Total Debt $ 752,138
Other Assets and Liabilities (24,389)
---------
Net Debt $ 776,527
=========
Preferred A (Toprs) 150,000
Preferred B (Greene Street Exchange Fund) 50,000
---------
Total Debt and Preferred $ 976,527
=========
</TABLE>
(1) Source: November 30, 1998 Balance Sheet
<PAGE> 32
32
PRIVATE MARKETS VALUATION
PROPERTY TAX REASSESSMENT ANALYSIS
($ IN THOUSANDS)
- - Assuming a sale of individual IAC properties, a property tax reassessment
(per Proposition 13) would have an $8.4 million negative impact to cash
flow.
<TABLE>
<S> <C>
Equity value @ $32.50/share 1,469
Add: Liabilities 984
Less: Other Assets (20)
------
Net Asset Value 2,433
Less: Current Assessed Value 1,614
Property Tax Increased Assessment 818
Ad Valorem Tax Rate 1.03%
Property Tax Reassessed Increase 8.4
Capped @ 7.62% 110.6
Per Share Impact 2.45
</TABLE>
<PAGE> 33
33
PRIVATE MARKETS VALUATION
COMPARABLE SALES TRANSACTIONS
<TABLE>
<CAPTION>
Number Units/ NRA
Name/ Location City Sale Date Age Land Ac Average Size
- -------------- ---- --------- --- ------------ ------------
<S> <C> <C> <C> <C> <C>
One Park Place Irvine Oct-98 N/A 216 N/A
N/A N/A
The Lakes at South Coast Costa Mesa Aug-98 13 770 716,080
14.13 930
The Resorts Aliso Viejo Jul-98 7 & 8 1,609 2,133,560
96.55 1,326
-------------------------------------------------------
Average 10 865 1,424,820
Median 10 770 1,424,820
-------------------------------------------------------
Adjusted cap rate for IAC assets based upon current market conditions: 7.25%
</TABLE>
<TABLE>
<CAPTION>
Sale
Name/ Location Price Price/Unit Price/SF Cap Rate
- -------------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C>
One Park Place $ 28,000,000 $129,630 N/A 8.3%(1)
The Lakes at South Coast $114,000,000 $148,052 $159 6.6%(1)
The Resorts $198,600,479 $123,431 $107 5.8%
--------------------------------------------------------------
$113,533,493 $133,704 $133 6.9%
$114,000,000 $129,630 $133 6.6%
--------------------------------------------------------------
Adjusted cap rate for IAC assets based upon current market conditions: 7.25%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Villas Alliento Rancho Santa Oct-98 10 225 164,484
Margarita
11.30 731
Laguna Brisas Apartments Laguna Niguel Feb-98 12 175 174,843
999
Sea Terrace Apartments Dana Point May-97 26 208 183,820
11.88 884
Villa Serena Apartments Rancho Santa Apr-97 9 301 229,593
Margarita
14.29 763
Toscana Apartments Irvine Feb-97 5 563 501,337
11.64 890
-----------------------------------------------
Average 13 294 250,815
Median 10.5 225 183,820
-----------------------------------------------
Adjusted cap rate for IAC assets based upon current market conditions: 7.70%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Villas Alliento $14,450,000 $64,222 $88 9.0%
Laguna Brisas Apartments $16,750,000 $95,714 $96 7.4%
Sea Terrace Apartments $19,450,000 $93,510 $106 7.2%(2)
Villa Serena Apartments $17,710,000 $58,837 $77 7.2%
Toscana Apartments $51,250,000 $91,030 $102 8.3%
-------------------------------------------------
$23,922,000 $80,663 $94 7.8%
$17,710,000 $91,030 $96 7.4%
-------------------------------------------------
Adjusted cap rate for IAC assets based upon current market conditions: 7.70%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Oasis Martinque Costa Mesa Oct-97 10 713 642,249
13.88 901
Sea Palms Village Costa Mesa Jun-97 8 146 130,053
4.77 893
Crown Terrace Apartments Laguna Niguel Mar-97 13 176 175,296
19.43 996
Woodbridge Meadows Irvine Feb-97 18 375 299,318
17.80 798
Mill Creek Costa Mesa Jul-96 25 258 208,333
807
-----------------------------------------------
Average 15 334 291,050
Median 13 258 208,333
-----------------------------------------------
Adjusted cap rate for IAC assets based upon current market conditions: 8.00%
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Oasis Martinque $67,500,000 $94,670 $105 7.6%
Sea Palms Village $11,550,000 $79,347 $89 9.8%
Crown Terrace Apartments $12,305,000 $69,915 $70 8.0%
Woodbridge Meadows $29,158,000 $77,755 $97 7.8%
Mill Creek $17,500,000 $67,829 $84 8.0%
-------------------------------------------------
$27,602,600 $77,903 $89 8.2%
$17,500,000 $77,755 $89 8.0%
-------------------------------------------------
Adjusted cap rate for IAC assets based upon current market conditions: 8.00%
</TABLE>
(1) Includes benefit of existing tax-exempt financing.
(2) Cap rate increased for favorable financing and revenues adjusted to
reflect actual occupancy.
<PAGE> 1
Exhibit 99.7
NATIONSBANC MONTGOMERY SECURITIES
Scott M. Kelley
Managing Director
Morgan Stanley Dean Witter
1585 Broadway
New York, NY 10036
January 12, 1999
Dear Scott:
TIC Acquisition LLC ("TIC") has made a $32.50 offer that provides shareholders
of Irvine Apartment Communities ("IAC") with a significant premium to the
inherent value of their investment. It is TIC's strong opinion, in light of
traditional public and private valuation methodologies, that this offer is not
only very fair but also aggressive and that there is no other source who will
pay more than $32.50 per share. Based on public statements and investor
activity, the vast majority of Wall Street research analysts, the financial and
business press and most importantly, IAC shareholders, all agree with the basic
fairness of the TIC offer.
We fully appreciate the dedicated effort the Special Committee of IAC's Board of
Directors and its advisor, Morgan Stanley, have expended in making TIC defend
its valuation. However, we believe that the material we submitted on January 5,
1999, in response to your letter of December 30, 1998, together with this letter
more than adequately support our valuation and confirms the offer's fairness.
As requested in your letter, dated January 6, 1999, we are forwarding to you our
support and positions regarding our valuation methodology and assumptions. It is
our expectation that the sections outlined below, together with the enclosed
information, will help you better understand the large body of analysis
supporting the validity of TIC's $32.50 offer.
Public Valuation Approach
Based upon traditional public valuation methodologies, the value for IAC on a
per share basis is between $20.00 and $32.00. Key points from our public
valuation analysis are as follows:
- TIC offered a 19% premium to the closing IAC stock price as
of November 30, 1998. This one-day premium compares
favorably to the 8% median in recent REIT M&A transactions.
See Exhibit I-A.
- The $32.50 offer price is equivalent to 12.7x 1999
projected funds from operations (FFO) based upon First Call
consensus. Comparable large capitalization apartment REITs
trade between 7.2x and 10.6x projected 1999 FFO. Although
IAC already had the highest FFO multiple in the apartment
sector
<PAGE> 2
Morgan Stanley
Page 2
before the offer, TIC's offer represents a 34% premium to
the average 1999 FFO multiple of 9.5x for comparable
apartment REITs. See Exhibit I-B.
- IAC traded at the highest FFO multiple partially due to the
support from an open market purchase program conducted by
The Irvine Company prior to its offer. In 1998, The Irvine
Company purchased 2.0 million shares of IAC, or roughly 17%
of all shares traded, at an average purchase price of
approximately $29.00. The share price prior to TIC's offer
was also supported by TIC with respect to the "10% Return
Guarantee" relating to land sales which has now expired.
- The average published net asset value (NAV) for IAC, as
estimated by Wall Street research analysts prior to TIC's
proposal, is $26.57 and the range is from $24.00 to $28.71.
TIC's offer is a 22% premium to the average NAV estimate.
See Exhibit I-D.
- The average 12 to 18 month target IAC share price, as
projected by Wall Street research analysts within the two
months prior to TIC's offer, was $32.00. TIC's offer is a
2% premium to this average target share price. Since the
average target share price is projected 12 to 18 months in
the future, TIC's offer is substantially greater than a 2%
premium after considering the time value of money. See
Exhibit I-D.
- The offer price represents a 21% premium to the 30-day
average share price prior to the offer, a 25% premium to
the 90-day average share price prior to the offer and is
greater than the 52-week high of $32.44. See Exhibit I-C.
- General consensus by Wall Street research analysts since
TIC's proposal was announced has been that the $32.50 offer
price is fair (See Exhibit I-E). In unrelated and
unsolicited conversations with shareholders and research
analysts, the common view is that the $32.50 offer price is
fair. For example, Ken Rosen, noted California economist
and founding partner of Lend Lease Rosen Real Estate
Securities, which owns approximately 4% of IAC's
outstanding stock, has indicated his support and intent to
vote in favor of the transaction.
- Trading activity also reflects that TIC's offer is fair,
with over 20% of shares owned by non-IAC affiliates sold
since TIC's offer on December 1, 1998. All of the shares
traded have been at less than the $32.50 offer price.
Rent Growth
Rent growth projections, in our analysis, are consistent with the views of IAC
management and action taken by the Board of Directors of IAC. IAC management
projections are reflected in their 1999 Revised Business Plan, dated October
1998 (Exhibit II-A), and in a presentation to the IAC Board of Directors on
October 30, 1998 (Exhibit II-B). The Business Plan, which indicated
<PAGE> 3
Morgan Stanley
Page 3
a 5% rent growth projection for 1999, was approved at the October 30, 1998,
Board of Directors meeting for release to Wall Street research analysts and
financial institutions.
The IAC Board of Directors and management expect IAC to meet or exceed the
market rent growth rate in 1999. Based upon the information contained in Exhibit
II, projected market rent growth is 5%. Additional points concerning market rent
growth are summarized below.
- The Exhibit II Summary provides 21 references of projected
1999 rent growth rates ranging from 3.0% to 6.2%. IAC
management and Wall Street research analysts provided these
projections. The average of all sources of 1999 Orange
County rent growth projections is 4.8%. No source projects
rent growth above 6.2%.
- Management has provided a range of 1999 rent growth
projections for IAC from 3% to 6%. This is consistent with
real estate appraisers, real estate market research and
Wall Street research analysts. Therefore, TIC and
NationsBanc Montgomery Securities LLC ("NMS") believe that
the appropriate growth rates to be used in the IAC
valuation should range from 3% to 6%. TIC and NMS used the
IAC Revised Business Plan scenario of 5%. In establishing
5% rent growth for 1999, we considered the totality of the
IAC Revised Business Plan (the low case, base case and
upside case) and the market information noted herein.
- Economic growth, as reflected by both Gross Domestic
Product (GDP) and job growth projections, is expected to
slow as a result of the Asian economic crisis and other
factors (Exhibit II-Z). This will likely affect housing
demand and inhibit IAC's ability to increase rents.
In our discussions concerning rent growth, there has been reference to a 12%
Chairman's Goal. With the view of putting this reference in context, we have
discussed your observations with TIC and reviewed written material supplied to
the Board as the preliminary 1999 Business Plan was being discussed. Based upon
this review, it is clear that the 12% reference was to rental growth achieved by
a select group of competitive apartment communities in South Orange County by
annualizing nine months of 1998.
The Chairman indicated to management and discussed with members of the Board
that IAC's performance was behind both their own projections and the 12% market
growth in 1998 by a considerable margin. After much discussion, the following
points were agreed upon unanimously by the Board and were supported by IAC
management. All agreed that looking forward in 1999, it would be IAC's objective
to meet or exceed the rental growth results of the competitive market in Orange
County, whatever that growth might be. For purposes of specificity, several
levels of numerical goals were unanimously approved relating to the 1999
Business Plan. The Board first confirmed a revised base planning goal of 5%, 4%
and 3% rental growth for the years 1999 to 2001, respectively. This would be the
official plan and the plan discussed publicly.
<PAGE> 4
Morgan Stanley
Page 4
Additionally, it was agreed that an "Upside Goal" for management to target in
1999 would be a 7% rental growth rate, not 12%. This was the action taken and
was the agreement of all involved. We hope this clarification is helpful to you.
Bulk Discount
Regarding your point suggesting that it is not "appropriate, based on legal
precedent regarding transactions of this type, to apply a liquidity or control
discount," we note the following.
We would emphasize at the outset that we are in no way suggesting a "control" or
any other type of discount to the 83% non-TIC ownership of IAC. Instead, we are
proposing a premium at $32.50 per share. The relevance of discounts to this
analysis is in evaluating the price that you can reasonably expect to obtain
from a third party which, based upon our analysis, is significantly less than
TIC's proposal.
However, it has been TIC's and NMS' experience that in transactions of this size
and type, buyers would typically apply a size-oriented discount to the total
value of the assets being acquired. Market research, interviews with market
participants and legal precedent suggests that there is considerable support for
size-oriented discounts.
- A private buyer must consider liquidity when contemplating
the purchase of such a sizeable portfolio of assets. It is
NMS' view that very few buyers exist that would be willing
or have the resources available to make such an investment.
Therefore, any buyer would consider this risk in making a
determination in value.
- The geographic concentration of the portfolio holds future
risk for a potential buyer. Such risks include but are not
limited to:
- legislative (e.g., rent control)
- natural disasters (e.g., earthquakes)
- economic downturn (e.g., Orange County
bankruptcy, Asian economic crisis)
- If a third party buyer ultimately elected to sell this
portfolio, the buyer would discount current value for
several reasons. First, an orderly liquidation would take
considerable time to complete. This suggests a cost
associated with the time value of money. Second, any such
disposition would require significant transaction costs
further reducing the current valuation from the perspective
of the buyer. Finally, selling this number and value of
properties would place downward pressure on property prices
resulting in an additional discount to the value of the
assets.
<PAGE> 5
Morgan Stanley
Page 5
- When a buyer ultimately sells these properties, there will
be a substantial increase in property taxes due to
Proposition 13 tax reassessment. A buyer must recognize
this diminution of value in its terminal sales price.
Let us be clear why this subject has been broached in our analysis. We believe
it is important that the Special Committee assess whether there is a method
whereby more sales proceeds on a net basis can be returned to shareholders in
cash above TIC's offer of $32.50. In assessing such possibilities, another buyer
would think in terms of a bulk discount, Proposition 13 reassessment and the
like. Our analysis shows conclusively that such considerations would result in
net cash available to shareholders substantially below $32.50.
Notwithstanding the above discussion, we would note that if Morgan Stanley's
most significant assumptions affecting valuation of no bulk discount and 45%
savings of corporate, general and administrative expenses are applied to our net
asset value analysis, the price per share is still substantially below TIC's
offer price of $32.50 (Exhibit III-A).
Land Rights Agreement
NMS' analysis has indicated a value for the Land Rights Agreement that is
affected by the supply of available land for multi-family development on the
Irvine Ranch. Additionally, any land identified for future multi-family
development in the 1999 IAC Revised Business Plan is not a contractual
obligation of TIC. The Land Rights Agreement is clear that TIC has no obligation
to make any land available to IAC for future apartment development. Not only is
this contractually true, but it has been the subject of consistent public
disclosure. The land which is owned by TIC can be sold or used, at TIC's sole
discretion, for any purpose other than apartments, including residential
condominiums.
- NMS used the 1999 IAC Revised Business Plan for determining
the number of units to be developed under the Land Rights
Agreement, which is 5,763 units over five years (Exhibit
IV-A). Given historical construction activity, we consider
IAC's estimate (and ours) for multi-family development over
the next five years to be aggressive. Also, TIC has
informed IAC on several occasions that the projects listed
in its Business Plan will likely not all be made available
for both entitlement and competitive reasons. In this
regard, TIC must maintain a balance in its master plan,
which includes other medium to high density uses besides
apartments (e.g., for sale condominiums). Not all of this
entitled land will be made available for apartment use.
- During our conference call on January 5, 1999, you
indicated that an appropriate methodology is to assume a
total of 15,000 units to be developed over a forecast
period of 10 years to arrive at a value for the Land Rights
Agreement. Morgan Stanley's estimate of 15,000 units is
unattainable for several reasons:
<PAGE> 6
Morgan Stanley
Page 6
- During the past 30 years, when land was in much
greater abundance and entitlement was more
readily attainable, approximately 16,000
apartment units were developed on the Irvine
Ranch. Building nearly the same number of units
in one-third the amount of time with greater
zoning restrictions and less land is highly
questionable.
- Since it's IPO, IAC has developed approximately
800 units per year on the Irvine Ranch, which is
just over half of Morgan Stanley's estimate going
forward. It should also be noted that for several
years just prior to the IPO, no new apartment
development occurred on the Irvine Ranch.
- Morgan Stanley has suggested that the value to IAC should
be greater than the 5% discount to fair market value
stipulated in the Land Rights Agreement, although no basis
for the suggestion has been offered. The Land Rights
Agreement clearly states that IAC is to receive a 5.0%
discount to fair market value as determined by independent
MAI appraisers. It should also be noted that the "10%
Minimum Return" guarantee, and thus the land costs
subsidized by TIC in the past, have now expired under the
agreement. Therefore, NMS has used a 5.0% discount in
arriving at the cash flow numbers to be valued over the
forecast period.
- Discount rates for land should be significantly higher than
discount rates for completed apartment units due to the
speculative nature of the investment, the uncertainty of
entitlement, lack of cash flow and the long term investment
horizon. Appropriate discount rates would likely range from
a low of 12% to a high exceeding 20% for the forecast
period.
- Morgan Stanley indicated land prices of $50,000 to $75,000
per unit in its valuation analysis of the Land Rights
Agreement. $54,000 is the current price per unit for the
best Irvine Ranch land designated for normal apartment
densities, such as Bonita Canyon Village 2 in Newport
Beach. The projected land to be supplied under the Land
Rights Agreement will primarily be located in the central,
non-coastal areas of Orange County where land prices are
somewhat lower. However, to the benefit of your client, NMS
has used an average land price of $50,000 per unit for the
forecast period.
- In the event that multi-family development on the Irvine
Ranch decreases or ceases, Morgan Stanley suggests that
more value should be attributed to the existing portfolio
as a result of higher rents. NMS disagrees for the
following reasons.
- TIC has the right to use any land on the Irvine
Ranch for the development and sale of medium to
high density residential property, including
condominiums, an affordable alternative to
apartments. This use would
<PAGE> 7
Morgan Stanley
Page 7
directly compete with IAC, just as the move up
for sale market alternative has inhibited IAC
growth over the last year.
- Additionally, competitors may build apartment
units adjacent to Irvine Ranch property, which
would offset the potential for rent growth from
decreased on-ranch development. The completion of
the Highway 73 corridor has already opened up
more land to compete with the Irvine Ranch. IAC
management has highlighted the impact of toll
roads on the market, a relevant point in
assessing the value of the Land Rights Agreement.
Corporate, General & Administrative Costs
With regard to your point concerning corporate, general and administrative
costs, TIC needs and expects to retain the existing management structure in
order to manage effectively this portfolio of assets.
- The current offer communicates TIC's intention to continue
to pursue apartment development on and off the Irvine Ranch
over the long term. A significant management structure,
similar to that presently employed by IAC, will be
required.
- In arriving at a projected amount of corporate, general and
administrative expense of $9.2 million for 1999, NMS has
already deducted over $1,000,000 from the existing Business
Plan to reflect cost savings. (Reference Exhibit V-A)
- TIC intends to retain public securities such as the public
bonds and preferred stock. Thus, expenses related to public
reporting requirements and obtaining credit ratings will
continue to be incurred.
As earlier noted, if Morgan Stanley's most significant assumptions affecting
valuation of no bulk discount and 45% savings of corporate, general and
administrative expenses are applied to our net asset value analysis, the price
per share is still substantially below TIC's offer price of $32.50 (Exhibit
III-A).
Cap Rates
NMS has conducted an extensive review of 45 IAC properties and 20 comparable
apartment projects within the Southern Orange County area. We maintain that a
blended cash flow cap rate of 7.62% is fair when considering all factors
affecting valuation.
- Comparable sales and Wall Street research analysts have
cash flow cap rates averaging 7.8% and 7.8%, respectively
(Exhibit VI Summary).
<PAGE> 8
Morgan Stanley
Page 8
- The Hon Apartment Portfolio in Laguna Niguel was recently
sold to Simpson, a Denver-based private development
company, for $80 million at a forward cash flow cap rate of
7.55% (Exhibit VI-G). IAC valued the 794-unit Hon Portfolio
at a 7.6% forward 12-month cash flow cap rate (Exhibit
VI-B). The majority of this portfolio compares favorably
with IAC's assets, which we valued at a 7.25% cash flow cap
rate (Exhibit VI-C).
- Other recent IAC apartment bids and successful acquisitions
were valued at cap rates ranging from 7.3% to 7.8% and are
noted below (Exhibit VI-E). These bids and successful
acquisitions were subject to a consensus among IAC
management, TIC representatives and The Board itself as to
what was both economic and prudent. Additionally, IAC's
1999 Revised Business Plan specifies target breakeven cap
rates of 7.75% (Exhibit VI-D).
- Villas of Renaissance (IAC cap rate: 7.3%; NMS
valuation: 7.25%)
- The Lakes at South Coast (IAC: 7.3%; NMS
valuation: 7.25%)
- The Resorts (IAC: 7.6%; NMS valuation: 7.25%)
- Champagne Towers (IAC: 7.8%)
- Due to turmoil in the public equity and public debt
markets, the number of real estate buyers is decreasing.
Thus, over the last 90 days cap rates are increasing as
evidenced in the most recent comparable sales, Park Place
and the Hon portfolio.
- Two recent comparable sales should have their cap rates
adjusted based upon several factors:
- The Lakes had favorable financing and a
high-density urban location.
- Rents at the Resorts were 30% less than average
IAC rents prior to the sale, and subsequently the
Resorts experienced tremendous rent growth with
the opening of the 73 corridor.
- The Resorts sale price reflects a strong
tax-motivated buyer.
- While there are several top tier properties within the IAC
portfolio, there are ten properties built in the late
1960's and mid 1970's which would be valued at cap rates
significantly above our blended cash flow cap rate of
7.62%.
- Based upon our blended cash flow cap rate of 7.62%, TIC's
offer price equates to approximately $140,000 per
stabilized apartment unit. This is more than double the
average apartment unit sold in Orange County and
$36,000/unit more (or 34% more) than the comparable
apartment sales in the Southern Orange County area
<PAGE> 9
Morgan Stanley
Page 9
(Exhibit VI-A). In addition, the per unit purchase price is
significantly higher than all Orange County apartment
sales, including The Resorts and The Lakes as noted above.
Discount Rates for Analysis of Present Value of Future Property Cash Flow
NMS believes that it has applied the appropriate asset discount rates in
arriving at its valuation using present value analysis. As stated in the current
IAC Revised Business Plan, and in numerous presentations and conversations with
IAC senior management, the estimated cost of equity for IAC shareholders is
15.0%. Assuming 15.0% as the cost of equity (and using the same capital
structure and cost of debt assumed by Morgan Stanley) the WACC for IAC is 11.8%.
Institutional investors such as pension funds, who would be the likely private
buyers for a portfolio of this magnitude, would look at valuation using
unleveraged discount rates in the 11% to 13% range.
In addition, it is our view that the capital asset pricing model ("CAPM") is
inherently flawed when applied to the real estate industry.
- The CAPM methodology uses correlation between the stock
price movement of IAC and the S&P 500 over time. However,
the S&P 500 does not even allow REIT's into the index due
to the special circumstances that surround their structure.
- The R-Squared correlation of IAC and the S&P 500 between
1/31/94 and 12/31/98, for example, was 9%. This is not a
significant number.
- It is inappropriate to apply a public market weighted
average cost of capital ("WACC") when using that WACC for a
private market valuation.
In summary and based upon the foregoing, we reiterate that TIC's offer at $32.50
per share is fair for the shareholders of IAC.
It is our view that the all cash TIC proposal is by far the best offer the
Special Committee can find on behalf of shareholders. It is also our view that
this offer is in the best interest of shareholders. Shareholders want this
transaction consummated as soon as possible. Dozens of contacts have been made
by shareholders to representatives at TIC. Unanimously, the primary concern is
how soon the transaction will be completed. The market trading activity
indicates acceptance of the offer as does institutional feedback. Therefore, we
think it is incumbent upon our respective clients to finalize an agreement.
We have made every effort to explain our valuation philosophy to you and to
respond in detail to your questions and concerns. We have disclosed material to
you upon which our valuation was based, and we have been specific as to the
numerous methodologies we have employed. We are not aware of the existence of
any information or analysis which indicates value conclusions different from
those presented to you. We believe our analysis is fair, thorough and complete
<PAGE> 10
Morgan Stanley
Page 10
and clearly supports the fact that $32.50 is a premium for shareholders of IAC.
We, therefore, look forward to your final response.
Sincerely,
Ron D. Sturzenegger
Senior Managing Director
Exhibits Attached
cc: Thomas Dobson
<PAGE> 11
EXHIBIT I
<PAGE> 12
I-A
PUBLIC MARKETS VALUATION
SELECTED COMPARABLE M&A TRANSACTIONS
<TABLE>
<CAPTION>
PREMIUM PREMIUM
PAID TO PAID TO
SHARE SHARE AGG
AGGREGATE PRICE PRICE VALUE/ EQUITY
DATE VALUE 1 DAY 30 DAYS LTM VALUES/
ANNOUNCED TARGET NAME ACQUIROR NAME ($MIL) BEFORE BEFORE EBITDA LTM PPO
- --------- ------------------------------- -------------------------------- --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
11/17/98 Meridian Industrial Trust ProLogis Trust $1,472.6 12.7% 9.0% 13.1x 14.5x
09/10/98 American Apartment Communities United Dominion Trust 787.0 NA NA NA NA
07/08/98 Merry Land & Investment Co Inc Equity Residential Pptys Trust 2,228.7 12.0% 14.5% 15.1x 14.9x
04/02/98 Security Capital Atlantic Inc Security Capital Pacific Trust 1,627.0 14.9% 14.2% 15.2x 13.3x
03/08/98 Avalon Properties Inc Bay Apartment Communities 1,967.7 (1.3)% (4.4)% 17.9x 19.7x
12/22/97 ASR Investments Corp United Dominion Realty Trust Inc 281.6 3.2% 2.0% 15.7x 13.9x
12/17/97 Oasis Residential Inc Camden Property Trust 947.9 9.4% 10.1% 12.9x 10.9x
12/16/97 Ambassador Apartments Inc Apartment Investment & Mgmt Co 629.8 4.0% 4.3% 13.0x 10.6x
08/28/97 Evans Withycombe Residential Equity Residential Pptys Trust 957.4 14.2% 18.9% 13.6x 12.4x
08/25/97 Arbor Property Trust Vornado Realty Trust 234.2 3.2% 4.8% 11.3x 13.6x
08/04/97 Columbus Realty Trust Post Properties Inc 590.9 4.2% 4.5% 17.5x 15.0x
02/20/97 NHP Inc Apartment Investment & Mgmt Co 284.0 NM NM 8.1x NM
01/17/97 Wellsford Residential
Property Trust Equity Residential Pptys Trust 996.0 7.9% 10.1% 13.7x 14.0x
---------------------------------------------------------------------------
Average 7.7% 8.0% 13.9x 13.9x
Median 7.9% 9.0% 13.6x 13.9x
===========================================================================
Private Eye Data $27.13 $27.13 $138.4 $ 98.7
Implied Valuation - Average $29.20 $29.29 $20.79 $30.37
Implied Valuation - Median $29.27 $29.57 $19.96 $30.35
</TABLE>
- ----------
* Source: Public Filings, SDC, and Factset.
<PAGE> 13
I-B
PUBLIC MARKETS VALUATION
TRADING COMPARABLES
<TABLE>
<CAPTION>
12-MONTH RANGE
STOCK PRICE ------------------ %ABOVE %BELOW INDICATED CURRENT
COMPANY TICKER 11/23/98 LOW HIGH LOW HIGH ANNUAL DIV. YIELD
- ----------------------------- ------ ----------- ------ ------ ------ ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Avalon Bay Communities, Inc. AVB $33.38 $30.50 $40.50 9.4% (21.3)% $ 2.04 6.1%
Apartment Investment and Mgmt AIV 34.94 30.00 41.00 16.5% (17.4)% 2.25 6.4%
BRE Properties BRE 23.88 21.50 30.00 11.0% (25.7)% 1.44 6.0%
Equity Residential Ppts Trust EQR 42.75 34.69 52.56 23.2% (23.0)% 2.68 6.3%
Post Properties, Inc. PPS 38.69 35.81 42.00 8.0% (8.6)% 2.60 6.7%
Archstone Communities ASN 20.50 17.88 25.13 14.7% (22.6)% 1.42 6.9%
Charles E. Smith Residential SRW 29.13 28.31 35.75 2.9% (22.7)% 2.14 7.3%
United Dominion Realty Trust UDR 10.56 10.44 14.94 1.2% (41.4)% 1.05 9.9%
- -------------------------------------------------------------------------------------------------------------------------
MEAN 10.9% (22.8)% 7.0%
MEDIAN 10.2% (22.7)% 6.6%
=========================================================================================================================
IAC - Current IAC $27.13 $23.00 $32.44 17.9% (19.6)% $ 1.54 5.7%
IAC - Offer IAC $32.50 41.3% 4.7%
=========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
EST. CY FFO/SHARE 1998
---------------------------- IMPLIED FFO PAYOUT
COMPANY 1997A 1998E 1999E EST. CAGR(2) RATIO
- ----------------------------- ----- ----- ----- ------------ ------
<S> <C> <C> <C> <C> <C>
Avalon Bay Communities, Inc. $2.45 $2.88 $3.29 15.9% 70.8%
Apartment Investment and Mgmt 2.78 3.42 3.95 19.2% 65.8%
BRE Properties 1.84 2.11 2.34 12.8% 68.2%
Equity Residential Ppts Trust 3.69 4.05 4.44 9.7% 66.2%
Post Properties, Inc. 3.03 3.37 3.66 9.9% 77.2%
Archstone Communities 1.61 1.80 2.03 12.3% 78.9%
Charles E. Smith Residential 2.65 2.91 3.16 9.2% 73.5%
United Dominion Realty Trust 1.36 1.38 1.46 3.6% 76.1%
- --------------------------------------------------------------------------------------
MEAN 11.6% 72.1%
MEDIAN 11.1% 72.2%
- --------------------------------------------------------------------------------------
IAC - Current $2.01 $2.25 $2.56 12.9% 68.4%
IAC - Offer
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
PRICE/FFO
---------------------- SHARES MARKET CAP. NET LTD FIRM
COMPANY TICKER 1997A 1998E 1999E O/S(MM)(3) ($MM) ($MM) VALUE
------- ------ ----- ----- ------ ---------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Avalon Bay Communities, Inc. AVB 13.6x 11.6x 10.1x 69.1 $2,305.2 $1,524.5 $ 3,829.7
Apartment Investment and Mgmt AIV 12.6 10.2 8.8 52.4 1,829.6 1,623.0 3,452.6
BRE Properties BRE 13.0 11.3 10.2 50.0 1,193.2 699.6 1,892.9
Equity Residential Ppts Trust EQR 11.6 10.6 9.6 133.5 5,708.2 4,830.2 10,538.3
Post Properties, Inc. PPS 12.8 11.5 10.6 44.4 1,717.9 773.1 2,491.0
Archstone Communities ASN 12.7 11.4 10.1 104.6 2,144.7 2,328.9 4,473.6
Charles E. Smith Residential SRW 11.0 10.0 9.2 34.0 989.3 890.7 1,880.0
United Dominion Realty Trust UDR 7.8 7.7 7.2 103.8 1,096.8 1,775.4 2,872.2
- ------------------------------------------------------------------------------------------------------------------
MEAN 11.9x 10.5x 9.5x
MEDIAN 12.7x 10.9x 9.9x
===================================================================================================================
IAC - Current IAC 13.5x 12.1x 10.6x 45.2 $1,224.9 $ 987.0 $ 2,211.9
IAC - Offer 16.2x 14.4x 12.7x $1,467.6 $ 987.0 $ 2,454.6
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
DEBT/ MOODY S&P TOTAL IMPLIED VALUE
COMPANY FIRM VALUE RATING RATING UNITS PER UNIT
------- ---------- ------ ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Avalon Bay Communities, Inc. 39.8% Baa2 BBB 42,564 $89,975
Apartment Investment and Mgmt 47.0% NR NR 58,495 59,023
BRE Properties 37.0% Baa2 BBB 23,301 81,236
Equity Residential Ppts Trust 45.8% A3 BBB+ 192,558 54,728
Post Properties, Inc. 31.0% Baa1 BBB+ 32,514 76,614
Archstone Communities 52.1% NR NR 93,170 48,015
Charles E. Smith Residential 47.4% NR NR 23,400 80,342
United Dominion Realty Trust 61.8% Baa1 BBB+ 73,000 39,345
- -----------------------------------------------------------------------------------------
MEAN 45.2% 66,160
MEDIAN 46.4% 67,819
==========================================================================================
IAC - Current 44.6% Baa2 BBB- 18,768 117,915
IAC - Offer 130,855
==========================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================
IMPLIED VALUE BASED ON COMPARABLE TRADING MULTIPLES:
Price/FFO
----------------------------------------
1997A 1998E 1999E
------ ------ ------
<S> <C> <C> <C>
Mean Multiples $23.87 $23.68 $24.30
Median Multiples $25.43 $24.60 $25.25
================================================================================
</TABLE>
(1) FFO Estimates derived from First Call and NationsBanc Montgomery Securities
research.
(2) Est. CAGR derived from percentage change between 1997 and 1999 estimates.
(3) Includes OP Units.
<PAGE> 14
I-C
PUBLIC MARKETS VALUATION
IAC STOCK PRICE - AS OF NOVEMBER 23, 1998
<TABLE>
<S> <C> <C>
Current stock price $27.13
Average stock price over the last:
30 days $26.81
60 days $26.21
90 days $25.95
52-week high $32.44
All-time high $33.50
Offering prices for:
IPO:
11.8 million shares 12/1/93 $17.50
Follow-ons:
4.5 million shares 8/3/95 $17.25
1.15 million shares 2/14/97 $27.50
</TABLE>
<PAGE> 15
I-D
Private Eye
Research Analyst's Views (Before the Offer Date as of December 1, 1998)
<TABLE>
<CAPTION>
Report
Date Firm Analyst Rating Target Price Target Date NAV Estimate NAV Methodology
- ------- ---- ------- ------ ------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
11/4/98 Merrill Lynch Eric I. Hemel Long Term Not in report $27.18 NAV estimate is
Accumulate from July 24, 1997
report; no NAV was
stated in the most
recent report
11/3/98 NationsBanc Christopher Buy $32.00 12 month $24.50 Cap rate of 8.0%
Montgomery Hartung with estimated
Securities 99 NOI of $148mm
based upon a 3%
growth rate
11/3/98 Jefferies & Co., James F. Wilson Buy $32.00 was $35-36 $24.00 No basis for analysis
Inc. in June 1998 was given
10/7/98 Morgan Stanley Steven G. Bloom Outperform $34.00 Not in report
Dean Whitter
10/5/98 Sutro & Co. Craig M. Silvers Accumulate/ $30.00 12 month Not in report
Buy
9/1/98 JP Morgan Lee Schalop Buy Not in report $28.71 Q2 98 annualized
property cash flow;
capped at 8.0% (states
in report that a 7.5%
cap equates to a
$32 NAV); development
is based on 10.5%
return on cost and
an 8.0% cap rate
8/28/98 Painewebber Susan Kaupie Neutral Not in report Not in report
Jonathan Litt
8/19/98 CIBC Oppenheimer Roxana Zirakzadeh Buy Not in report $28.46 Cap rate used: 8.0%
on Q2 98 annualized
NOI; NAV increased
by $100MM for "under-
market debt"
2/1/98 EVEREN Securities Burland B. East
1/1/98 Goldman Sachs David A. Feit No report
David Kostin since 1/98
10/28/97 Donaldson, Lawrence D. Market Not in report Not in report
Lufkin & Raiman Performance
Jenrette
10/24/97 Salomon Smith Michael Sgro Outperform $33.00 12 month Not in report
Barney David M. Sherman (2nd highest (estimate
rating) over 1
year old)
Prudential Louis W. Taylor
Securities
AVERAGE(1) $32.00 $26.57
</TABLE>
- ----------
Source: Research Bank, Bloomberg, Investex
<PAGE> 16
EXHIBIT I-E
ANALYST RESEARCH REPORTS
POST TRANSACTION (AFTER DECEMBER 1, 1998)
<PAGE> 17
<TABLE>
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
[LOGO]
MORGAN STANLEY DEAN WITTER
Equity Research
Briefing Note
- -------------------------------------------------------------------------------------------------------------------
##.SBLO,.US, I/REA
Irvine Apt Comm(IAC); We Downgrade Rating to Neutral; IAC Jumps 15% On Buyout
Offer.
Steven G. Bloom, CFA (212) 761-6284 Date: December 3, 1998
Industry: Real Estate Type: Earnings Forecast Change
- -------------------------------------------------------------------------------------------------------------------
Rating: Neutral Price: 32
52-wk Range: 32 - 23 Price Target: NA
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FY Ends --FFO-- --AFFO--
Dec Curr Prior P/E Curr Prior P/E
<S> <C> <C> <C> <C> <C> <C>
97A $2.01 15.7x $1.87 16.9x
98E $2.29 13.8x $2.10 15.0x
99E $2.55 12.4x $2.37 13.3x
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Qtrly --1Q-- --2Q-- --3Q-- --4Q--
FFO Curr Prior Curr Prior Curr Prior Curr Prior
<S> <C> <C> <C> <C> <C> <C> <C>
97A $0.48 $0.50 $0.51 $0.52
98E $0.52A $0.56A $0.60A $0.61
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
5 Yr. FFO Growth: 10% Debt to Cap.: 35%
Dividend: $1.54 Yield: 4.9% Total Stock Mkt Cap.: $2,123MM
Shares & Units Outst.: 45.1MM
FFO = Funds From Operations
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
KEY POINTS
- -We have downgraded our rating on Irvine to Neutral from Outperform.
- -Irvine Apartment Communities' stock price rose 15% to $31-9/16 from $27-3/8 on
Wednesday December 2, 1998 after the announcement that the privately held Irvine
Company offered $32.50 for the 16.6 million shares outstanding that it does not
own.
DETAILS
*WE ARE DOWNGRADING OUR RATING TO NEUTRAL FROM OUTPERFORM. The board of Irvine
Apartment Communities (IAC) received a letter from TIC Acquisition LLC, a
subsidiary of The Irvine Company (TIC) proposing to acquire the outstanding
shares in the REIT for $32.50 per share. The stock closed yesterday at $31-9/16,
which is within 3.0% of the offered price. The shares traded up 15% from the
prior day's close of $27-3/8. TIC management indicated they would like to close
<PAGE> 18
during the first quarter of 1999. We think a competing bid is unlikely. The
price would have to move beyond $36 to warrant an Outperform rating.
Consequently we have downgraded our rating to Neutral.
*THE IRVINE COMPANY OWNS A MAJORITY OF THE OPERATING PARTNERSHIP. The Irvine
Company is a privately held real estate firm that owns the Irvine Ranch in
Orange County, California. The ranch is the largest master-planned community in
the country. TIC owns 55% of the partnership interests of Irvine Apartment
Communities, L.P. Irvine Apartment Communities, the REIT, owns the remaining
45%. However, TIC also owns 17% of the stock in the REIT, giving TIC an overall
63% economic interest in the operating partnership.
*A SUBSIDIARY OF THE IRVINE COMPANY MADE THE $32.50 PER SHARE PROPOSAL. The
proposal was made on December 1, 1998 to the Board of Directors of IAC with a
response requested by December 31, 1998. Now, we believe the board has to have
its committee evaluate the proposal and provide an answer.
*WE DO NOT EXPECT COMPETING OFFERS. One of the attractions of investment in IAC
was its exclusive right to develop multifamily communities on the Irvine Ranch.
Management of TIC indicated to us that such a right might not transfer to
another acquirer of the REIT, which could make such an investment much less
appealing. Also, the $32.50 per share price offered represents 12.7x our 1999
FFO estimate of $2.55 per share. Such a price would likely be dilutive to most
other REITS.
We had been carrying a $31 per share net asset value (NAV) for IAC. Thus, a
price of $32.50 appears reasonable. We derived our net asset value using an 8.0%
cap rate on fourth quarter expected net operating income. We calculate that it
would take a 7.75% cap rate to reach the $32.50 per share level. In addition, a
price-to-FFO multiple of 12.7x our 1999 estimate, or 13.7x using our AFFO
(adjusted FFO, or FFO less recurring capital expenditures) estimate is well
beyond the upper end of the range we are carrying for our multifamily universe.
TIC management indicated that the offered price represented a 21% premium to the
stock's closing price prior to the offer.
*TIMING IS STILL UNCERTAIN. Management of TIC indicates it would likely pursue a
merger with the REIT or a tender offer. A merger could take much longer owing to
requirements for the mailing of a proxy, setting a shareholder meeting, and
conducting the vote. A tender offer, however, could proceed much more quickly if
the requisite number of stockholders tender their shares.
*TIC HAS FINANCING LINED UP. TIC delivered a no financing contingency offer to
IAC's board. The funds are immediately available to close on the transaction.
TIC has a $350 million acquisition term loan from the Bank of America and other
cash and credit facilities available to fund the $540 million needed to purchase
16.6 million shares at $32.50. If successful, TIC would leave the operating
partnership intact and, therefore, would not have to retire its outstanding debt
or preferred stock.
*TIC OUTLINED SEVERAL REASONS FOR THE TRANSACTION. Among them, it believes that
it can access capital on a more cost efficient basis as a private company.
Raising equity has become a more expensive proposition for REITS, including IAC,
at current prices. Also, the dividend distribution requirement limits the amount
of capital left to reinvest in the business and fund development.
For a more detailed discussion on how this may affect other multifamily REITS,
see our First Call note dated December 2, 1998.
<PAGE> 19
The information and opinions in this report were prepared by Morgan Stanley &
Co. Incorporated ("Morgan Stanley Dean Witter"). Morgan Stanley Dean Witter does
not undertake to advise you of changes in its opinion or information. Morgan
Stanley Dean Witter and others associated with it may make markets or specialize
in, have positions in and effect transactions in securities of companies
mentioned and may also perform or seek to perform investment banking services
for those companies.
Within the last three years, Morgan Stanley & Co. Incorporated, Dean Witter
Reynolds Inc. and/or their affiliates merged or co-managed a public offering of
the securities of Irvine Apartment Communities.
The investments discussed or recommended in this report may be unsuitable for
investors depending on their specific investment objectives and financial
position. Where an investment is denominated in a currency other than the
investor's currency, changes in rates of exchange may have an adverse effect on
the value, price of, or income derived from the investment. Past performance is
not necessarily a guide to future performance. Income from investments may
fluctuate. The price or value of the investments to which this report relates,
either directly or indirectly, may fall or rise against the interest of
investors.
To our readers in Australia: This publication has been issued by Morgan Stanley
& Co. Inc. but is being distributed in Australia by Morgan Stanley Australia
Limited, a licensed dealer, which accepts responsibility for its contents. Any
person receiving this report and wishing to effect transactions in any security
discussed in it may wish to do so with an authorized representative of Morgan
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To our readers in the United Kingdom: This publication has been issued by Morgan
Stanley & Co. Incorporated and approved by Morgan Stanley & Co. International
Ltd., regulated by the Securities and Futures Authority Limited. Morgan Stanley
& Co. International Limited and/or its affiliates may be providing or may have
provided significant advice or investment services, including investment banking
services, for any company mentioned in this report. The investments discussed or
recommended in this report may be unsuitable for investors depending on their
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representative about the investments concerned.
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Additional information on recommended securities is available on request.
(C) Copyright 1998 Morgan Stanley Dean Witter & Co.
This memorandum is based on information available to the public. No
representation is made that it is accurate or complete. This memorandum is not
an offer to buy or sell or a solicitation of an offer to buy or sell the
securities mentioned. Please refer to the notes at the end of this report.
<PAGE> 20
A.G. Edwards & Sons, Inc.
Equity Research - Real Estate Investment Trusts
December 3, 1998
Analyst: Arthur L. Havener (314) 955-3436
Buyout proposal of $32 1/2 per share represents fair value in our opinion.
- --------------------------------------------------------------------------------
Irvine Apartment Communities - (IAC - 31 11/16)
Buy
- --------------------------------------------------------------------------------
TIC Acquisition LLC, a unit of The Irvine Co., late Tuesday announced a proposal
to the Board of Directors of Irvine Apartment Communities (IAC) to acquire all
the outstanding common shares of IAC in a business combination for $540 million
or $32.50 per share in cash. This comprises the 16.6 million outstanding shares
that the Irvine Company did not already own and represents an approximate 18.7%
premium to Tuesday's closing price of $27 3/8.
- --------------------------------------------------------------------------------
Market Cap: $1,429 million Total Return Objective: NA
52-week price range: 32 7/16 - 23 Estd. 1997-1999 FFO CAGR: 12.3%
Dividend: $1.54 Yield: 4.9%
1998E Estimate Return of Capital: 50%
Funds From Operations (diluted) estimates:
<TABLE>
<CAPTION>
Qtrl (Mar) Qtr2 (June) Qtr3 (Sept.) Qtr4 (Dec) Year
<S> <C> <C> <C> <C> <C>
1997 $0.48 $0.50 $0.51 $0.52 $2.00
1998E $0.52A $0.56A $0.60A $0.61 $2.29
1999E $2.52
</TABLE>
- --------------------------------------------------------------------------------
We are changing our investment rating on the shares of IAC to reduce from buy
based on yesterday's announcement. As you are probably aware, IAC management
received a proposal from TIC Acquisition LLC, a wholly owned subsidiary of The
Irvine Company, to acquire all outstanding common shares of IAC for $32.50, a
21% premium to Tuesday's closing share price. Our rating change reflects the
share price reaction to this announcement (up over $4 per share), what we
perceive to be a relatively fair value of The Irvine Company's proposed offer,
the unlikelihood of competing offers, and the uncertainty related to the timing
of consummating the acquisition of shares. With minimal near term upside
potential, we would not hesitate to take a gain or stop to look a gift horse in
the mouth. In addition, the recent dividend record date has passed and thus,
current shareholders are entitled to the upcoming dividend and management not in
a position to make a decision regarding future dividends for the next couple of
months. Based on our NAV analysis, we viewed the $32.50 per share offer as
representing close to a 7% capitalization rate. Though we are cognizant that our
analysis placed no premium on IAC's
<PAGE> 21
development pipeline or accounted for IAC's recent tax exempt bond financing
which would enhance future cash flow.
Current management of IAC takes a lot of pride in being the only REIT to
complete this very complex transaction. Thus, the refinancing of tax exempt debt
may prove to be something that IAC management will seek to maximize its value
and be appropriately rewarded (through a higher share price offer). At this
time, we are reluctant to put a "sell" on the shares based on the outside chance
that IAC management may be able to negotiate a slightly higher share price. IAC
management intends to hire a financial advisor over the next several days to
explore its options and indicated that this was their first offer. We got the
impression that management, at the minimum, expects to counter-offer the
proposal. Given The Irvine Company's majority economic interest in IAC, we
believe a competing bid from a third party is unlikely. The relatively low
initial return on investment may not warrant consideration from a third party to
be a minority partner to The Irvine Company. However, IAC has a very competent
corporate finance division (many with Wall Street experience and savvy). In
particular, Jim Mead, IAC's current CFO recently announced his retirement from
IAC to pursue other opportunities. Mr. Mead has been an integral part of IAC's
success. Remember, management of IAC is distinctly different from The Irvine
Company and may have the "normal" concerns related to finding new employment,
many of whom came to Newport Beach for the lifestyle as well as to work for a
Donald Bren run company. The Irvine Company's local dominance limits the number
of comparable employment opportunities. We find it somewhat surprising that IAC
management, mainly the corporate finance division, was "blind-sided" by this
announcement. The first knowledge they had of this proposal was received through
the traditional media outlets. One member of IAC management indicated that his
conversation with Mr. Bren (roughly two weeks ago) indicated Mr. Bren's
enthusiasm and pleasure in operating a public company. We asked management of
IAC at the recent NAREIT conference why they didn't look to go back to being a
private company, given their modest valuation, in our opinion (we had changed
our investment rating to Buy). Their response was text book - "We wouldn't have
gone public in the first place if the benefits didn't outweigh the negatives."
We believe these factors may contribute to an extra incentive for management to
maximize shareholder value. We would also mention that Mr. Mead had sold shares
of IAC as recently as two weeks ago (in part to help finance his future
endeavor). We believe Mr. Mead would like to walk away from IAC knowing he
maximized shareholder value.
As we stated earlier, The Irvine Company has only made a proposal at this time.
This proposal should not be construed as a leveraged buyout or a tender offer.
IAC's board must approve the proposal before any future steps are taken.
Therefore, the timing of when or if the transaction takes place is unknown. We
would not expect management of IAC to make any decision until their financial
advisor has pursued all options (at least 30 days). Following a public response
from IAC management, there is no guideline at this time that can reasonably
dictate when the acquisition would be completed.
In addition, if the two companies can not agree on a fair price for IAC, we
would expect IAC shares to fall back significantly. In addition, it may take a
long time to generate investor confidence in IAC given what would most likely be
perceived as "bad blood" between IAC and The Irvine Company. Both companies
depend on each other to succeed.
<PAGE> 22
The Irvine Company currently owns, in aggregate, 62% economic interest in IAC.
The Irvine Company has been acquiring common shares sporadically throughout the
last few months and reached the maximum ownership interest in IAC as dictated
under the REIT regulations (i.e., the five-or-fewer rule). We estimate The
Irvine Company's recent purchases included roughly 500,000 shares ranging from
$23 to $29 per share. Hindsight may indicate that not only did The Irvine
Company believe the shares offered an attractive valuation given the positive
events and fundamentals, but they had another motive.
It is important to note that though IAC was spun-off from The Irvine Company in
December 1993 at $20 per share, both entities operate under distinctly different
management teams. The development agreement between the two companies is very
unique and primarily the result of The Irvine Company's significant ownership
interest in the REIT. The only common factor in both management teams is Donald
Bren. However, the REIT's management team was formed to operate in the public
arena and thus, recruited talent from the appropriate sources.
Where does IAC go from here? We believe IAC may remain in a wait and see mode
for many months. Certain issues related to liquidity (or lack of) with REITs may
indicate that this may offer an opportunity for investors to lighten their
positions. For investors looking to stay in the apartment sector of REITs, we
recommend AvalonBay Communities (AVB), Equity Residential (EQR), or Pacific Gulf
Properties (PAG) for those looking to stay in California.
<PAGE> 23
A.G. EDWARDS
INVESTMENT OPINION
- --------------------------------------------------------------------------------
IRVINE APARTMENT COMMUNITIES 12/03/98 01:46PM
RATING CHANGED TO: REDUCE/AGGRESSIVE
FROM: BUY/AGGRESSIVE
IAC/NYSE/$31 11/16 12 MONTH TOTAL RETURN OBJECTIVE: 17%
*********EMPLOYEES MAY NOT ACT UPON THIS RECOMMENDATION FOR RESTRICTED ACCOUNTS
(QN AGEBUY) FOR A PERIOD OF 3-TRADING HOURS FROM THE TIME THIS RECOMMENDATION IS
ISSUED. (12/03/98 AND TIME 07:30AM CST)*****************************************
********************************RESEARCH ALERT*********************************
***SEE RECENT DEVELOPMENT SECTION FOR INFORMATION ON BUYOUT PROPOSAL.
<TABLE>
FISCAL YEAR (DEC) 1994 1995 1996 1997 CAGR 1998E 1999E
<S> <C> <C> <C> <C> <C> <C> <C>
FUNDS FROM OP. (FFO, MIL.) $ 33.3 $ 48.2 $ 68.3 $ 87.6 38.0% $103.1 $114.7
FFO PER SHARE $ 1.10 $ 1.45 $ 1.75 $ 2.00 22.1% $ 2.29 $ 2.52
FAD (MIL.) $ 27.7 $ 43.6 $ 66.3 $ 85.2 45.4% $ 98.8 $110.0
FAD PER SHARE $ 0.92 $ 1.31 $ 1.70 $ 1.95 28.5% $ 2.19 $ 2.41
DILUTED SHS OUTST* (MIL.) 30.3 33.2 38.9 43.6 -- 45.0 45.5
DIVIDENDS PAID PER SHARE $ 1.34 $ 1.39 $ 1.44 $ 1.48 3.4% $ 1.52 $ 1.60
PRICE RANGE 21-16 19-15 25-19 31-24 -- -- --
P/FFO RANGE 19-15 12-9 14-11 13.0X -- 11.9X 10.3X
CURRENT DIVIDEND: $1.54 YIELD: 5.6% 1998E RETURN OF CAPITAL: 50%
</TABLE>
NOTES: FFO=FUNDS FROM OPERATIONS (NET INCOME + REAL ESTATE DEPRECIATION AND
AMORTIZATION LESS ANY CAPITAL GAINS AND LOSSES) FAD=FUNDS AVAILABLE FOR
DISTRIBUTION (FFO MINUS CAPITALIZED EXPENSES)
*ASSUMES CONVERSION OF ALL COMMON SHARE EQUIVALENTS.
INITIAL PUBLIC OFFERING IN DECEMBER 1993.
EST. 1997-1999 FFO CAGR: 12.3% SECTOR: FINANCIAL
EST. 1997-1999 DIV CAGR: 3.9% CAGR: COMPOUND ANNUAL GROWTH RATE
AGE LISTS: MASTER, DSIP EBITDA/INTEREST EXPENSE: 5.3X
ANALYST: ART HAVENER (3436)
NEXT QUARTERLY EARNINGS REPORT EXPECTED: (2/15/99)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 QTR1 $0.41 QTR2 $0.43 QTR3 $0.44 QTR4 $0.47 YR $1.75
1997 0.48 0.50 0.51 0.52 2.00
1998E 0.52 0.56A 0.60A 0.61E 2.29
1999E 2.52
</TABLE>
COMPANY DESCRIPTION: IAC IS A SELF-ADMINISTERED EQUITY REIT THAT WAS FORMED TO
CONTINUE AND EXPAND THE OWNERSHIP AND DEVELOPMENT OF MULTIFAMILY PROPERTIES OF
THE IRVINE COMPANY (A PRIVATE ENTITY). IAC CURRENTLY OWNS 62 PROPERTIES (55
LOCATED ON THE IRVINE RANCH) THAT CONTAIN 18,758 UNITS.
INVESTMENT PREMISES (RECOMMENDATION ORIGINATED ON 12/03/98): WE ARE CHANGING OUR
INVESTMENT RATING ON THE SHARES OF IAC TO A REDUCE FROM A BUY BASED ON
YESTERDAY'S ANNOUNCEMENT. AS YOU ARE PROBABLY AWARE, IAC MANAGEMENT RECEIVED A
PROPOSAL FROM TIC ACQUISITION LLC, A WHOLLY OWNED SUBSIDIARY OF THE IRVINE
COMPANY, TO ACQUIRE ALL
<PAGE> 24
OUTSTANDING COMMON SHARES OF IAC FOR $32.50, A 21% PREMIUM TO TUESDAY'S CLOSING
SHARE PRICE. OUR RATING CHANGE REFLECTS THE SHARE PRICE REACTION TO THIS
ANNOUNCEMENT (UP OVER $4 PER SHARE), WHAT WE PERCEIVE TO BE A RELATIVELY FAIR
VALUE OF THE IRVINE COMPANY'S PROPOSED OFFER, THE UNLIKELIHOOD OF COMPETING
OFFERS, AND THE UNCERTAINTY RELATED TO THE TIMING OF CONSUMMATING THE
ACQUISITION OF SHARES.
ATTRACTIVE FEATURES
MONOPOLISTIC DEVELOPMENT OPPORTUNITY. IAC HAS THE EXCLUSIVE RIGHTS TO ALL NEW
DEVELOPMENT ON THE MULTIFAMILY PROPERTIES ON IRVINE RANCH THROUGH THE YEAR 2025.
WE BELIEVE THE PRIMARY SOURCE OF GROWTH IN FFO WILL CONTINUE TO BE DERIVED
THROUGH THE DEVELOPMENT OF MULTIFAMILY PROPERTIES.
MASTER PLANNED COMMUNITY. IAC ESTIMATES THAT IT HAS THE POTENTIAL TO CONTAIN
ABOUT 20,000 APARTMENT UNITS BY 2000. WE BELIEVE THAT THE TRUST'S PORTFOLIO IS
UNIQUE AS THE IRVINE COMPANY AND IAC HAVE DEVELOPED ALL 54 APARTMENT PROPERTIES
LOCATED ON THE IRVINE RANCH. IAC PROVIDES A VARIETY OF APARTMENT PROPERTIES
DESIGNED TO MEET DIFFERENT RESIDENT PROFILES. RETURNS ON THE DEVELOPMENT OF
MULTIFAMILY PROPERTIES SHOULD BE AROUND 10% (A VERY FAVORABLE RETURN THAT IS THE
RESULT OF THE RELATIONSHIP BETWEEN IAC AND THE IRVINE CO.).
ACQUISITION STRATEGY. GIVEN IAC'S MARKET SHARE DOMINANCE ON THE IRVINE RANCH,
THE COMPETITIVE ENVIRONMENT FOR MULTIFAMILY PROPERTIES THROUGHOUT CALIFORNIA,
AND THE TRUST'S DEVELOPMENT PIPELINE, IAC WILL PURSUE ONLY SELECT VERY HIGH-END
ACQUISITION OPPORTUNITIES OFF THE IRVINE RANCH.
INTERNAL GROWTH. INTERNAL GROWTH SHOULD BE GENERATED FROM A HIGH QUALITY OF
PORTFOLIO ASSETS CHARACTERIZED AS HAVING CONSISTENTLY HIGH OCCUPANCY RATES, HIGH
MONTHLY RENTS AND IMPECCABLE QUALITY. THE TRUST HAS OPERATED ON THE IRVINE RANCH
OVER THE PAST 28 YEARS AND HAS ACHIEVED CONSECUTIVE ANNUAL GROWTH IN NET
OPERATING INCOME (NOI); IMPRESSIVE GIVEN THE ECONOMIC AND REAL ESTATE CYCLES IN
CALIFORNIA. WE ESTIMATE THAT IAC WILL ACHIEVE GROWTH IN "SAME PROPERTY" NOI OF
ABOUT 6.5% TO 7.0%, IN 1998 AND 1999, RESPECTIVELY.
VALUATION PERSPECTIVE. IAC'S CURRENT MULTIPLE IS SLIGHTLY HIGHER THAN ITS PEERS
REFLECTING IAC'S MONOPOLISTIC FOOTHOLD ON THE IRVINE RANCH AND IMPROVING
FUNDAMENTALS OF SOUTHERN CALIFORNIA'S REAL ESTATE MARKET. IAC SHARES HAVE NOT
TRADED AS A MULTIPLE THIS LOW SINCE ITS IPO.
<PAGE> 25
SOUND FINANCIAL STRUCTURE. AS OF 9/30/98, IAC HAD TOTAL DEBT OUTSTANDING OF $735
MILLION THAT REPRESENTS 38% TO TOTAL MARKET CAPITALIZATION. IAC WAS CARRYING A
WEIGHTED AVERAGE INTEREST RATE OF APPROXIMATELY 6.4% (INCLUDING THE NON-CASH
AMORTIZATION OF DEFERRED FINANCING COSTS). THE TRUST CURRENTLY HAS A TOTAL FIXED
RATE DEBT OF $630 MILLION (APPROXIMATELY 87% OF TOTAL DEBT OUTSTANDING) THAT
CARRIES AN AVERAGE INTEREST RATE OF 6.4%. APPROXIMATELY $325 MILLION OF THE
FIXED RATE DEBT REPRESENTS TAX-EXEMPT BOND FINANCING THAT AVERAGES 5.85%. GIVEN
THE HIGH QUALITY OF ASSETS, IAC HAS MINIMAL CAPITAL EXPENDITURE REQUIREMENTS
APPROXIMATING $4 MILLION (OR $125 PER UNIT) IN 1998.
MANAGEMENT EXPERTISE. IAC HAS INCREASED ITS NET OPERATING INCOME ANNUALLY FOR
OVER 28 YEARS, WITHSTANDING SEVERAL REAL ESTATE CYCLES. THE IRVINE COMPANY AND
ITS CHAIRMAN, DONALD BREN, MAINTAIN A 55% INTEREST IN IAC.
INVESTMENT CONCERNS
ORANGE COUNTY BANKRUPTCY. IAC WAS NOT SIGNIFICANTLY IMPACTED BY THE 1994
BANKRUPTCY FILING BY ORANGE COUNTY, CALIFORNIA. HOWEVER, CERTAIN ISSUES AND
PERCEPTIONS SURROUNDING THE BANKRUPTCY MAP IMPACT INVESTOR ENTHUSIASM.
DEPENDENCE ON THE SOUTHERN CALIFORNIA. IAC'S WELL BEING IS DEPENDENT ON THE
ECONOMIC VIABILITY OF SOUTHERN CALIFORNIA.
REITS ARE GENERALLY CONSIDERED SMALL-CAP AND MID-CAP ISSUES. ACCORDINGLY,
TRADING LIQUIDITY AND MACRO-ISSUES IMPACTING SMALL AND MID-CAP ISSUES MAY
POTENTIALLY IMPACT REITS IN A SIMILAR FASHION.
<PAGE> 26
RECENT DEVELOPMENT:
(12/03/98) WE ARE CHANGING OUR INVESTMENT RATING ON THE SHARES OF IAC TO A
REDUCE FROM A BUY BASED ON YESTERDAY'S ANNOUNCEMENT. AS YOU ARE PROBABLY AWARE,
IAC MANAGEMENT RECEIVED A PROPOSAL FROM TIC ACQUISITION LLC, A WHOLLY OWNED
SUBSIDIARY OF THE IRVINE COMPANY, TO ACQUIRE ALL OUTSTANDING COMMON SHARES OF
IAC FOR $32.50, A 21% PREMIUM TO TUESDAY'S CLOSING SHARE PRICE. OUR RATING
CHANGE REFLECTS THE SHARE PRICE REACTION TO THIS ANNOUNCEMENT (UP OVER $4 PER
SHARE), WHAT WE PERCEIVE TO BE A RELATIVELY FAIR VALUE OF THE IRVINE COMPANY'S
PROPOSED OFFER, THE UNLIKELIHOOD OF COMPETING OFFERS, AND THE UNCERTAINTY
RELATED TO THE TIMING OF CONSUMMATING THE ACQUISITION OF SHARES. WITH MINIMAL
NEAR-TERM UPSIDE POTENTIAL, WE WOULD NOT HESITATE TO TAKE A GAIN OR STOP TO LOOK
A GIFT HORSE IN THE MOUTH. IN ADDITION, THE RECENT DIVIDEND RECORD DATE HAS
PASSED AND THUS, CURRENT SHAREHOLDERS ARE ENTITLED TO THE UPCOMING DIVIDEND.
MANAGEMENT IS NOT IN A POSITION TO MAKE A DECISION REGARDING FUTURE DIVIDENDS
FOR THE NEXT COUPLE OF MONTHS. BASED ON OUR NAV ANALYSIS, WE VIEWED THE $32.50
PER SHARE OFFER AS REPRESENTING CLOSE TO A 7% CAPITALIZATION RATE. THOUGH WE ARE
COGNIZANT THAT OUR ANALYSIS PLACED NO PREMIUM ON IAC'S DEVELOPMENT PIPELINE OR
ACCOUNTED FOR IAC'S RECENT TAX EXEMPT BOND FINANCING WHICH WOULD ENHANCE FUTURE
CASH FLOW. CURRENT MANAGEMENT OF IAC TAKES A LOT OF PRIDE IN BEING THE ONLY REIT
TO COMPLETE THIS VERY COMPLEX TRANSACTION. THUS, THE REFINANCING OF TAX EXEMPT
DEBT MAY PROVE TO BE SOMETHING THAT IAC MANAGEMENT WILL SEEK TO MAXIMIZE ITS
VALUE AND BE APPROPRIATELY REWARDED (THROUGH A HIGHER SHARE PRICE OFFER). AT
THIS TIME, WE ARE RELUCTANT TO PUT A "SELL" ON THE SHARES BASED ON THE OUTSIDE
CHANCE THAT IAC MANAGEMENT MAY BE ABLE TO NEGOTIATE A SLIGHTLY HIGHER SHARE
PRICE. IAC MANAGEMENT INTENDS TO HIRE A FINANCIAL ADVISOR OVER THE NEXT SEVERAL
DAYS TO EXPLORE ITS OPTIONS AND INDICATED THAT THIS WAS THEIR FIRST OFFER. WE
GOT THE IMPRESSION THAT MANAGEMENT, AT THE MINIMUM, EXPECTS TO COUNTER-OFFER THE
PROPOSAL. GIVEN THE IRVINE COMPANY'S MAJORITY ECONOMIC INTEREST IN IAC, WE
BELIEVE A COMPETING BID FROM A THIRD PARTY IS UNLIKELY. THE RELATIVELY LOW
INITIAL RETURN ON INVESTMENT MAY NOT WARRANT CONSIDERATION FROM A THIRD PARTY TO
BE A MINORITY PARTNER TO THE IRVINE COMPANY. HOWEVER, IAC HAS A VERY COMPETENT
CORPORATE FINANCE DIVISION (MANY WITH WALL STREET EXPERIENCE AND SAVVY). IN
PARTICULAR, JIM MEAD, IAC'S CURRENT CFO RECENTLY ANNOUNCED HIS RETIREMENT FROM
IAC TO PURSUE OTHER OPPORTUNITIES. MR. MEAD HAS BEEN AN INTEGRAL PART OF IAC'S
SUCCESS. REMEMBER, MANAGEMENT OF IAC IS DISTINCTLY DIFFERENT FROM THE IRVINE
COMPANY AND MAY HAVE THE "NORMAL" CONCERNS RELATED TO FINDING NEW EMPLOYMENT,
MANY OF WHOM CAME TO NEWPORT BEACH FOR THE LIFESTYLE AS WELL AS TO WORK FOR A
DONALD BREN RUN COMPANY. THE IRVINE
<PAGE> 27
COMPANY'S LOCAL DOMINANCE LIMITS THE NUMBER OF COMPARABLE EMPLOYMENT
OPPORTUNITIES. WE FIND IT SOMEWHAT SURPRISING THAT IAC MANAGEMENT, MAINLY THE
CORPORATE FINANCE DIVISION, WAS "BLIND-SIDED" BY THIS ANNOUNCEMENT. THE FIRST
KNOWLEDGE THEY HAD OF THIS PROPOSAL WAS RECEIVED THROUGH THE TRADITIONAL MEDIA
OUTLETS. ONE MEMBER OF IAC MANAGEMENT INDICATED THAT HIS CONVERSATION WITH MR.
BREN (ROUGHLY TWO WEEKS AGO) INDICATED MR. BREN'S ENTHUSIASM AND PLEASURE IN
OPERATING A PUBLIC COMPANY. WE ASKED MANAGEMENT OF IAC AT THE RECENT NAREIT
CONFERENCE WHY THEY DIDN'T LOOK TO GO BACK TO BEING A PRIVATE COMPANY, GIVEN
THEIR MODEST VALUATION, IN OUR OPINION (WE HAD CHANGED OUR INVESTMENT RATING TO
BUY). THEIR RESPONSE WAS TEXT BOOK - "WE WOULDN'T HAVE GONE PUBLIC IN THE FIRST
PLACE IF THE BENEFITS DIDN'T OUTWEIGH THE NEGATIVES". WE BELIEVE THESE FACTORS
MAY CONTRIBUTE TO AN EXTRA INCENTIVE FOR MANAGEMENT TO MAXIMIZE SHAREHOLDER
VALUE. WE WOULD ALSO MENTION THAT MR. MEAD HAD SOLD SHARES OF IAC AS RECENTLY AS
TWO WEEKS AGO (IN PART TO HELP FINANCE HIS FUTURE ENDEAVOR). WE BELIEVE MR. MEAD
WOULD LIKE TO WALK AWAY FROM IAC KNOWING HE MAXIMIZED SHAREHOLDER VALUE.
AS WE STATED EARLIER, THE IRVINE COMPANY HAS ONLY MADE A PROPOSAL AT THIS TIME.
THIS PROPOSAL SHOULD NOT BE CONSTRUED AS A LEVERAGED BUYOUT OR A TENDER OFFER.
IAC'S BOARD MUST APPROVE THE PROPOSAL BEFORE ANY FUTURE STEPS ARE TAKEN.
THEREFORE, THE TIMING OF WHEN OR IF THE TRANSACTION TAKES PLACE IS UNKNOWN. WE
WOULD NOT EXPECT MANAGEMENT OF IAC TO MAKE ANY DECISION UNTIL THEIR FINANCIAL
ADVISOR HAS PURSUED ALL OPTIONS (AT LEAST 30 DAYS). FOLLOWING A PUBLIC RESPONSE
FROM IAC MANAGEMENT, THERE IS NO GUIDELINE AT THIS TIME THAT CAN REASONABLY
DICTATE WHEN THE ACQUISITION WOULD BE COMPLETED.
IN ADDITION, IF THE TWO COMPANIES CAN NOT AGREE ON A FAIR PRICE FOR IAC, WE
WOULD EXPECT IAC SHARES TO FALL BACK SIGNIFICANTLY. IN ADDITION, IT MAY TAKE A
LONG TIME TO GENERATE INVESTOR CONFIDENCE IN IAC GIVEN WHAT WOULD MOST LIKELY BE
PERCEIVED AS "BAD BLOOD" BETWEEN IAC AND THE IRVINE COMPANY. BOTH COMPANIES
DEPEND ON EACH OTHER TO SUCCEED.
THE IRVINE COMPANY CURRENTLY OWNS, IN AGGREGATE, 62% ECONOMIC INTEREST IN IAC.
THE IRVINE COMPANY HAS BEEN ACQUIRING COMMON SHARES SPORADICALLY THROUGHOUT THE
LAST FEW MONTHS AND REACHED THE MAXIMUM OWNERSHIP INTEREST IN IAC AS DICTATED
UNDER THE REIT REGULATIONS (I.E., THE FIVE-OR-FEWER RULE). WE ESTIMATE THE
IRVINE COMPANY'S RECENT PURCHASES INCLUDED ROUGHLY 500,000 SHARES RANGING FROM
$23 TO $29 PER SHARE. HINDSIGHT MAY INDICATE THAT NOT ONLY DID THE IRVINE
COMPANY BELIEVE THE SHARES OFFERED AN ATTRACTIVE VALUATION GIVEN THE POSITIVE
EVENTS AND FUNDAMENTALS, BUT THEY HAD ANOTHER MOTIVE.
<PAGE> 28
IT IS IMPORTANT TO NOTE THAT THOUGH IAC WAS SPUN-OFF FROM THE IRVINE COMPANY IN
DECEMBER 1993 AT $20 PER SHARE, BOTH ENTITIES OPERATE UNDER DISTINCTLY DIFFERENT
MANAGEMENT TEAMS. THE DEVELOPMENT AGREEMENT BETWEEN THE TWO COMPANIES IS VERY
UNIQUE AND PRIMARILY THE RESULT OF THE IRVINE COMPANY'S SIGNIFICANT OWNERSHIP
INTEREST IN THE REIT. THE ONLY COMMON FACTOR IN BOTH MANAGEMENT TEAMS IS DONALD
BREN. HOWEVER, THE REIT'S MANAGEMENT TEAM WAS FORMED TO OPERATE IN THE PUBLIC
ARENA AND THUS, RECRUITED TALENT FROM THE APPROPRIATE SOURCES.
WHERE DOES IAC GO FROM HERE? WE BELIEVE IAC MAY REMAIN IN A WAIT AND SEE MODE
FOR MANY MONTHS. CERTAIN ISSUES RELATED TO LIQUIDITY (OR LACK OF) WITH REITS MAY
INDICATE THAT THIS MAY OFFER AN OPPORTUNITY FOR INVESTORS TO LIGHTEN THEIR
POSITIONS. FOR INVESTORS LOOKING TO STAY IN THE APARTMENT SECTOR OF REITS, WE
RECOMMEND AVALONBAY COMMUNITIES (AVB), EQUITY RESIDENTIAL (EQR), OR PACIFIC GULF
PROPERTIES (PAG) FOR THOSE LOOKING TO STAY IN CALIFORNIA.
(12/2/98) TIC ACQUISITION LLC, A UNIT OF THE IRVINE CO., LATE YESTERDAY
ANNOUNCED A PROPOSAL TO THE BOARD OF DIRECTORS OF IRVINE APARTMENT COMMUNITIES
(IAC) TO ACQUIRE ALL THE OUTSTANDING COMMON SHARES OF IAC IN A BUSINESS
COMBINATION FOR $540 MILLION OR $32.50 PER SHARE IN CASH. THIS COMPRISES THE
16.6 MILLION OUTSTANDING SHARES THAT THE IRVINE COMPANY DID NOT ALREADY OWN AND
REPRESENTS AN APPROXIMATE 18.7% PREMIUM TO YESTERDAY'S CLOSING PRICE OF $27 3/8.
THE PROPOSAL IS NOT SUBJECT TO A FINANCING CONTINGENCY. WE BELIEVE THE BUYOUT
PROPOSAL REFLECTS FAIRLY ON ASSET VALUE AS OUR ESTIMATED NAV FOR IAC, BASED ON A
CAP RATE RANGE OF 7% TO 7 1/2%, IS $30-$33 PER SHARE. WE WILL HAVE ADDITIONAL
COMMENTS AS FURTHER INFORMATION BECOMES AVAILABLE.
(11/03/98) IAC REPORTED THIRD QUARTER 1998 FFO PER SHARE OF $0.60 COMPARED TO
$0.51, REPRESENTING A 17.6% INCREASE AND $.03 AHEAD OF OUR ESTIMATE. SAME
PROPERTY NOI INCREASED 10.1% AS A RESULT OF A 4.6% INCREASE IN MONTHLY RENT,
4.7% DECREASE IN OPERATING EXPENSES PER UNIT, AND A 0.3% INCREASE IN AVERAGE
OCCUPANCY.
SAME PROPERTY RESULTS REPRESENT 48 PROPERTIES AND 13,541 UNITS (AVERAGE MONTHLY
RENT = $1,171, OPERATING EXPENSES PER UNIT = $244, AND PHYSICAL OCCUPANCY =
94.1)%. WE ATTRIBUTE ROUGHLY ONE-HALF OF THE HIGHER THAN EXPECTED RESULTS TO THE
SUCCESS OF IAC'S IMPLEMENTATION OF SELF-MANAGEMENT AND THE OTHER ONE-HALF TO
BETTER THAN EXPECTED OPERATING RESULTS DUE TO MARKET FUNDAMENTALS.
IAC CURRENTLY HAS A TOTAL OF SIX NEW DEVELOPMENT PROJECTS UNDER CONSTRUCTION:
TWO ON THE IRVINE RANCH, TWO IN NORTHERN CALIFORNIA (SILICON VALLEY AREA), AND
TWO IN NORTHERN SAN DIEGO. IN ADDITION, IAC IS RENOVATING THE ONLY LUXURY RENTAL
PROPERTY ALONG THE COAST-LINE OF LOS ANGELES WESTSIDE AT THE CORNER OF SANTA
MONICA BLVD AND OCEAN
<PAGE> 29
BLVD. IN TOTAL, THESE PROJECTS WILL REPRESENT AN INVESTMENT OF $320 MILLION OF
WHICH $180 MILLION HAS BEEN INCURRED TO DATE.
IAC CURRENTLY OWNS A TOTAL OF 62 PROPERTIES CONTAINING 18,758 UNITS, INCLUDING
THOSE PROPERTIES UNDER DEVELOPMENT. IAC'S CURRENT DIVIDEND REPRESENTS A
COMFORTABLE 64.5% AND 67.5% PAYOUT TO Q3 1998'S FFO AND FAD PER SHARE,
RESPECTIVELY. IAC'S TOTAL DEBT TO TOTAL MARKET CAPITALIZATION REPRESENTS 38%
WITH AN IMPRESSIVE INTEREST COVERAGE RATIO OF 5.3x.
***WE ARE RAISING OUR 1998 AND 1999 FFO SHARE ESTIMATES TO $2.29 AND $2.52,
RESPECTIVELY.
(10/09/98) WE ARE USING THE RECENT PULLBACK IN THE SHARE PRICE OF IAC TO CHANGE
OUR RATING TO A BUY. SHARES AT LAST NIGHT'S CLOSE HAVE NEVER BEEN MORE
ATTRACTIVE. THE MARKET VALUE OF IAC EQUATES TO ROUGHLY $102,000 PER APARTMENT
UNIT (INCLUDING THOSE 1,800 UNITS UNDER CONSTRUCTION), A MODEST VALUATION GIVEN
THE CURRENT MARKET STRENGTH. THIS VALUATION OCCURS WHEN APARTMENT REAL ESTATE
FUNDAMENTALS IN SOUTHERN CALIFORNIA, ESPECIALLY ORANGE COUNTY, APPEAR TO BE IN
THE EARLY STAGES OF IMPROVING.
IAC IS WELL POSITIONED GIVEN IT'S MONOPOLISTIC ADVANTAGE IN CENTRAL ORANGE
COUNTY (OR THE IRVINE RANCH). IAC'S PORTFOLIO IS CHARACTERIZED AS BEING OF
IMPECCABLE QUALITY AS NEARLY ALL OF THE PROPERTIES HAVE BEEN DEVELOPED BY IAC,
OR ITS PREDECESSOR. THE IRVINE RANCH IS THE LARGEST MASTER PLANNED COMMUNITY IN
THE U.S. AND HAS BEEN NAMED THE SAFEST PLACE TO LIVE IN THE U.S. BY THE F.B.I.
IAC HAS A 28 YEAR HISTORY OF ACHIEVING IMPROVED OPERATING RESULTS REGARDLESS OF
ECONOMIC CONDITIONS OR EVEN THE ORANGE COUNTY BANKRUPTCY. WE DO NOT VIEW IAC'S
GROWTH BEING DEPENDENT ON ISSUING EQUITY OVER THE NEXT 18 TO 24 MONTHS. THE REIT
HAS A CONSERVATIVE INTEREST COVERAGE RATIO OF 5.6x WHICH DOES NOT FULLY
RECOGNIZE THE RECENT DEBT REFINANCING. IAC REFINANCED $334 MILLION OF SECURED
TAX-EXEMPT BOND FINANCING CARRYING AN AVERAGE INTEREST RATE OF AROUND 6% WITH
UNSECURED TAX EXEMPT BONDS CARRYING AN AVERAGE INTEREST RATE OF 4.93%.
IAC HAS A WELL-CONCEIVED GROWTH STRATEGY IN-PLACE AND SHOULD CONTINUE TO
PROSPER. THE IRVINE RANCH HAS DEMONSTRATED ITS RESILIENCE IN THE PAST AND IAC
SHOULD CONTINUE ITS GROWTH IN NOI AND REVENUE. NEW DEVELOPMENT PROJECTS WILL
CONTINUE TO ADD TO FFO PER SHARE IN 1999 AND BEYOND.
RECENT DEVELOPMENT
<PAGE> 30
(07/04/98) IAC REPORTED SECOND QUARTER 1998 FFO PER SHARE OF $.56, A 12%
INCREASE AND $.02 AHEAD OF EXPECTATIONS.
HIGHLIGHTS OF Q2 RESULTS ARE AS FOLLOWS:
IAC REFINANCED $334 MILLION SECURED TAX EXEMPT DEBT WITH "UNSECURED" TAX EXEMPT
DEBT UNENCUMBERING 23 PROPERTIES AND PRICED AT A 4.93% FIXED INTEREST RATE WITH
MATURITIES RANGING FROM 10 - 15 YEARS. IAC EFFECTIVE INTEREST RATE WAS LOWERED
TO 5.8% FROM 6.2% AND ITS AVERAGE MATURITY WAS EXTENDED TO 12.3 YEARS FROM 9
YEARS.
SAME STORE NOI INCREASED 6.4%. RENTS INCREASED 5.2%. AVG MONTHLY RENT = $1,150.
EXPENSES REMAINED FLAT. OCCUPANCY DECLINED SLIGHTLY TO 94.1%. NEW DEVELOPMENT
CONTINUES AT 4 PROPERTIES LOCATED ON THE IRVINE RANCH, 2 IN NORTHERN CA (SILICON
VALLEY), 2 IN SOUTHERN CA, AND 1 LUXURY HIGH RISE PROPERTY IN SANTA MONICA
(CORNER OF OCEAN AVE AND WILSHIRE BLVD). IAC INCREASED ITS DIVIDEND 2.7% TO
$1.54 PER SHARE.
FUNDAMENTALS REMAIN STRONG THROUGHOUT CALIFORNIA, ESPECIALLY ON THE IRVINE RANCH
IN ORANGE COUNTY.
WE CONTINUE TO RATE SHARES ACCUMULATE.
EARLY STAGES OF MARKET RECOVERY
WE CONTINUE TO BELIEVE THAT IAC REMAINS WELL POSITIONED TO ACHIEVE SUSTAINABLE
GROWTH IN ANNUAL FFO PER SHARE OVER THE NEXT COUPLE YEARS. THE IRVINE RANCH
CONTINUES TO BE THE PRIMARY SOURCE OF NEW JOB GROWTH IN ORANGE COUNTY. WE
ESTIMATE THAT IAC WILL INCREASE "SAME PROPERTY" RENT BY 4.5% AND 6% IN 1997 AND
1998, RESPECTIVELY. COUPLED WITH INFLATIONARY INCREASES IN OPERATING EXPENSES,
WE PROJECT "SAME PROPERTY" NOI INCREASE OF 6.0% AND 8.0%, RESPECTIVELY.
MANAGEMENT STATED THAT ITS CURRENT DEVELOPMENT, THE COLONY, ADJACENT TO FASHION
ISLAND, IS ACHIEVING ATTRACTIVE DEMAND AND IAC MAY BEGIN TO REQUIRE A
NON-REFUNDABLE DEPOSIT OF $1,000 FOR TENANTS TO BE PLACED ON A WAITING LIST.
WHILE THE DEMAND FOR VERY HIGH END PROPERTIES IS STRONG ON THE IRVINE RANCH,
MANAGEMENT EXPECTS TO BEGIN DEVELOPING PROPERTIES TO ACCOMMODATE MORE FAMILY
ORIENTED TENANTS.
SOUTHERN CALIFORNIA - IAC RECENTLY ACQUIRED THE 923 UNIT VILLAS OF RENAISSANCE
FOR $127 MILLION, OR $137,500 PER UNIT. THE PROPERTY HAS BEEN 95% OCCUPIED FOR
SEVERAL YEARS, EXCLUDING THE CORPORATE HOUSING UNITS. IAC INCREASED RENTS $125
PER MONTH ON ALL PROPERTIES THE DAY AFTER THE ACQUISITION WAS COMPLETED WITH NO
RESISTANCE BY TENANTS. IAC INTENDS TO SPEND AN ADDITIONAL $4 TO $5 MILLION ON
REPAIRS. MANAGEMENT EXPRESSED THE INTEREST OF THE IRVINE COMPANY IN ACQUIRING
LARGE PARCELS OF LAND (50 TO 100 ACRES) IN WELL LOCATED AREAS
<PAGE> 31
THROUGHOUT BOTH SOUTHERN AND NORTHERN CALIFORNIA AS A MEANS OF APPLYING
ITS EXPERTISE IN DEVELOPING MASTER PLANNED COMMUNITIES. IAC WOULD HAVE SIMILAR
ARRANGEMENT (I.E., EXPECTED RETURNS, LAND SALES, ETC.) WITH THE IRVINE COMPANY
IN DEVELOPING MULTIFAMILY PROPERTIES. WE CONTINUE TO RATE THE SHARES OF IAC WITH
AN ACCUMULATE RATING SUITABLE FOR AGGRESSIVE INVESTORS. WHILE WE DO NOT EXPECT
ANY SHARE PRICE WEAKNESS, WE WOULD NOT HESITATE TO ADD OR INCREASE POSITIONS ON
ANY SHARE PRICE PULLBACK BELOW $30.
ADDITIONAL INFORMATION:
ATTRACTIVE MARKET NICHE. IAC OPERATES IN ONE OF THE MORE UNIQUE REAL ESTATE
MARKETS IN THE U.S. THE TRUST'S PROPERTIES ARE LOCATED THROUGHOUT THE 90 SQUARE
MILE IRVINE RANCH WHICH CONSISTS OF 13 SEPARATE "VILLAGES" EACH POSSESSING
DIFFERING DEMOGRAPHIC CHARACTERISTICS SUCH AS HOUSEHOLD INCOME AND HOUSEHOLD
MIX. THERE IS AN ESTIMATED 55,000 ACRES OF UNDEVELOPED LAND AND AVAILABLE FOR
EXPANSION. THE IRVINE RANCH INCLUDES THE CITY OF IRVINE AND PORTIONS OF TUSTIN
AND NEWPORT BEACH. THE IRVINE RANCH HAS A RELATIVELY HIGH ESTIMATED AVERAGE
ANNUAL HOUSEHOLD INCOME OF $60,000. IAC ESTIMATES THAT APPROXIMATELY TWO-THIRDS
OF THE EMPLOYEES THAT WORK ON THE IRVINE RANCH COMMUTE FROM OUTSIDE THE IRVINE
RANCH. THE IRVINE RANCH IS DESIGNED AS A MASTER PLANNED COMMUNITY WHICH LIMITS
AND CONTROLS NEW DEVELOPMENT, INFRASTRUCTURE, AND OTHER COSMETIC FEATURES.
ACCORDING TO THE FEDERAL BUREAU OF INVESTIGATION (FBI), THE IRVINE RANCH WAS
RANKED THE #1 SAFEST PLACE TO LIVE IN THE U.S., MAKING IT A HIGHLY DESIRABLE
PLACE OF RESIDENCY.
THIRD PARTY PROPERTY MANAGEMENT. THE TRUST CURRENTLY EMPLOYEES THIRD PARTY
PROPERTY MANAGERS AT ALL OF ITS PROPERTIES. THESE MANAGERS RECEIVE A MANAGEMENT
FEE EQUAL TO APPROXIMATELY 2.9% OF TOTAL RENTAL REVENUES COLLECTED. THE THREE
DIFFERENT PROPERTY MANAGERS HAVE MANAGED THESE PROPERTIES FOR AN AVERAGE OF
EIGHT YEARS. WE ESTIMATE THAT EMPLOYING THIRD PARTY PROPERTY MANAGERS HAS A
MINIMAL IMPACT ANNUAL FFO PER SHARE OF APPROXIMATELY $0.03.
CENTRAL LEASING OFFICE. IN DECEMBER 1995 THE TRUST OPENED A CENTRAL LEASING
OFFICE LOCATED IN THE HEART OF THE IRVINE RANCH. THIS OFFICE IS DESIGNED TO
CONTROL TURNOVER AT THE TRUST'S PROPERTIES, BECOME MORE EFFECTIVE IN CAPTURING
NEW RESIDENTS, AND STREAMLINE MARKETING COSTS (I.E., ADVERTISING) AT INDIVIDUAL
PROPERTIES. THIS CENTRAL OFFICE PROVIDES POTENTIAL RESIDENTS WITH A ONE-STOP
SHOPPING FACILITY BY NARROWING DOWN SEVERAL POTENTIAL APARTMENT PROPERTIES THAT
MEET YOUR SPECIFICATIONS. THIS OFFICE SETS UP APPOINTMENTS WITH PROPERTY
MANAGERS, FOLLOW-UP WITH RESIDENTS WHO MOVE OUT, AND FIND ROOMMATES FOR
RESIDENTS. SINCE OPENING THIS CENTRAL LEASING OFFICE,
<PAGE> 32
THE TRAFFIC FLOW HAS AVERAGED APPROXIMATELY 200 VISITORS PER WEEK WITH AN
ESTIMATED 30% TO 35% "CAPTURE RATE."
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
12/03/98 ART HAVENER D.J.I.A.: 9064.54
S&P IND: 1398.15
S&P COMP: 1171.25
<PAGE> 33
FIRST CALL RESEARCH NETWORK
02:30pm EST 04-Dec-98 Dresdner Kleinwort Benson (McGrath/Hogan (212)
IAC: Going Private; Price Appears Very Fair; Maintain Hold Rating
Dresdner Kleinwort Benson
December 4, 1998
US REITS
Shila McGrath (212) 429-3442
Mary Hogan (212) 429-3441
Haendel St. Juste (212) 429-3443
Irvine Apartment Communities (IAC)
Rating: HOLD
<TABLE>
<S> <C> <C> <C>
Ticker (NYSE) IAC Dividend $1.54
Rating Hold Current dividend yield 4.9%
Price (12/3/98) $31 5/8 FFO 1997A(e) $2.01
12-month price target N/A FFO 1998E(e) $2.29
52-week price range $33 - $23 FFO 1999E(e) $2.55
Shares outstanding(a) 45.2 1999 FFO payout ratio 60.6%
Debt-to-market cap.(b) 34.0% 5-year FFO growth rate 8.0%
Institutional ownership(c) 56.6% Price/1998 FFO 13.8x
Avg. daily trading vol. (YTD)(d) 51,200 Price/1999 FFO 12.4x
</TABLE>
(a) Millions. Includes shares and operating units.
(b) Calculated using market value of equity, consistent with REIT industry
standards.
(c) Source: Spectrum.
(d) Source: FactSet.
(e) Represents funds from operations (FFO) per share. FFO is defined as net
income before gains and losses from property sales, plus amortization and
depreciation, plus FFO from unconsolidated joint ventures.
IAC: Going Private; Price Appears Very Fair; Maintain Holding Rating
x THE TRANSACTION. The privately-held Irvine Company (TIC) announced a proposal
to repurchase all of the 16.6 million outstanding shares of Irvine Apartment
Communities that it does not already own for approximately $540 million, or
$32.50 per share. The transaction, which essentially amounts to a leveraged
buyout (LBO), is not contingent on financing. This represents an offer by the
largest stockholder of IAC to purchase the 37% economic interest in the company
that it does not currently own. Based on the preliminary terms of the proposal,
the existing debt and preferred stock of Irvine Apartment Communities will
remain outstanding and aren't expected to be affected by the transaction.
<PAGE> 34
x RATIONALE. The Irvine Company is currently the largest stockholder of IAC,
owning about 17% of IAC's outstanding common shares. In addition, The Irvine
Company also owns approximately 55% of the partnership interest of Irvine
Apartment Communities, L.P., of which IAC is a general partner. In aggregate,
The Irvine Company owns an approximate 63% economic stake in IAC. The Irvine
Company cited conditions in the equity markets affecting REITs as a principal
cause for choosing to pursue this course of action. TIC believes that in the
current environment, where access to public market financing has become limited
and expensive, a private company is better suited to undertake the risks
associated with development and will utilize its retained capital to finance
future projects. IAC's frequent changes in management over the past several
years and its soon to be vacant CFO slot may have also had a small role in the
decision to pursue this strategy.
x OFFER LOOKS VERY FAIR TO SHAREHOLDERS. The offer of $32.50 per share
represents an 18% premium to where IAC's shares closed on December 1, 1998, and
a 21% premium based on the closing price on November 30, 1998. This represents a
total investment of approximately $540 million for the 16.6 million outstanding
shares. The risk of this transaction is that investors may be skeptical of the
pricing because of the relationship of The Irvine Company (TIC) and IAC; the
perception may be that Donald Bren, chairman of TIC, may be trying to buy back
shares at a cheap price. Our concerns about the fairness of the offer are
alleviated by the following: (a) this pricing implies a cap rate in the low 7%
range and a 15% premium to our estimate of IAC's net asset value; (b) the offer
price is at the 52-week high for the stock; and (c) the $32.50 offer price per
share implies a 1999 FFO multiple of 12.7x based on our 1999 estimate of $2.55
per share or a 45% premium to the apartment REIT sector average and a 24%
premium to the average multiple of the next five highest multiple apartment
REITS (ASN, AVB, BRE, ESS and PPS). We do recognize that IAC exclusive
development rights agreement on the ranch does have additional value, however,
we are skeptical how effectively "transferable" that agreement would be to
another buyer. In the land rights agreement, TIC has NO obligation to sell land,
just an obligation to sell multifamily sites that will be developed to IAC. As a
result, we would ascribe little value to this option for any other potential
buyer of IAC. We believe this offer is attractive to shareholders and we believe
the balance of IAC shares are most valuable to TIC, the majority owner of the
company. Consequently, a higher offer from any other buyer is unlikely. There is
the possibility, however, that IAC may be able to "tweek" the price a little
higher; a slight increase in price based on negotiations between the two parties
would assuage everyone's concerns about IAC's board acting in the best interest
of shareholders. IAC's board met on the offer yesterday, and we expect a brief
official response from the company later today. Within the next several days,
IAC will be hiring a financial advisor to evaluate the offer. We maintain our
Hold recommendation.
Company Description
Irvine Apartment Communities, Inc. was established as the successor in the
apartment business of The Irvine Company (TIC). IAC is an extremely focused
multifamily real estate company: the majority of its portfolio is on the Irvine
Ranch, which is located between Los Angeles and San Diego in Orange County,
California. The company's properties represent over 85% of the apartment
communities located on the Ranch. TIC, the master developer of the Irvine Ranch,
will continue to develop the Ranch, with IAC developing all future apartment
development sites
<PAGE> 35
through 2020. In 1997, IAC initiated an expansion program into other high-growth
California markets, including the Silicon Valley and North San Diego. IAC's
portfolio has historically achieved higher rental rate than the surrounding
markets, due to the desirability of the planned community environment, the above
market standard landscaping, amenities, property maintenance and the appealing
architectural design of the properties. As of September 30, 1998, IAC owns or
has under development 62 apartment communities with 18,758 units.
Additional information is available on request.
Dresdner Kleinwort Benson North America LLC. New York: 75 Wall Street, 30th
Floor, New York, NY 10005-2889 Telephone 212-429-3475 Telex 427118 Fax
212-429-4598. London: PO Box 560, 20 Fenchurch Street, London EC3P 3DB Telephone
0171-623-8000 Telex 922241 Fax 0171-929-7907. A member of the Dresdner Bank
Group.
This report has been prepared by Dresdner Kleinwort Benson North America LLC
("DKBNA") using sources believed to be reliable and accurate but which without
further investigation cannot be warranted as to accuracy or completeness. The
information and opinions in this report are subject to change without notice.
DKBNA and/or its affiliated or associated companies and/or any of their clients
may have acted upon the information or opinions in this report prior to your
receipt of it. Neither DKBNA nor any affiliated or associated companies nor any
of their directors, representatives or employees accepts liability for any loss
arising from the use of this document or its contents. DKBNA and/or its
affiliated or associated companies may provide investment-banking services for
the issuers of the securities mentioned in this report. DKBNA and/or its
affiliated or associated companies and/or their directors, representatives or
employees may have positions in or options on the securities mentioned in this
report or may buy, sell or offer to buy or sell such securities, as principal or
agent. This report is for the use of addressees only. It may not be copied or
distributed to any other persons without the prior written consent of DKBNA.
Additional information on the contents of the report is available on request.
Dresdner Kleinwort Benson North America LLC 1998.
First Call Corporation - all rights reserved. 617/345-2500
Note ID: 352629
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To update your order or to receive research on
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First Call is a registered trademark of the First Call Corporation.
<PAGE> 36
IAC AF 001/014 M0-01
EPS/F COM/F OTH/F US/F NA/F REA/F REITSS FCC// INV/F IAC
15:54 FDL IRVINE APARTMENT COMMUNITIES: Privately held Irvine Company pro
DLJ ****** DONALDSON, LUFKIN & JENRETTE ****** DLJ
December 2, 1998 Lawrence D. Raiman (212) 892-2380
Anthony Paolone (212) 892-2383
Joseph Nadol (212) 892-2376
Michael W. Mueller, CFA (212) 892-4272
IRVINE APARTMENT COMMUNITIES (IAC: $27 3/8) #
Privately held Irvine Company proposes tender offer for shares not already owned
at $32.50 per share; do not anticipate many more "LBO's" in the REIT group
<TABLE>
<CAPTION>
Range: FFO Per Share(a) FAD Per Share(b)
$32 7/16 - 23 Old New P/FFO Old New P/FAD
<S> <C> <C> <C> <C> <C> <C> <C>
(FY: Dec.) 1999E $2.50 $2.60 10.5 $2.29 $2.40 11.4
1998E 2.20 2.30 11.9 2.07 2.16 12.7
1997A 2.00 13.7 1.87 14.6
</TABLE>
Yield: 5.6% Market Cap.: $1.2 bil 3-Yr. Growth Rate: 13-15%
Dividend: $1.54 Avg. Trading Vol. (000): 68 Net Asset Value:
(a) Funds from operations (FFO) represents net income plus depreciation less
capital gains (losses).
(b) Funds available for distribution (FAD) equals FFO less recurring capital
expenditures, straight line rent accruals and debt amortization.
RATING: Market Perf. Change: None 12-Mo. Target: $32.50
VIEWPOINT
Last night, The Irvine Company, a privately held real estate concern controlled
by Donald Bren, announced a proposal to acquire for $32.50 per share in cash the
16.6 million common shares of Irvine Apartment Communities (IAC) that it does
not already own-a 21% premium to the closing price. This transaction essentially
amounts to a leveraged buyout (LBO) and would take IAC private. Recall, IAC has
been somewhat of a financing entity in that it has acted as a vehicle to develop
certain land interests on The Irvine Ranch in California held by Donald Bren. To
note is that the takeout price implies a total enterprise value for IAC of $2.20
billion, on which $736 million is debt. Of the $1.46 billion in equity, The
Irvine Company holds the $813 million of operating partnership units (OP units)
and an additional $111 million in common stock, thus making the tender offer for
$540 million. The offer is not subject to financing contingencies.
In our view, we find this transaction surprising on both quantitative and
qualitative fronts. On the quantitative front, the pricing of the transaction
appears rich in light of declining property values, therefore presenting a clear
positive for current shareholders. We have expressed for
<PAGE> 37
some time our opinion that asset values are likely to be on the decline due to
the stanching of both debt and equity capital for real estate. Furthermore,
while we have always recognized IAC's quality asset base and strong market
fundamentals, our neutral rating on the stock has been purely a function of its
already 12% comparative multiple premium. The proposed takeout price is set at
12.5 times our revised 1999 FFO estimate and approximately 12.5 times our
estimated EBITDA (after stripping out approximately $200 million in land and
construction in progress), or about 8% cap rate equivalent - a 30% - plus
premium to its peer group multiple. __ares based on his more bullish view of the
Company's upcoming d_____ peline, asset values and future ____
front, we are also surprised that The Irvine Company is taking IAC out of the
public fold and willing to forego access to both public and private capital. Mr.
Bren obviously believes--maybe rightfully so--that the retention of cash flow as
a private company and lack of public scrutiny will provide it greater
flexibility as a developer; he may also believe accounting issues relating to
development are unduly restraining.
With respect to our earnings estimates, we are revising our estimates for 1998
and 1999. For 1998 we are raising our FFO estimate from $2.20 per share to $2.30
per share and our FAD estimate from $2.07 per share to $2.16 per share. In 1999,
we are raising our FFO estimate from $2.50 per share to $2.60 per share and our
FAD estimate from $2.29 per share to $2.40 per share. Given today's news and the
move in the stock, it is now clear IAC shareholders have maximized value.
IMPORTANT POINTS
Implications and likelihood of other LBO activity in the REIT universe. A key
question that comes to mind when considering this transaction is, "Is this the
first in a wave of REIT LBO's?" In our view, it is NOT. We think the IAC
transaction is an anomaly for several reasons. First, the acquirer in the IAC
transaction already owns 67% of the enterprise. Therefore, the cross ownership
of the two enterprises makes this deal somewhat unique. Donald Bren, most
likely, believes that retention of capital would provide The Irvine Company an
important source of funds with which to finance its large development appetite.
Second, Mr. Bren has historically shunned the public markets, and most likely
views private ownership of IAC to be less restrictive. Third, we estimate that
most REITs trade only on par with their underlying net asset values. At these
levels, prices are too high to undertake LBOs.
IAC's core market, Orange County, should continue to perform well over the
near-to-intermediate term. In our recently rolled out DLJ Real Estate Forward
Supply/Demand Index, we highlighted the 20 markets that contain the most and
least supply versus demand risk over the next 18 months. Based on our
calculations, we contend that Orange County should exhibit greater demand growth
than supply growth (by about 200 basis points). The Irvine Company may now be
willing to pay the premium it has offered because of its current and expected
strength in this core market of theirs.
Does this transaction change the competitive landscape in the Southern
California apartment market? Given the fact that we consider Donald Bren and his
organization to be "smart money", this transaction is a very bullish signal that
there is imbedded value in the Southern California
<PAGE> 38
apartment markets. However, we do not think the competitive landscape between
IAC and its competitors should change much. We say this because IAC will likely
continue in its private form developing, acquiring, and managing their
operations at least as aggressively as it has been in the REIT wrapper. Thus,
today's transaction is a bullish signal from a well-heeled investor about the
prospects for other multifamily REITs situated in Southern California, such as
Archstone Communities (ASN), AvalonBay Communities (AVB), Essex Property Trust
(ESS)+, and Pacific Gulf Properties (PAG), BRE Properties (BRE), and Equity
Residential (EQR), could benefit if Mr. Bren's confidence in his real estate
markets manifests.
WITHIN THE PAST THREE YEARS DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
HAS BEEN A MANAGING OR CO-MANAGING UNDERWRITER OF THE COMPANY'S SECURITIES.
AN AFFILIATE OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION . . . .
[ILLEGIBLE] . . .
ORDERS EXECUTED ON A REGIONAL STOCK EXCHANGE WHERE IT ACTS AS A SPECIALIST.
Copyright Donaldson, Lufkin & Jenrette Securities Corporation, 1998.
Additional information is available upon request.
First Call Corporation - all rights reserved. 617/345-2500
END OF NOTE
<PAGE> 39
Copies Howie Original
Mead Wagner Churchill
Paul McFarland
Lifland McKee
Harry E. Rose
FIRST CALL RESEARCH NETWORK
01:26 pm EST 04-Dec-98 EVEREN Securities IAC
IAC: The Irvine Company proposes to take IAC private
EVEREN Securities, Inc. Equity Research Note
December 4, 1998
<TABLE>
<S> <C>
Burland East, CFA 619.702.4355
Eric Lohmeier 312.574.5963
Philip Martin 312.574.6280
Hollis Taylor 619.702.4358
Jeff Donnelly, CFA 619.702.4356
Christiana Moffa 312.574.5903
</TABLE>
<TABLE>
<CAPTION>
Company: Irvine Apartment Communities (IAC-$31.63) a/o 7:00am CST
<S> <C> <C>
Industry: Real Estate
Int. Term Rating: 2 - Outperformer Target Price: $32.50
Long Term Rating: 2 - Outperformer Target Price: NA
Suitability Income
</TABLE>
*The Irvine Company (TIC) proposes to take IAC private
*Makes cash offer for $32.50 per share
*TIC already owns 63% of equity
*Reducing rating to 2-2 based on price movement
*We do not see this as a precursor to additional going private transactions
<TABLE>
<S> <C>
Dividend: $1.54 P/FFO 1998: 13.8x
Yield: 4.81% P/FFO 1999: 12.3x
Cash Flow `99E: $2.58 5 Year Est. FFO- Growth Rate: 11%
Inst. Hldgs.: 71% Insider Hldgs.: 55%
FY: December Shares Outstanding (Mil): 45
Payout Ratio `99E: 59.2% 52 WK Range: $33-$23
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
FF0 1997A 1998E Prior 1999E Prior 2000E
Q1 0.48 0.52 0.63 0.61
Q2 0.50 0.56 0.64 0.62
Q3 0.51 0.60A 0.65 0.63
Q4 0.52 0.61 0.60 0.66 0.64
$ 2.01 $ 2.29 $ 2.25 $ 2.58 $ 2.50 $ 2.88
Consensus $ 2.25 $ 2.54 $ 2.84
</TABLE>
*As reported: A=Actual, E=Estimate;
Highlights
The Irvine Company (TIC) has made an offer to purchase the 37% of the shares of
Irvine Apartment Communities that it does not already own. The offer is for
$32.50 in cash. The board of directors of
<PAGE> 40
IAC will meet today and likely choose a financial advisor to opine as to
valuation and fairness. We do not anticipate any roadblocks in this deal and we
think that TIC has the financing to make it happen. The timeline to close is
uncertain, but we would guess that first quarter of FY 1999 is likely.
We speculate that the reason for the transaction is that TIC believes that the
implied return on equity it must pay the public markets exceeds the returns it
would pay to private investors or joint venture partners. The implied cap rate
on the portfolio based on 4Q 1998 annualized NOI is slightly higher than 8%.
We are reducing our rating on the shares to 2-2 based on the price of the shares
and believe they are fully valued at this time.
Time: 12:15 pm CST S&P 500: 1169
Additional information available upon request.
This report herein is not a complete analysis of every material fact respecting
any company, industry or security. The opinions expressed here reflect the
judgment of the author at this date and are subject to change without notice.
Information has been obtained from sources believed to be reliable, but is not
guaranteed. EVEREN Securities, Inc. and/or its officers, directors, employees or
members of their families and investment portfolios managed by the firm or its
affiliated companies may have an interest in the securities and/or options of
the issues described in this report, and may purchase, sell, trade or act as a
market maker while this report is in circulation. Copyright 1998 by EVEREN
Securities, Inc.
First Call Corporation - all rights reserved. 617/345-2500
Note ID: 352449
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To update your order or to receive research on other companies,
please call Corporate Services at (617) 856-2100.
First Call Corporation TEL: 617-856-2100
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Boston, MA 02210 EMAIL: [email protected]
First Call is a registered trademark of the First Call Corporation
<PAGE> 41
Copies Howie Original
Mead Wagner Churchill
Paul McFarland
Lifland McKee
Harry E. Rose
FIRST CALL RESEARCH NETWORK
09:55am EST 03-Dec-98 J.P. Morgan (SCHALOP, LEE (1-212)
IRVINE APARTMENT COMMUNITIES: PROPOSES $32.50 PER SHARE
December 3, 1998
J.P. MORGAN SECURITIES INC. - EQUITY RESEARCH
LEE SCHALOP (1-212) 648-9470
Alexis V. Hughes (1-212) 648-6752
John Saunders (1-212) 648-6585
Josh Paradise (1-212) 648-9480
Irvine Apartment Communities (Buy)
THE IRVINE COMPANY PROPOSES $32.50 PER SHARE BUYOUT OF IAC;
NEGOTIATIONS TO BEGIN
<TABLE>
<CAPTION>
IAC FFO/Share P/FFO
12/1 Rge 12/97 12/98 12/99 4Q/98 4Q/97 12/98E 12/99E Yld (MM)
- ---- --- ----- ----- ----- ----- ----- ------ ------ --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$31.56 $32-23 $2.00A $2.29E $2.58E $0.61E $0.52A 13.8 12.2 4.9% $635MMx
</TABLE>
x REIT shares only
Yesterday, The Irvine Company (TIC), a private California company controlled by
Donald Bren that owns the approximately 90,000 acre Irvine Ranch in Orange
County, CA, announced an offer to acquire the 16.6 million publicly owned shares
of Irvine Apartment Communities (NYSE: IAC) for $32.50 per share, or about $540
million. TIC currently owns roughly 55% of Irvine Apartment Communities, L.P.
(the operating partnership) and roughly 17% of IAC. This equates to a 63% total
ownership stake. See the first bullet point below for an explanation of IAC's
ownership structure. If the acquisition of the remaining 37% of the operating
partnership is completed, IAC will become a private company. Details on the
transaction follow:
- - First, a word on IAC's structure. IAC is an UPREIT (umbrella partnership
REIT). This means that IAC does not own real estate directly; instead, it
is a partner in Irvine Apartment Communities, L.P. (the operating
partnership), which owns apartment buildings, options on sites, and the
exclusive right through 2020 to develop apartment communities on TIC-owned
land. IAC is the sole general partner of the operating partnership is TIC,
which is a limited partner and owns the remaining 55% (in addition to its
17% ownership stake in IAC). TIC's total ownership of the operating
partnership is roughly 63% (55% + 17%x45% = 63%).
- - We believe TIC's offer of $32.50 per share is reasonable for two reasons.
First, a price of $32.50 represents a $5.12 premium over IAC's November 30
close (the last day of which IAC traded before the announcement) of
$27.38, or an 18.7% premium. This compares favorably with the average 10%
premium paid for real estate company targets during the past two years.
Second, a price of $32.50 represents a premium over our calculation of
IAC's net asset value of $28.71-32.04 per share (which
<PAGE> 42
is based on cap rate range of 8.0-7.5%, second quarter annualized results,
and no value for the exclusive land rights). Despite our view that the
offer is reasonable, we believe IAC's board is likely to try to negotiate
a higher price.
- - IAC's response. We expect IAC to respond to TIC's offer by announcing its
receipt of the offer and its intent to hire a financial adviser to
negotiate the price and the structure of the deal. This process is likely
to take several weeks. Despite the fact that the $32.50 price per share
appears reasonable, we believe there is a strong likelihood that IAC's
board will be able to negotiate a higher price, given the company's
monopolistic position and strong development pipeline. Regarding the
structure, it is likely to be either a tender offer (which could close in
roughly one month) or a friendly merger (which we would expect to close in
several months).
- - Debt and preferred may be an issue. In its announcement, TIC declared its
intentions to leave outstanding the operating partnership's current debt
and preferred stock. In our view, it is uncertain (although probable) that
TIC will legally be permitted to do this. Nonetheless, it is also likely
that TIC will encounter fierce opposition from those who bought this debt
and preferred stock with the expectation that such would remain securities
of a public company. For example, Moody's has already placed under review
for possible downgrade the operating partnership's Baa2 senior unsecured
debt rating.
Our IAC financial model is available on the J.P. Morgan research web site
MorganWise (www.jpmorgan.com/morganwise). For information on obtaining access to
the site, contact your J.P. Morgan salesperson.
(J.P. Morgan Securities Inc. acted as co- or lead-manager in an offering of
securities for this company within the past three years.) First Call Corporation
- - all rights reserved. 617/345/2500
Note ID: 341655
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To update your order or to receive research on other companies, please call
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- --------------------------------------------------------------------------------
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Boston, MA 02210 EMAIL: [email protected]
First Call is a registered trademark of the First Call Corporation
<PAGE> 43
Copies Howie Original
Mead Wagner Churchill
Paul McFarland
Lifland McKee
Harry E. Rose
FIRST CALL RESEARCH NETWORK
11:00am EST 03-Dec-98 Salomon Smith Barney (SHERMAN (2]
IAC: Downgrade To Neutral Based On Price
- - - SUMMARY: - - Irvine Apartment Communities -- Real Estate Investment Trusts
x Yesterday, following The Irvine Company's (TIC) offer to purchase the 37%
of IAC it does not already own for $32.50 a share. IAC jumped to $31.50
x Our target had been $31
x Our note yesterday described $32.50 as a full price for IAC (12%-15% over
our NAV, a 7.5% cap rate on forward NOI and 12.7x 99E FFO)
x Highly unlikely another bidder will emerge, given price but mostly since
TIC owns 63% and would not (in our view) ever be sellers of their stake
x To obtain approval from independent directors/minority shareholders, it is
possible that TIC will have to increase its bid (not because $32.50 is
cheap but because of typical process/negotiating strategy in a deal where
insiders take a co. private); we are not counting on more than a few
pennies extra, if any; raising target to $32.50 & lowering rating to 3M
EARNINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
<S> <C> <C> <C> <C> <C> <C> <C>
Actual 12/97 FFO $0.48A $0.50A $0.51A $0.52A $2.00A
Previous 12/98 FFO $0.52A $0.56A $0.60A $0.61E $2.27E
Current 12/98 FFO $0.52A $0.56A $0.60A $0.61E $2.27E
Previous 12/99 FFO $N/A $N/A $N/A $N/A $2.55E
Current 12/99 FFO $N/A $N/A $N/A $N/A $2.55E
Previous 12/00 FFO $N/A $N/A $N/A $N/A $N/A
Current 12/00 FFO $N/A $N/A $N/A $N/A $N/A
Footnotes:
</TABLE>
FUNDAMENTALS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Current Rank . . . . . . . . :3-M Price 12/02/98 . . . . . . . :$31.56
Prior Rank . . . . . . . . . :2-M Target Price . . . . . . . . :$32.50
Price FFO/98 . . . . . . . . :13.9X 52 Wk. Price Range . . . . . :32.18 - 23.37
Price FFO/99 . . . . . . . . :12.4X Proj. 5yr EPS Grth . . . . . :9.0%
LT Debt-to-Capital . . . . . :34.61% Dividend . . . . . . . . . . :$1.50
Revenue 0098 . . . . . . . . :$N/A mil Yield. . . . . . . . . . . . :4.7%
Shares Outstanding . . . . . :45.03 mil Convertible. . . . . . . . . :No
Mkt. Capitalization. . . . . :$1421.15 mil Hedge Clause(s). . . . . . . :
Comments . . . . . . . . . . :
</TABLE>
FFO = Funds from Operations per share. FFO is defined as net income according to
GAAP before depreciation, amortization, and gains or losses from property sales,
plus FFO from unconsolidated joint ventures.
<PAGE> 44
(a) Calculated using market value of equity.
OPINION
- --------------------------------------------------------------------------------
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person. Investors should obtain individual financial advice based on their own
particular circumstances before making an investment decision on the basis of
the recommendations in this report.
The research opinions of the Firm may differ from those of the Robinson-Humphrey
Company, LLC, a wholly owned brokerage subsidiary of Salomon Smith Barney Inc.
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(c) Salomon Smith Barney Inc., 1998. All rights reserved. Any unauthorized use,
duplication or disclosure is prohibited by law and will result in prosecution.
SHERMAN (212) 816-8408
First Call Corporation - all rights reserved. 617/345-2500
Note ID: 341968
- --------------------------------------------------------------------------------
To update your order or to receive research on other companies,
please call Corporate Services at (617) 856-2100.
- --------------------------------------------------------------------------------
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First Call is a registered trademark of the First Call Corporation
<PAGE> 45
Copies Howie Original
Mead Wagner Churchill
Paul McFarland
Lifland McKee
Harry E. Rose
FIRST CALL RESEARCH NETWORK
11:00am EST 03-Dec-98 Salomon Smith Barney (SHERMAN (2]
IAC: Downgrade To Neutral Based On Price
- - - SUMMARY: - - Irvine Apartment Communities -- Real Estate Investment Trusts
x Yesterday, following The Irvine Company's (TIC) offer to purchase the 37%
of IAC it does not already own for $32.50 a share. IAC jumped to $31.50
x Our target had been $31
x Our note yesterday described $32.50 as a full price for IAC (12%-15% over
our NAV, a 7.5% cap rate on forward NOI and 12.7x 99E FFO)
x Highly unlikely another bidder will emerge, given price but mostly since
TIC owns 63% and would not (in our view) ever be sellers of their stake
x To obtain approval from independent directors/minority shareholders, it is
possible that TIC will have to increase its bid (not because $32.50 is
cheap but because of typical process/negotiating strategy in a deal where
insiders take a co. private); we are not counting on more than a few
pennies extra, if any; raising target to $32.50 & lowering rating to 3M
EARNINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
<S> <C> <C> <C> <C> <C> <C> <C>
Actual 12/97 FFO $0.48A $0.50A $0.51A $0.52A $2.00A
Previous 12/98 FFO $0.52A $0.56A $0.60A $0.61E $2.27E
Current 12/98 FFO $0.52A $0.56A $0.60A $0.61E $2.27E
Previous 12/99 FFO $N/A $N/A $N/A $N/A $2.55E
Current 12/99 FFO $N/A $N/A $N/A $N/A $2.55E
Previous 12/00 FFO $N/A $N/A $N/A $N/A $N/A
Current 12/00 FFO $N/A $N/A $N/A $N/A $N/A
Footnotes:
</TABLE>
FUNDAMENTALS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Current Rank . . . . . . . . . :3-M Price 12/02/98 . . . . . . . . :$31.56
Prior Rank . . . . . . . . . . :2-M Target Price . . . . . . . . . :$32.50
Price FFO/98 . . . . . . . . . :13.9X 52 Wk. Price Range . . . . . . :32.18 - 23.37
Price FFO/99 . . . . . . . . . :12.4X Proj. 5yr EPS Grth . . . . . . :9.0%
LT Debt-to-Capital . . . . . . :34.61% Dividend . . . . . . . . . . . :$1.50
Revenue 0098 . . . . . . . . . :$N/A mil Yield. . . . . . . . . . . . . :4.7%
Shares Outstanding . . . . . . :45.03 mil Convertible. . . . . . . . . . :No
Mkt. Capitalization. . . . . . :$1421.15 mil Hedge Clause(s). . . . . . . . :
Comments . . . . . . . . . . . :
</TABLE>
FFO = Funds from Operations per share. FFO is defined as net income according to
GAAP before depreciation, amortization, and gains or losses from property sales,
plus FFO from unconsolidated joint ventures.
<PAGE> 46
(a) Calculated using market value of equity.
OPINION
- --------------------------------------------------------------------------------
Salomon Smith Barney is a registered broker-dealer. It is a member of Citigroup
Inc. and is affiliated with Citibank, N.A. and its subsidiaries and branches
worldwide (collectively "Citibank"). Despite those affiliations, securities
recommended, offered, sold by, or held at, Salomon Smith Barney: (i) are not
insured by the Federal Deposit Insurance Corporation; (ii) are not deposits or
other obligations of any insured depository institution (including Citibank);
and (iii) are subject to investment risks, including the possible loss of the
principal amount invested.
<PAGE> 47
Copies Howie Original
Mead Wagner Churchill
Paul McFarland
Lifland McKee
Harry E. Rose
FIRST CALL RESEARCH NETWORK
11:00am EST 03-Dec-98 Salomon Smith Barney (SHERMAN (2]
IAC: Downgrade To Neutral Based On Price
- - - SUMMARY: - - Irvine Apartment Communities -- Real Estate Investment Trusts
x Yesterday, following The Irvine Company's (TIC) offer to purchase the 37%
of IAC it does not already own for $32.50 a share. IAC jumped to $31.50
x Our target had been $31
x Our note yesterday described $32.50 as a full price for IAC (12%-15% over
our NAV, a 7.5% cap rate on forward NOI and 12.7x 99E FFO)
x Highly unlikely another bidder will emerge, given price but mostly since
TIC owns 63% and would not (in our view) ever be sellers of their stake
x To obtain approval from independent directors/minority shareholders, it is
possible that TIC will have to increase its bid (not because $32.50 is
cheap but because of typical process/negotiating strategy in a deal where
insiders take a co. private); we are not counting on more than a few
pennies extra, if any; raising target to $32.50 & lowering rating to 3M
EARNINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
<S> <C> <C> <C> <C> <C> <C> <C>
Actual 12/97 FFO $0.48A $0.50A $0.51A $0.52A $2.00A
Previous 12/98 FFO $0.52A $0.56A $0.60A $0.61E $2.27E
Current 12/98 FFO $0.52A $0.56A $0.60A $0.61E $2.27E
Previous 12/99 FFO $N/A $N/A $N/A $N/A $2.55E
Current 12/99 FFO $N/A $N/A $N/A $N/A $2.55E
Previous 12/00 FFO $N/A $N/A $N/A $N/A $N/A
Current 12/00 FFO $N/A $N/A $N/A $N/A $N/A
Footnotes:
</TABLE>
FUNDAMENTALS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Current Rank . . . . . . . . :3-M Price 12/02/98 . . . . . . . :$31.56
Prior Rank . . . . . . . . . :2-M Target Price . . . . . . . . :$32.50
Price FFO/98 . . . . . . . . :13.9X 52 Wk. Price Range . . . . . :32.18 - 23.37
Price FFO/99 . . . . . . . . :12.4X Proj. 5yr EPS Grth . . . . . :9.0%
LT Debt-to-Capital . . . . . :34.61% Dividend . . . . . . . . . . :$1.50
Revenue 0098 . . . . . . . . :$N/A mil Yield. . . . . . . . . . . . :4.7%
Shares Outstanding . . . . . :45.03 mil Convertible. . . . . . . . . :No
Mkt. Capitalization. . . . . :$1421.15 mil Hedge Clause(s). . . . . . . :
Comments . . . . . . . . . . :
</TABLE>
FFO = Funds from Operations per share. FFO is defined as net income according to
GAAP before depreciation, amortization, and gains or losses from property sales,
plus FFO from unconsolidated joint ventures.
<PAGE> 48
(a) Calculated using market value of equity.
OPINION
- --------------------------------------------------------------------------------
Salomon Smith Barney is a registered broker-dealer. It is a member of Citigroup
Inc. and is affiliated with Citibank, N.A. and its subsidiaries and branches
worldwide (collectively "Citibank"). Despite those affiliations, securities
recommended, offered, sold by, or held at, Salomon Smith Barney: (i) are not
insured by the Federal Deposit Insurance Corporation; (ii) are not deposits or
other obligations of any insured depository institution (including Citibank);
and (iii) are subject to investment risks, including the possible loss of the
principal amount invested.
<PAGE> 49
IAC AC 001/014 M001
EC/F US/F NA/F REA/F REITSS FCC// INV/F IAC
4:00 F03 IAC; RECEIVES $32.50 OFFER FROM IRVINE CO., RATING FROM
ACCUMULATING: HOLD December 2, 1998
12-Month Price Target: N/A Craig M. Silvers, CFA (310) 914-0770
Katherine E. Flores (310) 914-0774
Irvine Apartment Communities (IAC/NYSE - $31 3/4)
Receives $32.50 per Share Offer from Irvine Co. Unit;
Lowering Rating from Accumulate to Hold
<TABLE>
<CAPTION>
52-Week Shares Out/ Hist P/E Long-Term Dividend Dividend 3-Year Projected
Range Market Cap Range Debt/Capital /Yield Growth Rate
$32 7/16 - 45.1M/$1.4B N/A 38% $1.54/4.9% 7 - 9%
$23
1Q 2Q 3Q 4Q YEAR P/FFO* PrvEst. Street
<S> <C> <C> <C> <C> <C> <C> <C>
12/97A$0.28 0.50 0.51 0.52 2.01 15.8
12/98E$0.52A 0.56A 0.60A 0.61 2.29 13.9 same $2.25
12/99E$0.62 0.64 0.65 0.68 2.59 12.3 same $2.54
</TABLE>
*FFO = Funds From Operations.
Prices as of 12/02/98 mid-day.
Key Points
Unit of The Irvine Company makes offer to acquire outstanding shares of IAC
for $32.50 each.
- - We believe investors should tender or buy other apartment REITs.
The valuation is fair and implies that other California-focused apartment
REITs are undervalued.
Discussion
The Irvine Company, controlled by IAC's Chairman Donald Bren, has launched a
tender offer of $32.50 per share for the approximately 16 million shares of IAC
that it does not own. The offer price is an 18.7% premium for Tuesday's closing
price, and we believe, is a small premium to the market value of Irvine's
assets. We believe the deal will go through. The implications of the offer price
are that Western apartment REITs are undervalued and that California apartment
markets should remain strong. We recommend that investors tender their shares or
use the stocks as a source of funds for investment into another apartment REIT.
Rating lowered to Hold.
Premium Valuation. The $32.50 per share price represents a nice premium to
Tuesday's closing price. The offer equates to $137,500 per completed unit
(taking into account the approximately 2,700 units Irvine currently has under
construction, we calculate a price of $125,000 per unit). Based on the implied
cap rate and per unit valuations of Bren's offer, we believe the $32.50 price is
fair and we expect the offer to be completed without any significant delays.
Changes in Capital Markets Drive Offer. Bren's representative stated that a
private company is better suited to operate in the current environment. Raising
equity in the current market today would be costly for a REIT, so the best
source of new capital is retained earnings. However, the 95% dividend
requirements removes a big chunk of equity that could be used to buy or build
new properties. Therefore, a private company, with lesser distribution
requirements, will be at an advantage to the public
<PAGE> 50
companies. For a company such as Irvine that has a significant amount of
development, going private is the best method to reallocate cash toward
construction rather than dividends.
California-focused apartment REITs we cover, Essex (ESS(t)/NYSE - $30 3/4; Buy)
and BRE Properties (BRE/NYSE - $24 7/16; Buy) are significantly undervalued.
Furthermore, Bren's offer signals a belief that the fundamentals in California's
housing markets should remain strong. We concur with this view based on the
state's ongoing economic expansion and the relatively tough construction
permitting process.
Valuation. The table below shows the valuation measures implied by Bren's offer.
According to the National Real Estate Index, apartments in Orange County traded
at an 8.5% cap rate during the second quarter of 1998. We believe that larger,
higher-quality apartments, such as those in Irvine's portfolio, would carry
significantly lower cap rates, probably in the 7.5% to 8% range. The table also
shows the implied valuations of the other California-focused REIT stocks we
cover based on Bren's Irvine valuations. On these measures, BRE and Essex are
significantly undervalued.
<TABLE>
<CAPTION>
Implied Cap Rate Implied P/FFO Multiple
3Q98 NOI 4Q98E NOI 1998E FFO 1999E FFO
<S> <C> <C> <C> <C>
Irvine 7.2% 7.5% 14.2 12.5
Prices based on Irvine's Implied Valuations:
BRE $26.42 $27.49 $29.80 $29.61
ESS $40.04 $39.21 $40.45 $39.40
</TABLE>
On a per unit basis, Bren's offer equals about $137,500 per unit. This valuation
measure is not appropriate to apply to BRE or Essex as those companies have a
meaningful portion of their units outside of California and/or have some "B"
quality units as compared to Irvine whose portfolio is comprised almost entirely
of "A" quality units.
The above valuation of Irvine does not take into account the approximately 2,700
units Irvine has under various stages of development. Adjusting for the
development properties at book value, we calculate that Bren's offer carries an
implied cap rate of 7.9%, which translates into prices of about $25 for BRE and
$37 for Essex.
This material is produced by SUTRO & CO. INCORPORATED, 201 California Street,
San Francisco, CA 94111 and TUCKER ANTHONY INCORPORATED, One Beacon Street,
Boston, MA 02108/Members of all major U.S. Securities Exchanges; Members SIPC.
Sutro & Co. Incorporated is a subsidiary of Freedom Securities Co., which is
listed on the NYSE (FSI). Katherine Flores and Craig Silvers. CFA are employees
of Sutro & Co. Incorporated. (n) Sutro & Co. Incorporated makes a market in this
stock. (t) Sutro & Co. Incorporated has managed or comanaged a public offering
of securities for this company within the past three years. (c) Bonds or
preferred stock convertible into this issue are available. (j) Sutro & Co.
Incorporated and Tucker Anthony Incorporated may both, from time to time, issue
research reports with differing opinions on the same company. (o) Listed options
available. (b) Tucker Anthony Incorporated has managed or comanaged a public
offering of securities for this company within the past three years. (m) Tucker
Anthony Incorporated makes a market in this stock. The information contained
herein is obtained from sources we believe to be reliable, but no representation
or guarantee is made as to its accuracy or completeness. This report is neither
an offer, nor the solicitation of an offer, to buy or sell any securities
referenced in this report. Opinions expressed are subject to change without
notice. Sutro & Co. Incorporated, and Tucker Anthony Incorporated are associated
with Freedom Specialist, Incorporated, an NYSE specialist that makes a market in
certain
<PAGE> 51
securities. At any given time, Freedom Specialist, Inc., may have an inventory
position either "long" or "short", in this security and as a result of its
function as a market maker, Freedom Specialist, Inc., may be on the opposite
side of orders executed on the floor of the Exchange in this security. Copyright
1998 Sutro & Co., Incorporated, Tucker Anthony Incorporated.
First Call Corporation - all rights reserved. 617/345-2500
END OF NOTE
<PAGE> 52
SUTRO & CO. IAC/NYSE
INVESTMENT PROFESSIONALS DECEMBER 2, 1998
SINCE 1858 CRAIG M. SILVERS, CFA
RATING: HOLD (310) 914-0770
12-MONTH PRICE KATHERINE E. FLORES
TARGET: N/A (310) 914-0774
IRVINE APARTMENT COMMUNITIES (IAC/NYSE - $31 3/4)
RECEIVES $32.50 PER SHARE OFFER FROM IRVINE CO. UNIT;
LOWERING RATING FROM ACCUMULATE TO HOLD
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
Changes made in: EPS Revisions Old New Expected short-term impact: ____
Estimates FY98 Shares may strengthen ____
Rating X FY99 No impact anticipated ____
Price Target FY00 Shares may weaken ____
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
52-Week Shares Outstanding/ Historical P/E Long-Term Dividend 3-Year Projected
Range Market Cap Range Debt/Capital /Yield Growth Rate
$32 7/16-$23 45.1 Mil $1.4 Bil N/A 38% $1.54 4.9% 7 - 9%
1Q 2Q 3Q 4Q YEAR P/FFO* Prv.Est. Street
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/97A $0.28 0.50 0.51 0.52 2.01 15.8
12/98E $0.52A 0.56A 0.60A 0.61 2.29 13.9 same $2.25
12/99E $0.62 0.64 0.65 0.68 2.59 12.3 same $2.54
</TABLE>
*FFO=Funds From Operations.
Prices as of 12/02/98 mid-day.
- --------------------------------------------------------------------------------
KEY POINTS
- - Unit of The Irvine Company makes offer to acquire outstanding shares of
IAC for $32.50 each.
- - We believe investors should tender or buy other apartment REITs.
- - The valuation is fair and implies that other California-focused apartment
REITs are undervalued.
DISCUSSION
The Irvine Company, controlled by IAC's Chairman Donald Bren, has launched a
tender offer of $32.50 per share for approximately 16 million shares of IAC that
it does not own. The offer price is 18.7% premium to Tuesday's closing price,
and we believe, is a small premium to the market value of Irvine's assets. We
believe the deal will go through. The implications of the offer price are that
Western apartment REITs are undervalued and that California apartment markets
should remain strong. We recommend that investors tender their shares or use the
stock as a source of funds for investment into another apartment REIT. RATING
LOWERED TO HOLD.
Premier Valuation. The $32.50 per share price represents a nice premium to
Tuesday's closing price. The offer equates to $137,500 per completed unit
(taking into account the approximately 2,700 units Irvine currently has under
construction, we calculate a price of $125,000 per unit). Based on the implied
cap rate and per unit valuations of Bren's offer, we believe the $32.50 price is
fair and we expect the offer to be completed without any significant delays.
<PAGE> 53
Changes in Capital Markets Drive Offer. Bren's representative stated that a
private company is better suited to operate in the current environment. Raising
equity in the current market today would be costly for a REIT, so the best
source of new capital is retained earnings. However, the 95% dividend
requirement removes a big chunk of equity that could be used to buy or build new
properties. Therefore, a private company, with lessor distribution requirements,
will be at an advantage to the public companies. For a company such as Irvine
that has a significant amount of development, going private is the best method
to reallocate cash toward construction rather than dividends.
Implications of the Offer. The offer implies that the two other
California-focused apartment REITs we cover, Essex (ESS /NYSE - $30 3/4; Buy)
and BRE Properties (BRE/NYSE - $24 7/16; Buy) are significantly undervalued.
Furthermore, Bren's offer signals a belief that the fundamentals in California's
housing markets should remain strong. We concur with this view based on the
state's ongoing economic expansion and the relatively tough construction
permitting process.
Valuation. The table below shows the valuation measures implied by Bren's offer.
According to the National Real Estate Index, apartments in Orange County traded
at an 8.5% cap rate during the second quarter of 1998. We believe that larger,
higher-quality apartments, such as those in Irvine's portfolio, would carry
significantly lower cap rates, probably in the 7.5% to 8% range. The table also
shows the implied valuations of the other California-focused REIT stocks we
cover based on Bren's Irvine valuations. On these measures, BRE and Essez are
significantly undervalued.
<TABLE>
<CAPTION>
Implied Cap Rate Implied P/FFO Multiple
3Q98 NOI 4Q98E NOI 1998E FFO 1999E FFO
------------------------- ---------------------------
<S> <C> <C> <C> <C>
Irvine 7.2% 7.5% 14.2 12.5
Prices based on Irvine's Implied Valuations:
BRE $26.42 $27.49 $29.80 $29.61
ESS $40.04 $39.21 $40.45 $39.40
</TABLE>
On a per unit basis, Bren's offer equals about $137,500 per unit. This valuation
measure is not appropriate to apply to BRE or Essex as those companies have a
meaningful portion of their units outside of California and/or have some "B"
quality units as compared to Irvine whose portfolio is comprised almost entirely
of "A" quality units.
The above valuation of Irvine does not take into account the approximately 2,700
units Irvine has under various stages of development. Adjusting for the
development properties at book value, we calculate that Bren's offer carried an
implied cap rate of 7.9%, which translates into prices of about $25 for BRE and
$37 for Essex.
<PAGE> 54
EXHIBIT II
<PAGE> 55
1999 PROJECTED APARTMENT RENT GROWTH RATES
EXHIBIT II SUMMARY
<TABLE>
<CAPTION>
Projected
Exhibit 1999 Rent Growth
------- ----------------
<S> <C> <C>
OVERALL AVERAGE (ALL SOURCES) 4.8%
Irvine Apartment Communities
1999 Business Plan, dated October 1998 II-A/B 5.0%
Bonita Canyon II-C 6.0%
Park Place (existing apartments) II-D 5.0%
Park Place (Pro-forma land) II-D 6.0%
Lower Peters Canyon
Base Case II-E 5.0%
Low Case II-E 3.0%
High Case II-E 6.0%
Based on Orange County Household Income Growth Projections II-S 3.3%
10-Year Historical Rent Growth II-T 3.0%
20-Year Historical Rent Growth II-V 6.2%
AVERAGE - IRVINE APARTMENT COMMUNITIES 4.9%
Wall Street Research
Jeffries II-R 5.0%
JP Morgan II-R 5.0%
DLJ II-R 5.5%
Sutro II-R 3.0%
Prudential II-R 6.0%
Goldman Sachs II-R 5.0%
Merrill Lynch II-R 5.0%
Bear Stearns II-R 5.0%
Salomon Smith Barney II-R 3.7%
UBS II-R 4.5%
Oppenheimer II-R 5.0%
AVERAGE - WALL STREET RESEARCH 4.8%
</TABLE>
<PAGE> 56
ECONOMIC REPORT - EXECUTIVE SUMMARY
- --------------------------------------------------------------------------------
IAC's investment decisions are driven by fundamental market economic conditions.
The success of IAC's capital investments is largely determined by supply/demand
imbalances for the Company's products. IAC's market research effort is dedicated
to identifying these imbalances in order to enhance returns on investment. On
the basis of this market research, IAC has identified target markets which
exhibit significant imbalances. By focusing investment in supply-constrained
areas, IAC will enhance risk-adjusted returns to shareholders.
The following table summarizes the Company's rent growth assumptions for the
Business Planning period:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Irvine Ranch 5.0% 4.0% 3.0% 3.0% 3.0%
San Diego 4.0% 4.0% 3.0% 3.0% 3.0%
Silicon Valley 5.0% 4.0% 3.0% 3.0% 3.0%
West L.A. 5.0% 4.0% 3.0% 3.0% 3.0%
</TABLE>
- - MACRO MARKET ANALYSIS INDICATES SLOWER ECONOMIC GROWTH. Global economic
conditions will result in slower growth in each of IAC's markets. Drive by
recessionary pressures in Asia and the emerging markets, California's
growth is expected to moderate. IAC will continue to monitor macro
conditions to determine any impact on the Company's investment strategy.
- - MICRO MARKET ANALYSIS INDICATES CONTINUED DEMAND FOR IAC PRODUCT. Despite
the global market conditions, IAC believes that there continues to be
strong demand for high-end apartment communities in each of the Company's
markets. A combination of higher wage job growth and low supply levels
will lead to a continued supply/demand imbalance.
- - IAC MARKET RESEARCH WILL ENABLE THE COMPANY TO CHALLENGE TRADITIONAL VIEWS
OF RENTERS. IAC will use its knowledge of the market to go beyond the
traditional renter base. The challenge for the Company is to identify new
consumers of its product. The successful introduction of the "Family"
product demonstrates the potential of this approach. By continuing to
challenge the concept of the renter, IAC will be able to grow the market
for its product.
- - IAC WILL USE ITS MARKET RESEARCH AS A SOURCE OF COMPETITIVE ADVANTAGE.
IAC's long history of developing in high-end markets has given it an
unmatched knowledge of these markets. The Company will use this knowledge
as a competitive advantage against its peers. Having a better
understanding of the high-end markets enables IAC to make more informed
investment decisions than its competitors, and hence increase relative
returns.
<PAGE> 57
II-A
ECONOMIC REPORT
- --------------------------------------------------------------------------------
IAC continuously monitors local, regional, national and international trends in
order to develop sound strategies for Business Planning. Projections for
specific demand rely heavily on the relationships between employment, population
and household growth within each of the Company's markets. Although IAC projects
strong growth in demand for high-end apartments in each of its markets, there
are major issues abroad which may have an impact on the Company's earnings.
IAC Market Research is dedicated to providing value-added market intelligence in
order to gain insight into industry competitors, target markets, product
segmentation, demand and supply dynamics, key economic indicators and trends,
development strategy, marketing strategy, operating strategy and the dimension
and magnitude of potential acquisition plans. Overall, the information and
analysis generated by IAC Market Research will ultimately assist IAC in
achieving the Company's overall mission; by contributing to IAC's profitability,
NOI, shareholder value and leadership position within the real estate
multifamily market.
Summary of Economic Overview
Of primary concern for industry across the United States is the looming global
economic crisis. Japan, Russia, Hong Kong and many other countries--especially
in Asia--are in the midst of a financial meltdown. Foreign banks are strapped
for cash--Japan's banking system is saddled with nearly a trillion in bad or
risky loans. Foreign currencies have plummeted--the Russian Ruble has dropped
over 335% in value versus the U.S. dollar over the past two months. These
economic crises are leading to serious civil unrest, and no one is stepping up
to provide leadership. Concern over the global markets has affected the U.S.
markets in recent months, as stock markets continue to fluctuate wildly.
Economists expect the effect of global economic crises to continue to ripple
through the United States economy.
Fundamentals in the United States, however, remain strong. The jobless rate is
hovering around 4.5%, inflation is low and the general economy is growing
steadily. Although California is perhaps more susceptible to the decline in
Asian economics than much of the rest of the nation, the Company expects no
recession in the near-term.
The Company's outlook on its core markets, therefore, remains strong in the
near-term. The following bullets summarize the Company's projection of rent
growth in each market for the Business Planning period.
- - RENT GROWTH IN EACH OF THE COMPANY'S FOUR MARKETS IS EXPECTED TO RANGE
BETWEEN 4% AND 5% OVER THE NEXT TWO YEARS.
- - ECONOMISTS EXPECT THAT THE GLOBAL ECONOMIC CRISIS WILL FUNDAMENTALLY
AFFECT THE U.S. ECONOMY IN 2000. TO REFLECT THIS SENTIMENT AND OTHER
ANALYSES, THE COMPANY PROJECTS 3% RENT GROWTH FROM 2001 THROUGH THE
REMAINDER OF THE BUSINESS PLAN PERIOD.
The remainder of this section provides a summary context for the Company's
projects. See Appendix D for a detailed outlook regarding the Company's markets.
<PAGE> 58
Orange County/Irvine Ranch Economic Outlook
The Orange County economic outlook for 1999 is for a moderate contraction due to
a variety of declining and potentially collapsing foreign economies as well as
the declining California economic outlook. However, stabilized job growth and
household formation growth, coupled with the limited supply of for-sale housing
and decreasing affordability levels, should fuel demand for long-term rental
housing. Orange County's big economic story in 1998 was the extremely hot
for-sale housing market that created a short-term dip in apartment demand during
the first half of 1998. This short-term dip in apartment demand appears to be
dissipating, with encouraging occupancy trends occurring during the 3rd quarter
of 1998.
- - RENT GROWTH ON THE IRVINE RANCH IS EXPECTED TO BE 5% IN 1999. Rent growth
is expected to average approximately 3.6% through 2003, which reflects a
moderate decline as the global economic crisis penetrates Orange County.
- - PROJECTED APARTMENT DEMAND IS EXPECTED TO OUTPACE PROJECTED APARTMENT
SUPPLY. Economists project that, on average, apartment demand will outpace
apartment supply through 2003.
- - JOB GROWTH IS PROJECTED TO DECREASE AND REMAIN AT MODERATE TO STRONG
LEVELS IN 1999. Orange County employers added 44,900 jobs during 1997, a
3.8% increase. 1998 has already seen a moderate decline in job growth, as
seven out of the last nine months have seen fewer jobs created than last
year. Estimates for 1998 job growth range from 35,000 on the low end to
55,000 on the very high end, with the median around 42,500 new jobs.
- - JOB GROWTH IS PROJECTED TO BE STRONGEST IN SERVICES, MANUFACTURING,
WHOLESALE TRADE AND CONSTRUCTION. In 1997, services added 15,500 jobs,
manufacturing added 6,300 jobs, wholesale trade added 4,900 jobs and
construction added 2,300 jobs. This trend is expected to continue through
the Business Planning period, as Orange County's industry continues to
diversify. Continued growth in the manufacturing sector is expected to be
focused on high-tech and durable manufacturing firms, which should offset
projected losses in the aerospace/defense sector.
- - AS NEW JOBS ARE CREATED ON THE IRVINE RANCH, THE NEW TOLL ROADS ARE
EXPECTED TO EASE THE COMMUTE ONTO THE RANCH. The Eastern Transportation
Corridor is scheduled to open in the fall of 1998. This corridor may
impact the housing location decisions of future homebuyers and renters.
The relatively new toll roads are projected to have only a short-term
negative impact on the Irvine Ranch rental market. The potential impact of
the three toll roads should be monitored carefully. The following bullets
summarize the status of the toll roads.
- The 24-mile EASTERN TRANSPORTATION CORRIDOR is scheduled to be
completed in 1999 and will provide easier and faster access for
potential Irvine Ranch employees to Riverside and outlying areas of
North Orange County, such as Anaheim Hills and Orange.
- The 30-mile FOOTHILL TRANSPORTATION CORRIDOR is approximately half
completed and provides easier and faster access for potential Irvine
Ranch employees to areas within South Orange County such as Mission
Viejo, San Clemente and Coto de Caza.
<PAGE> 59
- The completed 17 1/2-mile SAN JOAQUIN HILLS TRANSPORTATION CORRIDOR
provides easier and faster access for potential Irvine Ranch
employees to areas within South Orange County such as Aliso Viejo
and Laguna Niguel.
SAN DIEGO COUNTY/GOLDEN TRIANGLE ECONOMIC OUTLOOK
The San Diego County economic outlook for 1999 projects a moderate contraction,
as many foreign economies degenerate. Like Orange County, San Diego's big
economic story in 1998 was the extremely hot for-sale housing market. However,
unlike Orange County, the very strong for-sale housing market did not create a
short-term dip in apartment demand. From 1999 to 2003, stabilized job growth,
population growth and household formation growth coupled with decreasing
affordability levels should fuel demand for long-term rental housing.
- - RENT GROWTH IN THE SAN DIEGO MARKETPLACE IS EXPECTED TO BE 4% IN 1999.
Although the San Diego market is not as strong as Orange County, the
looming foreign crisis is projected to decrease rent growth to an average
3.4% over the Business Planning period.
- - PROJECTED APARTMENT DEMAND SHOULD OUTPACE 1999 PROJECTED APARTMENT SUPPLY.
Gross demand for units in San Diego County should average approximately
3,400 units per year. This estimate is slightly lower than historical
trends, which have been approximately 3,800 units per year from 1990
through 1996, yet higher than projected construction activity.
- - JOB GROWTH IS PROJECTED TO DECREASE THROUGH 1999 AND REMAIN AT MODERATE TO
STRONG LEVELS THEREAFTER. San Diego County employers added 43,100 jobs
during 1997, a 4.3% increase. However, like the trend in Orange County,
eight out of the last nine months reflected less job growth. Forecasts for
1998 job growth range from 25,000 to 35,000.
- - THE NORTH SAN DIEGO POPULATION DEMONSTRATES STRONG DEMOGRAPHIC
FUNDAMENTALS. The population of north San Diego County is relatively
educated and affluent. In 1996, 40.7% of adults in North San Diego had
received a bachelor's degree, compared to 20.0% of the adults in the
nation. The median household income in 1996 of North San Diego was
$50,600, as compared to a $36,625 figure for the nation.
Santa Clara County/North San Jose Economic Outlook
Like the Orange County and San Diego markets, Santa Clara County is projected to
experience a moderate contraction, as it has a relatively high exposure to the
declining global economy. This is expected to translate into declining job
growth, as the percentage of high-tech exports from this region decrease.
However, in the long term, stabilized job growth and household formation growth
coupled with the limited supply of for-sale housing and one of the lowest
affordability indexes in the nation should fuel long-term demand for rental
housing.
- - RENT GROWTH IN IAC'S SILICON VALLEY MARKETS IS EXPECTED TO BE 5% IN 1999.
Rent growth is expected to average approximately 3.6% through 2003, which
reflects a moderate decline as the global economic crisis penetrates Santa
Clara County.
<PAGE> 60
- - PROJECTED APARTMENT DEMAND SHOULD OUTPACE APARTMENT SUPPLY. Gross demand
for units in Santa Clara County is projected to average approximately
2,900 units per year, which outpaces projected supply by approximately 300
units.
- - JOB GROWTH IS PROJECTED TO DECLINE THROUGH 1999 AND REMAIN AT MODERATE TO
STRONG LEVELS THEREAFTER. Santa Clara County employers added 48,400 jobs
during 1997, a 5.5% increase. However, eight out of the last nine months
reflected less job growth. Although job growth is weaker this year,
forecasts for 1998 job growth still range from 25,000 to 35,000.
Los Angeles County/West Los Angeles Economic Outlook
The for-sale housing market in Los Angeles was strong in the first half of 1998;
however, it did not create a short-term dip in apartment demand. Because much of
the Los Angeles market, like Santa Monica, is governed with rent control, there
was some pent-up demand and price insensitivity. However, the market
fundamentals remain strong for the general Los Angeles market as well. From 1999
to 2003, stabilized job growth, population growth and household formation growth
coupled with decreasing affordability levels are projected to fuel demand for
long-term rental housing.
- - MARKET RENT GROWTH IN WEST LOS ANGELES IS EXPECTED TO BE 5% IN 1999.
Market rent growth is expected to average approximately 3.6% through 2003,
which reflects a moderate decline as the global economic crisis penetrates
southern California. Properties governed by rental control, such as
Champagne Towers will, of course, lag the market.
- - PROJECTED APARTMENT DEMAND IS EXPECTED TO OUTPACE APARTMENT SUPPLY. On
average, projected apartment demand is expected to outpace projected
supply by 875 units. Demand for units in Los Angeles County should average
approximately 4,100 units per year. This estimate is higher than
historical trends, which have been approximately 2,500 to 3,000 units per
year.
- - JOB GROWTH IS PROJECTED TO DECLINE THROUGH 1999 AND REMAIN AT MODERATE TO
STRONG LEVELS THEREAFTER. Los Angeles County employers are expected to add
70,000 new jobs in 1998, compared to 83,683 new jobs during 1997. The
aforementioned Asian financial crisis will undoubtedly impact Los Angeles
County. This is partially due to Los Angeles County's decreasing high-tech
exports, especially from the port in Long Beach, one of the busiest ports
in the world.
Preliminary Irvine Ranch Market Research Observations
Market research compiled over the past years has indicated specific demographic
trends which are the basis for the strategies outlined in the Business Plan. By
matching undersupplied market segments with projected land availability, the
Company has constructed a product pipeline to maximize returns. The Irvine Ranch
product segmentation strategy calls for an increase in Conventional, Family,
Value, Professional, Student/Faculty, Urban Village and For-sale Alternative.
The Company utilizes new product segmentation as well as repositioning of
existing product to take advantage of expected demand segments. Overall, the
Company has identified nine primary renter segments within the Irvine Ranch
portfolio and has established the following targets for each renter segment
based on demographic and economic trends:
<PAGE> 61
II-B
IAC BUSINESS PLAN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Average
---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Rent Growth 5% 4% 3% 3% 3% 3.6%
</TABLE>
- - Global recession slowing U.S. growth
- - Low inflation environment, if not deflation
- IAC rent growth has outpaced CPI by 0% - 3% historically
- Results in 3% - 5% average rent growth
<PAGE> 62
II-C
IRVINE APARTMENT COMMUNITIES, L.P.
BONITA CANYON - VILLAGE 3 (GRAY MARKET)
PROJECT PRO FORMA
TIC PROPOSED LAND PRICE/IAC ASSUMPTIONS
<TABLE>
<CAPTION>
Current Pro Forma
-----------------
<S> <C> <C> <C>
I. Project Statistics/Assumptions
Net Building Acres 10.6 (a)
Units 187
Density 17.6
Project Mix:
Sq. Ft. # Units % of Total
Two Bedroom TH 1,166-1,327 64 34.2%
Three Bedroom TH 1,355-1,581 123 65.8%
------------ -------
187 100.0%
============ =======
Average Sq. Feet 1,384
============
Rent Structure: (Current)
Two Bedroom TH $ 1,805
Three Bedroom TH $ 2,120
Average Rent per Unit $ 2,012 $ 1.45
============ =======
Rent Inflation: (IAC Assumptions):
To Project Opening 6.00%
During Lease-up 3.00%
First Stabilized Year 3.00%
Three-Year Average 4.00%
------------
II. Project Investment/Equity
Total Per Unit Sq. Ft.
------------ ------------ -------
Direct Building Costs $ 13,500,000 $ 72,193 $ 52.17
Indirect Building Costs 2,361,000 12,626 9.12
Common Area 1,400,000 7,487 5.41
Direct Sitework Costs 1,500,000 8,021 5.80
Indirect Sitework Costs 900,000 4,813 3.48
Offsite Costs (Pro Rata Share) 952,000 5,091 3.68
Development/Construction Fee 250,000 1,337 0.97
Marketing 700,000 3,743 2.71
Contingency 1,000,000 5,248 3.86
Finance 3,680,000 19,679 14.22
Land ($1,487,000 per acre incl. spine street) 17,503,000 93,599 67.64
------------ ------------ -------
Total Project Costs $ 43,746,000 $ 233,937 $169.07
============ ============ =======
</TABLE>
<PAGE> 63
<TABLE>
<CAPTION>
Total Per Unit Sq. Ft.
------------ ------------ -------
<S> <C> <C> <C>
III. Project Operations (Stabilized)
Total Project Revenue $ 4,858,000 $ 25,979 $ 18.77
Operating Expenses:
Ongoing Operating Expenses (534,000) (2,856) (2.06)
Management Fee (85,000) (455) (0.33)
Property Taxes (457,000) (2,444) (1.77)
------------ ------------ -------
Operating Expenses (1,076,000) (5,754) (4.16)
------------ ------------ -------
Net Operating Income $ 3,782,000 $ 20,225 $ 14.62
------------ ------------ -------
IV. Return Analysis
Unleveraged Project Yield - 1st Stabilized Year 8.65%
============
</TABLE>
(a) Based on Final Map acreages for Bonita Village.
<PAGE> 64
II-C
IRVINE APARTMENT COMMUNITIES, L.P.
BONITA CANYON - VILLAGE 2 (KTGY)
PROJECT PRO FORMA
TIC PROPOSED LAND PRICE/IAC ASSUMPTIONS
<TABLE>
<CAPTION>
Current Pro Forma
<S> <C> <C> <C>
I. Project Statistics/Assumptions
Net Building Acres 16.1 (a)
Units 351
Density 21.8
Project Mix:
Sq. Ft # Units % of Total
One Bedroom Flat 670-836 140 39.9%
Two Bedroom Flat 1,002-1,140 153 43.6%
Three Bedroom TH 1,138-1,241 58 16.5%
--------- --------------
351 100.0%
========= ==============
Average Sq. Feet 972
=========
Rent Structure: (Current)
One Bedroom Flat $ 1,311
Two Bedroom Flat $ 1,577
Three Bedroom TH $ 1,771
---------
Average Rent per Unit $ 1,504 $ 4.55
========= ==============
Rent Inflation: (IAC Assumptions)
To Project Opening 6.00%
During Lease-up 3.00%
First Stabilized Year 3.00%
Three-Year Average 4.00%
II. Project Investment/Equity
Total Per Unit Sq. Ft.
Direct Building Costs $18,851,000 $ 53,707 $ 55.23
Indirect Building Costs 3,260,000 9,288 9.55
Common Area 2,917,000 8,311 8.55
Direct Sitework Costs 2,002,000 5,704 5.87
Indirect Sitework Costs 1,511,000 4,305 4.43
Offsite Costs (Pro Rata Share) 1,440,000 4,103 4.22
Development/Construction Fee 200,000 570 0.59
Marketing 820,000 2,336 2.49
Contingency 1,300,000 3,704 3.81
Finance 5,388,000 15,350 15.79
Land ($1,390,000 per acre
incl. spine street alloc.) 24,727,000 70,447 106.02
----------- -------- -------
Total Project Costs $62,416,000 $177,824 $216.45
=========== ======== =======
</TABLE>
<PAGE> 65
<TABLE>
<CAPTION>
Total Per Unit Sq. Ft.
-------------------- --------- --------------
<S> <C> <C> <C>
III. Project Operations (Stabilized)
Total Project Revenue $ 6,828,000 $ 19,453 $ 20.01
Operating Expenses:
Ongoing Operating Expenses (866,000) (2,467) (2.54)
Management Fee (119,000) (339) (0.35)
Property Taxes (655,000) (1,866) (1.92)
-------------------- --------- --------------
Operating Expenses (1,640,000) (4,672) (4.81)
-------------------- --------- --------------
Net Operating Income $ 5,188,000 $ 14,781 $ 15.20
-------------------- --------- --------------
IV. Return Analysis
Unleveraged Project Yield - 1st Stabilized Year 8.3%
=========
</TABLE>
(a) Based on Final Map acreages for Bonita Village including 1/2 of Main Rec.
Area.
<PAGE> 66
II-D
IRVINE APARTMENT COMMUNITIES, L.P.
PARK PLACE
EXISTING PROPERTY
PRO FORMA OPERATIONS
30-JUN-98
<TABLE>
<CAPTION>
% of
Total Per Unit Revenue Assumptions/Notes
----- -------- ------- -----------------
<S> <C> <C> <C> <C>
REVENUES
Gross Scheduled Rent $ 2,531,000 $ 11,718 Grows first year market rents at 5%;
BMR's at 3% Turnover at 4% per month
Vacancy (101,000) $ (468) 4.0%
------------ ------------
Net Rental Revenue 2,430,000 11,250
Other Income 62,000 287 2.4% Does not include potential Cox package
------------ ------------ deal
Total Revenue 2,492,000 11,537
------------ ------------
OPERATING EXPENSES
Property Operating & Maintenance 480,000 2,222 19.3%
Management Fees 65,000 301 2.6% Net IAMC Management Fee
Property Taxes 314,000 1,454 12.6% Increase to new basis
------------ ------------ -----
Total Operating Expenses 859,000 3,977 34.5%
------------ ------------ -----
NOI Before Tax-exempt Benefit 1,633,000 7,560 65.5%
Tax-exempt benefit 700,000 3,241 28.1% Tax-exempt financing benefit
------------ ------------ -----
Adjusted NOI $ 2,333,000 $ 10,801 93.6%
============ ============ ====
Purchase Price $ 28,000,000 8.3%
============
Project IRR 10.70%
============
</TABLE>
<PAGE> 67
II-D
IRVINE APARTMENT COMMUNITIES, L.P.
PARK PLACE - 1,225 UNITS
PROJECT PRO FORMA
26-JUN-98
<TABLE>
<CAPTION>
Current Pro Forma
-----------------
<S> <C> <C> <C> <C>
I. Project Statistics/Assumptions
Net Building Acres 28.0
Units 1,226
Density 43.8
Project Mix:
No. of Current % of
Unit Size Units Rents Total
--------- ------ ------- -----
True Studio 550 58 $ 990 4.7%
Junior One Bedroom 650 62 $ 1,165 5.1%
One Bedroom 750 271 $ 1,215 22.1%
One Bedroom + Den 900 123 $ 1,340 10.0%
Two Bedroom Dual Master 1,075 430 $ 1,490 35.1%
Two Bedroom + Den 1,200 163 $ 1,590 13.3%
Two Bedroom (TH) w/2-Car Garage 1,150 58 $ 1,840 4.7%
Two Bedroom + Den (TH) w/2-Car Garage 1,300 61 $ 1,965 5.0%
---------- ---------- ---------- -----
Total 1,190,000 1,226 $1,750,190 100.0%
========== ========== ========== =====
Average 871 $ 1,428
===== ==========
Rent Inflation:
To First Occupancy 6.00%
During Lease-up 4.00%
First Stabilized Year 3.00%
</TABLE>
<TABLE>
<S> <C> <C> <C>
II. Project Investment/Equity
Total Per Unit Sq. Ft
----- -------- ------
Direct Building Costs $ 93,728,000 $ 76,450 $ 78.76
Indirect Building Costs 22,410,000 18,279 18.83
Common Area 9,536,000 7,778 8.01
Direct Sitework Costs 6,480,000 5,285 5.45
Indirect Sitework Costs 3,655,000 2,981 3.07
Development/Construction Fee 800,000 653 0.67
Marketing 2,105,000 1,717 1.77
Offsite Costs 1,000,000 816 0.84
Contingency 4,000,000 3,263 3.36
Finance 20,558,000 16,768 17.28
Land 40,000,000 32,626 33.61
------------- ------------- -------
Total Project Costs $ 204,272,000 $ 166,617 $171.66
============= ============= =======
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
Total Per Unit Sq. Ft
----- -------- ------
<S> <C> <C> <C>
III. Project Operations (Stabilized)
Total Project Revenue $ 24,818,000 $ 20,243 $ 20.86
Operating Expenses:
Ongoing Operating Expenses (2,851,000) (2,325) (2.40)
Management Fee (368,000) (300) (0.31)
Property Taxes (2,317,000) (1,890) (1.95)
------------- ------------- -------
Operating Expenses (5,536,000) (4,515) (4.65)
------------- ------------- -------
Net Operating Income $ 19,282,000 $ 15,728 $ 16.20
============= ============= =======
IV. Return Analysis
Unleveraged Project Yield -
1st Stabilized Year 9.44%
=============
</TABLE>
<PAGE> 69
II-E
PETERS CANYON 5B SENSITIVITY
9.75% CAPITALIZATION RATE
BASE CASE
---------
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rent Growth 5.0% 4.0% 3.0% 3.0% 3.0%
Expense Growth 2.5% 2.5% 3.0% 3.0% 3.0%
</TABLE>
<TABLE>
<CAPTION>
Stabilized NOI Land Price $/Acre Total Cost IRR
-------------- ---------- ------ ---------- ----
<S> <C> <C> <C> <C>
$4,120 $15,169 $1,431 $42,256 12.9%
</TABLE>
LOW CASE
--------
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rent Growth 3.0% 2.0% 1.0% 2.0% 3.0%
Expense Growth 2.5% 2.0% 1.0% 2.0% 3.0%
</TABLE>
<TABLE>
<CAPTION>
Stabilized NOI Land Price $/Acre Total Cost IRR
-------------- ---------- ------ ---------- ----
<S> <C> <C> <C> <C>
$3,934 $13,468 $1,271 $40,346 12.7%
</TABLE>
HIGH CASE
---------
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rent Growth 6.0% 6.0% 6.0% 5.0% 4.0%
Expense Growth 2.5% 2.5% 3.0% 3.0% 3.0%
</TABLE>
<TABLE>
<CAPTION>
Stabilized NOI Land Price $/Acre Total Cost IRR
-------------- ---------- ------ ---------- ----
<S> <C> <C> <C> <C>
$4,275 $16,591 $1,565 $43,851 13.5%
</TABLE>
5-YEAR ACCRETION/DILUTION
-------------------------
<TABLE>
<CAPTION>
Stock Multiple(1)
-----------------
9.0x 10.0x 11.0x 12.0x
------- ------ ------ ------
<S> <C> <C> <C>
($0.008) $0.003 $0.013 $0.022
</TABLE>
- --------
(1) At today's multiple of 10.2x the project is $0.005 accretive.
<PAGE> 70
II-E
PETERS CANYON 5A SENSITIVITY
9.75% CAPITALIZATION RATE
BASE CASE
---------
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rent Growth 5.0% 4.0% 3.0% 3.0% 3.0%
Expense Growth 2.5% 2.5% 3.0% 3.0% 3.0%
</TABLE>
<TABLE>
<CAPTION>
Stabilized NOI Land Price $/Acre(1) Total Cost IRR
-------------- ---------- --------- ---------- ---
<S> <C> <C> <C> <C>
$5,422 $16,437 $999 $55,608 12.7%
</TABLE>
LOW CASE
--------
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rent Growth 3.0% 2.0% 1.0% 2.0% 3.0%
Expense Growth 2.5% 2.0% 1.0% 2.0% 3.0%
</TABLE>
<TABLE>
<CAPTION>
Stabilized NOI Land Price $/Acre Total Cost IRR
-------------- ---------- ------ ---------- ---
<S> <C> <C> <C> <C>
$5,183 $14,291 $869 $53,154 12.5%
</TABLE>
HIGH CASE
---------
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Rent Growth 6.0% 6.0% 6.0% 5.0% 4.0%
Expense Growth 2.5% 2.5% 3.0% 3.0% 3.0%
</TABLE>
<TABLE>
<CAPTION>
Stabilized NOI Land Price $/Acre Total Cost IRR
-------------- ---------- ------ ---------- ---
<S> <C> <C> <C> <C>
$5,684 $18,786 $1,142 $58,296 13.2%
</TABLE>
5-YEAR ACCRETION/DILUTION
-------------------------
<TABLE>
<CAPTION>
Stock Multiple(2)
---------------
<S> <C> <C> <C>
9.0x 10.0x 11.0x 12.0x
-------- ------- ------ -----
($0.017) ($0.002) $0.011 $0.022
</TABLE>
1 In order to reach a land price of $1,295/Acre the rent growth over the
next three years would have to equal 7.95%.
2 At today's multiple of 10.2x the project is break even.
<PAGE> 71
II-R
IAC MARKET RESEARCH
1999 RENT GROWTH PROJECTIONS
WALL STREET ANALYSTS
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
<CAPTION>
YEAR IAC'S RENT GROWTH
---- -----------------
<S> <C>
1989 4.2%
1990 2.9%
1991 2.2%
1992 1.8%
1993 0.7%
1994 1.9%
1995 1.5%
1996 2.2%
1997 6.2%
1998 5.8%
</TABLE>
<PAGE> 72
II-S
RENT GROWTH FORECAST
- --------------------------------------------------------------------------------
BASED ON OC HOUSEHOLD INCOME GROWTH PROJECTIONS
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
<CAPTION>
YEAR IAC'S RENT GROWTH
---- -----------------
<S> <C>
1977 9.3%
1978 11.5%
1979 15.9%
1980 15.1%
1981 11.5%
1982 6.4%
1983 6.4%
1984 6.5%
1985 6.4%
1986 3.7%
1987 7.0%
1988 7.0%
1989 4.2%
1990 2.9%
1991 2.2%
1992 1.8%
1993 0.7%
1994 1.9%
1995 1.5%
1996 2.2%
1997 6.2%
1998 5.8%
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 73
II-T
10-YEAR HISTORICAL RENT GROWTH
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
<CAPTION>
WALL STREET ANALYST INTEREST GROWTH
------------------- ---------------
<S> <C>
Jeffries 5.0%
J. P. Morgan 5.0%
DLJ 5.5%
Sutro 3.0%
Prudential 6.0%
Goldman 5.0%
Merrill 5.0%
Bear Stevens 5.0%
Sol. Smith Barney 3.7%
UBS 4.5%
Oppenheimer 5.0%
----
Average of Wall Street Analysts 4.8%
</TABLE>
<PAGE> 74
II-V
20-YEAR HISTORICAL RENT GROWTH
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
<TABLE>
<CAPTION>
[CORRESPONDING]
HOUSEHOLD INCOME GROWTH PROJECTIONS AVERAGE RENT GROWTH FORECAST
----------------------------------- ----------------------------
<S> <C>
1% 1.00%
2% 1.47%
3% 1.94%
4% 2.41%
5% 2.87%
6% 3.34%
7% 3.81%
8% 4.28%
7% 3.81%
8% 4.28%
9% 4.74%
10% 5.21%
</TABLE>
<PAGE> 75
II-Z
Economic Forecasts - UCLA, Chapman University, CSU Fullerton and Blue-Chip
National Economy
- - The national economy is expected to slow during 1999 due to a slowing
world economy. However, none of the forecasters feel that there is a
strong possibility of recession during the next 1-2 years.
<TABLE>
<CAPTION>
REAL GDP GROWTH
---------------
Actual Forecast
------ --------
1997 1998 (est) 1999 2000 2001 +
---- ---------- ---- ---- ------
<S> <C> <C> <C> <C> <C>
UCLA Anderson Forecast 3.9% 3.7% 2.5% 2.8% 2.7%
Chapman University Forecast 3.9% 3.6% 1.9% 2.4% 3.1%
CSU Fullerton Forecast 3.9% 3.3% 1.8% 2.0% 2.5%
Blue Chip Economic Indicators 3.9% 3.6% 2.2% -- --
</TABLE>
- - Weak real GDP growth is expected to cause the Fed to reduce short-term
interest rates.
- - Chapman projects that long-term rates will increase throughout 1999
because of the increase in the health of the global financial markets.
<TABLE>
<CAPTION>
90-DAY T-BILLS
--------------
Actual Forecast
------ --------
1997 1998 (est) 1999 2000 2001 +
---- ---------- ---- ---- ------
<S> <C> <C> <C> <C> <C>
UCLA Anderson Forecast 5.1% 4.7% 4.0% 4.4% 4.7%
Chapman University Forecast 5.1% 5.1% 4.6% -- --
Blue Chip Economic Indicators 5.1% 4.8% 4.3% -- --
</TABLE>
<TABLE>
<CAPTION>
30-YEAR T-BILLS
---------------
Actual Forecast
------ --------
1997 1998 (est) 1999 2000 2001 +
---- ---------- ---- ---- ------
<S> <C> <C> <C> <C> <C>
UCLA Anderson Forecast 6.6% 5.6% 5.3% 5.6% 5.8%
Chapman University Forecast 6.6% 5.6% 5.6% -- --
CSU Fullerton Forecast 6.6% 5.2% 5.4% 5.6% 5.5%
Blue Chip Economic Indicators 6.6% 5.2% 5.0% -- --
</TABLE>
- - UCLA reports that low interest rates, inflation and unemployment fueled
growth in the housing sector in 1998 and anticipates that these factors
will continue through 1999.
- - Chapman reports a softening in demand for housing with housing starts
dropping off slightly over the next few years.
<TABLE>
<CAPTION>
HOUSING STARTS (MILLIONS)
-------------------------
Actual Forecast
------ --------
1997 1998 (est) 1999 2000 2001 +
---- ---------- ---- ---- ------
<S> <C> <C> <C> <C> <C>
UCLA Anderson Forecast 1.48 1.63 1.73 1.67 1.57
Chapman University Forecast 1.48 1.58 1.47 1.42 1.42
Blue Chip Economic Indicators 1.48 1.59 1.51 0.00 0.00
</TABLE>
<PAGE> 76
II-Z
NATIONAL ECONOMIC OUTLOOK
Economists project a moderate contraction in the U.S. economy primarily due to
the broad challenges facing the global economy. The fundamental question then
becomes "how long can the expanding national economy be sustained". Economics
are forecasting steady growth through much of 1999.
The following bullets summarize some of the characteristics of this forecast:
- - ECONOMISTS PREDICT THAT THE U.S. ECONOMY WILL GROW APPROXIMATELY 1.8%
THROUGH 2003 -- LESS THAN HALF OF LAST YEAR'S EXPECTATION. The U.S.
economy has enjoyed an unparalleled period of expansion, with real GDP at
seemingly unsustainable levels while inflation has remained very low by
recent historical standards. Although the evidence of a contracting
economy is accumulating, the U.S. economy remains fundamentally strong:
- Economy is currently in its 87th consecutive month of expansion.
- Federal Budget is in surplus for the first time in three decades.
- Unemployment is at a 28-year low at 4.3%.
- Inflation is minimal.
CALIFORNIA ECONOMIC OUTLOOK
California's economic growth is expected to decrease but remain at moderately
strong growth levels during 1999. Overall, the Company's four County submarkets
(Orange County, San Diego County, Santa Clara County and Los Angeles County)
should continue to benefit from California's recent reemergence as the nation's
leader in economic growth. Although a contracting state economy is projected
during 1999, the rental housing market is expected to benefit from the state's
ability to maintain moderate to strong job growth, relatively low unemployment,
strong in-migration and strong household income growth.
The following bullets summarize some of the characteristics of California's
economic outlook:
- - CALIFORNIA'S ECONOMIC FORECAST FOR THE BUSINESS PLANNING PERIOD CALLS FOR
ECONOMIC GROWTH TO BE 2.4%, A DECREASE FROM LAST YEAR'S ESTIMATED GROWTH
OF 4.0%.
- - CALIFORNIA'S PROJECTED JOB GROWTH OF 2.5% REFLECTS A DECLINE TO MORE
MODERATE LEVELS. California's 1998 and 1999 job growth is projected to be
less than California's 1997 job growth of 3.4%. The industry groups
leading California's job growth are services, manufacturing, wholesale
trade and construction. Orange County, Santa Clara County and San Diego
County are the state's primary drivers of its improved economy.
<PAGE> 77
II-Z
ORANGE COUNTY/IRVINE RANCH ECONOMIC OUTLOOK
The Orange County economic outlook for 1999 is for a moderate contraction due to
a variety of declining and potentially collapsing foreign economies as well as
the declining California economic outlook. However, stabilized job growth and
household formation growth, coupled with the limited supply of for-sale housing
and decreasing affordability levels, should fuel demand for long-term rental
housing. Orange County's big economic story in 1998 was the extremely hot
for-sale housing market that created a short-term dip in apartment demand during
the first half of 1998. This short-term dip in apartment demand appears to be
dissipating, with encouraging occupancy trends occurring during the 3rd quarter
of 1998.
- - RENT GROWTH ON THE IRVINE RANCH IS EXPECTED TO BE 5% OF 1999. Rent growth
is expected to average approximately 3.6% through 2003, which reflects a
moderate decline as the global economic crisis penetrates Orange County.
- - PROJECTED APARTMENT DEMAND IS EXPECTED TO OUTPACE PROJECTED APARTMENT
SUPPLY. Economists project that, on average, apartment demand will outpace
apartment supply through 2003.
- - JOB GROWTH IS PROJECTED TO DECREASE AND REMAIN AT MODERATE TO STRONG
LEVELS IN 1999. Orange County employers added 44,900 jobs during 1997, a
3.8% increase. 1998 has already seen a moderate decline in job growth, as
seven out of the last nine months have seen fewer jobs created than last
year. Estimates for 1998 job growth range from 35,000 on the low end to
55,000 on the very high end, with the median around 42,500 new jobs.
- - JOB GROWTH IS PROJECTED TO BE STRONGEST IN SERVICES, MANUFACTURING,
WHOLESALE TRADE AND CONSTRUCTION. In 1997, services added 15,500 jobs,
manufacturing added 6,300 jobs, wholesale trade added 4,900 jobs and
construction added 2,300 jobs. This trend is expected to continue through
the Business Planning period, as Orange County's industry continues to
diversify. Continued growth in the manufacturing sector is expected to be
focused on high-tech and durable manufacturing firms, which should offset
projected losses in the aerospace/defense sector.
- - AS NEW JOBS ARE CREATED ON THE IRVINE RANCH, THE NEW TOLL ROADS ARE
EXPECTED TO EASE THE COMMUTE ONTO THE RANCH. The Eastern Transportation
Corridor is scheduled to open in the fall of 1998. This corridor may
impact the housing location decisions of future homebuyers and renters.
The relatively new toll roads are projected to have only a short-term
negative impact on the Irvine Ranch rental market. The potential impact of
the three toll roads should be monitored carefully. The following bullets
summarize the status of the toll roads.
- The 24-mile EASTERN TRANSPORTATION CORRIDOR is scheduled to be
completed in 1999 and will provide easier and faster access for
potential Irvine Ranch employees to Riverside and outlying areas of
North Orange County, such as Anaheim Hills and Orange.
- The 30-mile FOOTHILL TRANSPORTATION CORRIDOR is approximately half
completed and provides easier and faster access for potential Irvine
Ranch employees to areas within South Orange County such as Mission
Viejo, San Clemente and Coto de Caza.
<PAGE> 78
- The completed 17 1/2-mile SAN JOAQUIN HILLS TRANSPORTATION CORRIDOR
provides easier and faster access for potential Irvine Ranch
employees to areas within South Orange County such as Aliso Viejo
and Laguna Niguel.
SAN DIEGO COUNTY/GOLDEN TRIANGLE ECONOMIC OUTLOOK
The San Diego County economic outlook for 1999 projects a moderate contraction,
as many foreign economies degenerate. Like Orange County, San Diego's big
economic story in 1998 was the extremely hot for-sale housing market. However,
unlike Orange County, the very strong for-sale housing market did not create a
short-term dip in apartment demand. From 1999 to 2003, stabilized job growth,
population growth and household formation growth coupled with decreasing
affordability levels should fuel demand for long-term rental housing.
- - RENT GROWTH IN THE SAN DIEGO MARKETPLACE IS EXPECTED TO BE 4% IN 1999.
Although the San Diego market is not as strong as Orange County, the
looming foreign crisis is projected to decrease rent growth to an average
3.4% over the Business Planning period.
- - PROJECTED APARTMENT DEMAND SHOULD OUTPACE 1999 PROJECTED APARTMENT SUPPLY.
Gross demand for units in San Diego County should average approximately
3,400 units per year. This estimate is slightly lower than historical
trends, which have been approximately 3,800 units per year from 1990
through 1996, yet higher than projected construction activity.
- - JOB GROWTH IS PROJECTED TO DECREASE THROUGH 1999 AND REMAIN AT MODERATE TO
STRONG LEVELS THEREAFTER. San Diego County employers added 43,100 jobs
during 1997, a 4.3% increase. However, like the trend in Orange County,
eight out of the last nine months reflected less job growth. Forecasts for
1998 job growth range from 25,000 to 35,000.
- - THE NORTH SAN DIEGO POPULATION DEMONSTRATES STRONG DEMOGRAPHIC
FUNDAMENTALS. The population of north San Diego County is relatively
educated and affluent. In 1996, 40.7% of adults in North San Diego had
received a bachelor's degree, compared to 20.0% of the adults in the
nation. The median household income in 1996 of North San Diego was
$50,600, as compared to a $36,625 figure for the nation.
SANTA CLARA COUNTY/NORTH SAN JOSE ECONOMIC OUTLOOK
Like the Orange County and San Diego markets, Santa Clara County is projected to
experience a moderate contraction, as it has a relatively high exposure to the
declining global economy. This is expected to translate into declining job
growth, as the percentage of high-tech exports from this region decrease.
However, in the long term, stabilized job growth and household formation growth
coupled with the limited supply of for-sale housing and one of the lowest
affordability indexes in the nation should fuel long-term demand for rental
housing.
- - RENT GROWTH IN IAC'S SILICON VALLEY MARKETS IS EXPECTED TO BE 5% IN 1999.
Rent growth is expected to average approximately 3.6% through 2003, which
reflects a moderate decline as the global economic crisis penetrates Santa
Clara County.
<PAGE> 79
II-Z
- - PROJECTED APARTMENT DEMAND SHOULD OUTPACE APARTMENT SUPPLY. Gross demand
for units in Santa Clara County is projected to average approximately
2,900 units per year, which outpaces projected supply by approximately 300
units.
- - JOB GROWTH IS PROJECTED TO DECLINE THROUGH 1999 AND REMAIN AT MODERATE TO
STRONG LEVELS THEREAFTER. Santa Clara County employers added 48,400 jobs
during 1997, a 5.5% increase. However, eight out of the last nine months
reflected less job growth. Although job growth is weaker this year,
forecasts for 1998 job growth still range from 25,000 to 35,000.
LOS ANGELES COUNTY/WEST LOS ANGELES ECONOMIC OUTLOOK
The for-sale housing market in Los Angeles was strong in the first half of 1998;
however, it did not create a short-term dip in apartment demand. Because much of
the Los Angeles market, like Santa Monica, is governed with rent control, there
was some pent-up demand and price insensitivity. However, the market
fundamentals remain strong for the general Los Angeles market as well. From 1999
to 2003, stabilized job growth, population growth and household formation growth
coupled with decreasing affordability levels are projected to fuel demand for
long-term rental housing.
- - MARKET RENT GROWTH IN WEST LOS ANGELES IS EXPECTED TO BE 5% IN 1999.
Market rent growth is expected to average approximately 3.6% through 2003,
which reflects a moderate decline as the global economic crisis penetrates
southern California. Properties governed by rent control, such as
Champagne Towers will, of course, lag the market.
- - PROJECTED APARTMENT DEMAND IS EXPECTED TO OUTPACE APARTMENT SUPPLY. On
average, projected apartment demand is expected to outpace projected
supply by 875 units. Demand for units in Los Angeles County should average
approximately 4,100 units per year. This estimate is higher than
historical trends, which have been approximately 2,500 to 3,000 units per
year.
- - JOB GROWTH IS PROJECTED TO DECLINE THROUGH 1999 AND REMAIN AT MODERATE TO
STRONG LEVELS THEREAFTER. Los Angeles County employers are expected to add
70,000 new jobs in 1998, compared to 83,683 new jobs during 1997. The
aforementioned Asian financial crisis will undoubtedly impact Los Angeles
County. This is partially due to Los Angeles County's decreasing high-tech
exports, especially from the port in Long Beach, one of the busiest ports
in the world.
PRELIMINARY IRVINE RANCH MARKET RESEARCH OBSERVATIONS
Market research compiled over the past years has indicated specific demographic
trends which are the basis for the strategies outlined in the Business Plan. By
matching undersupplied market segments with projected land availability, the
Company has constructed a product pipeline to maximize returns. The Irvine Ranch
product segmentation strategy calls for an increase in Conventional, Family,
Value, Professional, Student/Faculty, Urban Village and For-sale Alternative.
The Company utilizes new product segmentation as well as repositioning of
existing product to take advantage of expected demand segments. Overall, the
Company has identified nine primary renter segments within the Irvine Ranch
portfolio and has established the following targets for each renter segment
based on demographic and economic trends:
<PAGE> 80
EXHIBIT III
<PAGE> 81
III-A
VALUATION SUMMARY
[GRAPH - INFORMATION IS SET FORTH BELOW IN TABULAR FORMAT]
PRIVATE REAL ESTATE METHODOLOGIES
<TABLE>
<S> <C> <C> <C> <C> <C>
Going Concern NAV Cap Rate Analysis 21.54 -- 24.12 -- 30.19
Going Concern Present Value Analysis 19.30 -- 21.68 -- 27.46
</TABLE>
LIQUIDATION METHODOLOGIES
<TABLE>
<S> <C> <C> <C> <C> <C>
Liquidation Value 21.70 -- 24.34 -- 29.38
</TABLE>
<PAGE> 82
EXHIBIT IV
<PAGE> 83
IV-A
IRVINE APARTMENT COMMUNITIES
IRVINE RANCH DEVELOPMENT PROGRAM
1999 BUSINESS PLAN BASE CASE - UPDATED PIPELINE
<TABLE>
<CAPTION>
Project Development Schedule
---------------------------------------------------
Total Total Cost Start Start First Project
Project/Planning Area Target Market* Units (mm) Planning Construction Occupancy Stabilization
- --------------------- -------------- ----- ---- -------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rancho Santa Fe Family-High Amenity 316 $39 C C C Nov-98
Sonoma Family 196 $25 C C Aug-98 Apr-99
Brittany I Conventional-Professional 393 $45 C C Jan-99 May-00
TOTAL 1997 905 $109
One Park Place Urban Village 216 $28 C C C C
Bonita Canyon Village 3 High Amenity 187 $42 C Nov-98 Sep-99 Jun-00
Bonita Canyon Village 2 TBD 351 $59 C Nov-98 Sep-99 Sep-00
TOTAL 1998 754 $128
Park Place I Urban Village 192 $33 Aug-98 Jan-99 Apr-00 Nov-00
Lower Peters Canyon 5A Conventional-Professional 388 $54 C Jan-99 Nov-99 Dec-00
Lower Peters Canyon 5B-1 For Sal Alternative 200 $40 C Feb-99 Dec-99 Aug-00
Park Place 2 Urban Village 530 $88 Aug-98 Apr-99 Aug-00 Aug-98
Lower Peters Canyon 11A Value 350 $32 C May-99 Mar-00 Mar-01
TOTAL 1999 1,660 $246
Brittany II Conventional-Professional 152 $38 C Jan-00 Nov-00 Jun-01
Newport Ridge Extension For Sale Alternative 250 $33 Apr-99 Jan-00 Nov-00 Dec-01
Park Place 3 Urban Village 504 $84 Aug-98 Apr-00 Aug-01 Aug-02
Lower Peters Canyon 5B-2 For Sale Alternative 157 $28 C Jun-00 Apr-01 Nov-01
TOTAL 2000 1,063 $183
Lower Peters Canyon 11B Value 350 $32 C Mar-01 Jan-02 Feb-03
Oak Creek IV Conventional-Professional 350 $49 Jan-01 Jun-01 Apr-02 Apr-03
Planning Area 27I TBD 375 $54 Mar-01 Nov-01 Sep-02 Oct-03
TOTAL 2001 1,075 $135
Bonita Canyon Village I TBD 513 $92 C Mar-02 May-03 Sep-04
Oak Creek V Conventional-Professional 350 $49 Nov-01 May-02 Mar-03 Mar-04
Lower Peters Canyon 3A TBD 320 $44 Jan-02 Jun-02 Apr-03 Apr-04
Planning Area 27II TBD 375 $54 May-02 Nov-02 Sep-03 Oct-04
TOTAL 2002 1,558 $239
Lower Peters Canyon 3B TBD 320 $44 Jan-02 Jun-03 Apr-04 Apr-05
Lower Peters Canyon 2 Family 275 $39 Jan-03 Sep-03 Jul-04 Jun-05
Planning Area 17 TBD 350 $50 Jan-03 Sep-03 Jul-04 Jul-05
Oak Creek VI TBD 275 $36 Mar-03 Nov-03 Sep-04 Aug-05
TOTAL 2003 1,220 $169
TOTAL IRVINE RANCH 8,235 $1,209
</TABLE>
<TABLE>
<CAPTION>
Deliveries
------------------------------------------------------------------
Project/Planning Area 1997 1998 1999 2000 2001 2002 2003 Total
- --------------------- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rancho Santa Fe 36 280 316
Sonoma 140 56 196
Brittany I 329 64 393
36 420 385 64 905
One Park Place 216 216
Bonita Canyon Village 3 107 80 187
Bonita Canyon Village 2 105 246 351
216 212 326 754
Park Place I 192 192
Lower Peters Canyon 5A 65 323 388
Lower Peters Canyon 5B-1 29 171 200
Park Place 2 250 280 530
Lower Peters Canyon 11A 318 32 350
93 1,255 312 1,660
Brittany II 51 101 152
Newport Ridge Extension 42 208 250
Park Place 3 189 315 504
Lower Peters Canyon 5B-2 157 157
92 656 315 1,063
Lower Peters Canyon 11B 350 350
Oak Creek IV 288 62 350
Planning Area 27I 125 250 375
763 312 1,075
Bonita Canyon Village I 274 274
Oak Creek V 318 318
Lower Peters Canyon 3A 262 262
Planning Area 27II 125 125
979 979
Lower Peters Canyon 3B
Lower Peters Canyon 2
Planning Area 17
Oak Creek VI
36 636 690 1,737 967 1,078 1,291 6,436
</TABLE>
* Target markets are preliminary and need to be reviewed.
<PAGE> 84
EXHIBIT V
<PAGE> 85
V-A
IRVINE APARTMENT COMMUNITIES
STATEMENT OF FAD
1999 STRATEGIC PLAN BASE CASE
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Forecast
------------------------------------------------------------------------
1998 1999 2000 2001 2002 2003
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Rental Income $ 212.6 $ 251.7 $ 310.4 $ 372.8 $ 431.1 $ 494.5
Other Income 7.2 7.7 9.5 10.9 12.1 13.3
------- ------- ------- ------- ------- -------
Operating Revenues 219.8 259.4 319.9 383.7 443.2 507.8
Property Operating and Maintenance (43.1) (48.1) (56.7) (64.8) (72.9) (84.3)
Lease Expense 0.0 0.0 (0.8) (1.3) (1.3) (1.4)
Management Fees (5.0) (4.6) (4.5) (4.6) (4.9) (5.1)
Real Estate Expense (17.4) (20.4) (25.3) (30.8) (36.0) (41.3)
------- ------- ------- ------- ------- -------
Net Operating Income 154.3 186.3 232.6 282.3 328.2 375.9
General and Administration (9.0) (10.2) (10.4) (10.7) (11.0) (11.3)
Interest Income 1.2 0.2 0.2 0.3 0.4 2.4
Interest Expense (27.3) (24.3) (36.6) (51.8) (64.8) (75.2)
Amortization of Deferred Financing Costs (1.9) (2.1) (2.0) (1.9) (2.0) (2.2)
Depreciation & Amortization of Non-Real Estate (0.4) (0.3) (0.3) (0.3) (0.3) (0.3)
Assets
Distributions to Preferred Holders (12.6) (18.8) (29.9) (36.7) (36.7) (45.7)
IAMC start-up 0.3 0.0 0.0 0.0 0.0 0.0
------- ------- ------- ------- ------- -------
Funds from Operations 104.6 130.9 153.6 181.3 213.9 243.6
Amortization of Deferred Financing Costs 1.9 2.1 2.0 1.9 2.0 2.2
Depreciation & Amortization of Non-Real Estate 0.4 0.3 0.3 0.3 0.3 0.3
Assets
Recurring Capital Expenditures (5.7) (7.4) (8.4) (9.4) (10.4) (11.8)
------- ------- ------- ------- ------- -------
Funds Available for Distribution $ 101.2 $ 125.8 $ 147.5 $ 174.0 $ 205.7 $ 234.3
======= ======= ======= ======= ======= =======
FFO per Share $ 2.31 $ 2.62 $ 2.92 $ 3.23 $ 3.53 $ 3.81
FAD per Share $ 2.24 $ 2.52 $ 2.80 $ 3.10 $ 3.40 $ 3.66
</TABLE>
<PAGE> 86
EXHIBIT VI
<PAGE> 87
COMPARABLE CASH FLOW CAP RATES SUMMARY
- --------------------------------------------------------------------------------
EXHIBIT VI SUMMARY
<TABLE>
<CAPTION>
EXHIBIT CASH FLOW CAP RATE
------- ------------------
<S> <C> <C>
Overall Average (all sources) 7.7%
IAC RECENT BIDS AND ACQUISITIONS
Hon Portfolio VI-B 7.6%
Villas of Renaissance VI-E 7.3%
The Lakes at South Coast VI-E 7.3%
The Resorts VI-E 7.6%
Champagne Towers VI-E 7.8%
AVERAGE - IAC RECENT BIDS AND ACQUISITIONS 7.5%
COMPARABLE SALES - SOUTHERN ORANGE COUNTY(1)
One Park Place (also a recent bid and acquisition) VI-A 8.3%
The Lakes at South Coast VI-A 6.6%
The Resorts VI-A 5.8%
Villas Alliento VI-A 9.0%
Laguna Brisas VI-A 7.4%
Sea Terrace VI-A 7.2%
Villa Serena VI-A 7.2%
Toscana VI-A 8.3%
Oasis Martinique VI-A 7.6%
Sea Palms Village VI-A 9.8%
Crown Terrace VI-A 8.0%
Woodbridge Meadows VI-A 7.8%
Mill Creek VI-A 8.0%
AVERAGE - IRVINE APARTMENT COMMUNITIES 7.8%
WALL STREET RESEARCH (ANALYSTS COVERING IAC)
A.G. Edwards VI-F 7.3%
CIBC Oppenheimer VI-F 8.0%
Everen Securities VI-F 8.1%
Green Street (prior to announced offer) VI-F 7.9%
JP Morgan (prior to announced offer) VI-F 8.0%
Morgan Stanley VI-F 8.0%
NationsBanc Montgomery Securities VI-F 8.0%
Realty Stock Review VI-F 7.3%
Sutro VI-F [illegible]
AVERAGE - WALL STREET RESEARCH 7.8%
</TABLE>
- ------------
(1) Several cash flow cap rates are based on trailing cash flows.
<PAGE> 88
VI-A
PRIVATE MARKETS VALUATION
COMPARABLE SALES TRANSACTIONS
TIER 1 ASSETS
<TABLE>
<CAPTION>
Number Units/ NRA Sale
Name/ Location City Sale Date Age Land Ac Average Size Price Price/Unit Price/SF Cap Rate
- -------------- ---- --------- --- ------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One Park Place Irvine Oct-98 N/A 216 N/A $28,000,000 $129,630 N/A 8.3%(1)
N/A N/A
The Lakes at South Coast Costa Mesa Aug-98 13 770 716,080 $114,000,000 $148,052 $159 6.6%(1)
14.13 930
The Resorts Aliso Viejo Jul-98 7&8 1,609 2,133,560 $198,600,479 $123,431 $107 5.8%
96.55 1,326
Average 10 865 1,424,820 $113,533,493 $133,704 $133 6.9%
Median 10 770 1,424,820 $114,000,000 $129,630 $133 6.6%
</TABLE>
Adjusted cap rate for IAC assets based upon current market conditions: 7.25%
TIER 2 ASSETS
<TABLE>
<CAPTION>
Number Units/ NRA Sale
Name/ Location City Sale Date Age Land Ac Average Size Price Price/Unit Price/SF Cap Rate
- -------------- ---- --------- --- ------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Villas Alliento Rancho Santa Oct-98 10 225 164,484 $14,450,000 $64,222 $88 9.0%
Margarita 11.30 731
Laguna Brisas Apartments Laguna Niguel Feb-98 12 175 174,843 $16,750,000 $95,714 $96 7.4%
999
Sea Terrace Apartments Dana Point May-97 26 208 183,820 $19,450,000 $93,510 $106 7.2%(2)
11.88 884
Villa Serena Apartments Rancho Santa Apr-97 9 301 229,593 $17,710,000 $58,837 $77 7.2%
Margarita 14.29 763
Toscana Apartments Irvine Feb-97 5 563 501,337 $51,250,000 $91,030 $102 8.3%
11.64 890
Average 13 294 250,815 $23,922,000 $80,663 $94 7.8%
Median 10.5 225 183,820 $17,710,000 $91,030 $96 7.4%
</TABLE>
Adjusted cap rate for IAC assets based upon current market conditions: 7.70%
TIER 3 ASSETS
<TABLE>
<CAPTION>
Number Units/ NRA Sale
Name/ Location City Sale Date Age Land Ac Average Size Price Price/Unit Price/SF Cap Rate
- -------------- ---- --------- --- ------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oasis Martinque Costa Mesa Oct-97 10 713 642,249 $67,500,000 $94,670 $105 7.6%
13.88 901
Sea Palms Village Costa Mesa Jun-97 8 146 130,053 $11,550,000 $79,347 $89 9.8%
4.77 893
Crown Terrace Apartments Laguna Niguel Mar-97 13 176 175,296 $12,305,000 $69,915 $70 8.0%
19.43 996
Woodbridge Meadows Irvine Feb-97 18 375 299,318 $29,158,000 $77,755 $97 7.8%
17.80 798
Mill Creek Costa Mesa Jul-96 25 258 208,333 $17,500,000 $67,829 $84 8.0%
807
Average 15 334 291,050 $27,602,600 $77,903 $89 8.2%
Median 13 258 208,333 $17,500,000 $77,755 $89 8.0%
</TABLE>
Adjusted cap rate for IAC assets based upon current market conditions: 8.00%
(1) Includes benefit of existing tax-exempt financing.
(2) Cap rate increased for favorable financing and revenues adjusted to reflect
actual occupancy.
<PAGE> 89
VI-B
HON PROPERTY INVESTMENTS
ORANGE COUNTY APARTMENT PORTFOLIO
PRO FORMA OPERATIONS
PALOMA SUMMIT
<TABLE>
<CAPTION>
1997 Aug-98 to %
Actual Jul-99 Change Assumptions/Notes
------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Gross Scheduled Rent $2,165,000 $2,527,000 16.7% Grow rents in place 5.8% from 5-98
Reduce concessions by $33,000
Turnover at 4.5% per month
Vacancy (50,000) 2.3% $ (129,000) 5.1% 158.0%
----------- -----------
Net Rental Revenue 2,115,000 2,398,000 13.4%
Other Income
Programs in Place 59,000 63,000 6.8%
Additional Items -- 44,000 NA RUBS, w/d rental/IAC Suites/Cox
---------- ----------
Total Revenue 2,174,000 2,505,000 15.2%
---------- ----------
OPERATING EXPENSES
Property Operating & Maintenance 624,000 533,000 -14.6% Economies of Scale
Management Fees 83,000 64,000 -22.9% IAMC Fee
Property Taxes 232,000 423,000 82.3% Increase in new basis
---------- ----------
Total Operating Expenses 939,000 1,020,000 8.6%
---------- ----------
Net Operating Income 1,235,000 1,485,000 20.2%
========== ========== =====
Total Budget at 7.8% (Accretive) $19,042,000
-----------
Less Capital Expenditures $ 362,000
-----------
Net Purchase Price $18,680,000
===========
Unlevered IRR 11.3%
===========
</TABLE>
Source: IAC Board presentation book for a potential acquisition.
<PAGE> 90
VI-B
HON PROPERTY INVESTMENTS
ORANGE COUNTY APARTMENT PORTFOLIO
PRO FORMA OPERATIONS
SEAVIEW SUMMIT
<TABLE>
<CAPTION>
1997 Aug-98 to %
Actual Jul-99 Change Assumptions/Notes
------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Gross Scheduled Rent $1,168,000 $1,304,000 11.6% Grow rents in place 7.2% from 5-98
Reduce concessions by $27,000
Turnover at 4.2% per month
Vacancy (12,000) 1.0% $ (53,000) 4.1% 341.7%
--------------- ----------------
Net Rental Revenue 1,156,000 1,251,000 8.2%
Other Income
Programs in Place 19,000 35,000 84.2%
Additional Items -- 28,000 NA RUBS, w/d rental/IAC Suites/Cox
-------------- ---------------
Total Revenue 1,175,000 1,314,000 11.8%
-------------- ---------------
OPERATING EXPENSES
Property Operating & Maintenance 281,000 300,000 6.8%
Management Fees 44,000 30,000 -31.8% IAMC Fee
Property Taxes 116,000 122,000 5.2% Increase in new basis
-------------- ---------------
Total Operating Expenses 441,000 452,000 2.5%
-------------- ---------------
Net Operating Income 734,000 862,000 17.4%
============== =============== =====
Total Budget at 7.8% (Accretive) $11,057,000
---------------
Less Capital Expenditures $ 200,000
---------------
Net Purchase Price $10,857,000
===============
Unlevered IRR 11.3%
===============
</TABLE>
Source: IAC Board presentation book for a potential acquisition.
<PAGE> 91
VI-B
HON PROPERTY INVESTMENTS
ORANGE COUNTY APARTMENT PORTFOLIO
PRO FORMA OPERATIONS
NIGUEL SUMMIT
<TABLE>
<CAPTION>
1997 Aug-98 to %
Actual Jul-99 Change Assumptions/Notes
------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Gross Scheduled Rent $ 1,922,000 $ 2,136,000 11.1% Grow rents in place 6% from 5-98
Reduce concessions by $45,000
Turnover at 4.2% per month
Vacancy (21,000) 1.1% $ (109,000) 5.1% 419.0%
--------------- ----------------
Net Rental Revenue 1,901,000 2,027,000 6.6%
Other Income:
Programs in Place 41,000 60,000 46.3%
Additional Items -- 59,000 NA RUBS, w/d rental/IAC Suites/Cox
-------------- ---------------
Total Revenue 1,942,000 2,146,000 10.5%
-------------- ---------------
OPERATING EXPENSES
Property Operating & Maintenance 576,000 463,000 -19.6% Economies of Scale
Management Fees 74,000 51,000 -31.1% IAMC Fee
Property Taxes 117,000 202,000 72.6% Increase to new basis
-------------- ---------------
Total Operating Expenses 767,000 716,000 -6.6%
-------------- ---------------
Net Operating Income 1,175,000 1,430,000 21.7%
============== =============== =====
Total Budget at 7.8% (Accretive) $ 18,335,000
---------------
Less Capital Expenditures $ 323,000
---------------
Net Purchase Price $ 18,012,000
===============
Unlevered IRR 11.2%
</TABLE>
Source: IAC Board presentation book for a potential acquisition.
<PAGE> 92
VI-B
HON PROPERTY INVESTMENTS
ORANGE COUNTY APARTMENT PORTFOLIO
PRO FORMA OPERATIONS
HIDDEN HILLS
<TABLE>
<CAPTION>
1997 Aug-98 to %
Actual Jul-99 Change Assumptions/Notes
------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Gross Scheduled Rent $3,392,000 $3,903,000 15.1% Grow rents in place 8.0% from 5-98
Reduce concessions by $100,000
Turnover at 5.0% per month
Vacancy (37,000) 1.1% $ (199,000) 5.1% 437.8%
--------------- ----------------
Net Rental Revenue 3,355,000 3,704,000 10.4%
Other Income
Programs in Place 86,000 98,000 14.0%
Additional Items -- 94,000 NA RUBS, w/d rental/IAC Suites/Cox
-------------- ---------------
Total Revenue 3,441,000 3,896,000 13.2%
-------------- ---------------
OPERATING EXPENSES
Property Operating & Maintenance 981,000 865,000 -11.8% Economies of Scale
Management Fees 131,000 97,000 -26.0% IAMC Fee
Property Taxes 197,000 363,000 84.3% Increase to new basis
-------------- --------------- -----
Total Operating Expenses 1,309,000 1,325,000 1.2%
-------------- --------------- ----
Net Operating Income 2,132,000 2,571,000 20.6%
============== =============== =====
Total Budget at 7.8% (Accretive) $32,964,000
---------------
Less Capital Expenditures $ 652,000
---------------
Net Purchase Price $32,312,000
===============
Unlevered IRR 11.3%
===============
</TABLE>
Source: IAC Board presentation book for a potential acquisition.
<PAGE> 93
VI-C
PRIVATE MARKETS VALUATION
STABILIZED PORTFOLIO VALUATION
CAP RATE ANALYSIS
<TABLE>
<CAPTION>
Year 1998 1998E 1999E
Prop # Property Name Location Built # Units Cash Flow Cash Flow Cap Rate
- ------ ------------- -------- ----- ------- --------- --------- --------
Tier 1
<S> <C> <C> <C> <C> <C> <C>
1 Baypointe Newport 1997 300 4,174 4,255 7.25%
2 Newport Ridge Newport 1996 512 6,657 6,850 7.25%
3 One Park Place (1)(2) Irvine 1997 216 -- 784 7.25%
4 Promontory Point Newport 1974 520 7,100 7,505 7.25%
5 Santa Clara Irvine 1996 378 4,106 4,215 7.25%
6 Santa Rosa I Irvine 1996 368 3,703 3,788 7.25%
7 Santa Rosa II (1) Irvine 1997 207 -- 2,591 7.25%
8 The Colony (1) Newport 1997 245 -- 4,032 7.25%
9 Villas at Renaissance (1)(2) San Diego 1997 923 -- 9,455 7.25%
----- -------- -------- ---- --
Tier 1 Total 3,669 $ 25,740 $ 43,476 7.25%(3)
Tier 2
10 Amherst Court Irvine 1991 162 1,116 1,281 7.70%
11 Berkeley Court Irvine 1986 152 1,290 1,343 7.70%
12 Cedar Creek Irvine 1985 176 1,466 1,534 7.70%
13 Cross Creek Irvine 1985 136 1,198 1,248 7.70%
14 Dartmouth Court Irvine 1986 294 2,392 2,606 7.70%
15 Newport North Newport 1986 570 5,330 5,789 7.70%
16 Northwood Park Irvine 1985 168 1,353 1,439 7.70%
17 Northwood Place Irvine 1986 604 5,007 5,328 7.70%
18 Rancho Alisal Tustin 1988 356 2,898 3,213 7.70%
19 Rancho Maderas Tustin 1989 266 2,442 2,571 7.70%
20 Rancho Mariposa Tustin 1992 238 2,059 2,135 7.70%
21 Rancho Monterey Tustin 1996 436 4,823 4,926 7.70%
22 Rancho San Joaquin Irvine 1976 368 3,211 3,363 7.70%
23 Rancho Santa Fe (1) Tustin 1997 316 -- 3,742 7.70%
24 Rancho Tierra Tustin 1989 252 2,497 2,595 7.70%
25 San Carlo Irvine 1989 354 3,578 3,761 7.70%
26 San Leon Irvine 1987 248 2,152 2,279 7.70%
27 San Marco Irvine 1988 426 3,415 3,669 7.70%
28 San Marino Irvine 1986 200 1,599 1,691 7.70%
29 San Mateo Irvine 1990 283 2,143 2,249 7.70%
30 San Paulo Irvine 1993 382 3,023 3,198 7.70%
31 San Remo Irvine 1986 248 1,927 2,041 7.70%
32 Santa Maria Irvine 1997 227 2,856 2,941 7.70%
33 Sierra Vista Tustin 1992 306 2,736 2,980 7.70%
34 Stanford Court Irvine 1985 320 2,659 2,819 7.70%
35 The Parklands Irvine 1983 121 1,092 1,317 7.70%
</TABLE>
<TABLE>
<CAPTION>
Value Range Implied Value
Prop # Property Name 1998 CFLO 1999 CFLO Per Unit
- ------ ------------- --------- --------- --------
Tier 1
<S> <C> <C> <C> <C>
1 Baypointe 57,572 58,695 192 196
2 Newport Ridge 91,819 94,488 179 185
3 One Park Place (1)(2) 28,000 10,814 130 --
4 Promontory Point 97,936 103,524 188 199
5 Santa Clara 56,637 58,139 150 154
6 Santa Rosa I 51,075 52,244 139 142
7 Santa Rosa II (1) 26,631 35,741 129 173
8 The Colony (1) 45,633 55,614 186 227
9 Villas at Renaissance (1)(2) 127,000 130,414 138 141
-------- -------- -------- --------
Tier 1 Total $582,303 $599,673 $ 159 $ 163
Tier 2
10 Amherst Court 14,494 16,640 89 103
11 Berkeley Court 16,751 17,441 110 115
12 Cedar Creek 19,041 19,925 108 113
13 Cross Creek 15,555 16,208 114 119
14 Dartmouth Court 31,068 33,847 106 115
15 Newport North 69,225 75,180 121 132
16 Northwood Park 17,577 18,691 105 111
17 Northwood Place 65,024 69,201 108 115
18 Rancho Alisal 37,637 41,722 106 117
19 Rancho Maderas 31,710 33,393 119 126
20 Rancho Mariposa 26,741 27,732 112 117
21 Rancho Monterey 62,643 63,973 144 147
22 Rancho San Joaquin 41,701 43,670 113 119
23 Rancho Santa Fe (1) 38,409 48,598 122 154
24 Rancho Tierra 32,426 33,695 129 134
25 San Carlo 46,472 48,838 131 138
26 San Leon 27,953 29,594 113 119
27 San Marco 44,349 47,644 104 112
28 San Marino 20,761 21,967 104 110
29 San Mateo 27,833 29,206 98 103
30 San Paulo 39,258 41,529 103 109
31 San Remo 25,022 26,507 101 107
32 Santa Maria 37,087 38,193 163 168
33 Sierra Vista 35,527 38,702 116 126
34 Stanford Court 34,539 36,611 108 114
35 The Parklands 14,182 17,098 117 141
</TABLE>
(1) 1998 value based on total project costs.
(2) Year built reflects acquisition dates.
(3) Based on 1999 Cash Flow.
<PAGE> 94
PRIVATE MARKETS VALUATION
STABILIZED PORTFOLIO VALUATION
CAP RATE ANALYSIS
<TABLE>
<CAPTION>
Year 1998 1998E 1999E
Prop # Property Name Location Built # Units Cash Flow Cash Flow Cap Rate
- ------ ------------- -------- ----- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
36 Turtle Rock Canyon Irvine 1991 217 2,479 2,593 7.70%
37 Turtle Rock Vista Irvine 1976 252 2,623 2,801 7.70%
38 Villa Coronado Irvine 1996 513 5,454 5,643 7.70%
39 Windwood Glen Irvine 1985 196 1,713 1,795 7.70%
40 Windwood Knoll Irvine 1983 248 1,959 2,122 7.70%
41 Woodbridge Oaks Irvine 1983 120 1,138 1,198 7.70%
42 Woodbridge Pines Irvine 1976 220 1,546 1,812 7.70%
43 Woodbridge Villas Irvine 1982 258 1,603 2,103 7.70%
44 Woodbridge Willows Irvine 1984 200 1,632 1,717 7.70%
----- ---------- ---------- ---- --
Tier 2 Total 9,833 $ 84,408 $ 93,842 7.70%(3)
Tier 3
45 Bayport Newport 1971 104 984 1,026 8.00%
46 Bayview Newport 1971 64 677 744 8.00%
47 Baywood Newport 1973 388 3,604 4,044 8.00%
48 Columbia Court Irvine 1984 58 479 524 8.00%
49 Cornell Court Irvine 1984 109 1,056 1,101 8.00%
50 Deerfield Irvine 1975 288 1,944 2,301 8.00%
51 Harvard Court Irvine 1986 112 961 1,000 8.00%
52 Mariner Square Newport 1969 114 972 1,089 8.00%
53 Orchard Park Irvine 1982 60 536 567 8.00%
54 Park West Irvine 1970 880 7,113 7,537 8.00%
55 Parkwood Irvine 1974 296 2,255 2,448 8.00%
56 The Hamptons (1) Silicon Valley 1998 342 -- 4,835 8.00%
----- ---------- ---------- ---- --
Tier 3 Total 2,815 $ 20,579 $ 27,216 8.00%(3)
Total Portfolio 16,317 $ 130,728 $ 164,534 7.62%(3)
</TABLE>
<TABLE>
<CAPTION>
Value Range Implied Value
Prop # Property Name 1998 CFLO 1999 CFLO Per Unit
- ------ ------------- --------- --------- --------
<S> <C> <C> <C> <C>
36 Turtle Rock Canyon 32,193 33,676 148 155
37 Turtle Rock Vista 34,063 36,379 135 144
38 Villa Coronado 70,833 73,288 138 143
39 Windwood Glen 22,241 23,317 113 119
40 Windwood Knoll 25,435 27,553 103 111
41 Woodbridge Oaks 14,778 15,562 123 130
42 Woodbridge Pines 20,080 23,538 91 107
43 Woodbridge Villas 20,819 27,307 81 106
44 Woodbridge Willows 21,188 22,301 106 112
---------- ---------- ---------- ----------
Tier 2 Total $1,134,617 $1,218,728 $ 115 $ 124
Tier 3
45 Bayport 12,296 12,830 118 123
46 Bayview 8,457 9,304 132 145
47 Baywood 45,049 50,545 116 130
48 Columbia Court 5,988 6,552 103 113
49 Cornell Court 13,204 13,757 121 126
50 Deerfield 24,297 28,758 84 100
51 Harvard Court 12,010 12,503 107 112
52 Mariner Square 12,152 13,608 107 119
53 Orchard Park 6,696 7,085 112 118
54 Park West 88,907 94,214 101 107
55 Parkwood 28,186 30,597 95 103
56 The Hamptons (1) 51,923 60,443 152 177
---------- ---------- ---------- ----------
Tier 3 Total $ 309,166 $ 340,197 $ 110 $ 121
Total Portfolio $2,026,086 $2,158,598 124 132
</TABLE>
(1) 1998 value based on total project costs.
(2) Year built reflects acquisition dates.
(3) Based on 1999 Cash Flow.
<PAGE> 95
VI-D
GROWTH STRATEGIES - EXECUTIVE SUMMARY
- --------------------------------------------------------------------------------
OBJECTIVE
The goal of this plan is to outline the Company's investment objectives and
guidelines in order to continue to grow FFO per share from the investment of new
capital. External growth through development has historically provided
approximately half of the Company's FFO per share growth. Meeting development
objectives has driven a lower cost of capital, widening profitability on
development activities in a market that has not been constrained. The Company is
now in a different marketplace in which capital is both scarce and more
expensive than in the recent past. Any spread over the Company's cost of capital
provides only a marginal return.
Going forward, the Company must limit investments by ranking the risk-adjusted
returns and contribution to FFO per share of investment alternatives. Given
scarcity of capital, those opportunities with the most accretive and highest
risk-adjusted return should be taken. Furthermore, if capitalization rates
become too low on market deals, the Company is better served by not investing in
new projects. For example, an investment of $100 million at a 1/2% profit margin
would provide only $0.01 per share annually.
This section will more fully describe management's suggested hurdle rate
guidelines and investment plans that can be funded in the current environment.
PLAN
- - CAREFULLY LIMIT INVESTMENT ALLOCATIONS SO THAT A TWO-YEAR FUNDING
WINDOW IS MAINTAINED. The funding section of this Business Plan
includes an objective to maintain the ability to fund planned
investments for two years without the need to raise common equity.
Because the current market constrains the issuance of additional equity
capital, IAC will begin to cut into this two year window as it funds
committed investments. Any investment proposed in excess of the Plan
would require a funding strategy for the incremental capital.
- - ESTABLISH A HURDLE RATE METHODOLOGY AND GUIDELINES TO GOVERN THE
INVESTMENT PROCESS. It is recommended that the Board adopt investment
criteria to serve as guidelines for management when considering
incremental investments. From a return perspective, an approach based
on accretive yield and weighted average cost of capital models is
suggested. This would be used in combination with a qualitative
assessment of investment risk and upside/downside.
- - Because of the Company's accelerated off-Ranch activity and the end of
the 10% guarantee for Irvine Ranch land purchases, the Company has
instituted investment criteria typical of other REITs and industrial
companies. The Company benchmarks all investment opportunities against
hurdle rates, which are based upon the Company's historical break-even
rates of 7.75% for acquisitions and 9.25% for developments.
- - THE COMPANY'S HURDLE RATES HAVE HISTORICALLY BEEN 9.75% FOR
DEVELOPMENTS AND 8.00% FOR ACQUISITIONS. On a development, the 9.75%
includes a 1/2% profit margin over the Company's 9.25% average cost of
capital over time. This means that an investment of $100 million would
provide the Company with only $0.01 per share annually. This is
negligible compared to $0.06 per share
<PAGE> 96
VI-E
IAC
Irvine Apartment Communities
MEMORANDUM
Date: May 5, 1998
To: Mike Goode
From: Rick Lamprecht
RE: Recent Acquisition/Bid Financial Information
- --------------------------------------------------------------------------------
Please find below the financial information you requested related to recent
acquisitions/bids made by IAC.
<TABLE>
<CAPTION>
PROPERTY INITIAL YIELD PROJECT IRR
<S> <C> <C>
Villas of Renaissance 7.3% 10.6%
The Lakes at South Coast 7.3% 10.0%
Plaza (IAC bid)
AEW Portfolio 7.6% 11.3%
(Resorts/Country Club)
(IAC Bid)
Champagne Towers 7.8% 9.9%
</TABLE>
Please contact me if you have any questions.
cc: Bill McFarland
<PAGE> 97
VI-F
EQUITY ANALYST RESEARCH SUMMARY 12/23/98 6:20 PM
- --------------------------------------------------------------------------------
RESEARCH COMPARISON: PRE VS. POST-ANNOUNCEMENT
<TABLE>
<CAPTION>
NAV(1) Price Target (1)
------------------------ -------------------------
Company Low Medium High Low Medium High
------- --- ------ ---- --- ------ ----
<S> <C> <C> <C> <C> <C> <C>
A.G. Edwards $30.00 $31.50 $33.00 $30.50 $31.50 $32.50
CIBC Oppenheimer $27.26 $28.46 $29.74 $30.25/ $30.25/ $30.25/
$32.00 $32.50 $33.00
DLJ $29.75/ $29.75/ $29.75/
$32.50 $32.50 $32.50
Dresdner $28.25 $28.25 $28.25
Kleinwort
Everen $32.50 $32.50 $32.50
Securities
Green Street $31.62 $33.39 $35.28
Advisors
</TABLE>
<TABLE>
<CAPTION>
Cap Rates (1) Pre- Post
------------------------ Announcement Announcement
Company Low Medium High Rating Rating Comments
------- --- ------ ---- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
A.G. Edwards 7.00% 7.25% 7.50% Buy/Aggressive Reduced to $32.50/ share is a fair bid price.
(Indicated on Reduce/Aggressive The new rating reflects the
12/3 Report) (12/3) unlikelihood of competing offers
and the uncertainty relating to the
timing of consummation. IAC will
likely try to negotiate a slightly
higher price
CIBC Oppenheimer 7.75% 8.00% 8.25% Buy (8/19) Reiterate Price is fair to cheap. Private
Buy (12/2) California market transactions are
at or lower than the implied 7.4%
ca rate. The land option is not
included in the price. Hold shares
in anticipation of better terms.
DLJ Market Reiterate Market Quantitatively, the pricing appears
Performance Performance rich in light of declining property
(10/28) (12/2) values resulting from problems in
the capital markets. Surprised
Bren is foregoing access to public
capital. Bren believes that
retention of cash flow as a private
company and lack of public scrutiny
will provide it greater flexibility
as a developer. He may also
believe accounting issues relating
to development are unduly
restraining.
Dresdner Hold Reiterate Hold Price appears fair. However, IAC
Kleinwort (12/4) may be able to tweek the price a
little higher; a slight increase
in price based on negotiations
between the two parties would
assuage everyone's concerns about
IAC's board acting in the best
interest of shareholders.
Everen 8.10% 8.10% 8.10% Out Performer Reduced To Everen does not anticipate any road
Securities (5/98) Market Performer blocks; speculates that reason for
(12/4) transaction is that TIC believes
that the implied return on equity it
must pay the public markets exceeds
the returns it would pay to private
investors.
Green Street 7.90%/ 7.90%/ 7.90%/ n/a Reiterate Buy Paying a large premium, but doesn't
Advisors 7.0% 7.25% 7.5% (12/10) fully reflect intrinsic value of
company; hard to envision a scenario
where shareholders aren't at least
paid a minimum of $32.50/share. No
value ascribed to Land Rights.
</TABLE>
<PAGE> 98
<TABLE>
<CAPTION>
NAV(1) Price Target (1)
------------------------ -------------------------
Company Low Medium High Low Medium High
------- --- ------ ---- --- ------ ----
<S> <C> <C> <C> <C> <C> <C>
JP Morgan $28.71/ $28.71/ $28.71/
$28.71 $30.38 $32.04
Merrill Lynch
Morgan Stanley $31.00 $31.00 $31.00 $34.00 $34.00 $34.00
NationsBanc $32.00 $32.00 $32.00 $24.50 $26.28 $28.06
Montgomery
Securities
Paine Webber $26.38 $26.38 $26.38
Realty Stock $20.00 $24.43 $29.00 $33.00 $34.00 $35.00
Review
Solomon Smith $32.45 $32.50 $32.55
Barney
Sutro & Co. $30.00/ $30.00/ $30.00/
$32.50 $32.50 $32.50
AVERAGE(2): $28.61 $29.72 $30.87 $30.33 $30.71 $31.09
</TABLE>
<TABLE>
<CAPTION>
Cap Rates (1) Pre- Post
------------------------ Announcement Announcement
Company Low Medium High Rating Rating Comments
------- --- ------ ---- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
JP Morgan 8.0%/ 8.0%/ 8.0%/ (6/98) (12/3) Offer is reasonable, however IAC's
7.5% 7.75% 8.0% board likely will be able to
negotiate a higher price. No value
ascribed to Land Rights.
Merrill Lynch Accumulate n/a
(11/4)
Morgan Stanley 8.00% 8.00% 8.00% Outperform Reduced To Morgan Stanley believes a competing
(10/7) Neutral (12/3) bid is unlikely. A price above $32.50
would be dilutive to other REITs.
In order to maintain its prior Outperform
rating, IAC's share price would have to
move beyond $36.
NationsBanc 8.00% 8.00% 8.00% Buy (11/3) n/a
Montgomery
Securities
Paine Webber Neutral (8/28) n/a
Realty Stock 7.25% 7.25% 7.25% Hold Increased To Realty Stock Review suggests that
Review Buy (12/7) the $540 million offer does not
fully reflect the value of the
Company's development pipeline.
They conclude that the independent
directors of IAC will push TIC
to raise its bid to $35 per share.
Solomon Smith Out Perform Reduced To $32.50 is a full price. To obtain
Barney (5/98) Neutral (12/3) approval from directors and
minority shareholders, TIC may have
to increase its bid due to typical
processes related to taking company
private; increase should not be
more than a few pennies.
Sutro & Co. 7.50% 7.75% 8.00% Accumulate Reduced To Deal will go through at the current
(10/5) Hold (12/2) offer price. Small premium to the
NAV. Recommends that investors
tender their shares. Expects offer
to be completed without delays.
AVERAGE(2): 7.72% 7.81% 7.90%
</TABLE>
(1) Legend:
Regular font: Post-announcement data.
BOLD FONT: PRE-ANNOUNCEMENT DATA.
Italicized font: Implied data (Bold: pre-announcement; Regular:
post-announcement).
(2) Where more than one figure is presented, averages make use of bold amounts.
<PAGE> 99
DENVER DEVELOPER BUYS
800 HON UNITS IN ORANGE
COUNTY
Denver-based apartment developer and owner
SIMPSON HOUSING L.P. has purchased all 800
apartment units owned by Laguna Hills-based
Hon Development for about $80 million.
The purchase, which pencils out to nearly
$100,000 a unit, includes three complexes in
Laguna Niguel, all about 10 years old, and a
roughly 8-year-old complex in Foothill
Ranch.
Hon Development officials could not be
reached for comment.
Simpson Housing executive Irv Baker said the
deal marks his company's first purchase in
Orange County, He said the company's
interest was sparked by steep rent hikes
over the past two years in the south county,
at a time of little new construction.
