<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
SCHEDULE 13E-3
RULE 13e-3 TRANSACTION STATEMENT
(PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934)
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IRVINE APARTMENT COMMUNITIES, INC.
(NAME OF ISSUER)
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TIC ACQUISITION LLC
THE IRVINE COMPANY
DONALD BREN
(NAME OF PERSON(S) FILING STATEMENT)
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463606-10
(CUSIP NUMBER OF CLASS OF SECURITIES)
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COMMON STOCK, $ .01 PAR VALUE
(TITLE OF CLASS OF SECURITIES)
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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
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TRANSACTION VALUATION* AMOUNT OF
FILING FEE
<S> <C>
$685,980,362...........................................................$137,197
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</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
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This Amendment No. 3 ("Amendment No. 3") to the Rule 13e-3
Transaction Statement on Schedule 13E-3 filed on February 25, 1999 (the
"Original Schedule 13E-3" and together with Amendment No. 1 filed on April
2, 1999, Amendment No. 2 filed on April 20, 1999 and, as amended hereby, this
"Schedule 13E-3") is being filed jointly by TIC Acquisition LLC, a Delaware
limited liability company (the "Acquiror"), The Irvine Company, a Delaware
corporation ("TIC"), and Mr. Donald Bren 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, none 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 Amendment No. 3 is being filed with the Securities and
Exchange Commission concurrently with a revised 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) "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Background of the Merger;" and "CERTAIN
RELATIONSHIPS AND TRANSACTIONS"
(a)(2) "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Background of the Merger;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- 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;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER;" and "THE MERGER"
(b) "SUMMARY;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER;" and "THE MERGER"
5. PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE
(a) - (g)
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Background of the Merger;" "BACKGROUND; PURPOSE
AND EFFECTS OF THE MERGER -- The Acquiror's Purpose;
Structure of the Merger;" "BACKGROUND; PURPOSE
AND EFFECTS OF THE MERGER -- Certain Consequences
of the Merger;" and "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- 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
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<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) "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Background
of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- The Acquiror's Purpose; Structure of the Merger;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Opinion of the Financial Advisor
for the Special Committee;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Position of the Acquiror, The
Irvine Company and Mr. Bren;" and "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Summary of the NationsBanc Montgomery
Reports"
(d) "SUMMARY -- Purpose, Structure and Effects of the Merger;"
"SUMMARY -- Potential Conflicts of Interest of Officers and
Directors of the Company" "SUMMARY -- Federal Income Tax
Consequences;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- The Acquiror's Purpose; Structure of the Merger;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Benefits and Detriments to
Nonaffiliated Shareholders;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Interests of Certain Persons in the
Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Certain Consequences of the Merger;" "BACKGROUND; PURPOSE
AND EFFECTS OF THE MERGER -- Plans for the Company After the
Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Material Tax Consequences;" "BACKGROUND; PURPOSE AND EFFECTS
OF THE MERGER -- Accounting Treatment;" "THE MERGER;" and
"CERTAIN RELATIONSHIPS AND TRANSACTIONS -- Agreement with
Messrs. Thompson, Dorfman and Hughes"
8. FAIRNESS OF THE TRANSACTIONS
(a) - (e) "INFORMATION CONCERNING THE SPECIAL MEETING -- Vote
Required;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Background of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS
OF THE MERGER -- The Acquiror's Purpose; Structure of the
Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Recommendation of the Special Committee and the Board of
Directors; Fairness of the Merger;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Position of the Acquiror, The
Irvine Company and Mr. Bren;" "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER -- Opinion of the Financial Advisor for the Special
Committee;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- Summary of the NationsBanc Montgomery Reports;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Interests of
Certain Persons in the Merger; Certain Company Benefit Plans;"
and "APPENDIX B -- OPINION OF MORGAN STANLEY"
(f) *
9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN
NEGOTIATIONS
(a) - (c) "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Background of the Merger;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- The Acquiror's Purpose; Structure
of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- Recommendation of the Special Committee and the
Board of Directors; Fairness of the Merger;" "BACKGROUND;
PURPOSE AND EFFECTS OF THE MERGER -- Position of the
Acquiror, The Irvine Company and Mr. Bren;" "BACKGROUND; PURPOSE
AND EFFECTS OF THE MERGER -- Opinion of the Financial
Advisor for the Special Committee;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Summary of the NationsBanc Montgomery
Reports;" and "APPENDIX B -- OPINION OF MORGAN STANLEY"
10. INTEREST IN SECURITIES OF THE ISSUER
(a) "SECURITIES OWNERSHIP"
(b) "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Background of the Merger;" "THE MERGER;" and "CERTAIN
RELATIONSHIPS AND TRANSACTIONS"
11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS "SUMMARY;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
WITH RESPECT TO THE ISSUER'S SECURITIES Background of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER -- The Acquiror's Purpose; Structure of the Merger;"
"THE MERGER;" and "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;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Background of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- The Acquiror's Purpose; Structure of the Merger;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Recommendation of
the Special Committee and the Board of Directors; Fairness of the
Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Position of the Acquiror, The Irvine Company and Mr. Bren;" and
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Interests of
Certain Persons in the Merger"
13. OTHER PROVISIONS OF THE TRANSACTION
(a) "SUMMARY -- No Appraisal Rights;" and "THE
MERGER -- No Appraisal Rights"
(b) *
</TABLE>
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<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 to be mailed to Shareholders with the
Proxy Statement.
(b) *
15. PERSONS AND ASSETS EMPLOYED, RETAINED OR
UTILIZED
(a) "INFORMATION CONCERNING THE SPECIAL MEETING --
Proxy Solicitation;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Background of the Merger;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
The Acquiror's Purpose; Structure of the Merger;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Certain Consequences of the Merger;" "BACKGROUND;
PURPOSE AND EFFECTS OF THE MERGER -- Plans for the
Company After the Merger;" "THE MERGER --
Financing; Source of Funds;" and "THE MERGER
-- Fees and Expenses"
(b) "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Summary of the NationsBanc Montgomery Reports;"
"THE MERGER -- Fees and Expenses;" and
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Position of the Acquiror, The Irvine Company and
Mr. Bren"
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 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, TIC and Mr. Bren.
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, Mr. Bren, 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 "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER -- 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 "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER -- Background of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- 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;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER;" and "THE MERGER" in the Proxy Statement is hereby
incorporated herein by reference.
(b) The information set forth in "SUMMARY;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER;" 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 "BACKGROUND; PURPOSE AND EFFECTS
OF THE MERGER -- Background of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER -- The Acquiror's Purpose; Structure of the Merger;" "BACKGROUND;
PURPOSE AND EFFECTS OF THE MERGER -- Certain Consequences of the Merger;" and
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Plans for the Company After
the Merger" in the Proxy Statement is hereby incorporated herein by reference.
5
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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 "BACKGROUND; PURPOSE AND EFFECTS
OF THE MERGER -- Background of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER-- The Acquiror's Purpose; Structure of the Merger;" "BACKGROUND;
PURPOSE AND EFFECTS OF THE MERGER -- Recommendation of the Special Committee and
the Board of Directors; Fairness of the Merger;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Opinion of the Financial Advisor for the Special
Committee;" and "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Position of
the Acquiror, The Irvine Company and Mr. Bren" 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 -- Potential Conflicts of Interest of Directors
and Officers of the Company;" "SUMMARY -- Federal Income Tax Consequences;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- The Acquiror's Purpose;
Structure of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Recommendation of the Special Committee and the Board of Directors; Fairness of
the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Benefits and
Detriments to Nonaffiliated Shareholders;" "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER -- Interests of Certain Persons in the Merger;" "BACKGROUND; PURPOSE
AND EFFECTS OF THE MERGER -- Certain Consequences of the Merger;" "BACKGROUND;
PURPOSE AND EFFECTS OF THE MERGER -- Plans for the Company After the Merger;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Material Tax Consequences;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Accounting Treatment;" "THE
MERGER" and "CERTAIN RELATIONSHIPS AND TRANSACTIONS -- Agreement with Messrs.
Thompson, Dorfman and Hughes" 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;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- Background of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- The Acquiror's Purpose; Structure of the Merger;" "BACKGROUND; PURPOSE
AND EFFECTS OF THE MERGER -- Recommendation of the Special Committee and the
Board of Directors; Fairness of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER -- Position of the Acquiror, The Irvine Company and Mr. Bren;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Benefits and Detriments to
Nonaffiliated Shareholders;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Opinion of the Financial Advisor for the Special Committee;" "BACKGROUND;
PURPOSE AND EFFECTS OF THE MERGER -- Summary of the NationsBanc Montgomery
Reports;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Interests of Certain
Persons in the Merger;" and "APPENDIX B -- OPINION OF MORGAN STANLEY" 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 "BACKGROUND; PURPOSE AND EFFECTS
OF THE MERGER --Background of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER -- The Acquiror's Purpose; Structure of the Merger;" "BACKGROUND;
PURPOSE AND EFFECTS OF THE MERGER -- Recommendation of the Special Committee and
Board of Directors; Fairness of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER -- Position of the Acquiror, The Irvine Company and Mr. Bren;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Opinion of the Financial
Advisor for the Special Committee;" "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- Summary of the NationsBanc Montgomery Reports;" and "APPENDIX B --
OPINION OF MORGAN STANLEY" 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 "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- 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;" "BACKGROUND; PURPOSE AND EFFECTS
OF THE MERGER -- Background of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF
THE MERGER -- 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;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Background of the Merger;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- The Acquiror's Purpose; Structure of the Merger;"
"BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER -- Recommendation of the Special
Committee and the Board of Directors; Fairness of the Merger;" "BACKGROUND;
PURPOSE AND EFFECTS OF THE MERGER -- Position of the Acquiror, The Irvine
Company and Mr. Bren;" and "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
Interests of Certain Persons in the Merger" 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 to be 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;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER
- -- Background of the Merger;" "BACKGROUND; PURPOSE AND EFFECTS OF THE MERGER --
The Acquiror's Purpose; Structure of the Merger;" "BACKGROUND; PURPOSE AND
EFFECTS OF THE MERGER -- Certain Consequences of the Merger;" "BACKGROUND;
PURPOSE AND EFFECTS OF THE MERGER -- 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 "BACKGROUND; PURPOSE AND EFFECTS OF THE
MERGER -- Position of the Acquiror and The Irvine Company;" "BACKGROUND;
PURPOSE AND EFFECTS OF THE MERGER -- Summary of the NationsBanc Montgomery
Reports;" and "THE MERGER -- Fees and Expenses" 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 -- $350 million Acquisition Term Loan Agreement between The
Irvine Company, the Banks therein named, and Bank of America
National Trust and Savings Association, as administrative agent,
dated March 16, 1999.*
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 -- Revised 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.
99.9 -- Morgan Stanley written Discussion Materials dated
December 22, 1998.
99.10 -- Morgan Stanley written Discussion Materials dated
January 14, 1999.
99.11 -- Morgan Stanley Valuation Analysis dated January 22,
1999.
- --------------
* Previously filed.
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: April 30, 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
DONALD BREN
BY /s/ DONALD BREN
------------------------------
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 -- $350 million Acquisition Term Loan Agreement between The Irvine
Company, the Banks therein named, and Bank of America National Trust and
Savings Association, as administrative agent, dated March 16, 1999.*
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 -- Revised 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.
99.9 -- Morgan Stanley written Discussion Materials dated December 22, 1998.
99.10 -- Morgan Stanley written Discussion Materials dated January 14, 1999.
99.11 -- Morgan Stanley Valuation Analysis dated January 22, 1999.
- --------------
* Previously filed.
</TABLE>
10
<PAGE> 1
EXPLANATORY NOTE
(Not Part of This Exhibit)
Pursuant to the requirements of Rule 13e-3 of the Exchange Act, the following
preliminary analysis is being filed as an exhibit to the Schedule 13E-3. The
following preliminary analysis was prepared by Morgan Stanley and discussed with
the Special Committee on December 22, 1998. The information contained in the
preliminary analysis was prepared as a negotiating tool and to provide the
Special Committee with some background information with respect to possible
alternatives in connection with the offer made by TIC Acquisition LLC. It is
important to note that neither the due diligence nor the analysis performed by
Morgan Stanley reflected in the above referenced draft was complete at the time
the preliminary draft was prepared and it was not intended to be relied upon by
the Special Committee or any third parties, including the Shareholders. The
Special Committee was aware of the status of and the preliminary nature of the
draft and the fact that it was not to be relied upon. The preliminary analysis
was prepared as of December 22, 1998 and reflects information made available to
Morgan Stanley prior to such date. Therefore, Morgan Stanley's preliminary
analysis performed as of December 22, 1998 does not and did not reflect the
final views of Morgan Stanley with respect to Morgan Stanley's valuation of the
Company or an opinion as to the fairness of the proposed transaction as of the
date it was provided to the Special Committee.
<PAGE> 2
DRAFT
PROJECT DELTA
Discussion Materials
December 22, 1998
<PAGE> 3
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Discounted Cash Flow Analysis
CURRENT CAPITAL STRUCTURE
<TABLE>
<CAPTION>
1999 Ranch Low High
Rent Growth Occupancy Value(1) Value(2)
<S> <C> <C> <C> <C>
Case 1 5.0% 95.0% $34.05 $42.04
Case 2 7.0% 96.0% 35.00 43.26
Case 3 9.0% 97.0% 35.95 44.44
</TABLE>
LBO STRUCTURE
<TABLE>
<CAPTION>
1999 Ranch Low High
Rent Growth Occupancy Value(3) Value(4)
<S> <C> <C> <C> <C>
Case 4 5.0% 95.0% $32.53 $40.60
Case 5 7.0% 96.0% 34.51 43.06
Case 6 9.0% 97.0% 35.59 44.41
</TABLE>
Notes:
(1) Current capital structure low value: 9.0 times 2004 FFO terminal value,
15.0% discount rate.
(2) Current capital structure high value: 10.5 times 2004 FFO terminal value,
13.0% discount rate.
(3) LBO low value: 8.5 times 2004 FFO terminal value, 16.5% discount rate.
(4) LBO high value: 10.0 times 2004 FFO terminal value, 14.5% discount rate.
-11-
<PAGE> 4
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Selection of Comparable Companies
<TABLE>
<CAPTION>
COMPANY GEOGRAPHY REASON FOR INCLUSION
- ------------------- ---------------------------------------------- -------------------------------------
<S> <C> <C>
Archstone Southern California, selected states in the California exposure; current strategy
Pacific Northwest, Southeast and Southwest involves entering high-barrier-to-
entry markets
Avalon Bay Northern and Southern California, selected California exposure; high quality
states in the Mid-Atlantic, Northeast, Midwest properties; high-barrier-to-entry
and Pacific Northwest markets
BRE Properties California, Arizona, Washington, Oregon, Regional REIT; significant California
Nevada, New Mexico, Utah and Colorado exposure
Equity Residential In 35 states, including 64 properties in Largest publicly traded apartment
California company; improving portfolio quality
Essex Property Trust San Francisco, Seattle, Southern California California exposure; high-barrier-to-
and Portland entry markets
Post Properties Southeast and Southwest High quality properties; increasingly
in high-barrier-to-entry markets
</TABLE>
-12-
<PAGE> 5
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Table of Contents
<TABLE>
<S> <C> <C>
SECTION I EXECUTIVE SUMMARY
SECTION II ANALYSIS OF ALPHA
Tab A Current Net Asset Value
Tab B Discounted Cash Flows
Tab C Comparable Company Analysis
Tab D Ability-to-Pay Analysis
Tab E Comparable Multifamily Transactions
Tab F Comparable Squeeze-out Transactions
Tab G Wall Street's View
SECTION III ASSESSMENT OF ALTERNATIVES
SECTION IV STRUCTURAL CONSIDERATIONS
Tab H Governance
Tab I Debt and Preferred Stock
SECTION V PROCESS/NEXT STEPS
APPENDIX A FINANCIAL ANALYSIS
Tab A Current Net Asset Value
Tab B Discounted Cash Flows
Tab C Comparable Company Analysis
APPENDIX B RESEARCH
APPENDIX C INSTITUTIONAL SHAREHOLDERS
</TABLE>
<PAGE> 6
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Executive Summary
BACKGROUND / CHRONOLOGY
- On December 1, 1998, following the close of trading, Beta published a
proposal (the "Proposal") to acquire the shares of Alpha (or the
"Company") it does not already own in a going-private transaction
- Price: $32.50/share
- Declared to have no financing contingency
- Contemplates a cash merger with no tender to precede (draft
Merger Agreement has been received)
- A special committee was formed by Alpha's Board of Directors to work
with legal and financial advisors in considering the Proposal and
formulating a response
- On December 8, 1998, Morgan Stanley was notified that it had been
selected by the special committee as the Company's financial advisor
- On December 10, 1998 Morgan Stanley requested and began receiving and
reviewing information for Alpha
- On December 15, 1988, Morgan Stanley met with management and local
consultants of Alpha to discuss a number of topics:
- Review of business plan
- Review of projections / company model
- Discussion of market conditions and market studies
<PAGE> 7
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Executive Summary
FINANCIAL ANALYSIS
- In evaluating the Proposal, we have attempted to estimate a valuation
range for the Company by the application of several different
valuation methodologies
- Net asset value: Looks at the current value of the Company's
assets on an asset sale basis, netting out debt and preferred to
estimate common equity value. This is analogous to liquidation
value, although debt and preferred penalties to retire are not
included nor is the time value of any disposition program
- Discounted cash flow: Relies on projections, based on several
scenarios, of the Company's performance to estimate a going
concern value, either under the current capital structure or
under a more highly leveraged structure consistent with the
Proposal
- Comparable company analysis: Estimates the value of the Company
based on trading levels of selected peers, without implying that
it has traded or would trade similarly. It is important to note
that no good comparable company exists
- Ability-to-pay: Estimates the value of the Company if it were
acquired by another public apartment company based on a variety
of assumptions as to the acquirer's acceptable level of earnings
accretion or dilution
- Comparable multifamily transactions: Looks at other transactions
that have occurred in the sector. As these (a) were typically
mergers of equals and (b) involved stock as consideration as
opposed to cash, they are not considered sufficiently comparable
so as to allow meaningful value conclusions to be drawn
- Comparable squeeze-out transactions: Reviews premiums paid in
prior squeeze-out transactions. Although a resulting range is
shown, the applicability is limited because of variations, among
other factors, in the rights of each side and the pre-offer
public trading valuation relative to a theoretical intrinsic
value
- Wall Street's view: Synopsis of statements as to the value of the
Company published by research analysts before and after
publication of the Proposal
-2-
<PAGE> 8
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Executive Summary
Summary of Preliminary Analyses
<TABLE>
Beta Offer Price
$32.50
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997-1998 Trading Range $23.38-----------------------$33.50
Current Net Asset Value $35.00-----------$44.00
Discounted Cash Flow
- -- Base Case $34.00-----------$43.00
- -- Leveraged Alternative $33.00-------------$43.00
Comparable Company Analysis $27.00------------$34.00
Ability-to-Pay Analysis $32.00-----$35.00
Acquisition Comps
- -- Public Multifamily Not Applicable
REIT Transactions
- --Squeeze-out Transactions $30.00-------$35.00
Wall Street's View $30.00---------$36.00
-------------------------------------------------------------------------------
$20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00
</TABLE>
-3-
<PAGE> 9
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Executive Summary
ALTERNATIVE TRANSACTIONS
- To assess the Proposal, a number of other potential transactions were
reviewed and assessed
- These transactions included doing nothing (status quo, an
alternative which the Company is in a strong position to
elect to pursue), pursuing a strategic partner other than
Beta, and extinguishing the Land Rights Agreement (in
conjunction with some or all of the following elements: sale
of the Company, sale of assets to Beta, recapitalization)
- They were assessed on the basis of
- Shareholder value
- Execution risk
- Future access to capital and business plan risk
- Tax impact to shareholders
- Resolution of issues relative to Beta
-4-
<PAGE> 10
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Key NAV Assumptions
STABILIZED PROPERTIES
The 55 stabilized properties including two recent acquisitions, were placed into
three tiers based upon:
- year built - average rent
- location - quality
Each tier was ascribed a cap rate range:
Tier I Newer properties in prime locations with highest
rents. Cap rate range: 7.25% - 7.75%
Tier II Late 1980s product including the student housing
properties. Cap rate range: 7.5% - 8.0%
Tier III Older product, lower average rent. Cap rate
range: 7.75% - 8.25%
Cap rates were applied to 1999E NOI
These ranges were evaluated and deemed appropriate in light of cash flow yields
(NOI less capital reserves) which would be about 96% as high
Net operating income was calculated based on:
- 4th quarter forecasted NOI was annualized
- Operating margin is assumed to be 70% and annual revenues are
increased 5% to 10%
- Expenses are escalated at 3%
PROPERTIES UNDER DEVELOPMENT
Properties under development were valued as follows:
DCFs were performed for each property from 1/1/99 until
stabilization
Cap rates were applied ranging from 7.25% to 8.25% to compute
terminal value at stabilization
Discount rates of 12% to 16% were utilized
The values computed were adjusted by development costs to be
incurred from 9/30/98 to 1/1/99
LAND RIGHTS AGREEMENT
The Land Rights Agreement was calculated utilizing two methodologies:
I. Below-market land acquisition prices
Assuming the land is being transferred to Alpha at prices below what a
third party would pay, the value differential was calculated given
Alpha pays 95% of appraised value, with a total discount of 5% to
15% compared to a third party
The agreement was valued based upon the following variables:
<TABLE>
<S> <C>
Discount to market: 5% to 15% Average cost/unit: $50,000 to $75,000
Units Developed: 1,000 to 1,500 per year Discount Rates: 10% to 13%
</TABLE>
II. Value of Non-Compete
The value differential between Alpha having the Agreement and the
choice to develop, versus a third party developing on-ranch
The agreement was valued based upon the comparison of two DCF
analyses:
1. Third party developer develops on-ranch, rents increase 7% in
1999, 4% in 2000, and 3% thereafter
2. Alpha stops developing on-ranch, rents increase over time, at
rates of 1% to 2% above rates for Analysis I
-5-
<PAGE> 11
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
NAV Summary
($MM)
<TABLE>
<CAPTION>
1998 Q4 Forecast NOI 1999 Projected NOI
Average Year ---------------------- -----------------------------
Properties Units Of Completion(1) Total Per Unit Low Case(4) High Case(3)
------------- ------- ------------------ -------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
STABILIZED PROPERTIES:
Tier I(5) 18 6,433 1992(2) $18.3 $2,851 $ 77.7 $ 82.9
Tier II(6) 24 5,969 1984 $14.5 2,423 $ 61.2 $ 65.4
Tier III 13 3,573 1978 $ 7.7 2,149 $ 32.5 $ 34.7
------------- ------- ------------------ -------- ----------- ------------- --------------
TOTAL STABILIZED
PROPERTIES 55 15,975 $40.5 $2,534 $171.4 $183.0
Properties Under
Development 8 2,999
Land Rights
------------- -------
TOTAL ASSET VALUE 63 18,974
Preferred Stock
Tax Exempt Debt Value(4)
Debt
NET ASSET VALUE
DILUTED SHARES(8)
NAV/SHARE
Selected Cap Rates Preliminary Value Range
----------------------------- ---------------------------
Low Case High Case Low Case High Case
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
STABILIZED PROPERTIES:
Tier I(5) 7.75% 7.25% $985.1 $1,126.2
Tier II(6) 8.00% 7.50% $764.9 $ 871.0
Tier III 8.25% 7.75% $394.1 $ 447.8
------------ ------------ --------- ----------
TOTAL STABILIZED
PROPERTIES 7.99% 7.48% $2,144.1 $2,445.0
Value per Unit $134,213 $153,052
Properties Under
Development $ 249.6(7) $ 294.6
Land Rights $ 50.0 $ 100.0
--------- ----------
TOTAL ASSET VALUE $2,443.7 $2,839.6
Preferred Stock (144.1) (144.1)
Tax Exempt Debt Value 64.3 83.6
Debt (734.9) (734.9)
--------- ----------
NET ASSET VALUE $1,629.0 $2,044.2
DILUTED SHARES(8) 45,330,741 45,442,718
NAV/SHARE $35.94 $44.98
</TABLE>
Notes:
(1) For average unit in sub-portfolios, reflects first year of completion of
project.
(2) 1994 if Promontory Point is excluded (520 unit property built in 1974).
(3) Low Case assumed 5% rent growth, high case assumed 10% rent growth. Both
cases assume 3% expense growth and 70.0% operating margin.
(4) Interest rate savings of 250 bp on $334.2 MM of bonds capped at 10% and 13%.
(5) Includes recent acquisition of One Park Place, adjusted for remaining costs
to incur of $17.3 MM for renovation capital expenditures.
(6) Includes recent acquisition of Rancho Santa Fe, adjusted for remaining costs
to incur of $0.6 MM for renovation capital expenditures.
(7) Adjusted for costs to be incurred 9/30/98 to 1/1/00.
(8) Options derived from Treasury Method using $35.00 purchase price for low
value, $45.00 purchase price for high value.
-6-
<PAGE> 12
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Net Asset Value Back-Up
Properties Under Development
<TABLE>
<CAPTION>
Terminal Cap Rates Discount Rates
------------------ -----------------
First Month Low High Low High Low High
Property Location Stabilized Units Case Case Case Case Case(1) Case(1)
- ----------------------- ----------- ----------- ----- ------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Champagne Towers Los Angeles Dec-99 119 7.75% 7.25% 15.00% 13.00% $ 43,698 $ 49,683
Brittany Ranch May-00 393 8.00% 7.50% 15.00% 13.00% 26,638 32,644
Sonoma Ranch Apr-99 196 8.00% 7.50% 14.00% 12.00% 24,967 27,240
Stonecrest Irvine Oct-99 336 8.00% 7.50% 14.00% 12.00% 25,477 29,385
The Colony at Avventine San Diego Jun-00 232 8.00% 7.50% 15.00% 13.00% 12,645 16,320
Bair Island Redwood Dec-99 155 8.00% 7.50% 15.00% 13.00% 13,745 16,873
Park Place Ranch Aug-02 1,226 8.25% 7.75% 16.00% 14.00% 40,920 56,495
The Hamptons(2) Cupertino Feb-99 342 8.25% 7.75% 15.00% 13.00% 61,548 65,973
----- -------- --------
TOTAL PROPERTIES UNDER DEVELOPMENT 2,999 $249,638 $294,613
</TABLE>
Notes:
(1) Valued as discounted cash flow as of 1/1/99 adjusted for costs to be
incurred from the present (9/30/98) to 1/l/99.
(2) The Hamptons is included in developments because it is still in
lease-up phase.
-7-
<PAGE> 13
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Notional Value of Land Rights Agreement
($MM)
VALUE OF BELOW-MARKET LAND ACQUISITION PRICES
<TABLE>
<S> <C> <C> <C>
Average land cost/unit (1) $50,000 Inflation 3.0%
Units developed/year (2) 1,500 % of appraised value (3) 95.0%
% of third party value 100.0% Total Discount 5.0%
</TABLE>
<TABLE>
<CAPTION>
Units to be Land Appraised 3rd Party Total
Developed (2) Purchase Price Value Value Difference Units
------------- -------------- --------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
1999 938 46.90 49.37 49.37 2.47 938
2000 559 28.79 30.30 30.30 1.52 1,497
2001 1,075 57.02 60.02 60.02 3.00 2,572
2002 1,558 85.12 89.60 89.60 4.48 4,130
2003 1,220 68.66 72.27 72.27 3.61 5,350
2004 1,500 86.95 91.52 91.52 4.58 6,850
2005 1,500 89.55 94.27 94.27 4.71 8,350
2006 1,500 92.24 97.10 97.10 4.85 9,850
2007 1,500 95.01 100.01 100.01 5.00 11,350
2008 1,500 97.86 103.01 103.01 5.15 12,850
2009 1,500 100.79 106.10 106.10 5.30 14,350
2010 1,500 103.82 109.28 109.28 5.46 15,850
2011 1,150 81.98 86.30 86.30 4.31 17,000
</TABLE>
<TABLE>
<CAPTION>
Discount Rates
Average Total --------------------------------------------------------------
Land Cost Market Discount Units Developed (1) 10% 11% 12% 13%
- --------- --------------- ------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$50,000 15% 1,000 $ 82.3 $ 77.0 $ 72.3 $ 67.9
50,000 10% 1,250 $ 54.8 $ 51.5 $ 48.5 $ 45.8
50,000 5% 1,500 $ 27.3 $ 25.7 $ 24.2 $ 22.9
- ------------------------------------------------------------------------------------------------------------------------
$75,000 15% 1,000 $ 123.4 $ 115.5 $ 108.4 $ 101.9
75,000 10% 1,250 $ 81.7 $ 76.8 $ 72.3 $ 68.1
75,000 5% 1,500 $ 41.5 $ 39.0 $ 36.8 $ 34.7
</TABLE>
(1) Recent land sale acquisition comps are in the $50,000 to $75,000 per unit
range
(2) For 1999-2003, units developed according to Alpha business plan for
Irvine Ranch, 1,500 units assumed thereafter based on 5% discount to
market
(3) Per Land Rights Agreement
-8-
<PAGE> 14
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Notional Value of Land Rights Agreement
($MM)
<TABLE>
<CAPTION>
VALUE OF NON-COMPETE
DCF Analysis 1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ANALYSIS I LOSS OF NON-COMPETE - THIRD PARTY DEVELOPERS ON-RANCH
On-ranch land can be sold to third party developers
On-ranch development is deducted from Alpha company model
Projected Rental Growth: 7.0% 4.0% 3.0% 3.0% 3.0%
ANALYSIS II VALUE OF NON-COMPETE - ALPHA RIGHT TO DEVELOP
Alpha stops buying land and ends on-ranch
development, constricting supply
On-ranch development is deducted from Alpha company model
</TABLE>
<TABLE>
<CAPTION>
Increase:
---------
<S> <C> <C> <C> <C> <C> <C>
Incremental Rental Growth - 1.0% by year 5 0.2% 7.2% 4.4% 3.6% 3.8% 4.0%
Incremental Rental Growth - 1.5% by year 5 0.3% 7.3% 4.6% 3.9% 4.2% 4.5%
Incremental Rental Growth - 2.0% by year 5 0.4% 7.4% 4.8% 4.2% 4.6% 5.0%
</TABLE>
<TABLE>
<CAPTION>
Increase in Rent by Year 5
------------------------------------------
VALUE OF NON-COMPETE: Terminal Multiple 1.0% 1.5% 2.0%
- --------------------- ----------------- ------ ------ ------
<S> <C> <C> <C> <C>
9.0x $ 50.7 $ 65.5 $ 91.4
9.5x $ 53.3 $ 68.8 $ 96.1
10.0x $ 55.9 $ 72.2 $100.8
10.5x $ 58.5 $ 75.5 $105.4
</TABLE>
-9-
<PAGE> 15
DRAFT
PROJECT DELTA
Discounted Cash Flow Analysis Assumptions
CURRENT CAPITAL STRUCTURE
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Acquisitions $0 $0 $0 $0 $0
Development (Units)
On Ranch 1,660 1,063 1,075 1,558 1,220
Off Ranch 1,547 1,732 1,511 850 850
Rental Growth
Case 1 5.0% 4.0% 3.0% 3.0% 3.0%
Case 2 7.0% 4.0% 3.0% 3.0% 3.0%
Case 3 9.0% 4.0% 3.0% 3.0% 3.0%
Occupancy
Case 1 95.0% 95.0% 95.0% 95.0% 95.0%
Case 2 96.0% 96.0% 96.0% 96.0% 96.0%
Case 3 97.0% 97.0% 97.0% 97.0% 97.0%
Expense Increases 3.0% 3.0% 3.0% 3.0% 3.0%
Equity Offerings
(Cases 1-3) $100 $100 $100 $100 $75
Debt Offerings
(Cases 1-3) 100 150 150 125 125
Interest Rate 7.50% 7.50% 7.50% 7.50% 7.50%
Interest Coverage
Case 1 3.3x 3.5x 3.9x 3.7x 3.9x
Case 2 3.4x 3.6x 4.0x 3.8x 3.9x
2004 FFO 2003 FFO grown at 1999-2003 CAGR
Dividends
Case 1 Company projections
Case 2 Company projections grown at 0.5x FFO percentage increase in 1999, 1.0x thereafter
Case 3 Company projections grown at 0.5x FFO percentage increase in 1999, 1.0x thereafter
DCF Range of discount rates: 12% to 16%
Range of terminal value multiples: 8.5x to 11.5x
Value of Land Rights Agreement in 2004 is included in terminal value
Shares Outstanding 45,330,741
</TABLE>
LBO STRUCTURE
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cowboy buys $550 MM shares of Steer on 1/31/99 at $32.50/share financed with debt
Acquisitions $0 $0 $0 $0 $0
Development (Units)
On Ranch 1,660 1,063 1,075 1,558 1,220
Off Ranch 1,547 1,732 1,511 850 850
Rental Growth
Case 4 5.0% 4.0% 3.0% 3.0% 3.0%
Case 5 7.0% 4.0% 3.0% 3.0% 3.0%
Case 6 9.0% 4.0% 3.0% 3.0% 3.0%
Occupancy
Case 4 95.0% 95.0% 95.0% 95.0% 95.0%
Case 5 96.0% 96.0% 96.0% 96.0% 96.0%
Case 6 97.0% 97.0% 97.0% 97.0% 97.0%
Expense Increases 3.0% 3.0% 3.0% 3.0% 3.0%
GA Adjustments (5,610) (5,701) (5,872) (6,048) (6,229)
Equity Offerings
(Cases 4-6) $0 $0 $0 $0 $0
Debt Offerings
(Cases 4-6) 650 150 150 125 125
Interest Rate 7.50% 7.50% 7.50% 7.50% 7.50%
Interest Coverage
Case 4 1.9x 2.0x 2.2x 2.2x 2.2x
Case 5 1.9x 2.1x 2.3x 2.3x 2.3x
2004 FFO 2003 FFO grown at 1999-2003 CAGR
Dividends 50% of FAD paid quarterly
DCF Range of discount rates: 13.5% to 17.5%
Range of terminal value multiples: 8.0x to 11.0x
Value of Land Rights Agreement in 2004 is included in terminal value
Shares Outstanding 45,330,741
</TABLE>
-10-
<PAGE> 16
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Discounted Cash Flow Analysis
CURRENT CAPITAL STRUCTURE
<TABLE>
<CAPTION>
1999 Ranch Low High
Rent Growth Occupancy Value(1) Value(2)
<S> <C> <C> <C> <C>
Case 1 5.0% 95.0% $34.05 $42.04
Case 2 7.0% 96.0% 35.00 43.26
Case 3 9.0% 97.0% 35.95 44.44
</TABLE>
LBO STRUCTURE
<TABLE>
<CAPTION>
1999 Ranch Low High
Rent Growth Occupancy Value(3) Value(4)
<S> <C> <C> <C> <C>
Case 4 5.0% 95.0% $32.53 $40.60
Case 5 7.0% 96.0% 34.51 43.06
Case 6 9.0% 97.0% 35.59 44.41
</TABLE>
Notes:
(1) Current capital structure low value: 9.0 times 2004 FFO terminal value,
15.0% discount rate.
(2) Current capital structure high value: 10.5 times 2004 FFO terminal value,
13.0% discount rate.
(3) LBO low value: 8.5 times 2004 FFO terminal value, 16.5% discount rate.
(4) LBO high value: 10.0 times 2004 FFO terminal value, 14.5% discount rate.
-11-
<PAGE> 17
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Comparable Company Analysis(1)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Aggregate Value/
EBITDA LTM: 13.4x - 16.6x $22.35---------------$32.46
1999E FFO Multiple: 9.3x - 10.4x $27.04---$30.59
1999E Normalized
FFO Multiple: 8.7x - 10.5x $26.36-----------$33.22
Pro Forma Dividend Yield(2): 5.9% - 7.2% $26.64-----------$33.74
Multiple to Total Return: 0.53 - 0.65(3) $28.64----------$35.38
-------------------------------------------------------------
$15.00 $20.00 $25.00 $30.00 $35.00 $40.00
</TABLE>
Notes: (1) Includes value of Land Rights Agreement estimated at $75MM or
$1.66 per share.
(2) Based on pro forma dividend of $1.89, expected to be paid in late
1999 or in 2000.
(3) Based on 1999 FFO and long-term growth rate estimates from
First Call.
-13-
<PAGE> 18
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Net Asset Value Back-Up
Properties Under Development
<TABLE>
<CAPTION>
TERMINATE CAP RATES DISCOUNT RATES
FIRST MONTH ------------------- -------------------
PROPERTY LOCATION STABILIZED UNITS LOW CASE HIGH CASE LOW CASE HIGH CASE LOW CASE(1) HIGH CASE(1)
- --------------- ----------- --------- ----- -------- --------- -------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Champagne Towers Los Angeles Dec-99 119 7.75% 7.25% 15.00% 13.00% $43,698 $49,683
Brittany Ranch May-00 393 8.00% 7.50% 15.00% 13.00% 26,638 32,644
Sonoma Ranch Apr-99 196 8.00% 7.50% 14.00% 12.00% 24,967 27,240
Stonecrest Irvine Oct-99 336 8.00% 7.50% 14.00% 12.00% 25,477 29,385
The Colony at Avventine San Diego Jun-00 232 8.00% 7.50% 15.00% 13.00% 12,645 16,320
Bair Island Redwood Dec-99 155 8.00% 7.50% 15.00% 13.00% 13,745 16,873
Park Place Ranch Aug-02 1,226 8.25% 7.75% 16.00% 14.00% 40,920 56,495
The Hamptons(2) Cupertino Feb-00 342 8.25% 7.75% 15.00% 13.00% 61,548 65,973
----- ------- -------
TOTAL PROPERTIES UNDER DEVELOPMENT 2,999 $249,638 $294,613
</TABLE>
Notes:
(1) Valued as discounted cash flow as of 1/1/99 adjusted for costs to be
incurred from the present (9/30/98) to 1/1/99.
(2) The Hamptons is included in developments because it is still in lease-up
phase.
31
<PAGE> 19
DRAFT
PROJECT DELTA
- ------------------------------------------------------------------------------
STATISTICS FOR SELECTED APARTMENT REITS(1)
<TABLE>
<CAPTION>
Equity Total Total Aggregate
Apartment Market Market Market Cap/ Value(5)/ Price/FFO
Company (Ticker) Units(2) Value Capitalization(1) Unit(4) LTM EBITDA 1999E(6)
- ------------------------------------- --------- -------- ----------------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 69,582 $2,803.1 $ 5,141.3 $ 73,888 15.9x 9.7x
Avalon Bay Communities (AVB) 38,132 $2,185.1 $ 4,090.1 $107,261 16.6x 10.2x
BRE Properties (BRE) 20,375 $1,149.3 $ 1,852.1 $ 90,902 15.5x 10.3x
Equity Residential Properties Trust (EQR) 192,558 $5,288.2 $11,402.4 $ 59,216 13.5x 9.1x
Essex Property Trust (ESS) 12,266 $ 545.9 $ 946.4 $ 77,158 13.3x 9.4x
Post Properties (PPS) 26,737 $1,634.6 $ 2,571.9 $ 96,194 15.0x 10.4x
- --------------------------------------------------------------------------------------------------------------------
LOW $ 545.9 $ 946.4 $ 59,216 13.3x 9.1x
MEAN $2,267.7 $ 4,334.0 $ 84,103 15.0x 9.8x
MEDIAN $1,909.9 $ 3,331.0 $ 84,030 15.2x 9.9x
HIGH $5,288.2 $11,402.4 $107,261 16.6x 10.4x
- --------------------------------------------------------------------------------------------------------------------
ALPHA ASSUMPTIONS:
LTM EBITDA 1999E FFO
---------- ---------
$136,950 $2.78
- --------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE
LOW $20.69 $25.38
HIGH $30.80 $28.93
- --------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE INCLUDING VALUE OF
THE LAND RIGHTS AGREEMENT(7)
LOW $22.35 $27.04
HIGH $32.46 $30.59
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Price/
Debt-to-Market Normalized FFO Dividend 5-Year Total Multiple in
Company (Ticker) Capitalization 1999E(6) Yield(8) FFO Growth(6) Return Total Return
- ---------------------------------- -------------- --------------- --------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 40.1% 11.3x 7.6% 11.0% 18.6% 0.52
Avalon Bay Communities (AVB) 37.8% 11.2x 6.0% 12.0% 18.0% 0.56
BRE Properties (BRE) 37.9% 11.2x 5.9% 9.9% 15.8% 0.65
Equity Residential Properties Trust (EQR) 41.2% 11.1x 7.0% 9.1% 16.1% 0.57
Essex Property Trust (ESS) 38.1% 10.3x 6.8% 10.0% 16.8% 0.56
Post Properties (PPS) 30.6% 8.8x 6.8% 9.6% 16.4% 0.64
- -------------------------------------------------------------------------------------------------------------------------------
LOW 30.6% 8.8x 5.9% 9.1% 15.8% 0.52
MEAN 37.6% 10.7x 6.7% 10.3% 16.9% 0.58
MEDIAN 38.0% 11.2x 6.8% 10.0% 16.6% 0.57
HIGH 41.2% 11.3x 7.6% 12.0% 18.6% 0.65
- -------------------------------------------------------------------------------------------------------------------------------
ALPHA ASSUMPTIONS: Normalized 5-Year
1999E FFO Dividend FFO Growth
---------- -------- ----------
$ 2.80 $ 1.89 11.7%
- -------------------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE
LOW $24.70 $24.98 $26.98
HIGH $31.56 $32.07 $33.72
- -------------------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE INCLUDING VALUE OF
THE LAND RIGHTS AGREEMENT(7)
LOW $26.36 $26.64 $28.64
HIGH $33.22 $33.74 $35.38
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) All information as of December 21, 1998.
(2) Does not include units under construction.
(3) Equals the sum of equity market value, debt outstanding and preferred
stock at liquidation preference, in $MM.
(4) Actual dollar amounts shown.
(5) Aggregate Value equals Total Market Capitalization less cash.
(6) Estimates from First Call as of December 21, 1998, unless otherwise noted.
(7) The Land Rights Agreement is valued at $1.66 per share, or $75MM
in aggregate.
(8) Based on dividend of $1.89, expected to be paid in late 1999 or 2000.
<PAGE> 20
DRAFT
PROJECT DELTA
Ability-to-Pay Analysis
Break-Even Price
<TABLE>
<CAPTION>
ASSUMED
SHARE PRICE COST OF 1999E
COMPANY 12/21/98 DEBT % EQUITY % DEBT FFO
------- -------- ------ -------- ---- ---
<S> <C> <C> <C> <C> <C>
Archstone Communities Trust $ 19.56 45.1% 54.9% 7.00% $ 2.02
Avalon Bay Communities $ 33.75 38.0% 62.0% 7.00% $ 3.31
BRE Properties $ 24.44 37.5% 62.5% 7.00% $ 2.38
Equity Residential Properties Trust $ 40.56 40.7% 59.3% 7.00% $ 4.44
Essex Property Trust $ 29.50 37.5% 62.5% 7.00% $ 3.15
Post Properties $ 38.44 30.9% 69.1% 7.00% $ 3.69
</TABLE>
<TABLE>
<CAPTION>
PRICE FFO MULTIPLE
1999E BREAK-EVEN AT 5% REQUIRED FOR
COMPANY FFO MULTIPLE PRICE (1) DILUTION (1) $35 VALUE (1)
------- ------------ --------- ------------ -------------
<S> <C> <C> <C> <C>
Archstone Communities Trust 9.7x $ 33.34 $ 35.01 10.8x
Avalon Bay Communities 10.2x $ 33.31 $ 34.98 11.2x
BRE Properties 10.3x $ 33.38 $ 35.05 11.2x
Equity Residential Properties Trust 9.1x $ 31.84 $ 33.44 11.0x
Essex Property Trust 9.4x $ 31.78 $ 33.37 11.2x
Post Properties 10.4x $ 32.92 $ 34.57 11.5x
Low $ 31.78 $ 33.37 10.8x
Median $ 33.12 $ 34.77 11.2x
High $ 33.38 $ 35.05 11.5x
</TABLE>
Note:
(1) Based on 1999E FFO of $2.78 from Alpha model, synergies of $6 MM, and $50
MM of transaction costs financed at 7%
-15-
<PAGE> 21
DRAFT
PROJECT DELTA
Ability-to-Pay Analysis
Multiple Expansion
<TABLE>
<CAPTION>
Supportable Price given FFO Multiple Expansion
-----------------------------------------------------------------------------------
COMPANY 0.00X 0.25X 0.50X 0.75X 1.00X 1.25X 1.50X
------- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust $ 33.34 $ 33.73 $ 34.12 $ 34.51 $ 34.90 $ 35.29 $ 35.67
Avalon Bay Communities $ 33.31 $ 33.75 $ 34.19 $ 34.63 $ 35.07 $ 35.51 $ 35.95
BRE Properties $ 33.38 $ 33.83 $ 34.27 $ 34.71 $ 35.15 $ 35.60 $ 36.04
Equity Residential Properties Trust $ 31.84 $ 32.26 $ 32.68 $ 33.10 $ 33.52 $ 33.95 $ 34.37
Essex Property Trust $ 31.78 $ 32.23 $ 32.67 $ 33.11 $ 33.55 $ 34.00 $ 34.44
Post Properties $ 32.92 $ 33.41 $ 33.90 $ 34.39 $ 34.88 $ 35.37 $ 35.86
</TABLE>
-16-
<PAGE> 22
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Multifamily REIT Mergers & Acquisitions
Premiums Paid Analysis
<TABLE>
<CAPTION>
TARGET
----------------------
PREMIUM TO
ANNOUNCED(1)/ ACQUIRER/ EQUITY AGGREGATE UNAFFECTED PREMIUM TO
COMPLETED TARGET ASSET CLASS CONSIDERATION VALUE VALUE PRICE(2) 52-WEEK HIGH
- ------------- -------------------------- ----------- ------------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
($MM) ($MM)
7/8/98 Equity Residential/ Multifamily Stock, Debt $1,366.8 $2,169.7 20.5% 5.4%
10/19/98 Merry Land & Investment
Company
4/2/98 Security Capital Pacific Multifamily Stock, Debt 1,153.0 1,679.0 15.1% -4.4%
7/6/98 Trust/Security Capital
Atlantic
3/8/98 Bay Apartment Multifamily Stock, Debt 1,260.3 2,013.6 -1.0% -6.5%
6/4/98 Communities/Avalon
Properties
12/23/97 Apartment Investment and Multifamily Stock, Debt 269.6 649.5 4.1% -21.6%
5/8/98 Management Co./
Ambassador Apartments
12/17/97 Camden Property Trust/ Multifamily Stock, Debt 394.4 833.9 11.0% -0.9%
4/8/98 Oasis Residential
8/28/97 Equity Residential/ Multifamily Stock, Debt 627.0 1072.5 20.7% 16.0%
12/23/97 Evans Withycombe
Residential
8/4/97 Post Properties/ Multifamily Stock, Debt 329.4 560.8 7.0% 5.0%
10/24/97 Columbus Realty Trust
1/17/97 Equity Residential/ Multifamily Stock, Debt 478.7 1009.1 13.5% 11.8%
5/30/97 Wellsford Residential
12/16/96 Camden Property Trust/ Multifamily Stock, Debt 338.3 338.6 14.2% -7.2%
4/15/97 Paragon Group, Inc.
10/1/96 United Dominion Realty/ Multifamily Stock, Debt 274.4 479.5 10.4% 0.4%
1/2/97 South West Property Trust
10/11/95 BRE Properties Multifamily Stock, Debt 177.7 265.0 13.3% 8.2%
3/15/96 REIT of California
Low -1.0% -21.6%
Mean 11.7% 0.6%
Median 13.3% 0.4%
High 20.7% 16.0%
Beta/ Multifamily Cash $1,467.6 $2,353.5 19.1%(3) 1.0%
Alpha
</TABLE>
Notes:
(1) Date announced is the date of the first significant press on the
transaction.
(2) Unaffected price represents the average stock price for the 10 trading days
ending five trading days prior to the announcement of the transaction.
(3) Based on current proposed price of $32.50. Unaffected price represents
the average stock price for the 10 trading days ending five trading days
prior to November 30, 1998.
-17-
<PAGE> 23
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Precedent Minority Transactions
<TABLE>
<CAPTION>
Size of Initial Ownership 55-75%
Premium to
Unaffected
Deal Size Price
- ------ -------- ------------
<S> <C> <C>
1992-1996
1. PHL Corp. Inc. $100MM-$300MM 28%
2. Southeastern Public Service Co. less than $100MM -5%
3. Club Med $100MM-$300MM 42%
4. Roto Rooter Inc. larger than $300MM 11%
5. Allmerican Ppty. & Casualty Cos. larger than $300MM 15%
1997
6. Systemix Inc. larger than $300MM 22%
7. Faulding Inc. less than $100MM 31%
8. Wheelabrator Technologies Inc. larger than $300MM 28%
9. Rhone-Poulenc Rorer Inc. larger than $300MM 22%
Rhone-Poulenc SA
10. BET Holdings Inc. $100MM-$300MM 18%
1998
11. Rayonier Timberlands LP $100MM-$300MM 25%
12. NACT Telecommunications less than $100MM 8%
13. Bo Office Products $100MM-$300MM 19%
14. XL Connect Solutions $100MM-$300MM 12%
15. BET Holdings larger than $300MM 15%
16. Mycogen Corp. larger than $300MM 49%
</TABLE>
PROJECT DELTA
Summary of Precedent Minority Transactions
<TABLE>
<CAPTION>
Size of Initial Ownership Less Than 55%
Premium to
Unaffected
Deal Size Price
- ------ -------- ------------
<S> <C> <C>
1992-1996
1. Medical Marketing Group Inc. $100MM-$300MM -8%
2. Enquierer/Star Group Inc. larger than $300MM 2%
3. Lin Broadcasting Corp. larger than $300MM -7%
4. Applied Immune Sciences $100MM-$300MM 47%
1997
5. Systemix Inc. $100MM-$300MM 29%
6. Calgene Inc. $100MM-$300MM 43%
7. Zurich Reinsurance larger than $300MM 22%
1998
8. Life Technologies larger than $300MM 17%
9. J&L Specialty Steel Inc. larger than $300MM 72%
10. BRC Holdings Inc. larger than $300MM 17%
</TABLE>
18
<PAGE> 24
DRAFT
PROJECT DELTA
Summary of Analysts' Valuation of Alpha
<TABLE>
<CAPTION>
SELECTED STATISTICS
-------------------------------------
ESTIMATED PRICE REPORT
FIRM / ANALYST NAV TARGET DATE OBSERVATIONS
-------------- --- ------ ---- ------------
<S> <C> <C> <C> <C>
Green Street Advisors $31.62 - $33.58 - 12/10/98 - Provide three ranges of NAV using cap
$35.28 $37.47 (1) rates of 7.5%, 7.25% and 7.0% respectively
MSDW/Bloom $31.00 $34.10 (2) 12/2/98 - Believes companies like Alpha should
trade above NAV. Statement made
12/3 that "$32.50 appears reasonable"
CIBC Oppenheimer/Zirakzadeh $27.34 $30.50 11/17/98 - "One of the best positioned companies
to weather most market difficulties,
given its: 1) monopoly on apartment
development on the Beta Ranch, 2)
attractive internal growth prospects, 3)
extensive development pipeline, and 4)
balance sheet strength"
Jefferies & Company/Wilson $24.00 $32.00 11/3/98
12/2/98
Sutro & Co./Silvers -- $30.00 10/5/98
</TABLE>
Notes: (1) Price target based on appropriate premium to NAV suggested in report
dated November 30, 1998.
(2) Represents a 10% premium to NAV, based on comments made in research.
-19-
<PAGE> 25
DRAFT
PROJECT DELTA
Summary of Analysts' Commentary
Following Announcement of Proposal
<TABLE>
<CAPTION>
REPORT
FIRM / Analyst DATE OBSERVATIONS
-------------- ---- ------------
<S> <C> <C>
Green Street Advisors 12/10/98 - NAV estimates: $31.62 at 7.5% cap; $33.39 at 7.25%
cap rate; $35.28 at 7.00% cap
- "[Beta] is clearly paying a large premium to the value
that the public market ascribed to [Alpha], but the
buyout price does not reflect the intrinsic value of the
company and operating partnership as a whole"
- Beta's offer ascribes no value to terminating the Land
Rights Agreement, nor any "franchise value"
- "At $32.50/sh, [Beta's] offer is at the lower-end of our
estimate of the range of [Alpha's] true NAV, and
equates to an economic cap rate of 7.4% (a nominal cap
rate of 7.7%), representing a per unit value of
approximately $130,000. The per unit value may sound
high, but other inferior apartment assets located in
Orange County have closed during the last few months
at valuations of $128,000-$148,000 per unit"
The Penobscot Group, Inc. 12/10/98 - "While it is still early, an affirmative answer on the
fairness issue seems a stretch"
</TABLE>
-20-
<PAGE> 26
DRAFT
PROJECT DELTA
Summary of Analysts' Commentary
Following Announcement of Proposal
(continued)
<TABLE>
<CAPTION>
REPORT
FIRM / ANALYST DATE OBSERVATIONS
-------------- ---- ------------
<S> <C> <C>
Realty Stock Review/ 12/4/98 - "...in our view, there's at least a 50/50 chance that
Barry Vinocur [Beta] will sweeten his offer"
- "An offer in the $34 to $35 range better reflects not
only [Alpha's] current value, but also gives investors
who bought the development story's potential
something for their vote of confidence in [Beta]"
- "We believe [Beta's] offer doesn't fully reflect the
future value that shareholders paid for when they
bought [Alpha]"
MSDW Bloom 12/3/98 - "A competing offer is not anticipated, as the right to be
the exclusive multifamily developer may not be
transferred to another acquirer"
- "... a price of $32.50 appears reasonable"
- "An offer in the $34 to $35 range better reflects ...
[Alpha's] current value..."
</TABLE>
-21-
<PAGE> 27
DRAFT
PROJECT DELTA
Summary of Analysts' Commentary
Following Announcement of Proposal
(continued)
<TABLE>
<CAPTION>
REPORT
FIRM / ANALYST DATE OBSERVATIONS
- -------------- ---- ------------
<S> <C> <C>
MSDW / Bloom 12/2/98 - "...[The proposal] confirms our belief that many companies are
trading at or below net asset value"
- "...[Beta] appears very well capitalized and clearly has the
wherewithal to carry out the transaction"
- "At $32.50 per share, we believe [Alpha's] income is being
valued at approximately 7.75% cap rate. We had used an 8% cap
rate in coming up with our $31 net asset value (NAV)"
- Believes companies with strong balance sheets, low payout ratios
and exposure to attractive markets should trade above NAV
Jefferies Wilson 12/2/98 - "We believe that the $32.50 share price offer, a 21% premium
over the previous day's closing price, is a fair price for several
reasons: (i) it represents a small premium (1/8) over the stock's
all-time high of $32 7/16; (ii) at 12.7x our 1999 FFO/share
estimate, it represents a significant premium over the peer group
average multiple of 9.8x; and (iii) it is above our $32 price
target."
- "Given [Beta's] controlling ownership position in the REIT and
over the Beta Ranch, we do not expect any competing offers."
</TABLE>
-22-
<PAGE> 28
DRAFT
PROJECT DELTA
SUMMARY ASSESSMENT OF ALTERNATIVES
<TABLE>
<CAPTION>
EVALUATION CRITERIA
--------------------------------------------------------------------
TRANSACTION
SHAREHOLDER EXECUTION
ALTERNATIVE BRIEF DESCRIPTION VALUE RISK
- --------------------- ------------------------- ---------------------------- ---------------------------------
<S> <C> <C> <C>
o Remain a public company o Sale of shares now in o Depends on Beta's persistence -
o Continue to pursue arbitrageurs hands will offer could remain outstanding
existing business plan hurt share price o However, Alpha can unilaterally
o Allows inherent value as a say no
I. Status Quo - "Just public company to be
Say No" eventually realized
o Does not capture strategic
value to Beta or another
buyer or incremental value
realizable as a private
company
- ------------------------------------------------------------------------------------------------------------------------------------
o Take Alpha private in accordance o Probable that highest inherent o Question of tender or cash
with current proposal value of Alpha is to Beta merger, and at what price
o Proposal may be modified/ o Cash transactions: positive
II. Sale to Beta improved through negotiations assessment contingent upon
current compensation for
future ability to realize
value
- ------------------------------------------------------------------------------------------------------------------------------------
o Announce that Steer is o Merged entity may enhance o Beta can (and probably would)
considering strategic shareholder value and block transaction
alternatives management o New GP entity would likely lose
III. Broader Marketing o Approach Essex, BRE, Avalon Bay, o Based on break-even multiple o Land Rights Agreement
of Company EQR, Archstone, Post of potential acquirors,
o Potentially could approach cash $32.50 is a full price
buyers for some or all of assets o Need substantial synergies to
match Beta bid
- ------------------------------------------------------------------------------------------------------------------------------------
o Beta buys-out Land Rights Agreement
o Alpha (or successor will acquire
ranch properties through market,
IV. Sale of Land Rights arms-length transactions
Agreement SEE BELOW FOR COMMENTS RELATIVE TO VARIOUS DERIVATIVE SCENARIOS
- ------------------------------------------------------------------------------------------------------------------------------------
o Sell on-ranch assets to Beta o Value may diminish given o Valuation of ranch assets
for L.P. units loss of exclusivity on o Valuation of remaining
o Alpha continues as California ranch term of Land Rights
public REIT with reduced o Does not capture strategic Agreement
IVa. Alpha Remains a Public percentage of on-ranch assets value to another buyer or
REIT o Alpha can acquire on-ranch incremental value
parcels at arm's length realizable as a private
company
- ------------------------------------------------------------------------------------------------------------------------------------
o Sell some or all on-ranch o Depends on valuation of o Valuation of ranch assets
assets to Beta for L.P. units on-ranch and off-ranch and remaining company
IVb. Sell On-Ranch Assets to o Terminate Land Rights Agreement assets and price achieved o Valuation of remaining
Beta & Sell Remaining o Merge remaining assets into a term of Land Rights
Company public REIT or sell to a cash Agreement
buyer
- ------------------------------------------------------------------------------------------------------------------------------------
o Lever up company to 65% o Initial distribution offset o Requires raise of
debt/value and pay out by lower future multiple substantial debt capital
dividend to shareholders o Requires high EBITDA o Requires Beta's approval
IVc. Lever Up Company o Will likely also require multiple to approach to raise debt
restructuring of existing $32.50 value
debt o Retirement of current
debt very costly
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PROJECT DELTA
SUMMARY ASSESSMENT OF ALTERNATIVES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
EVALUATION CRITERIA
------------------------------------------------------------------------------------------------------
CAPITAL ACCESS/
ABILITY TO ACHIEVE TAX IMPACT RESOLUTION OF
ALTERNATIVE BUSINESS PLAN ON SHAREHOLDERS BETA ISSUES
- --------------------- ------------------------- ----------------------- ----------------------------------
<S> <C> <C> <C>
o Good, assuming REITs regain o No transaction, no impact o Resolves no issues relative
favor in capital markets o However, dividend will to Beta
I. Status Quo-"Just o Potentially serious increase at a faster pace
Say No management issues given in the near term
current disruption o Also, low return-of-capital
component of dividend
- ------------------------------------------------------------------------------------------------------------------------------------
o Difficult if default on o High gain likely realized o Beta consolidates ownership
public bonds o As gain vs. income, more and control and removes
o Higher leverage achievable favorable tax rate probable conflicts
II. Sale to Beta o Ability to access equity
capital worsened
o Removal of Land Rights
Agreement eases operations
- ------------------------------------------------------------------------------------------------------------------------------------
o Could improve debt capacity o Low if structured as stock o If successful, would reduce
and cost of financing merger Beta/Alpha ties
III. Broader Marketing o Diversification may cheapen o Given perceived importance
of Company debt cost of control to Beta, major
issues would remain
- ------------------------------------------------------------------------------------------------------------------------------------
IV. Sale of Land Rights
Agreement SEE BELOW FOR COMMENTS RELATIVE TO VARIOUS DERIVATIVE SCENARIOS
- ------------------------------------------------------------------------------------------------------------------------------------
o Depends on Wall Street's o Transaction relates to OP, o Radical strategy with
view of Alpha without ranch not to public shareholders substantial financial and
exclusivity strategic impacts
IVa. Alpha Remains a o Multifamily development on- o Although ties are severed,
Public REIT ranch still subject to Beta/ Alpha will still be on ranch
Alpha conflicts/restrictions,
because Beta still largest
owner
- ------------------------------------------------------------------------------------------------------------------------------------
o Depends on Wall Street's view o High given possible taxable o Radical strategy with
of Alpha and the newly merged distribution substantial financial and
IVb. Sell On-Ranch Assets entity strategic impacts
to Beta & Sell o Makes Beta independent and o Although ties are severed,
Remaining Company reduces conflicts of interest Alpha and newly merged entity
can still exist on ranch
- ------------------------------------------------------------------------------------------------------------------------------------
o High leverage impairs future o Large taxable distribution o Does not address Beta proposal
access to capital nor issues under analysis
IVc. Lever Up Company o Management issues remain
o High leverage makes development
riskier
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Legend
-----------
O Worse/
Negative
O Neutral
O Better/
Positive
<PAGE> 29
DRAFT
PROJECT DELTA
Analysis of Beta's Rights
RIGHTS TO BLOCK ANOTHER BIDDER
- - Consent of majority of LP interests (i.e., Beta) is required to transfer GP
interest (including by merger) in the OP
- - Board cannot act without at least one Beta director present
- - Many actions require "Required Directors" (75% of entire Board) for
approval (see "Provisions affecting merger process")
SHAREHOLDER MATTERS
- - Beta has ownership limit of 20% of total outstanding stock
- - Can exchange one-third of LP units once in each 12-month period
- Is subject to 20% ownership limit
- Will trigger tax event
- - Has right to purchase shares in Alpha offerings, to maintain current
ownership level
- - Other shareholders subject to 7.4% ownership limit
RIGHT TO NOMINATE DIRECTORS
- - 20% OR more of LP units and stock - may nominate 3 members of the Board
- - 15% to 20% of LP units and stock - may nominate 2 members of the Board
- - 10% to 15% of LP units and stock - may nominate 1 member of the Board
- - Beta agrees to vote for directors resulting in majority of independent
directors
- - Company agrees to nominate to Board or fill vacancies on the Board with
person designated by Beta
CURRENT BOARD OF DIRECTORS (9 DIRECTORS):
<TABLE>
<CAPTION>
Expiring 1999 Expiring 2000 Expiring 2001
------------- ------------- -------------
<S> <C> <C> <C>
INDEPENDENT DIRECTORS J. Grundhofer J. Peltason A. Frank
B. McCoy J. Seymour
BETA DIRECTORS D. Bren M. McKee R. Watson
CEO W. McFarland
</TABLE>
-24-
<PAGE> 30
DRAFT
PROJECT DELTA
Analysis of Beta's Rights
(continued)
- - BETA'S ABILITY TO TERMINATE LAND RIGHTS AGREEMENT
- - If shareholders do not elect full number of Directors nominated by Beta
- - If Board does not elect a person nominated by Beta to fill vacancy of a
Beta-nominated Board member
- - If provision of charter or bylaws which requires approval of Required
Directors is modified or amended to require lower number of directors
without Beta's prior consent
PROVISIONS AFFECTING MERGER PROCESS
- - Beta cannot purchase shares above 20% ownership limit without two-thirds
shareholder approval - If consensual deal, could undertake tender
- - Approval of "Required Directors" (75% of entire Board) for change of
control of Alpha or OP, amendment to bylaws, any merger or consolidation of
assets of company or OP, issuance of equity securities, waiver or
modification of ownership limits
- - Beta is exempted from Maryland business combination and control share
statutes
- - Two-thirds shareholder vote for merger or sale
ALPHA DEFENSIVE MEASURES
- - Staggered Board of Directors - three classes holding office until third
annual meeting
- - Alpha may issue preferred stock without shareholder approval; requires
Board (Required Directors) approval
- - Business combination and control shares; but Beta exempted from Maryland
business combination and control share acquisition statutes
- - Directors may not be removed except for cause and upon 66-2/3% vote of
shareholders
- - Annual Meeting to elect directors and vote on business issues
- Board and shareholders must submit nominees 60 to 90 days prior to
meeting
- Advance notice must be provided on matters to be voted on at
shareholder meetings
- - Special Meeting may be called by:
- Chairman of Board
- President
- Majority of Board of Directors
- Written notice of certain percentage (maximum then allowed under
Maryland law) of shareholders - but, unless called by majority of
shares entitled to vote, a meeting will not be held to address matters
voted on at meeting in preceding 12 months
-25-
<PAGE> 31
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Financial Structure Considerations
<TABLE>
<CAPTION>
FINANCING DESCRIPTION ASSUMABILITY BY SUCCESSOR ENTITY ISSUES RELATED TO BUYOUT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SECURED $130MM outstanding at 7.12% Lender consent may be needed -DO YOU NEED CONSENT FOR CHANGE OF
MORTGAGES average rate and average maturity OF CONTROL AT GP?
of 8 years -IF CONSENT IS NEEDED, IT COULD
DELAY MERGER PROCESS
- ------------------------------------------------------------------------------------------------------------------------------------
MORTGAGE
NOTES PAYABLE $49.7MM outstanding at rate of Will be absorbed into Beta capital -None
TO BETA 5.75%
- ------------------------------------------------------------------------------------------------------------------------------------
ASSESSMENT $21.4MM outstanding at 4.43% rate Consent may be needed -Need consent of jurisdiction,
DISTRICT DEBT expiring from 2009 to 2013 trustee
- ------------------------------------------------------------------------------------------------------------------------------------
$334.2MM of bonds at average rate of Assumable - if following are met: -Not redeemable until 2008
4.93% Maturity May 15, 2025 -New entity shall assume bond -Covenant definition of total
UNSECURED TAX Mandatory tender in three tranches obligations Assets
EXEMPT BONDS ranging from 2008 to 2013 -No event of default shall occur -Failure to observe covenants will
-Written consent of letter of result in event of default
credit issuer -Event of default results in 1)
acceleration, 2)legal
proceedings, 3) appointment of
receiver
- ------------------------------------------------------------------------------------------------------------------------------------
-Covenant definition of Total
Assumable - if Successor: Assets
UNSECURED PUBLIC $100MM 7% Notes due 2007 -is organized under laws of -Waiver of certain covenants
10-YEAR NOTES Redemption at any time at domestic jurisdiction requires majority vote
Make-Whole of Treasuries + .25% -assumes the OP's obligations on -If default occurs, redeem at
the Debt make-whole of $115.8MM. If bonds
-does not cause Event of Default are downgraded, to prevent
lawsuits, can tender of bonds at
comparable cost
- ------------------------------------------------------------------------------------------------------------------------------------
Event of default occurs if (i) any
$250 mil unsecured credit facility person acquires more than 30% of the
UNSECURED LINE at 6.1% LIBOR plus .65% - current $0 common shares of IAC, (ii) failure Will require waivers
OF CREDIT balance 3 year facility expiring of Alpha to be NYSE-listed or a -If covenants cannot be waived,
June 2000 REIT, (iii) merger or (iv) change in will become due and payable
majority of Board of Directors over
12 months
- ------------------------------------------------------------------------------------------------------------------------------------
Event of default occurs if (i) any
UNSECURED $100 mil loan at 6.4% person acquires more than 30% of the
SHORT-TERM One year facility with two options common shares of Alpha, (ii) failure Will require waivers
LOAN Nov 2000 Wells Fargo and U.S. Bank of Alpha to be NYSE-listed or a REIT, -If covenants cannot be waived,
National Assoc (iii) merger or (iv) change in will become due and payable
majority of Board of Directors over
12 months
- ------------------------------------------------------------------------------------------------------------------------------------
$150MM 8.25% Series A REIT Trust -Possible lawsuit (although risk
SERIES A Originated Preferred (TOPrS) Yes, but some concern about factors state possibility of loss
PREFERRED Issue by Alpha Capital Trust de-REITing Alpha Capital Trust of REIT status) -Also, possible
SECURITIES Not redeemable prior to downgrade
December 31, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
SERIES B Yes, but if Alpha Capital Trust is -Issue of lawsuit if major tax
PREFERRED $50MM 8.75% Series B Preferred de-REITed, may cause OP to become liability as a result of action
L.P. UNITS L.P. Units Not redeemable prior a publicly traded partnership, which at Alpha Capital Trust
PRIVATE to November 12, 2003 would cause the holder to have a -Issue of lawsuit given issuance
PLACEMENT serious tax event 2 weeks prior to Beta's
announcement (downgrade of
Series B)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-26-
<PAGE> 32
DRAFT
PROJECT DELTA
Process / Next Steps
- - Many elements / audiences need to be considered in determining the next
actions to be taken by the special committee
- Beta
- Management
- Public shareholders / other potentially interested parties
- - The most important response is to Beta
- Form of response
- Consider providing an indication of value / range of values
- Timing of response
- Also need to consider the appropriate messenger
-27-
<PAGE> 33
DRAFT
PROJECT DELTA
Process / Next Steps
(continued)
- - Dealing with management is also critical
- Ensure appropriate participation by key people in this process, which
will help maximize value for shareholders
- Stay bonuses
- Change-of-control termination compensation
- Preserve ability of Company to function if Proposal or other
transaction is not completed
- - Gaining shareholder support for the selected course of action is imported
- Share price reaction to announcement will indicate support or
opposition -- important to Board for reaction to be positive
- Shareholder vote required: will be influenced by research analysts'
reactions
- - Other potential steps to consider
- Public announcement of engagement of advisor
- PR program to create negotiating leverage, specifically if
negotiations with Beta are not progressing
-28-
<PAGE> 34
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Property Breakdown: 55 Stabilized Properties
<TABLE>
<CAPTION>
1999 FORECASTED NOI
DATE OF NUMBER OF 1998 4TH QUARTER ---------------------------
PROPERTY TIER CITY COMPLETION UNITS FORECASTED NOI LOW VALUE LOW VALUE
- ------------------- ---- ------------- ---------- --------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Santa Maria I Irvine 1997 227 $709 $3,000 $3,202
Turtle Rock Canyon I Irvine 1991 217 656 2,779 2,967
The Colony I Newport Beach 1997 245 1,200 5,081 5,424
Newport Ridge I Newport Beach 1996 512 1,667 7,058 7,534
Promontory Point I Newport Beach 1974 520 1,900 8,046 8,589
Baypointe I Newport Beach 1997 300 1,025 4,338 4,631
Rancho Monterey I Tustin 1996 436 1,256 5,319 5,678
Villas of Renaissance I La Jolla 1992 923 2,490 10,542 11,253
Amherst Court I Irvine 1991 162 317 1,342 1,433
One Park Place I Irvine 1998 216 400 1,694 1,808
San Mateo I Irvine 1990 283 564 2,388 2,549
San Paulo I Irvine 1993 382 789 3,343 3,568
Santa Clara I Irvine 1996 378 1,041 4,408 4,705
Santa Rosa I Irvine 1996 368 962 4,073 4,348
Santa Rosa II I Irvine 1997 207 800 3,387 3,616
Villa Coronado I Irvine 1996 513 1,341 5,679 6,062
Rancho Mariposa I Tustin 1992 238 533 2,255 2,407
Sierra Vista I Tustin 1992 306 692 2,929 3,127
---------- --------- ---------------- ------------ ------------
TIER I SUBTOTAL 1992 6,433 $18,341 $77,662 $82,902
---------- --------- ---------------- ------------ ------------
Berkeley Court II Irvine 1986 152 369 1,564 1,670
Cedar Creek II Irvine 1985 176 383 1,620 1,730
Columbia Court II Irvine 1984 58 132 557 595
Cornell Court II Irvine 1984 109 277 1,171 1,250
Cross Creek II Irvine 1985 136 307 1,301 1,388
Dartmouth Court II Irvine 1986 294 663 2,806 2,995
Harvard Court II Irvine 1986 112 245 1,037 1,107
Rancho San Joaquin II Irvine 1976 368 862 3,649 3,896
San Carlo II Irvine 1989 354 932 3,947 4,214
San Leon II Irvine 1987 248 579 2,451 2,617
San Marco II Irvine 1988 426 934 3,957 4,224
San Marino II Irvine 1986 200 426 1,802 1,924
San Remo II Irvine 1986/88 248 512 2,168 2,314
Stanford Court II Irvine 1985 320 735 3,113 3,324
Turtle Rock Vista II Irvine 1976/77 252 666 2,822 3,012
Woodbridge Willows II Irvine 1984 200 443 1,874 2,000
Bayport II Newport Beach 1971 104 242 1,026 1,096
Bayview II Newport Beach 1971 64 178 753 804
Baywood II Newport Beach 1973/84 388 988 4,185 4,467
Newport North II Newport Beach 1986 570 1,470 6,226 6,646
Rancho Alisal II Tustin 1988/91 356 821 3,478 3,713
Rancho Maderas II Tustin 1989 266 641 2,714 2,897
Rancho Santa Fe II Tustin 1998 316 1,025 4,340 4,633
Rancho Tierra II Tustin 1989 252 632 2,675 2,856
---------- --------- ---------------- ------------ ------------
TIER II SUBTOTAL 1984 5,969 $14,463 $61,239 $65,371
---------- --------- ---------------- ------------ ------------
Deerfield III Irvine 1975/83 288 569 2,408 2,570
Northwood Park III Irvine 1985 168 363 1,538 1,642
Northwood Place III Irvine 1986 604 1,315 5,569 5,944
Orchard Park III Irvine 1982 60 150 634 676
Park West III Irvine 1970/71/72 880 1,870 7,918 8,452
Parkwood III Irvine 1974 296 593 2,509 2,679
The Parklands III Irvine 1983 121 314 1,330 1,419
Windwood Glen III Irvine 1985 196 462 1,956 2,088
Windwood Knoll III Irvine 1983 248 514 2,178 2,325
Woodbridge Oaks III Irvine 1983 120 290 1,227 1,310
Woodbridge Pines III Irvine 1976 220 471 1,992 2,127
Woodbridge Villas III Irvine 1982 258 508 2,150 2,295
Mariner Square III Newport Beach 1969 114 261 1,104 1,178
---------- --------- ---------------- ------------ ------------
TIER III SUBTOTAL 1978 3,573 $7,678 $32,512 $34,705
---------- --------- ---------------- ------------ ------------
TOTAL 15,975 $40,482 $171,412 $182,979
========= ================ ============ ============
</TABLE>
<PAGE> 35
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Stock Option Impact -- Treasury Stock Method
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT $45/SHARE
-------------------------------------------------
WTD.AVE. NET CUMULATIVE
EXERCISE NO. EXERCISE CUMULATIVE GROSS REPURCHASED SHARES SHARES
SERIES PRICE OUTSTANDING PRICE OUTSTANDING PROCEEDS SHARES ISSUED ISSUED
------ -------- ----------- -------- ----------- ----------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4/20/1995 Stock Options $12.6250 4,000 $12.6250 4,000 $ 50,500 1,122 2,878 2,878
3/1/1995 Stock Options 16.1250 110,333 16.0026 114,333 1,779,120 39,536 70,797 73,675
12/8/1993 Stock Options 17.4400 20,000 16.2166 134,333 348,800 7,751 12,249 85,924
11/30/1993 Stock Options 17.5000 32,500 16.4666 166,833 568,750 12,639 19,861 105,785
1/25/1994 Stock Options 17.5000 15,000 16.5518 181,833 262,500 5,833 9,167 114,951
4/30/1996 Stock Options 20.0625 4,000 16.6274 185,833 80,250 1,783 2,217 117,168
4/25/1997 Stock Options 26.6250 20,000 17.5988 205,833 532,500 11,833 8,167 125,335
4/25/1997 Stock Options 26.7500 5,000 17.8159 210,833 133,750 2,972 2,028 127,363
2/4/1997 Stock Options 26.8750 110,000 20.9218 320,833 2,956,250 65,694 44,306 171,668
7/15/1997 Stock Options 29.5000 100,000 22.9602 420,833 2,950,000 65,556 34,444 206,113
6/1/1998 Stock Options 29.8125 10,000 23.1193 430,833 298,125 6,625 3,375 209,488
5/7/1998 Stock Options 30.1250 12,500 23.3168 443,333 376,563 8,368 4,132 213,620
3/12/1998 Stock Options 30.4375 100,000 24.6274 543,333 3,043,750 67,639 32,361 245,981
2/23/1998 Stock Options 30.6875 10,000 24.7369 553,333 306,875 6,819 3,181 249,161
4/22//1998 Stock Options 31.1875 10,000 24.8514 563,333 311,875 6,931 3,067 252,231
4/1/1998 Stock Options 31.3125 23,500 25.1101 586,833 735,844 16,352 7,148 259,379
2/6/1998 Stock Options 31.6250 38,000 25.5063 624,833 1,201,750 26,706 11,294 270,673
2/2/1998 Stock Options 32.0625 53,000 26.0190 677,833 1,699,313 37,763 15,238 285,910
TOTAL/WTD. AVE. $26.0190 677,833 $17,636,513 391,923 285,910
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
VALUE/SHARE
----------------------------------------
<S> <C> <C> <C>
$35.00 $40.00 $45.00
------ ------ ------
Option Share Equivalents 173,933 236,920 285,910
Shares and Units 45,156,808 45,156,808 45,156,808
---------- ---------- ----------
TOTAL 45,330,741 45,393,728 45,442,718
- ---------------------------------------------------------------------
</TABLE>
<PAGE> 36
DRAFT
PROJECT DELTA
- -------------------------------------------------------------------------------
Case 1: Assumes 5% Rental Growth and 95% Occupancy
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004 CAGR
---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $132,491 $157,583 $185,700 $218,794 $250,664 $293,980
Shares Outstanding 49,539 52,302 55,601 59,694 62,932 62,932
FFO/Share $ 2.67 $ 3.01 $ 3.34 $ 3.67 $ 3.98 $ 4.67 10.5%
Dividend/Share $ 1.62 $ 1.83 $ 2.00 $ 2.21 $ 2.58 12.3%
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT --------------------------------------------------------------------------------------
RATES 8.5x 9.0x 9.5x 10.0x 10.5x 11.0x 11.5x
- -------- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12.0% Total Equity $1,701,964 $1,776,433 $1,850,903 $1,925,373 $1,999,843 $2,074,312 $2,148,782
Non-Beta Equity 627,107 654,546 681,985 709,425 736,864 764,303 791,742
Per Share $ 37.54 $ 39.19 $ 40.83 $ 42.47 $ 44.12 $ 45.76 $ 47.40
13.0% Total Equity $1,623,509 $1,694,111 $1,764,713 $1,835,316 $1,905,918 $1,976,520 $2,047,122
Non-Beta Equity 598,200 624,214 650,228 676,242 702,256 728,270 754,284
Per Share $ 35.81 $ 37.37 $ 38.93 $ 40.49 $ 42.04 $ 43.60 $ 45.16
14.0% Total Equity $1,549,560 $1,616,527 $1,683,493 $1,750,460 $1,817,427 $1,884,394 $1,951,360
Non-Beta Equity 570,952 595,627 620,302 644,976 669,651 694,325 719,000
Per Share $ 34.18 $ 35.66 $ 37.14 $ 38.61 $ 40.09 $ 41.57 $ 43.05
15.0% Total Equity $1,479,816 $1,543,364 $1,606,912 $1,670,460 $1,734,008 $1,797,556 $1,861,104
Non-Beta Equity 545,254 568,669 592,084 615,499 638,914 662,329 685,744
Per Share $ 32.64 $ 34.05 $ 35.45 $ 36.85 $ 38.25 $ 39.65 $ 41.06
16.0% Total Equity $1,414,001 $1,474,332 $1,534,663 $1,594,994 $1,655,325 $1,715,656 $1,775,987
Non-Beta Equity 521,004 543,234 565,463 587,693 609,923 632,152 654,382
Per Share $ 31.19 $ 32.52 $ 33.85 $ 35.18 $ 36.52 $ 37.85 $ 39.18
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
(2) Land Rights valued at $65 MM in 2004
<PAGE> 37
DRAFT
PROJECT DELTA
- -------------------------------------------------------------------------------
Case 2: Assumes 7% Rental Growth and 96% Occupancy
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004 CAGR
---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $137,806 $165,394 $193,547 $227,072 $259,731 $304,325
Shares Outstanding 49,519 52,219 55,350 59,245 62,335 62,335
FFO/Share $ 2.78 $ 3.17 $ 3.50 $ 3.83 $ 4.17 $ 4.88 10.6%
Dividend/Share $ 1.67 $ 1.89 $ 2.08 $ 2.26 $ 2.44 10.0%
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT --------------------------------------------------------------------------------------
RATES 8.5x 9.0x 9.5x 10.0x 10.5x 11.0x 11.5x
- -------- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12.0% Total Equity $1,749,336 $1,826,426 $1,903,516 $1,980,607 $2,057,697 $2,134,787 $2,211,878
Non-Beta Equity 664,562 672,967 701,371 729,776 758,181 786,586 814,990
Per share $ 38.59 $ 40.29 $ 41,99 $ 43.69 $ 45.39 $ 47.09 $ 48.79
13.0% Total Equity $1,668,636 $1,741,723 $1,814,809 $1,887,896 $1,960,982 $2,034,069 $2,107,155
Non-Beta Equity 614,827 641,757 668,686 695,616 722,545 749,475 776,404
Per share $ 36.81 $ 38.42 $ 40.03 $ 41.65 $ 43.26 $ 44.87 $ 46.48
14.0% Total Equity $1,592,574 $1,661,897 $1,731,220 $1,800,543 $1,869,867 $1,939,190 $2,008,513
Non-Beta Equity 586,801 612,344 637,887 663,430 688,973 714,516 740,059
Per share $ 35.13 $ 36.66 $ 38.19 $ 39.72 $ 41.25 $ 42.78 $ 44.31
15.0% Total Equity $1,520,840 $1,586,624 $1,652,408 $1,718,192 $1,783,977 $1,849,761 $1,915,545
Non-Beta Equity 560,370 584,609 608,848 633,087 657,326 681,564 705,803
Per share $ 33.55 $ 35.00 $ 36.45 $ 37.90 $ 39.35 $ 40.80 $ 42.26
16.0% Total Equity $1,453,150 $1,515,604 $1,578,058 $1,640,512 $1,702,966 $1,765,420 $1,827,874
Non-Beta Equity 535,429 558,441 581,453 604,465 627,476 650,488 673,500
Per share $ 32.06 $ 33.43 $ 34.81 $ 36.19 $ 37.57 $ 38.94 $ 40.32
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
(2) Land Rights valued at $65 MM in 2004.
<PAGE> 38
DRAFT
PROJECT DELTA
- -------------------------------------------------------------------------------
Case 3: Assumes 9% Rental Growth and 97% Occupancy
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004 CAGR
---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $140.858 $170,992 $199,913 $233,851 $266,813 $313,013
Shares Outstanding 49,512 52,198 55,214 58,948 61,931 61,931
FFO/Share $ 2.84 $ 3.28 $ 3.62 $ 3.97 $ 4.31 $ 5.05 10.9%
Dividend/Share $ 1.69 $ 1.95 $ 2.14 $ 2.33 $ 2.52 10.5%
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT --------------------------------------------------------------------------------------
RATES 8.5x 9.0x 9.5x 10.0x 10.5x 11.0x 11.5x
- -------- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12.0% Total Equity $1,796,973 $1,876,264 $1,955,555 $2,034,846 $2,114,137 $2,193,429 $2,272,720
Non-Beta Equity 662,114 691,330 720,546 749,761 778,977 808,193 837,408
Per share $ 39.64 $ 41.39 $ 43.14 $ 44,89 $ 46.64 $ 48.39 $ 50.14
---------- ---------- ---------- ----------
13.0% Total Equity $1,714,044 $1,789,217 $1,864,390 $1,939,563 $2,014,736 $2,089,909 $2,165,082
Non-Beta Equity 631,558 659,256 686,955 714,653 742,351 770,050 797,748
Per share $ 37.81 $ 39.47 $ 41.13 $ 42.79 $ 44.44 $ 46.10 $ 47.76
14.0% Total Equity $1,635,880 $1,707,182 $1,778,484 $1,849,787 $1,921,089 $1,992,391 $2,063,694
Non-Beta Equity 602,758 629,030 655,302 681,574 707,846 734,118 760,390
Per share $ 36.09 $ 37.66 $ 39.23 $ 40,81 $ 42.38 $ 43.95 $ 45.52
15.0% Total Equity $1,562,165 $1,629,827 $1,697,489 $1,765,151 $1,832,813 $1,900,476 $1,968,138
Non-Beta Equity 575,597 600,528 625,458 650,389 675,320 700,251 725,182
Per share $ 34.46 $ 35.95 $ 37.45 $ 38.94 $ 40.43 $ 41.92 $ 43.42
---------- ---------- ---------- ----------
16.0% Total Equity $1,492,605 $1,556,842 $1,621,079 $1,685,316 $1,749,553 $1,813,790 $1,878,027
Non-Beta Equity 549,967 573,636 597,304 620,973 644,642 668,311 691,980
Per share $ 32.93 $ 34.34 $ 35.76 $ 37.18 $ 38.59 $ 40.01 $ 41.43
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
(2) Land Rights valued at $65 MM in 2004.
<PAGE> 39
DRAFT
PROJECT DELTA
- -------------------------------------------------------------------------------
Case 4: LBO with 5% Rental Growth and 95% Occupancy
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004 CAGR
---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $94,911 $112,822 $133,571 $158,688 $183,250 $216,011
Shares Outstanding 29,419 29,419 29,419 29,419 29,419 29,419
FFO/Share $ 3.23 $ 3.83 $ 4.54 $ 5.39 $ 6.23 $ 7.34 17.9%
Dividend/Share $ 1.54 $ 1.83 $ 2.08 $ 2.48 $ 2.89
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT --------------------------------------------------------------------------------------
RATES 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x 11.0x
- -------- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
13.5% Total Equity $1,051,405 $1,101,926 $1,152,447 $1,202,967 $1,253,488 $1,304,009 $1,354,530
Per share $ 35.74 $ 37.46 $ 39.17 $ 40.89 $ 42.61 $ 44.33 $ 46.04
---------- ---------- ---------- ----------
14.5% Total Equity $1,002,786 $1,050,717 $1,098,647 $1,146,578 $1,194,508 $1,242,439 $1,290,370
Per share $ 34.09 $ 35.72 $ 37.34 $ 38.97 $ 40.60 $ 42.23 $ 43.86
15.5% Total Equity $ 956,943 $1,002,437 $1,047,931 $1,093,425 $1,138,919 $1,184,413 $1,229,907
Per share $ 32.53 $ 34.07 $ 35.62 $ 37.17 $ 38.71 $ 40.26 $ 41.81
16.5% Total Equity $ 913,694 $ 956,895 $1,000,095 $1,043,296 $1,086,497 $1,129,697 $1,172,898
Per share $ 31.06 $ 32.53 $ 33.99 $ 35.46 $ 36.93 $ 38.40 $ 39.87
---------- ---------- ---------- ----------
17.5% Total Equity $ 872,869 $ 913,910 $ 954,951 $ 995,992 $1,037,033 $1,078,074 $1,119,115
Per share $ 29.67 $ 31.07 $ 32.46 $ 33.86 $ 35.25 $ 36.65 $ 38.04
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
(2) Assumes Beta borrows $550 MM and buys back shares at $32.50.
(3) Land Rights given a value of $65 MM in 2004.
<PAGE> 40
DRAFT
PROJECT DELTA
- -------------------------------------------------------------------------------
Case 5: LBO with 7% Rental Growth and 96% Occupancy
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004 CAGR
---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $101,300 $122,253 $143,323 $169,146 $194,397 $228,803
Shares Outstanding 29,419 29,419 29,419 29,419 29,419 29,419
FFO/Share $ 3.44 $ 4.16 $ 4.87 $ 5.75 $ 6.61 $ 7.78 17.7%
Dividend/Share $ 1.65 $ 1.99 $ 2.25 $ 2.66 $ 3.08
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT --------------------------------------------------------------------------------------
RATES 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x 11.0x
- -------- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
13.5% Total Equity $1,115,325 $1,168,838 $1,222,350 $1,275,863 $1,329,375 $1,382,888 $1,436,401
Per Share $ 37.91 $ 39.73 $ 41.55 $ 43.37 $ 45.19 $ 47.01 $ 48.83
-------------------------------------------------
14.5% Total Equity $1,063,839 $1,114,608 $1,165,377 $1,216,146 $1,266,915 $1,317,684 $1,368,453
Per Share $ 36.16 $ 37.89 $ 39.61 $ 41.34 $ 43.06 $ 44.79 $ 46.52
15.5% Total Equity $1,015,291 $1,063,479 $1,111,667 $1,159,855 $1,208,043 $1,256,231 $1,304,419
Per Share $ 34.51 $ 36.15 $ 37.79 $ 39.43 $ 41.06 $ 42.70 $ 44.34
16.5% Total Equity $ 969,488 $1,015,247 $1,061,006 $1,106,765 $1,152,523 $1,198,282 $1,244,041
Per Share $ 32.95 $ 34.51 $ 36.07 $ 37.62 $ 39.18 $ 40.73 $ 42.29
-------------------------------------------------
17.5% Total Equity $ 926,250 $ 969,721 $1,013,193 $1,056,664 $1,100,135 $1,143,607 $1,187,078
Per Share $ 31.48 $ 32.96 $ 34.44 $ 35.92 $ 37.40 $ 38.87 $ 40.35
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
(2) Assumes Beta borrows $550 MM and buys back shares at $32.50.
(3) Land Rights given a value of $65 MM in 2004.
<PAGE> 41
DRAFT
PROJECT DELTA
- -------------------------------------------------------------------------------
Case 6: LBO with 9% Rental Growth and 97% Occupancy
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004 CAGR
---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $103,446 $126,622 $148,377 $174,572 $200,171 $236,087
Shares Outstanding 29,419 29,419 29,419 29,419 29,419 29,419
FFO/Share $ 3.52 $ 4.30 $ 5.04 $ 5.93 $ 6.80 $ 8.02 17.9%
Dividend/Share $ 1.69 $ 2.07 $ 2.33 $ 2.75 $ 3.18
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT --------------------------------------------------------------------------------------
RATES 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x 11.0x
- -------- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
13.5% Total Equity $1,150,131 $1,205,347 $1,260,564 $1,315,780 $1,370,996 $1,426,213 $1,481,429
Per share $ 39.09 $ 40.97 $ 42.85 $ 44.73 $ 46.60 $ 48.48 $ 50.36
-------------------------------------------------
14.5% Total Equity $1,097,043 $1,149,429 $1,201,814 $1,254,199 $1,306,585 $1,358,970 $1,411,356
Per share $ 37.29 $ 39.07 $ 40.85 $ 42.63 $ 44.41 $ 46.19 $ 47.97
15.5% Total Equity $1,046,985 $1,096,707 $1,146,429 $1,196,152 $1,245,874 $1,295,596 $1,345,318
Per share $ 35.59 $ 37.28 $ 38.97 $ 40.66 $ 42.35 $ 44.04 $ 45.73
16.5% Total Equity $ 999,756 $1,046,972 $1,094,187 $1,141,403 $1,188,619 $1,235,835 $1,283,050
Per share $ 33.98 $ 35.59 $ 37.19 $ 38.80 $ 40.40 $ 42.01 $ 43.61
-------------------------------------------------
17.5% Total Equity $ 955,172 $1,000,027 $1,044,883 $1,089,738 $1,134,594 $1,179,449 $1,224,304
Per share $ 32.47 $ 33.99 $ 35.52 $ 37.04 $ 38.57 $ 40.09 $ 41.62
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
(2) Assumes Beta borrows $550 MM and buys back shares at $32.50.
(3) Land Rights given a value of $65 MM in 2004.
<PAGE> 42
DRAFT
PROJECT DELTA
Trading Statistics for Selected Apartment REITS
<TABLE>
<CAPTION>
Equity Total Price/FFO(8)
12/21/98 52-Week Market Market ---------------------------
Company (Ticker) Price High/Low Value(1) Compensation(2) LTM(3) 1998E(4) 1999E(4)
- --------------------------------------- -------- ------------- -------- --------------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) $19.56 $24.69/$17.88 $2,803.1 $ 5,141.3 8.7x 10.9x 9.7x
Avalone Bay Communities (AVB) $33.75 $39.38/$30.50 $2,185.1 $ 4,090.1 12.7x 11.8x 10.2x
BRE Properties (BRE) $24.44 $28.75/$21.50 $1,149.3 $ 1,852.1 11.9x 11.6x 10.3x
Equity Residential Properties Trust (EQR) $40.56 $52.26/$34.69 $5,288.2 $11,402.4 13.4x 10.0x 9.1x
Essex Property Trust (ESS) $29.50 $35.38/$26.94 $ 545.9 $ 946.4 10.7x 10.3x 9.4x
Post Properties (PPS) $38.44 $42.00/$35.81 $1,634.6 $ 2,571.9 11.7x 11.4x 10.4x
- -------------------------------------------------------------------------------------------------------------------------
Mean $2,267.7 $ 4,334.0 11.5x 11.0x 9.8x
Median $1,909.9 $ 3,331.0 11.8x 11.2x 9.9x
- -------------------------------------------------------------------------------------------------------------------------
AMI.I Residential Properties (AML) $22.50 $24.38/$18.44 $ 447.9 $ 949.5 9.9x 9.6x 8.8x
Apartment Investment & Management (AIV) $37,31 $41.00/$30.00 $2,031.7 $ 3,775.3 10.7x 10.9x 9.4x
Associated Estates Realty (AEC) $12.44 $24.38/$12.00 $ 428.6 $ 958.1 6.2x 6.4x 6.3x
Berkshire Realty Company, Inc. (BRI) $ 9.19 $12.38/$ 8.13 $ 419.4 $ 1,048.3 8.2x 8.1x 7.6x
Camden Property Trust (CPT) $25.75 $31.13/$24.50 $1,216.2 $ 2,286.0 9.6x 8.7x 8.0x
Charles E. Smith Residential (SRW) $31.25 $35.75/$28.31 $ 975.6 $ 1,877.4 11.0x 10.7x 9.9x
Gables Residential Trust (GPB) $24.44 $28.31/$22.00 $ 802.4 $ 1,770.4 9.3x 9.2x 8.4x
Home Properties of New York (HME) $25.44 $28.06/$21.19 $ 681.8 $ 1,087.5 10.3x 10.5x 9.4x
Mid-America Apartment (MAA) $23.38 $29.88/$22.75 $ 510.3 $ 1,381.7 8.0x 7.9x 7.4x
Summit Properties (SMT) $17.63 $22.00/$16.50 $ 522.9 $ 1,126.5 8.9x 8.8x 8.2x
Town and Country Trust (TCT) $15.19 $17.94/$13.25 $ 276.9 $ 612.5 8.5x 8.6x 8.2x
United Dominion Realty Trust (UDR) $10.38 $14.81/$10.19 $1,106.5 $ 2,910.4 7.5x 7.6x 7.2x
Walden Residential Properties (WDN) $10.63 $17.13/$19.25 $ 575.0 $ 1,377.4 7.9x 7.7x 7.3x
- -------------------------------------------------------------------------------------------------------------------------
Mean $ 768.9 $ 1,627.8 8.8x 8.8x 8.2x
Median $ 575.0 $ 1,377.4 8.5x 8.6x 8.0x
- -------------------------------------------------------------------------------------------------------------------------
Alpha $32.00 $ 1,450.6 $ 2,330.6 14.5x 14.0x 12.5x
Alpha Unaffected(9)(10) $27.23 $ 1,234.4 $ 2,114.3 12.4x 11.9x 9.8x
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Aggregate
Price/AFFO(5) Value/EBITDA(7)(8) Payout Ratio (1998E) 5 Year
------------------ ---------------------- Dividend -------------------- FFO
Company (Ticker) 1998E(6) 1999E(6) LTM 1998E 1999E Yield FFO AFFO Growth(4)
- -------------------------------------- -------- -------- ------ ------ ------ -------- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 11.8x 10.7x 15.9x 15.5x 11.4x 7.6% 82.1% 89.2% 11.0%
Avalone Bay Communities (AVB) 12.1x 10.3x 16.6x 20.9x 11.8x 6.0% 71.1% 72.9% 12.0%
BRE Properties (BRE) 11.9x 10.7x 15.5x 14.0x 11.6x 5.9% 68.5% 69.9% 9.9%
Equity Residential Properties Trust (EQR) 11.2x 10.1x 13.5x N.A. N.A. 7.0% 70.2% 78.2% 9.1%
Essex Property Trust (ESS) 12.6x 11.4x 13.3x 11.3x 9.8x 6.8% 70.1% 85.5% 10.0%
Post Properties (PPS) 11.8x 11.0x 15.0x 14.4x 12.2x 6.8% 77.4% 79.8% 9.6%
- ----------------------------------------------------------------------------------------------------------------------------
Mean 11.9x 10.7x 15.0x 15.2x 11.4x 6.7% 73.2% 79.2% 10.3%
Median 11.8x 10.7x 15.2x 14.4x 11.6x 6.8% 70.6% 79.0% 10.0%
- ----------------------------------------------------------------------------------------------------------------------------
AMI.I Residential Properties (AML) 10.6x 9.9x 14.9x 13.6x 10.8x 7.8% 75.0% 83.0% 6.5%
Apartment Investment & Management (AIV) 12.8x 11.0x 16.6x 13.6x 9.6x 6.0% 65.9% 77.1% 12.3%
Associated Estates Realty (AEC) 6.4x 6.3x 14.1x 10.8x 7.7x 15.0% 96.0% 95.4% 3.0%
Berkshire Realty Company, Inc. (BRI) 8.7x 8.4x 12.1x 11.6x 9.7x 10.6% 85.2% 91.5% 6.0%
Camden Property Trust (CPT) 9.3x 8.4x 11.5x 12.0x 10.4x 7.8% 68.5% 72.7% 9.7%
Charles E. Smith Residential (SRW) 12.6x 11.4x 13.1x 12.6x 11.0x 6.8% 73.6% 85.9% 9.0%
Gables Residential Trust (GPB) 9.9x 9.2x 15.7x 13.5x 11.6x 8.3% 76.7% 82.9% 7.8%
Home Properties of New York (HME) 12.3x 11.0x 12.6x 8.6x 6.1x 7.5% 79.1% 93.2% 0.0%
Mid-America Apartment (MAA) 8.9x 8.3x 11.7x N.A. N.A. 9.4% 74.4% 84.0% 7.2%
Summit Properties (SMT) 9.7x 9.1x 13.2x 12.1x 9.1x 9.2% 81.4% 89.6% 6.7%
Town and Country Trust (TCT) 9.4x 9.1x 11.1x N.A. N.A 10.5% 90.7% 99.4% 2.0%
United Dominion Realty Trust (UDR) 8.5x 8.2x 11.4x 10.5x 8.4x 10.1% 76.9% 86.1% 7.3%
Walden Residential Properties (WDN) 8.6x 8.0x 9.6x 8.9x 8.7x 9.8% 76.1% 84.3% 9.0%
- ----------------------------------------------------------------------------------------------------------------------------
Mean 9.8x 9.1x 12.9x 11.6x 9.4x 9.2% 78.4% 86.5% 6.6%
Median 9.3x 8.4x 12.6x 11.6x 9.6x 9.4% 76.7% 85.9% 7.2%
- ----------------------------------------------------------------------------------------------------------------------------
Alpha 15.6x 14.0x 17.0x 16.0x 14.0x 4.8% 67.4% 75.1% 10.2%
Alpha Unaffected(9)(10) 12.7x 10.4x 15.4x 13.5x 11.7x 6.9% 68.0% 71.9% 10.2%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Includes shares and operating partnership units.
(2) Equals the sum of equity market value, debt outstanding and preferred
stock at liquidation preference, in $MM.
(3) For the 12 months ended September 30, 1998.
(4) Estimates from First Call as of December 21, 1998, unless otherwise noted.
(5) Adjusted Funds from Operations (AFFO) equals FFO less recurring capital
expenditures and straight line rent adjustments.
(6) Estimates from Morgan Stanley Research as of November 2, 1998, unless
otherwise noted.
(7) Aggregate Value equals Total Market Capitalization less cash.
(8) FFO and EBITDA estimates reflecting M&A activity occurring after April 1
were not available and are noted as N.A.
(9) An average of the 10 trading days closing prices ending 5 days before
November 30, 1998.
(10) AFFO is calculated as FFO less $0.15, based on analyst consensus.
<PAGE> 43
DRAFT
<TABLE>
<CAPTION>
PROJECT DELTA
- -----------------------------------------------------------------------------------------------------------------------------------
CREDIT STATISTICS FOR SELECTED APARTMENT REITS
Equity Total Debt-to- Debt-to-
12/21/98 Market Market Market Book
Company (Ticker) Price Value(1) Capitalization(2) Capitalization Capitalization(3)
- ---------------- -------- -------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) $19.56 $2,803.1 $ 5,141.3 40.1% 46.1%
Avalon Bay Communities (AVB) $33.75 $2,185.1 $ 4,090.1 37.8% 44.6%
BRE Properties (BRE) $24.44 $1,149.3 $ 1,852.1 37.9% 45.6%
Equity Residential Properties Trust (EQR) $40.56 $5,288.2 $11,402.4 41.2% 51.8%
Essex Property Trust (ESS) $29.50 $ 545.9 $ 946.4 38.1% 43.9%
Post Properties (PPS) $38.44 $1,634.6 $ 2,571.9 30.6% 45.2%
- -------------------------------------------------------------------------------------------------------------------------
Mean $2,267.7 $ 4,334.0 37.6% 46.2%
Median $1,909.9 $ 3,331.0 38.0% 45.4%
- -------------------------------------------------------------------------------------------------------------------------
AMLI Residential Properties (AML) $22.50 $ 447.9 $ 949.5 42.5% 58.0%
Apartment Investment & Management (AIV) $37.31 $2,031.7 $ 3,775.3 37.3% 50.8%
Associated Estates Realty (AEC) $12.44 $ 430.8 $ 960.3 49.3% 68.0%
Berkshire Realty Company, Inc. (BRI) $ 9.19 $ 419.4 $ 1,048.3 53.5% 61.4%
Camden Property Trust (CPT) $25.75 $1,216.2 $ 2,286.0 42.2% 45.3%
Charles E. Smith Residential (SRW) $31.25 $ 975.6 $ 1,877.4 40.1% 77.7%
Gables Residential Trust (GBP) $24.44 $ 802.4 $ 1,770.4 47.9% 60.6%
Home Properties of New York (HME) $25.44 $ 681.8 $ 1,087.5 37.3% 42.6%
Mid-America Apartment (MAA) $23.38 $ 510.3 $ 1,381.7 52.3% 63.7%
Summit Properties (SMT) $17.63 $ 522.9 $ 1,126.5 53.6% 63.5%
Town and Country Trust (TCT) $15.19 $ 276.9 $ 612.5 54.8% 89.0%
United Dominion Realty Trust (UDR) $10.38 $1,106.5 $ 2,910.4 53.2% 60.5%
Walden Residential Properties (WDN) $19.63 $ 575.0 $ 1,377.4 55.1% 50.9%
- -------------------------------------------------------------------------------------------------------------------------
Mean $ 769.0 $ 1,627.9 47.6% 60.9%
Median $ 575.0 $ 1,377.4 49.3% 60.6%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Alpha $32.00 $1,450.6 $ 2,330.6 31.6% 75.1%
Alpha Unaffected(5) $27.23 $1,234.4 $ 2,114.3 34.8%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LTM Credit Statistics(4) Senior Debt
Secured Floating --------------------------------- Ratings
Debt / Rate Debt / EBITDA / Debt / FFO / -------------
Company (Ticker) Total Debt Total Debt Interest EBITDA Debt Moody's / S&P
- ---------------- ---------- ---------- -------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 21.0% 42.1% 3.5x 6.4x 12.8% Baa1 / A-
Avalon Bay Communities (AVB) 32.9% 25.3% 3.9x 6.3x 11.5% Baa1 / BBB+
BRE Properties (BRE) 33.6% 30.4% 3.7x 5.9x 12.8% Baa2 / BBB
Equity Residential Properties Trust (EQR) 45.8% 30.5% 2.9x 5.6x 12.9% A3 / BBB+
Essex Property Trust (ESS) 82.5% 40.7% 4.0x 5.1x 15.5% N.R. / N.R.
Post Properties (PPS) 35.5% 50.9% 5.4x 4.6x 16.1% Baa1 / BBB+
- ---------------------------------------------------------------------------------------------------------
Mean 41.9% 36.6% 3.9x 5.7x 13.6%
Median 34.5% 35.6% 3.8x 5.8x 12.9%
- ---------------------------------------------------------------------------------------------------------
AMLI Residential Properties (AML) 62.8% 35.6% 3.4x 6.4x 12.4% Baa3 / N.R.
Apartment Investment & Management (AIV) 96.4% 7.2% 2.4x 6.3x 11.8% Ba1 / BB-
Associated Estates Realty (AEC) 13.5% 45.2% 2.4x 7.0x 7.9% Baa3 / BBB-
Berkshire Realty Company, Inc. (BRI) 78.0% 23.8% 2.5x 6.5x 9.7% Baa2 / N.R.
Camden Property Trust (CPT) 40.6% 42.8% 3.6x 4.9x 14.7% Baa2 / BBB
Charles E. Smith Residential (SRW) 67.5% 33.1% 3.0x 5.3x 12.5% N.R. / N.R.
Gables Residential Trust (GBP) 47.3% 34.2% 3.2x 7.5x 8.7% Baa2 / BBB
Home Properties of New York (HME) 96.0% 4.0% 2.8x 4.7x 14.4% N.R. / N.R.
Mid-America Apartment (MAA) 85.7% 22.2% 2.7x 6.2x 9.1% Ba1 / BB+
Summit Properties (SMT) 33.2% 65.3% 2.8x 7.1x 9.2% Baa3 / BBB-
Town and Country Trust (TCT) 100.0% 10.6% 2.5x 6.1x 9.6% N.R. / N.R.
United Dominion Realty Trust (UDR) 41.8% 22.1% 2.6x 6.1x 8.7% Baa2 / BBB
Walden Residential Properties (WDN) 61.6% 46.7% 2.7x 5.3x 10.2% Ba1 / N.R.
- ---------------------------------------------------------------------------------------------------------
Mean 63.4% 30.2% 2.8x 6.1x 10.7%
Median 62.8% 33.1% 2.7x 6.2x 9.7%
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Alpha 27.4% 15.9% 4.7x 5.4x 13.4% Baa2 / BBB
Alpha Unaffected(5)
- ---------------------------------------------------------------------------------------------------------
Notes:
(1) Includes shares and operating partnership units.
(2) Equals the sum of equity market value, debt outstanding and preferred stock at liquidation preference, in $MM.
(3) Book capitalization equals the sum of debt outstanding, minority interest, preferred stock at liquidation preference
and shareholders' equity, in $MM.
(4) For the 12 months ended September 30, 1998.
(5) An average of the 10 trading days closing prices ending 5 days before November 30, 1998.
</TABLE>
-38-
<PAGE> 44
DRAFT
[GREEN STREET ADVISORS LETTERHEAD]
- --------------------------------------------------------------------------------
IRVINE APARTMENT COMMUNITIES
Irvine Company Buyout Proposal: Rich Price - No, Reasonable Price - Maybe
(N/IAC)
December 10, 1998 * Recent Price $31.81 * DJIA 9009 * RMS 305
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I. SUMMARY
The Irvine Company (TIC), through a wholly-owned unit, recently proposed to
purchase the 16.6 million shares (83% of the common shares outstanding, or 37%
of the combined common shares and OP units outstanding) of Irvine Apartment
Communities (IAC) that it doesn't already own. The proposed price is $540
million, or $32.50/sh, a 19% premium to the prior day's closing price of $27.38.
TIC is clearly paying a large premium to the value that the public market
ascribed to IAC, but the buyout price does not fully reflect the intrinsic value
of the company and operating partnership as a whole.
TIC's offer is not subject to a financing contingency, and calls for IAC's
existing debt and preferred stock to remain outstanding. TIC announced that it
does not expect the debt or preferred stock to be affected by the transaction.
The offer will be financed from TIC's balance sheet, with the proceeds infused
into IAC as equity, thereby leaving IAC's debt and preferred stock unaffected
from a capital structure standpoint. What is less certain is how the rating
agencies will react as a result of "intangible" changes at IAC. The change in
the financial management team, the possible perception that the new IAC could
lack public market discipline, and the reduction in financing options available
to a private company may be discomforting to the agencies and could result in
negative rating implications. After the announcement of the offer, IAC was put
on credit watch for possible downgrade.
If IAC and the assets of the operating partnership were auctioned off in their
entirety, the company would likely fetch a higher price. However, TIC's majority
control, and the special voting rights that were afforded TIC at the formation
of the company, effectively preclude such an auction from taking place.
Therefore, evaluating the appropriateness of the pricing of the proposal raises
some interesting valuation issues, not the least of which is the disparity in
pricing that the public market ascribed to IAC versus what a private buyer might
pay.
IAC's Board of Directors may determine that the pricing is inadequate, but be
hard pressed to refute the proposal due to the robust premium being offered. At
the end of the day, we believe most shareholders would support the current
offer, but there could be some upside to the price if IAC's Board squawks loud
enough. Of course, squawking too much runs the risk of having TIC revoke its
offer entirely, although that risk is probably remote. In any event, it is hard
to envision a scenario where shareholders aren't at least paid a minimum of
$32.50/sh for their holdings.
The closing date of the transaction is uncertain, but is likely to fall sometime
near the end of the first quarter or early in the second quarter of 1999.
Assuming the company declares and pays a fourth quarter dividend, and the
transaction is completed at the stated price within fourth months, investors
would generate an annualized return of roughly 12% at the current share price.
The proposed buyout is interesting because it sends two messages to the REIT
industry. First, a savvy real estate industry veteran, Donald Bren (TIC is
privately held and 100% owned by Mr. Bren), has suggested that the REIT
structure doesn't work for his company. Mr. Bren's conclusion may be alarming to
most REIT proponents, but it shouldn't be because his situation is unique. We do
not foresee a wholesale movement to de-REIT or go private by other REIT
management teams despite such speculation by others. Second, and perhaps more
importantly, Mr. Bren, one of the most successful real estate entrepreneurs in
recent history, determined that the public market valuation of his company was
at least 19% too low. While some may choose to ignore it, the signal being sent
by Mr. Bren should be bullish for REITs in general, and apartment REITs with
exposure to California in particular.
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Exhibit 1
STRUCTURE OF IAC AND RELATED ENTITIES
[FLOW CHART]
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I. STRUCTURE
Exhibit 1 contains a chart depicting the structure of IAC and its operating
partnership. As can be seen, TIC has a sizable (63%) economic interest in the
operating partnership, directly through its limited partner interest and
indirectly through its ownership of IAC shares. The bottom line is that public
shareholders own a minority interest in the operating partnership, although they
own a majority interest in IAC, the sole general partner of the partnership.
Despite controlling a majority interest in the general partner, public
shareholders do not have complete control over the partnership.
The Operating Partnership Agreement, the Certificate of Incorporation, and IAC's
Bylaws effectively prohibit any sale, merger, or business combination of IAC or
the operating partnership without the approval of TIC. Thus, IAC is not in a
position to "auction" off the entire company, and is at a disadvantage when it
comes to ensuring that the best possible price is paid for its interests. This
is not to say that TIC's current offer is coercive or even unreasonable in any
way, but rather that other potential bidders are effectively locked out of
competing for the company. As a result, TIC is not under as much pressure to
offer the "best" price possible when proposing to buy the company. All other
things being equal, TIC has an incentive to pay only the minimum price that gets
the deal done. We have heard some argue that TIC may have aspirations of someday
returning to the public market, either with IAC's portfolio or the balance of
its commercial real estate holdings, and therefore is motivated to pay an
inflated price to leave public shareholders with a good taste in their mouths.
While the logic may be sound, $32.50/sh does not represent premium pricing for a
portfolio and company of IAC's quality.
III. NAV AND PRICING
In Exhibit 2, we present a range of NAV calculations for IAC as of 9/30/98
using various capitalization rates. Heretofore, we have used an economic cap
rate of 7.9% to value IAC's portfolio knowing that other apartment assets in
IAC's markets have traded hands at much lower cap rates (i.e. higher values).
We knowingly used an above-market cap rate for two primary reasons. First, the
7.9% rate, although not reflective of "market", was a full 30 basis points
lower than that used to value any other apartment REIT portfolio, and REIT
investors have displayed a discomfort with valuing fringe companies too
dissimilarly from the average. Second, despite the use of an above-market cap
rate, we have had a very strong buy on the company for some time, and recently
touted the company as the
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Irvine Apartment Communities - December 10, 1998
(c) 1998, Green Street Advisors, Inc.
<PAGE> 46
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EXHIBIT 2
Estimated range of NAVs for IAC using various capitalization rates. The values
reflect only operating apartment units and current development projects, with no
value given to future development opportunities off the Irvine Ranch or the Land
Rights Agreement covering development opportunities on the Irvine Ranch.
<TABLE>
<CAPTION>
Lower-end Mid-range Upper-end
<S> <C> <C> <C>
Estimated Economic NOI(1) $ 154,192 $ 154,192 $ 154,192
Economic Cap Rate 7.50% 7.25% 7.00%
Nominal Cap Rate 7.81% 7.55% 7.29%
Capitalized Real Estate Value $2,055,895 $2,126,788 $2,202,744
Development Projects(2) 258,021 266,918 276,451
Other Tangible Assets 28,441 28,441 28,441
--------- --------- ---------
Total Assets $2,342,356 $2,422,146 $2,507,636
Total Liabilities $ 714,384 $ 714,384 $ 714,384
Preferred Stock $ 200,000 $ 200,000 $ 200,000
--------- --------- ---------
Shareholders' Equity $1,427,972 $1,507,762 $1,593,252
Shares/Units Outstanding 45,157 45,157 45,157
NAV $ 31.62 $ 33.39 $ 35.28
========= ========= =========
</TABLE>
(1) Green Street Advisors' estimate, based on 3Q98 results, of forward 12 month
NOI from operating apartment units less a capital expenditure reserve of
$400/unit.
(2) Development projects are valued assuming a 10.25% nominal NOI yield on
costs incurred as of 9/30/98 ($196.6 million) and using the nominal
capitalization rate indicated in each scenario, resulting in premiums to
book value ranging from 30% in the lower-end scenario to 40% in the
upper-end scenario.
================================================================================
cheapest apartment REIT, and possibly even the cheapest REIT overall. Herein, we
present a range of economic cap rates from 7.0% to 7.5%. While we present three
scenarios, our best guess is that the NAV of the company really falls somewhere
around the mid-range, namely $33.50/sh (rounded). In our calculations we attempt
to give credit for the current development projects, but ascribe no specific
value to the Land Rights Agreement between TIC and IAC which gives IAC the
exclusive right to develop apartments on TIC's extensive land holdings through
the year 2020.
The value of the agreement is difficult to quantify because TIC is not obligated
to sell land to IAC, but should it so desire, or be required, to have apartments
developed, it must sell such land to IAC at a price that is no more than 95% of
appraised value. Any appraisal based system is subject to abuse and/or vagaries,
but here the pricing mechanism seemed to work to IAC's advantage because the
third party "comps" that would presumably be used would most likely be inferior
properties. Also, if IAC wanted to play hardball, it could preclude the
development of any new apartments on TIC owned land, and effectively "force"
favorable pricing in the event that apartments had to be developed (zoning
authorities often require a minimum amount of affordable housing). At the end of
the day, it is nearly impossible to accurately estimate the value of the
agreement, but at the very least it is worth something to TIC to buy itself out
of the obligation.
At $32.50/sh, TIC's offer is at the lower-end of our estimate of the range of
IAC's true NAV, and equates to an economic cap rate of 7.4% (a nominal cap rate
of 7.7%), representing a per unit value of approximately $130,000. The per unit
value may sound high, but other inferior apartment assets located in Orange
County have closed during the last few months at valuations of $128,000-$148,000
per unit. TIC's offer ascribes no value to terminating the Land Rights
Agreement, nor any "franchise value" for IAC, which has been active in creating
value through development off the Irvine Ranch in San Diego and Northern
California. Thus, using an intrinsic value approach, the offer price appears to
represent a discounted value based on recent private transactions, and should
provide TIC with meaningful upside.
IV. CONCLUSION
This transaction is unique in several ways. TIC's majority ownership position of
the operating partnership effectively gives it control, and diminishes the value
of IAC's minority interest position. The pricing of REITs of late provides an
opportunity for TIC to offer a premium to the public market price, but a dis-
<PAGE> 47
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Page 4
count to the private market value. The independent committee of IAC's Board
faces an interesting valuation issue, but should be motivated to maximize the
value of the offer. James Mead, IAC's CFO, recently announced his resignation
from the company, and may serve as a good advocate for shareholders; although he
no longer owns shares himself. Mr. Mead is arguably well suited to assess the
value of IAC, and doesn't appear to have a bias in determining the
appropriateness of the current offer.
How IAC's Board ultimately decides to proceed is anybody's guess. TIC's offer is
not fully-priced based on the public's pro rata share of the value of the
company as a whole, but it is not a low-ball offer either. At a 19% premium to
the public market's valuation of the company, TIC's offer is much more richly
priced than other acquisition or merger transactions that have occurred in
REITdom, suggesting that the price is more than reasonable on that measure. The
Board could determine that the offer is acceptable, and have a fairly good
defense for that conclusion. On the other hand, the Board could determine that
the offer must reflect IAC's pro rata share of the full value of the company or
something more close to it. If the Board takes this second stance, there is a
risk that TIC withdraws its offer and the shares trade back to their previous
range, although we believe that risk is remote. More likely TIC would either up
its bid, or perhaps call a shareholder vote (which Mr. Bren can do as Chairman
of the Board) and allow investors to directly evaluate the merits of the
proposal.
The reality of the situation is that Mr. Bren will be the one to decide whether
a higher price will be paid. IAC's Board can bluster and posture for a fight,
but we think Mr. Bren will ultimately be successful even if the offer is not
increased. His offer is, by any definition, reasonable. However, he has
contended that the offer is actually rich, as a result of his desire to exit the
public market with a feeling of good will from the investment community. We,
however, strongly disagree with his contention that this offer is rich. If he
truly wants to leave investors with a favorable impression, the offer needs to
be increased. The odds of this happening are highly influenced by his own
perception of whether TIC, IAC or some combination thereof may later wish to
access public equity markets again. On this point, we think there is a
reasonable chance of an Irvine-related entity coming public at some point in the
future. Because of this, there is also a reasonable chance that he will choose
to up his offer. We would not suggest that this is a high probability, but we
believe it is a legitimate possibility.
At the recent price, we recommend investors continue to BUY shares of IAC. At a
minimum, they should provide close to a 12% annualized return and a sweetened
bid by TIC could enhance that return.
Craig Leupold
Mike Kirby
Jon Fosheim
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IAC is a customer of Green Street Advisors regular research product.
(c)Copyright 1998, Green Street Advisors
This report was prepared from data believed reliable but not guaranteed by us,
without verification or investigation and does not purport to be complete. The
facts and opinions contained herein are not guaranteed to be complete or
error-free. The report is not to be considered as an offer to sell or
solicitation of an effort to buy the securities of the company(ies) covered
by this report. Opinions expressed are subject to change without notice.
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Irvine Apartment Communities-Dec. 10, 1998 (C)1998, Green Street Advisors, Inc.
<PAGE> 48
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[THE PENOBSCOT GROUP INC LETTERHEAD]
REIT Byte
IRVINE PROPOSES TO GO PRIVATE. IS THIS THE FIRST OF MANY? IS
THE DEAL FAIR?
December 6, 1998
The answer to the first question is maybe some, but not many.
There is a lot that makes Irvine very different from most other
REITs, particularly in aspects which affect the probability of
going private. Seeing what makes Irvine different goes a long
way to sorting out the probabilities of others following its
example. It also provides some insight into the second question
as to whether this deal is really good and fair for
shareholders. While it is still early, an affirmative answer on
the fairness issue seems a stretch.
The Facts
Late Tuesday, a special purpose affiliate of The Irvine Company
proposed to purchase all of the outstanding common shares of
Irvine Apartment Communities, Inc (IAC: NYSE; hereinafter IAC,
or the Company) at a price of $32.50 per share, $5.69 or 21.2%
over their closing price the prior day, and $15.00, or 85.7%
over their $17.50 price at their December 1993 IPO. The Irvine
Company and its affiliates, all largely controlled by Donald
Bren, owned IAC outright prior to the IPO, and afterwards
continued to hold an approximate 63% interest in IAC, largely
in the form of Operating Partnership units. Irvine Company
management estimated the compound annual return to shareholders
since the IPO to a takeover at this price would be 19.8%, a
number which would argue that the take-over was a good deal.
But a good deal is not necessarily a fair deal; there seem
certain other alternatives that would address the needs stated
by Mr. Bren in a manner shareholders might feel better serves
their differing interest.
The Differences
An unusually large number of facts and circumstances make IAC
quite different from most other REITs and, in almost all these
areas of difference, make a similar privatization less likely.
These include a variety of factors reflecting both
<PAGE> 49
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THE PENOBSCOT GROUP, INC.
the feasibility of going-private and incentives unique to The
Irvine Company for so doing.
FEASIBILITY CONSIDERATIONS: LEVERAGING THE PURCHASE. It seems
reasonable to assume that the aggregate purchase price of $540
million will be funded by a borrowing against the IAC assets,
or at least that would be preferable if it were feasible. The
feasibility of arranging this borrowing depends on both not
exceeding aggregate loan-to-value ratios at which most lenders
would balk and having collateral available to pledge to these
lenders. Both these considerations are made relatively more
easy by the shares to be purchased being less than a majority
of all outstanding shares and OP equivalents, more specifically
being 37% of shares and equivalents. Secondly, if the Company
is valued at a 9.0% cap rate, then existing liabilities
represent 41.3% of value and the $540 million to be borrowed
would represent 28.3%; the resulting post-privatization entity
would be leveraged at 69.6%, generally a quite feasible
level.(1) In an important sense, leveraging for this purchase
may be even easier than these ratios indicate because a great
deal of the Company's debt is very low cost debt. For the most
recent quarter, the Company had a very healthy interest
coverage ratio of 5.44 times; if it were to borrow the
$540 million at 7.0% - if anything, a slightly lower rate seems
feasible -- its coverage ratio would be 2.44 times, still very
acceptable to even the most cautious of lenders.
The last possible constraint is the availability of
unencumbered collateral to pledge to a lender. Based on the
Company's 1997 10K, secured indebtedness encumbers only 63% of
assets completed at that time, or 55.3% of assets including
(and treating as unencumbered) properties then under
development.(2) If all properties have uniform per-unit
valuations, then borrowing $540 million against unencumbered
assets would produce only an 87% loan-to-value on these pledged
assets, assuming these assets are valued at a 9.0% cap and
assuming no change in G & A, or a 73% LTV at a 8.0% cap with G
& A excluded as an operating expense. Including properties
under development, the LTV is 63% under the 9.0% cap/100% G&A
assumptions, or 53% under the 8.0% cap/0% G&A assumptions.
Very simply, even in today's difficult real estate borrowing
environment, financing this purchase looks like a no-brainer.
FEASIBILITY CONSIDERATIONS: BY-LAW TAKE-OVER IMPEDIMENTS. The
Company is a Maryland Corporation. Among the various reasons
that the Company, like many other REITs, elected this domicile
are the somewhat rigorous and time consuming procedures boards
of directors can impose on would-be acquirers to deter a
takeover proposal, procedures that are not available in all
other states. However, the Company's By-Laws explicitly exempt
Mr. Bren and his affiliates from complying with certain of
these standards and procedures.
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(1) These figures are based on third quarter, 1998 results annualized, valuing
property under development and other assets at book and treating G & A as a
property operating expense. Assuming savings of 50% of G & A and an 8.0% cap
rate, gross asset value increases 14% to $2.17 billion, and the resulting
post-privatization leverage reduces to very easy to obtain 61.1%.
(2) This measures assets by rental units. We are told by management that their
most recent tax exempt financing served to unencumber additional assets.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 2
<PAGE> 50
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THE PENOBSCOT GROUP, INC.
INTERESTED STOCKHOLDERS. Maryland General Corporation Law (MGCL) generally
prohibits certain "business combinations" between an Interested Stockholder
or an affiliate thereof "for five years after the most recent date on which
the Interested Stockholder becomes an Interested Stockholder. An Interested
Stockholder is defined as any person holding 10% or more of the voting
stock. Customarily, after the five-year period, any such combination must
be recommended by the vote of the board of directors of the corporation and
approved by at least (i) 80% of the votes entitled to be cast by holders of
outstanding voting shares and (ii) two-thirds of the votes entitled to be
cast by holders of outstanding voting shares of the corporation other than
shares held by the Interested Stockholder, unless, among other conditions,
the corporation's common stockholders receive a minimum price for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares."(3)
SEC filings by the Company go on to say, "The Articles of Incorporation and
resolutions adopted by the Board of Directors have exempted from these
provisions any business combination with The Irvine Company, or any
affiliates of The Irvine Company or Mr. Bren, or any members of the
immediate family of Mr. Bren and any other person acting in concert or as a
group with any of the foregoing. All other stockholders are subject to the
business combination statute."(4) Effectively, Mr. Bren is excused from
having to secure the affirmative vote of two-thirds of the shares in the
Company he does not own.
CONTROL SHARES. MGCL provides that at certain ranges of percentage
ownership by a potential acquirer, "control shares" are established that
"have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares
of stock owned by the acquirer or by officers or directors who are
employees of the corporation." With his ownership of common shares
currently at 17%, Mr. Bren does not have the minimum one-fifth common-share
ownership percentage that would normally trigger the "control share" rule.
But again, as reported in Company's SEC filings, "the Company's bylaws
adopted by the Board of Directors have exempted control share acquisitions
involving The Irvine Company, or any affiliate of The Irvine Company or Mr.
Bren, or any members of the immediate family of Mr. Bren and any other
person acting in concert or as a group. All other stockholders are subject
to the control share acquisition statute." Mr. Bren, unfettered by the
control share statute, is now free to convert enough of his interest in the
Operating Partnership into common shares (under the Exchange Rights granted
to The Irvine Company) to achieve the requisite voting control of the
Company, and then would not have these holdings subject to the Control
Shares provisions and restrictions as specified in the Company's Articles
of Incorporation.
These provisions make Mr. Bren different from other would-be acquirers of the
Company.(5) In the event his buy-out proposal is contested then, Mr. Bren
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(3) These provisions of Maryland law do not apply to business combinations
that are approved or exempted by the board of directors prior to the time
that the Interested Stockholder becomes an Interested Stockholder.
(4) Irvine Apartment Communities, Inc., Form S-3 as filed with the Securities
and Exchange Commission, May 14, 1997.
(5) Another item in the bylaws which is not especially unique but deserves
some small mention here because it could potentially have had a role in
deterring a contested takeover of the Company. The Company's bylaws require
that "with respect to an annual meeting of stockholders, the proposal of
business to be considered by stockholders... may be made only by advance
written notice procedures set forth in the Bylaws." The advance notice
procedures also apply to the nomination of persons for election to the
Board. However, Company filings make clear Mr. Bren's considerable
advantages: "The advance notice provisions are not applicable to The Irvine
Company," which suggests that competing offers to purchase the Company
could potentially never be included in Board business or presented at a
shareholders' meeting.
Page 3
<PAGE> 51
DRAFT
THE PENOBSCOT GROUP, INC.
would not have to jump through various requirements that might
be an annoyance, if not a final deterrent, to others interested
in taking over the Company. While we have not made a similar
survey of the by-law provisions of other REITs, we strongly
suspect that few give similar privileges to their dominant
shareholder.
FEASIBILITY CONSIDERATIONS: DEBT COVENANTS. There seems to be a
good chance that leveraging up might violate certain loan
covenants, especially leveraging up with secured debt. The
Company's shelf registration statement speaks of covenants not
to permit debt to rise above policy limits of 60%. Setting aside
the problem of determining how a private Company might determine
debt to market cap ratios, it is probably more relevant to
consider what would be the consequences of a violation of loan
covenants. In most cases, the recourse of debt holders is to
call their loan, not to reset or establish any kind of penalty
interest rate. A decade ago, in the midst of a collapsing real
estate market, more than one lender who called a loan after a
technical default only to find the borrower appearing the next
day tendering repayment at a 100 cents on the dollar, having
happily avoided loan-maintenance prepayment penalties in
repaying an expensive loan. While IAC might not experience as
large a windfall, there does seem some possibility it might
easily refinance existing indebtedness at a lesser cost. The
Company's existing $100 million of unsecured notes, its
liability most likely to contain covenants which would be
violated, bears interest at 7.0%, slightly higher than where it
could likely refinance this debt.
FEASIBILITY CONSIDERATIONS: DE-REITING AND OTHER TAX ISSUES.
There are likely a great many tax issues that complicate a
takeover or privatization, including the possibility that IAC
could lose its REIT tax-status, and/or that the IAC Operating
Partnership might terminate for tax purposes. In considering
these topics we are swimming in dangerous waters where
tax-sharks more knowledgeable than we have previously taken big
bites of our flesh. However, to our amateur eye, there seems to
be important differences in the details that make a
privatization easier for Mr. Bren than it would be for other
major holders of other REITs.
De-REITing seems an inevitability for Mr. Bren and for many
other would-be acquirers of other REITs. De-REITing means that
the tax-free pass-through of cash flow would be lost: instead,
any cash flow passed through what was the IAC REIT would now be
diluted by taxation. While tax-free pass-through could be
regained by exchanging the REIT shares for OP Units, such an
exchange seems unlikely to be deemed a like-kind, and therefor
tax-deferred exchange. Tax deferral should make no difference
for Mr. Bren because his basis in newly-acquired REIT shares
would be $32.50, meaning that the taxable gain and tax liability
would be minimal to non-existent(6). So far, there is nothing in
Mr. Bren's position that makes him different from dominant
shareholders of other REITs.
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(6) There would be gain only if the value of OP Units were deemed to be greater
than the $32.50 per share basis. Mr. Bren, might however, have a tax liability
with respect to shares owned by him to the extent that these shares had a lower
basis. A minority, but significant part of his holdings are in the form of
shares.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 4
<PAGE> 52
DRAFT
THE PENOBSCOT GROUP, INC.
This moves to the second problem, where the facts and
circumstances of the Company vary significantly from other
REITs. Assuming that the transaction by which REIT shares are
replaced by OP units is deemed for tax purposes a transfer of OP
Units, then, if 50% or more of the interests in the Operating
Partnership were so transferred, the Operating Partnership might
terminate for tax purposes, giving all former OP unit holders a
taxable gain to the extent of difference between the fair market
value of their OP units and their tax basis in these units. But
in fact, the Irvine Company holds an approximate 55% interest in
Irvine Apartment Communities, L.P., the Operating Partnership,
of which IAC is 45% general partner. Thus a transfer of all of
the OP units of IAC would not create a tax termination of the
Irvine Apartment Operating Partnership. In this respect, IAC is
very different from most other REITs. There may be other ways
others could skin their respective cats, but these methods seem
unavailable at most other REITs.
Very simply, the facts and circumstances unique to Mr. Bren and
IAC seem to suggest that tax issues and potential costs that
others might face are absent here.
SPECIAL INCENTIVES: LAND ISSUES. IAC had now come face to face,
but not yet come to grips with a zero-sum issue that would pit
the interests of public shareholders against controlling
insiders. The issue is, of course, the pricing of land to be
purchased by IAC from Mr. Bren's Irvine Company, on which IAC
would develop additional apartment communities. At the IPO,
under what is known as The Land Rights Agreement, The Irvine
Company agreed to sell land to the Company for an interim period
at prices which were estimated to result in a total 10.0% to
10.5% return on the Company's total investment. The Company's
rights to buy under this arrangement lapsed with the land
previously purchased on which 1,884 apartments have been or are
now being constructed. Thereafter, purchase prices were simply
not to exceed 95% of appraised value.
Given history and the interests of parties concerned, value
seems like a fight waiting to happen, and, but for this
privatization, likely to have happen very soon. Mr. Bren and the
Irvine Company would point to the same thing they pointed to in
announcing the buy-out proposal: "Accretive acquisitions of
Class A multi-family properties in California are difficult to
find." This means that cap rates are low and land should be
priced to reflect a similar low rate of return on investment. In
fact, we think it likely that they might argue that land on the
Irvine Ranch should be priced at an even lower cap and return on
cost than land elsewhere. Other parties, however, might point to
the land for the 1,884 units bought most recently. Absent some
prior agreement that these transactions could not be deemed a
comparable, it could be argued that these are the most direct
comparable, even if slightly stale.
The difference, we strongly suspect, is quite large, perhaps 300
to 400 basis points of return on total investment. A difference
of 300 basis points could amount to something like $60,000 per
rental unit.(7) Mr. Bren then faced the pos-
- -------------------------------
(7) The figure of $60,000 is based on a pro forma valuation of the Company at
$127,000 per unit, based on a 9.0% cap rate, and otherwise on the assumptions
more fully described above. If, alternatively, value were premised on a 6.0% cap
rate on the same average per unit NOI, per unit value would be $190,500 per unit
or $63,500 per unit higher. This is an imperfect comparison in that we are
comparing implicit per unit valuation as between 9.0% and 6.0%, as compared to a
more likely range of dispute of between 10.0% and 7.0%, but it
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 5
MORGAN STANLEY
<PAGE> 53
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sibility that he ultimately won the value war, it would destroy the
economics of IAC which he owns a majority of, while at the same time
alienating all other holders of IAC shares.(8) There is also the
possibility that he might have been advised that he wouldn't win the
valuation argument or that, if he won in the short run, he could expect to
subject to all sorts of shareholder rights suits, some of which might seek
punitive damages. The fight was going to have costs, even if it was
ultimately won. There seems to be value simply in avoiding the fight as is
achieved by taking the Company private.(9)
SPECIAL INCENTIVES: COMFORT AS A PUBLIC COMPANY. Donald Bren's role at IAC
had very few, if any, parallels in the REIT industry. He has a stature as
an experienced and successful investor over a number of years, a reputation
similar to that held by Sam Zell, Mort Zuckerman, or Richard Rainwater. But
he did not choose to take a particularly visible role and rarely attended
industry functions or in other ways tried to extend the luster of his
reputation in any which might expand the pricing multiple of IAC shares.
But although his face was rarely seen, his hand was more visible. We saw
what appeared as his influence in the turnover of senior officers,
especially officers who seemed to develop an independent standing or
stature in the industry.
First was Dick Moran, who was nominally Executive Vice President and CFO at
the IPO but held the position of highest visibility initially. In March
1995, the nominal President as of the IPO, T. Patrick Smith, was gone and
Mr. Bren stepped in as Acting President. Many people, ourselves included,
expected Moran to be named President, thus formally acknowledging the role
he seemed to already have. In May 1995, Steven Albert joined IAC to become
President; in October 1996 Moran announced his departure and shortly
thereafter emerged as CFO at Kilroy Realty Corp. Moran was replaced as CFO
by Jim Mead who had been at IAC in a less visible position for some time.
Mead then assumed a profile very similar to what Moran had held. By the
time IAC's 1996 Annual Report was released, Albert was no longer President
and Mr. Bren was once again, this time with no hyphenated "Acting"
preceding that title.
But that tenure was short-lived, and in 1997, William McFarland, who had
become a director in 1996 and had been associated with Irvine affiliates
since 1984 and with Mr. Bren previously, became President. Then, in October
1998, the departure of Jim Mead was announced, as of early 1999.
Admittedly, what we draw from these patterns is subjective, not conclusive
and subject to different interpretations. But what we see is a pattern of
those who have developed an eyeball-to-eyeball sense of trust with the
investing public not lasting long, while Mr. Bren seems to work his will
while avoiding the development of any relationship with other shareholders.
By no means does this suggest that Mr. Bren has or is about to willfully do
anything to harm the interests of public shareholders. Rather, it suggests
that he may not have
- --------------------------------------------------------------------------------
does nevertheless give some sense of the magnitude of the gap. At $60,000 per
apartment unit the $540 million purchase price would be fully recouped with
9,000 units, roughly 52% of what the Company now has.
(8) Based on this possibility, an argument could be made that Mr. Bren is
doing shareholders a favor by buying them out now rather than later.
(9) On the other hand, if the argument that the 10.0% to 10.5% return is real
value was to win, there might also be a strong argument that the $32.50 per
share buyout price is inadequate.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 6
MORGAN STANLEY
<PAGE> 54
DRAFT
developed a sense of being partners with shareholders to the
same extent as other, more visible REIT major-domos. In taking
IAC private, there is clearly no sense that, for better or
worse, we are all in this together.
Is This Good Deal
A Fair Deal?
At the advertised 19.8% compound annual return, it seems that
investors have a deal that should elicit few complaints. A
19.8% return is considerably better than the NAREIT Equity
Total Return Index which produced an IRR we measure at a little
over 10% over that same period.(10) But on the other hand,
these have been times of strong cyclical recovery. And in
California that recovery lagged the rest of the country,
meaning that compared to REITs with assets elsewhere, a larger
part of the California recovery occurred during this period,
and a lesser portion at times preceding this. Thus a 19.8%
return could well be merely what is to have been expected from
California assets over this time, or maybe even less than what
should be expected.
No less important, a good return is not necessarily the same
thing as a fair return. There will be those who assume that
anytime an insider buys from outsiders, the outsiders are being
disadvantaged, that the buyer, who can be presumed to know
relevant facts than the seller, thinks there is value at the
price being paid. Going from raw paranoia to the numbers seems
to dissipate the case, but only very slightly.
PER UNIT VALUATIONS. At $32.50 per share, the valuation of the
Company is roughly $148,000 per apartment unit.(11) This
compares to roughly $153,000 per unit cost of recently
constructed or now under construction units on the Ranch (which
were built on land priced to yield a 10.0% return), or $211,000
off the Ranch.(12) Off the Ranch figures are skewed by a
119-unit development in Santa Monica, estimated to cost
$630,000 per unit, but then again, that Santa Monica asset is
included in what Mr. Bren proposes to soon own all of at a
valuation of $148,000 per unit.
CAP RATE VALUATIONS. Based on trailing NOI, the value seems to
imply a 6.8% cap rate.(13) There would be roughly 20 basis
points of incremental yield from halving G&A. Adding in the
development pipeline at a 10.0% yield, together with halving
G&A gives an indicated 8.16% yield. If the development pipeline
produces a yield 50 basis points higher (i.e. 10.5%), the
composite cap rate moves by a little over 10 basis points to
8.27%. And lastly, if forward-looking, rather
- ---------------
(10) We have calculated return on the NAREIT Index using an internal rate of
return over the same time frame.
(11) These calculations reflect (a) the sum of (1) 45.09 million shares and
equivalents times $32.50 each, plus (2) $789 million of liabilities, plus (3)
$144 million of redeemable preferred shares, plus (4) an estimated $333 million
to complete properties now under construction, less (5) $41 million of other
assets, divided by (b) 18,197 units. The figure of 18,197 units includes units
presently under construction. This data is drawn from Company reports as of the
end of its third quarter, 1998.
(12) It might be argued that newer units should have a value above existing
older units. But IAC's old units bring with them one almost unique difference
which positively influences their value: roughly $325 million of tax-exempt
mortgage bond financing bearing interest at a rate of 5.28%. Indeed, as of the
end of 1997, IAC's $704 million of debt bore interest at a weighted average rate
of 6.06%.
(13) This figure is based on $36.6 million of quarterly NOI, annualized to
$150.5 million divided by the value determined for per units calculations above.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 7
<PAGE> 55
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than trailing NOI were used, as is customary, there might be 10
to 50 basis points additional increase in return, especially
given the strong movement in rents in this market.
It would be interesting to compare these per unit and cap rate
valuation benchmarks with the specific examples that brought
The Irvine Company to conclude that "Accretive acquisitions of
Class A multi-family properties in California are difficult to
find." It looks like Mr. Bren may have found a quite accretive
acquisition sitting right under his nose.
MORE EQUITABLE ALTERNATIVES. The leverage feasibility analysis
above seems to argue that, in full fairness, shareholders
perhaps should be offered one or two other alternatives to a
buyout. The first alternative would be to keep ownership as is,
take down similar debt and distribute the proceeds to
shareholders. That would of course mean the $540 million would
go to all shareholders and thus be less than $32.50 per-share;
we estimate it would be roughly $11.98 per-share. And it would
have a negative impact on per share FFO which can be estimated
at a reduction of roughly $0.84 per year.
While many shareholders might find this a not altogether
attractive alternative, in a roundabout way, thinking about
this possibility brings up another potential solution to the
problems that seem to have brought Mr. Bren to propose a buyout
as being in the best interests of the Company.(14) Part of the
stated reason for going private is to be able to retain
capital. But by leveraging up to fund a privatization, there is
actually going to be less cash flow available, even if all of
it could be retained and reinvested. Despite this inconsistency
with Mr. Bren's stated goals, the transaction is attractive to
him, largely because of a presumed cost of the capital
necessary to effectuate the buyout of 7.0% or less. Thus it
might more in the interest of shareholders to leave ownership
unchanged, but increase its leverage to the extent of $540,000
million and invest those proceeds in the opportunities Mr. Bren
sees as being lost to the present obligation to distribute all
cash flow; then shareholders in addition to Mr. Bren might
enjoy the benefits of higher leverage at prevailing rates. Or
stated another way, there is more than one way to deal with the
problems Mr. Bren purports to be solving and many shareholders
might find that solution preferable to being bought out at
$32.50 per share.
Probabilities
Elsewhere Very few other REITs seem to have similar facts and
circumstances to make a take-over by dominant insiders likely.
In our coverage universe, REITs where insiders hold a large
percentage of effective ownership of the consolidated
enterprise include Boston Properties (19.4% owned by the
chairman, management and their families), Cousins (19.2%),
Crescent (13.0%), CBL (27.9%), General Growth (17.2%), Simon
(23.6%, including DeBartolo family interests), Urban (38.0%),
and Taubman (17.7%).(15) All of these are some distance from
the
- ---------------
(14) At this point the "Company" seems to have taken on a metaphysical quality
wholly separate from the interests of its various shareholders. It seems to us a
more constructive approach would be to view the interests of the Company as
equivalent to the aggregate interest of these owners.
(15) This is calculated based on shareholdings of the chairman and board as of
their most recent proxy and shares and equivalents as of the third quarter of
1998.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 8
<PAGE> 56
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THE PENOBSCOT GROUP, INC.
level owned by Mr. Bren. Existing debt as a percent of the
fair market value of assets, using a 9.0% cap rate on
trailing NOI annualized, is generally higher than IAC's
level. At Boston Properties, liabilities equal 52% of FMV
calculated on this method, at Cousins 31%, at Crescent 42%,
at CBL 66%, at General Growth 78%, at Simon 94%, at Taubman
58% and at Urban 70%. Using an 8.0% cap rate, the mall
REIT's leverage is lower, 59% for CBL, 70% for General
Growth, 83% for Simon, 52% for Taubman, and 62% for Urban.
Very simply, the likelihood of the dominant shareholders of
these REITs following Mr. Bren's example seem quite low.
The most plausible exception seems to be Cousins, where
there may also be hidden value in non-income producing land
holdings.
In a sense, this analysis seems to turn the conventional
wisdom that larger ownership interests by management are
better than smaller. But as we see it the correct
conclusion is more a refinement than a refutation of
conventional wisdom. In effect a corollary should be added
to conventional wisdom: when management's interest is so
large as to give them effective unilateral control, it is
good to be attentive to all those signals which indicate
whether such a dominant shareholder views other
shareholders as either his partners, or as a convenient
source of the interim financing for his company.
Tying This Deal to
Our Macro
Perspectives Stated
Elsewhere
Our regular readers are no doubt aware of our recent
speculations regarding the possibility of deflation in
real estate.(16) In those ruminations, we have argued that
certain types of property might be spared the negative
effects of deflation and instead experience land
appreciation to arrive at full equilibrium between, on one
hand, supply and demand as reflected in rents and, on the
other hand, replacement cost as factored by the cost of
capital, the long-term debt portion of which has recently
declined significantly and appears likely to remain low.
We argued that the more favorable scenario is more likely
in circumstances where the providers of space have some
pricing control, some ability to avoid the other scenario
characterized by real declines in rents rather than land
appreciation. While we have also characterized urban
properties as more likely to perform in a manner
consistent with the land appreciation scenario, not all
urban areas would enjoy this pattern and not all non-urban
would not. One of the more likely locations to perform
well is the Irvine Ranch, a prospect that argues that it,
or more specifically, the Company should be valued
differently than real estate in other locations. It also
means that IAC might be especially missed by investors and
those of us who like to try to figure out what is really
going on.
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(c) 1998. The Penobscot Group, Inc. All rights reserved. Unauthorized copying or
distribution of this report or any portion hereof is prohibited.
- --------------------------------------------------------------------------------
(16) See "Deflation, New Capital Constituencies, and the Re-Sorting of the REIT
Industry," Relative Valuation Array Charts, December 1, 1998 and "Recessions,
Cheap Debt and Equilibrium," Relative Valuation Array Charts, November 3, 1998.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 9
<PAGE> 57
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THE PENOBSCOT GROUP, INC.
The information herein, including that drawn from other publications of The
Penobscot Group, Inc., while drawn from sources deemed reliable, is not
guaranteed, may not be accurate and should not be relied on as such. Opinions
expressed are our current opinions and are subject to change without notice.
The Penobscot Group, Inc. reserves the right to discontinue this series of
Reports at any time without prior notice. The Penobscot Group, Inc., its
affiliates, and officers, directors, and employees of both may currently hold
long or short positions in and from time to time purchase or sell securities of
any or all of the companies mentioned.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 10
<PAGE> 58
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[REALTY STOCK REVIEW FRONT PAGE, DECEMBER 4, 1998]
Market Analysis of REITs & Real Estate Operating Companies
WATERSHED OR NO BIGGIE?
After the market closed on December 1, The Irvine Company, a private real
estate entity controlled by Donald Bren, announced an offer to buy the
approximately 16.6 million shares of Irvine Apartment Communities that it
doesn't already own for $32.50 per share. Simply put, in a deal valued at $540
million, Bren is proposing to take private the company that he took public in
December 1993 at $17.50 per share. The Irvine Company hopes to have the deal
approved by the end of this year.
The Irvine Company is the largest current stockholder of IAC. As of
December 1, it held approximately 17% of the outstanding common shares. It also
owns approximately 55% of the partnership interests of Irvine Apartment
Communities, L.P. of which IAC is a 45% general partner. In all, Bren owns an
approximate 63% economic interest in IAC. Bottom line: After roughly five years
in the public fishbowl, Bren has apparently decided that he wants it all!
In its press release announcing the proposal, The Irvine Company stated
that the bid is not subject to a financing contingency. In addition, The Irvine
Company noted that the existing debt and preferred stock of Irvine Apartment
Communities, L.P., IAC's operating partnership, will remain outstanding and are
not expected to be affected by the proposed transaction.
We have mixed feelings about Bren's offer. On one hand, Bren is paying a
"fair" price for IAC (more on that subject, in a bit). On the other hand, though
IAC has had its ups and downs -- a mind-boggling number of senior level
management changes hasn't helped matters -- it is the sort of company we'd like
to see in the public arena. Furthermore, it has delivered solid returns for
investors, and our view is that even "better times" lie ahead.
[GRAPH SHOWING STOCK PRICE AND VOLUME]
BIG QUESTIONS
Is Bren the first of many to pack it in and take his REIT private? We
don't think so. First, we never thought Bren's heart was really in being
public. (He shuns the spotlight.) His attitude toward the public market from
the outset was tentative, at best. We
<PAGE> 59
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suspect Bren took IAC public -- and thought long and hard about taking other
pieces of The Irvine Company public -- not because he, like a Sam Zell, saw the
"equitization" of real estate as a long-term goal, but rather because it solved
shorter-term issues. (Though we suspect that had things gone differently he
might have stayed around, at least a while longer.) So, as we see it, Bren's
decision doesn't say anything about the resolve of those who came public over
the past five years or so to remain public.
Second, though some observers suggest the price Bren is offering -- roughly
a 20% premium to what IAC was going for before the announcement -- confirms that
REITs are under-valued by the market currently, we don't agree. REITs may be
cheap on a relative and possibly even on an absolute basis, but whatever price
Bren has to pay to get the shares of IAC he doesn't already own, it reflects the
uniqueness of the situation. Extrapolating from what Bren is willing to pay to
the market generally isn't warranted, though it would be nice to be able to do
so.
IAC RECAP
According to IAC's latest 10-Q (filed on November 11), the company had
20,129,873 common shares outstanding as of October 31. It owned 62 apartment
communities (it owned 42 when it came public) with 16,029 apartment units. (The
overwhelming majority of those are located in Orange County, California on the
Irvine Ranch.) It had 2,729 apartment units under development. The company broke
ground on its first apartment community, off the Irvine Ranch in Northern
California's Silicon Valley, in May of last year.
IAC reported third quarter FFO/share (diluted) of 60 cents vs. 51 cents in
the year-ago period. (It's 3Q98 FFO/share was a penny or two ahead of most
estimates, by the way.) FAD (funds available for distribution) was 57 cents vs.
49 cents in the year-ago period. (Weighted average shares/units outstanding was
45.157 million.) Same-store results -- 48 properties with 13,451 units owned and
stabilized before 1997 -- experienced a 10.1% increase in net operating income
over the year-ago period ($32.5 million vs. $29.5 million). Average monthly rent
went from $1,119 to $1,171 per unit. Physical occupancy went from 93.8% to
94.1%.
ISSUES TO WEIGH
Bren isn't trying to steal the company, but he's not overpaying either. His
offer of $32.50 per share is, as noted, well above the price IAC was changing
hands at immediately prior to the announcement. It's also a premium over "our
consensus NAV of $24.43 per share." (The high end of the consensus is in the
neighborhood of $28 to $29 per share.) However, recent conversations with
non-REIT folks in Orange County who are familiar with IAC's portfolio and local
economics lead us to believe that in some instances the cap rates being used to
value the portfolio are on the high side. (Something in the low 7% range seems
right to us.) More important, however, when IAC came public there was a good
deal of controversy about its valuation, generally, and specifically about the
company's unique development story. So, though an investor who bought IAC at the
IPO and held on to it has done well, we believe Bren's offer doesn't fully
reflect the "future" value that shareholders paid for when they bought IAC. It's
tough to nail down a hard number, though if IAC develops, say, $150 to $200
million in apartments per year and earns a 20% to 25% development profit on that
investment, it would add at least another $30 million to the mix annually. An
offer in the $34 to $35 range better reflects not only IAC's current value, but
also gives investors who bought the development story's potential something for
their vote of confidence in Bren.
It will be interesting (no, fascinating) to see how IAC's senior executives
and independent directors deal with Bren's offer. As one buy-sider put it, "Bren
casts a mighty large shadow, especially in Southern California." (This is yet
another test of corporate governance in the REIT sector.) Again, we wouldn't
accuse Bren of trying to steal the company, but given what he said when IAC came
public about the development story, we'd feel a lot better if he sweetened his
offer by $1.50 to $2.50 a share.
When we went to press, IAC was changing hands at $31 5/8 per share.
Assuming a transaction at $32.50 per share -- and counting IAC's fourth quarter
dividend of 38.5 cents per share -- an investor could earn roughly a 4% total
return in a month. Not too shabby! Moreover, in our view, there's at least a
50/50 chance that Bren will sweeten his offer. For those reasons, we're raising
our rating on IAC from DCA to a BUY.
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MORGAN STANLEY DEAN WITTER
[LOGO] 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>
<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
- --------------------------------------------------------------------------------
<CAPTION>
Qtrly ----1Q---- ----2Q---- ----3Q---- ----4Q----
FFO Curr Prior Curr Prior Curr Prior Curr Prior
<S> <C> <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>
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
- --------------------------------------------------------------------------------
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 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.
- --------------------------------------------------------------------------------
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> 61
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2 MORGAN STANLEY DEAN WITTER
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*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 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.
- --------------------------------------------------------------------------------
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> 62
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MORGAN STANLEY DEAN WITTER
- -----------------------------------------------------------------------------
- -------------
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
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Within the last three years, Morgan Stanley & Co. Incorporated, Dean Witter
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Stanley & Co. International Limited representative about the investments
concerned.
This publication is disseminated in Japan by Morgan Stanley Japan Limited and in
Singapore by Morgan Stanley Asia (Singapore) Pte.
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> 63
DRAFT
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER
EQUITY RESEARCH
BRIEFING NOTE
- --------------------------------------------------------------------------------
##.SBLO,.US,I/REA.AVB,BRE,BRI,IAC,SMT
Real Estate (I/REA): IAC COULD BE FIRST MULTIFAMILY REIT TO GO PRIVATE
Steven G. Bloom, CFA (212) 761-6284 Date: December 2, 1998
Type: Industry Overview
- --------------------------------------------------------------------------------
KEY POINTS
- -The Irvine Company plans to take Irvine Apartment Communities, a multifamily
REIT, private at $32.50 per share. The decision to go private points to some
REIT limitations like the inability to retain and the high current cost of
raising capital.
- -In most ways, the situation is unique to this REIT. However, it does confirm
our belief that many multifamily REITs are trading at or below net asset value
(NAV).
- -In our universe, Berkshire Realty (BRI, $10, Outperform) and Summit Properties
(SMT, $17, Outperform) are trading about 20% below our estimated NAV.
- -We think the better-managed companies with exposure to strong markets ought to
trade at a slight premium to NAV. Our top picks include Avalon Bay
Communities (AVB, $33, Strong Buy) and BRE Properties (BRE, $24, Strong Buy).
DETAILS
IRVINE APARTMENT COMMUNITIES COULD GO PRIVATE. The Irvine Company (TIC), which
owns a majority 55% interest of Irvine Apartment Communities LP and 17% of the
shares of Irvine Apartment Communities Inc. (IAC, a real estate investment
trust), announced an offer to IAC's board to acquire the remaining 16.6 million
shares of IAC it does not already own. IAC is unusual in that the REIT is a
minority owner of the operating partnership. TIC intends to pay $32.50 per
share. The shares closed on December 1, 1998, just prior to the announcement,
at $27 3/8.
THE DECISION POINTS TO SEVERAL CHALLENGES FACING MULTIFAMILY REITS TODAY. The
Irvine Company offered several reasons for its decision. On one hand, it
believes a private company is better situated to handle development risks. On
the other, raising new capital has become expensive. The decision to take the
REIT private points to some of the limitations affecting multifamily REITs
today. We think it also confirms our belief that many companies are trading at
or below net asset value.
In general, distributing at least 95% of net income, and in most cases, 70-80%
of cash flow after reserving for recurring capital expenditures, leaves little
in the way of retained earnings to reinvest in the company. With many companies
trading at or below net asset value, selling new equity can be expensive.
Combined with historically low leverage levels, many multifamily REITs have
lost their low cost of capital advantage, especially if capital continues to
flow to private players.
WHILE GOING PRIVATE MAY SERVE AS A CATALYST FOR THE SECTOR. . .IAC is the
first company in our multifamily universe to commence with plans to go private.
To the degree management has stepped up and indicated it sees more value in the
REIT than the public markets give credit for, investors may pay greater
attention to the sector. Most of the companies in our universe are trading at
or below our estimate for net asset value. There are two stocks we have rated
Outperform that are trading approximately 20% below our estimated net asset
value. They are Berkshire Realty (BRI, $10) and Summit Properties (SMT, $17).
. . . IAC WAS A UNIQUE SITUATION. IAC was the only company we track whereby the
REIT owned a minority interest in the operating partnership. Moreover, the
Irvine Company appears very well capitalized and clearly has the
- --------------------------------------------------------------------------------
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> 64
DRAFT
2 MORGAN STANLEY DEAN WITTER
- --------------------------------------------------------------------------------
wherewithal to carry out the transaction. By leaving the operating partnership
intact it does not have to refund the partnership's debt and preferred
securities. Even if another management team wanted to take its company private,
debt costs may still be prohibitive.
WE DERIVE A 7.75% CAP RATE FOR THE TRANSACTION. At $32.50 per share, we believe
the company's income is being valued at approximately a 7.75% cap rate. We had
used an 8% cap rate in coming up with our $31 net asset value (NAV). Assets in
California are generally valued more highly than other areas of the country
given favorable demographics and high barriers to new construction. IAC was
particularly interesting because the Irvine Company owns the Irvine Ranch in
Orange County, which is the largest master planned community in the U.S. The
REITs had an exclusive right to develop multifamily communities on the ranch,
effectively giving it a local monopoly on new development. We presume that the
Irvine Company saw even greater value to the REIT or future development to
justify the price offered for the shares.
WE BELIEVE BETTER-QUALITY COMPANIES OUGHT TO TRADE AT PREMIUMS TO NAV. We think
the better-managed companies with strong balance sheets, low payout ratios, and
exposure to attractive markets ought to be able to trade at a premium to NAV.
Alternatively, when a company's strategy is not embraced by investors the stock
may trade below NAV. Over time, the difference may determine which multifamily
REITs can issue equity on a cost-effective basis and continue to grow through
acquisitions and development compared to those that may be precluded from
raising cheap capital.
We maintain our cautious near-term outlook for companies with exposure to
markets that may experience oversupply problems during 1999 such as Dallas,
Houston, and Orlando. While we expect apartment starts to slow by year-end and
through the early part of next year, recent increases in starts could contribute
to market weakness during 1999 as new communities are completed. We think the
supply outlook ought to improve in 2000.
TOP PICKS: AVB AND BRE. We would continue to focus on companies with exposure
to markets that have been undersupplied and with high barriers to entry. Our
top picks include Strong Buy rated Avalon Bay Communities (AVB, $33) and BRE
Properties (BRE, $24). Avalon Bay has a national presence through exposure to
West Coast, Midwest, Mid-Atlantic, and Northeast markets. BRE's portfolio is
located primarily in West Coast markets.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
FFO/Share
------------ MSDWE MSDWE Prem/
Company Sym. Rating Price 98E 99E Cap Rate NAV Disc.
- ------- ----- ------ ----- ---- ---- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Avalon Bay AVB SB 33.38 2.87 3.25 8.50% 35.47 0.94
- --------------------------------------------------------------------------
BRE Prop. BRE SB 24.56 2.11 2.35 8.25% 24.63 1.00
- --------------------------------------------------------------------------
Berkshire BRI OP 9.50 1.14 1.17 9.50% 12.97 0.73
- --------------------------------------------------------------------------
Irvine IAC OP 27.38 2.29 2.55 8.00% 30.86 0.89
- --------------------------------------------------------------------------
Summit SMT OP 17.56 2.00 2.12 9.00% 22.46 0.78
- --------------------------------------------------------------------------
MSDWE: Morgan Stanley Dean Witter Estimate
</TABLE>
- ------------------------------------------------------------------------------
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> 65
DRAFT
MORGAN STANLEY DEAN WITTER
- --------------------------------------------------------------------------------
- ---------------------
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.
Morgan Stanley & Co. Incorporated, Dean Witter Reynolds Inc. and/or their
affiliates or their employees have or may have a long or short position or
holding in the securities, options on securities, or other related investments
of issuers mentioned herein.
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 authorised representative of Morgan
Stanley Australia Limited.
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 specific investment objectives and
financial position. Private investors should obtain the advice of their Morgan
Stanley & Co. International Limited representative about the investments
concerned.
This publication is disseminated in Japan by Morgan Stanley Japan Limited and
in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte.
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.
- --------------------------------------------------------------------------------
MORGAN STANLEY
<PAGE> 66
DRAFT
MORGAN STANLEY
<PAGE> 67
DRAFT
[JEFFERIES & COMPANY, INC. LOGO]
REAL ESTATE/REITs
EQUITY RESEARCH
JAMES F. WILSON, CFA (415) 263-1432 UPDATE
WILLIAM H. SMITH (415) 263-1403 DECEMBER 2, 1998
- --------------------------------------------------------------------------------
IRVINE APARTMENT COMMUNITIES, INC.
NYSE: IAC - $31 9/16
RATING: HOLD
<TABLE>
<CAPTION>
<S> <C>
52 Week Range $32 7/16 - $23
Shares Out - FD (MM) 45.2
Float (MM) 16.9
Institutional Ownership 58.9%
Avg Daily Vol (3 Mos) 81,778
Equity Market Cap (MM) $1,426.5
Total Debt (MM) $735.9
Net Asset Val/share $24.00
Dividend/Yield $1.54 / 4.9%
</TABLE>
<TABLE>
<CAPTION>
FY Dec 1996 1997A 1998E 1999E
- ------ ------ ------- ------- -------
<S> <C> <C> <C> <C>
Revenue $154.9 $186.9 $217.2 $253.6
FFO/Sh $1.75 $2.01 $2.28 $2.55
F/FFO/Sh -- 15.7x 13.8x 12.4x
FAD/Sh $1.70 $1.88 $2.14 $2.37
FFO Growth Rate 9-12%
($MM), except per share data
</TABLE>
IAC TO GO PRIVATE; DONALD BREN OFFERS $32.50 PER COMMON SHARE
WE ARE LOWERING OUR INVESTMENT RATING ON IRVINE APARTMENT COMMUNITIES, INC. TO
HOLD FROM BUY. WE BELIEVE THAT DONALD BREN AND THE IRVINE COMPANY'S ANNOUNCED
OFFER TO PURCHASE ALL OF THE OUTSTANDING COMMON SHARES OF IAC FOR $32.50 PER
SHARE IN CASH REPRESENTS A FAIR PRICE AND NOTE THAT IT IS IN EXCESS OF OUR $32
TARGET PRICE. HOWEVER, GIVEN THE APPRECIATION IN THE SHARE PRICE IN REACTION TO
THE ANNOUNCEMENT, THE PROPOSAL OFFERS ONLY MODEST UPSIDE FROM THE CURRENT SHARE
PRICE, PRECIPITATING OUR RATING CHANGE. GIVEN THE IRVINE COMPANY'S CONTROLLING
POSITION IN THE REIT AND OVER THE IRVINE RANCH, WE WOULD NOT EXPECT ANY
COMPETING OFFERS. WE BELIEVE THAT CURRENT SHAREHOLDERS SHOULD HOLD IAC SHARES
AND REINVEST THE CASH PROCEEDS IN THE SHARES OF ESSEX PROPERTY TRUST, INC. (ESS
- - $31 1/8, BUY) AND BRE PROPERTIES, INC. (BRE - $24 9/16, BUY), THE TWO
REMAINING WEST COAST MULTIFAMILY SECTOR PURE PLAYS.
o THE IRVINE COMPANY TO TAKE IAC PRIVATE - Yesterday, TIC Acquisition LLC, a
wholly owned subsidiary of The Irvine Company, announced an offer to
purchase the 16.6 million common shares of IAC that it currently does not
own for $32.50 per share in cash, for a total purchase price of
approximately $540 million. IAC management stated that conditions facing
REITs have become increasingly difficult and that it believes that a
private company is better suited to operate in such an environment.
o TRANSACTION ANTICIPATED TO CLOSE WITHIN TWO TO THREE MONTHS - Given the
Irvine Company's controlling ownership position in the REIT and over the
Irvine Ranch, we do not expect any competing offers. Through its ownership
of 17% of the outstanding common shares and 55% interest in the operating
partnership, The Irvine Company holds a 63% economic interest in IAC. The
Irvine Company also controls the land and, therefore, development on the
Irvine Ranch, making the operation of the REIT by an unfriendly third party
economically unfeasible. The proposal does not include a tender and IAC's
Board of Directors has until December 31, 1998 to respond to the proposal.
We expect the deal to be completed within two to three months.
<PAGE> 68
DRAFT
* FAIR PRICE TO IAC SHAREHOLDERS; OPPORTUNITY TO TRADE INTO REMAINING WEST COAST
APARTMENT PLAYS -- We believe that the $32.50 share price offer, a 21% premium
over the previous day's closing price, is a fair price for several reasons:
(i) it represents a small premium (1/8) over the stocks all-time high of $32
7/16; (ii) at 12.7x our 1999 FFO/share estimate, it represents a significant
premium over the peer group average multiple of 9.8x; and (iii) it is above
our $32 price target. We believe that current shareholders should Hold IAC
shares and reinvest the cash proceeds in the shares of Essex Property Trust
(9.9x our 1999 FFO/share estimate of $3.15) and BRE Properties (10.2x our 1999
FFO estimate of $2.40), the two remaining West Coast multifamily sector pure
plays.
- --------------------------------------------------------------------------------
This material has been prepared by Jefferies & Company, Inc. ("Jefferies") a
U.S.-registered broker-dealer, employing appropriate expertise, and in the
belief that it is fair and not misleading. It is approved for distribution in
the United Kingdom by Jefferies International Limited ("JIL"), regulated by the
Securities and Futures Authority (SFA), with offices at 46 New Broad Street,
London EC2M 1JD. The information upon which this material is based was obtained
from sources believed to be reliable, but has not been independently verified.
Therefore, except for any obligations under the rules of SFA, we do not
guarantee its accuracy. Additional and supporting information is available upon
request. However, this is not an offer or solicitation of an offer to buy or
sell any security or investment. Any opinions or estimates constitute our best
judgment as of this date, and are subject to change without notice. Jefferies
and JIL and their affiliates and their respective directors, officers and
employees may buy or sell securities mentioned herein as agent or principal for
their own account. This material is intended for use by professional or
institutional investors only and not the general investing public. None of the
investments or investment services mentioned or described herein are available
to "private customers" as defined by the rules of SFA, or to anyone in Canada
who is not a "Designated Institution" as defined by the Securities Act
(Ontario).
<PAGE> 69
DRAFT
APPENDIX C
PROJECT DELTA
- --------------------------------------------------------------------------------
Analysis of All Shareholdings
<TABLE>
<CAPTION>
CURRENT CUMULATIVE REPORT
RANK INSTITUTION CHANGE HOLDINGS %TSO %TSO DATE
- ---- ------------------------------------ --------- --------- ---- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1 Beta(1) 0 3,430,413 17.0% 17.0% 12/02/98
2 ABKB/LaSalle Securities Ltd. 11,100 1,246,300 6.2% 23.2% 9/30/98
3 Morgan Stanley Dean Witter(2) (2,941) 1,126,459 5.6% 28.8% 9/30/98
4 ABN AMRO Asset Management(3) (17,800) 834,900 4.1% 33.0% 9/30/98
5 Lend Lease ERE Rosen Real Estate Sec 88,750 804,500 4.0% 37.0% 9/30/98
6 Prudential Mutual Fund Invt. Mgmt. 0 787,400 3.9% 40.9% 9/30/98
7 Capital Guardian Trust Company (33,300) 648,400 3.2% 44.1% 9/30/98
8 Franklin Resources, Inc. 82,537 590,017 2.9% 47.0% 9/30/98
9 Merrill Lynch Asset Management(4) 0 583,625 2.9% 49.9% 9/30/98
10 Smith Barney Investment Advisors (21,356) 583,486 2.9% 52.8% 9/30/98
11 Barclays Global Investors, N.A. 83,377 391,272 1.9% 54.8% 9/30/98
12 State Teachers Retirmnt Syst. - Ohio 0 300,000 1.5% 56.3% 9/30/98
13 The Vanguard Group (27,500) 296,800 1.5% 57.7% 9/30/98
14 United States Trust Co. of New York (12,900) 242,138 1.2% 58.9% 9/30/98
15 Pioneering Management Corporation (10,000) 237,000 1.2% 60.1% 9/30/98
16 John McStay Investment Counsel 37,200 205,700 1.0% 61.1% 9/30/98
17 Fidelity Management & Research Co. 0 192,200 1.0% 62.1% 9/30/98
18 Northwestern Mutual Life Ins. Co. 0 190,800 0.9% 63.0% 9/30/98
19 State Street Bank and Tr. Co. Boston 43,000 164,025 0.8% 63.9% 9/30/98
20 Alliance Capital Management L.P. 900 157,400 0.8% 64.6% 9/30/98
21 Cohen & Steers Capital Mgmt. Inc. (1,165,400) 118,000 0.6% 65.2% 9/30/98
22 Colorado Public Employees Retirement 47,600 105,800 0.5% 65.7% 9/30/98
23 Mellon Bank, N.A. 900 89,234 0.4% 66.2% 9/30/98
24 Duff & Phelps Investment Management 0 81,100 0.4% 66.6% 9/30/98
25 Foreign & Colonial Emerging Markets 80,927 80,927 0.4% 67.0% 6/30/98
---------------------------------------- ---------- ---------- ----- ----- --------
Top 25 Holders 13,487,896 67.0%
Remaining Holders 6,645,491 33.0%
---------- ------
Total Shares Outstanding 20,133,387 100.0%
</TABLE>
Notes:
(1) Includes 183,325 shares held by Mr. Beta.
(2) Includes 602,859 shares held by Morgan Stanley Dean Witter Asset
Management and Van Kampen.
(3) Includes 317,800 shares held by ABN AMRO Bank.
(4) Includes 142,000 shares held by Merrill Lynch Capital Markets.
-39-
<PAGE> 70
DRAFT
PROJECT DELTA
DISCOUNTED CASH FLOW ANALYSIS ASSUMPTIONS
<TABLE>
<CAPTION>
<S><C>
</TABLE>
<PAGE> 1
EXPLANATORY NOTE
(Not Part of This Exhibit)
Pursuant to the requirements of Rule 13e-3 of the Exchange Act, the following
preliminary analysis is being filed as an exhibit to the Schedule 13E-3. The
following preliminary analysis was prepared by Morgan Stanley and discussed with
the Special Committee on January 14, 1999. The information contained in the
preliminary analysis was prepared as a negotiating tool and to provide the
Special Committee with some background information with respect to possible
alternatives in connection with the offer made by TIC Acquisition LLC. It is
important to note that neither the due diligence nor the analysis performed by
Morgan Stanley reflected in the above referenced draft was complete at the time
the preliminary draft was prepared and it was not intended to be relied upon by
the Special Committee or any third parties, including the Shareholders. The
Special Committee was aware of the status of and the preliminary nature of the
draft and the fact that it was not to be relied upon. The preliminary analysis
was prepared as of January 14, 1999 and reflects information made available to
Morgan Stanley prior to such date. Therefore, Morgan Stanley's preliminary
analysis performed as of January 14, 1999 does not and did not reflect the final
views of Morgan Stanley with respect to Morgan Stanley's valuation of the
Company or an opinion as to the fairness of the proposed transaction as of the
date it was provided to the Special Committee.
<PAGE> 2
DRAFT
PROJECT DELTA
Discussion Materials
January 14, 1999
<PAGE> 3
DRAFT
PROJECT DELTA
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION I EXECUTIVE SUMMARY
SECTION II MORGAN STANLEY ANALYSIS OF ALPHA
Tab A Current Net Asset Value
Tab B Discounted Cash Flow Analysis
Tab C Comparable Company Trading Analysis
Tab D Ability-to-Pay Analysis
Tab E Comparable Multifamily Transactions
Tab F Comparable Squeeze-out Transactions
Tab G Wall Street's View
SECTION III NATIONSBANC ANALYSIS OF ALPHA
APPENDIX A SELECTED ANALYSIS BACK-UP
Tab A Current Net Asset Value
Tab B Discounted Cash Flow Analyses
Tab C Comparable Company Analysis
APPENDIX B INVENTORY OF BETA MATERIALS PROVIDED
</TABLE>
<PAGE> 4
DRAFT
PROJECT DELTA
EXECUTIVE SUMMARY
BACKGROUND / CHRONOLOGY
- - November 25, 1998: Beta's financial advisor, NationsBanc Montgomery
Securities ("NationsBanc") met with Beta to discuss a potential
going-private transaction for Alpha, including:
- Strategic rationale
- Valuation
- Financing impact
- Potential for an interloper
- - December 1, 1998: Following the close of trading, Beta published a proposal
(the "Proposal") to acquire the shares of Alpha (or the "Company") it did
not already own in a going-private transaction
- Price: $32.50/share
- Declared to have no financing contingency
- Contemplates a cash merger with no tender to precede (draft Merger
Agreement has been received)
- - A special committee was formed by Alpha's Board of Directors to work with
legal and financial advisors in considering the Proposal and formulating a
response
- - December 8, 1998: Morgan Stanley was notified that it had been selected by
the special committee as the Company's financial advisor
- - December 10, 1998: Morgan Stanley requested and began receiving and
reviewing information for Alpha
-1-
<PAGE> 5
DRAFT
PROJECT DELTA
EXECUTIVE SUMMARY
(CONTINUED)
BACKGROUND / CHRONOLOGY
- - December 15, 1988: Morgan Stanley met with management and local consultants
of Alpha to discuss a number of topics:
- Review of business plan
- Review of projections / company model
- Discussion of market conditions and market studies
- - December 22, 1998: Alpha's special committee and its financial and legal
advisors met to discuss the Proposal, consisting primarily of:
- Analysis of Alpha
- Alternatives potentially available to Alpha
- Structural considerations
- - December 30, 1998: The financial advisors of Alpha and Beta met to discuss
valuation analyses of Alpha that each had performed. In addition, Morgan
Stanley requested that all information considered by Beta or its advisors
in valuing Alpha be provided to Morgan Stanley
- - January 6, 1999: Letter sent to Beta's financial advisor listing ways in
which Morgan Stanley believes that assumptions made by NationsBanc in its
valuation of Alpha do not adequately reflect the value of Alpha
- - January 8, 1999: Materials received from NationsBanc per request dated
December 30, 1998 (index included)
-2-
<PAGE> 6
DRAFT
PROJECT DELTA
EXECUTIVE SUMMARY
(CONTINUED)
BACKGROUND / CHRONOLOGY
- - January 12, 1999: Package received from NationsBank in response to Morgan
Stanley letter dated January 6, 1999
- - January 14, 1999: Morgan Stanley and NationsBank met to discuss materials
received from NationsBanc and the respective financial advisors' analyses
of Alpha
-3-
<PAGE> 7
DRAFT
PROJECT DELTA
EXECUTIVE SUMMARY
(CONTINUED)
FINANCIAL ANALYSIS
- - In evaluating the Proposal, we have attempted to estimate a valuation range
for the Company by the application of several different valuation
methodologies
- Net asset value: Looks at the current value of the Company's assets on
an asset sale basis, netting out debt and preferred to estimate common
equity value. This is analogous to liquidation value, although debt
and preferred penalties to retire are not included nor is the time
value of any disposition program
- Discounted cash flow: Relies on projections, based on several
scenarios, of the Company's performance to estimate a going concern
value. Includes dividend discount model, free cash flow model, and
leveraged recapitalization analysis
- Comparable company analysis: Estimates the value of the Company based
on trading levels of selected peers, without implying that it has
traded or would trade similarly. It is important to note that no good
comparable company exists
- Ability-to-pay: Estimates the value of the Company if it were acquired
by another public apartment company based on a variety of assumptions
as to the acquirer's acceptable level of earnings accretion or
dilution
- Comparable multifamily transactions: Looks at other transactions that
have occurred in the sector. As these (a) were typically mergers of
equals and (b) involved stock as consideration as opposed to cash,
they are not considered sufficiently comparable so as to allow
meaningful value conclusions to be drawn
- Comparable squeeze-out transactions: Reviews premiums paid in prior
squeeze-out transactions. Although a resulting range is shown, the
applicability is limited because of variations, among other factors,
in the rights of each side and the pre-offer public trading valuation
relative to a theoretical intrinsic value
- Wall Street's view: Synopsis of statements as to the value of the
Company published by research analysts before and after publication of
the Proposal
-4-
<PAGE> 8
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
SUMMARY OF PRELIMINARY ANALYSES
<TABLE>
Beta Offer Price
$32.50
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997-1998 Trading Range $23.38----------------$33.50
Current Net Asset Value $34.50--------$40.00
Discounted Cash Flow
- Dividend Discount $32.50------------------$43.00
- Free Cash Flow $33.00-----------------------$45.00
- Leveraged Alternative $33.50------------------------$46.00
Comparable Company Analysis $29.00--------$35.50
Ability-to-Pay Analysis $32.50--$35.50
Acquisition Comps
Public Multifamily Not Applicable
REIT Transactions
Squeeze-out Transactions $30.00-----$35.00
Wall Street's View $30.00-------$36.00
------------------------------------------------------------------------
$20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00
</TABLE>
MORGAN STANLEY
<PAGE> 9
DRAFT
PROJECT DELTA
KEY NAV ASSUMPTIONS
STABILIZED PROPERTIES
The 56 stabilized properties including recent acquisitions Park Place, Hamptons
and Rancho Santa Fe, were placed into three tiers based upon:
- year built - average rent
- location - quality
Each tier was ascribed a cap rate range:
Tier I Newer properties in prime locations with highest rents.
Cap rate range: 7.25% - 7.75%
Tier II Late 1980s product including the student housing
properties. Cap rate range: 7.5% - 8.0%
Tier III Older product, lower average rent. Cap rate range:
7.75% - 8.25%
Cap rates were applied to 1999E NOI
These ranges were evaluated and deemed appropriate in light of cash flow yields
(NOI less capital reserves) which would be about 96% as high
Net operating income was calculated based on:
- 4th quarter forecasted NOI was increased at a quarterly
compounded growth rate
- Operating margin is assumed to be 70% and annual revenues are
increased 7% to 12%
- Expenses are escalated at 3%
PROPERTIES UNDER DEVELOPMENT
Properties under development were valued as follows:
- DCFs were performed for each property from l/l/99 until
stabilization
- Cap rates were applied ranging from 7.25% to 8.25% to compute
terminal value at stabilization
- Discount rates of 12% to 16% were utilized
LAND RIGHTS AGREEMENT
The Land Rights Agreement was calculated utilizing two methodologies:
I. Below-market land acquisition prices
Assuming the land is being transferred to Alpha at prices below
what a third party would pay, the value differential was
calculated given Alpha pays 95% of appraised value, with a total
discount of 5% to 15% compared to a third party
The agreement was valued based upon the following variables:
<TABLE>
<S> <C> <C> <C>
Discount to market: 5% to 15% Average cost / unit: $50,000 to $75,000
Units Developed: 1,000 to 1,500 per year Discount Rates: 12% to 15%
</TABLE>
II. Value of Non-Compete
The value differential between Alpha having the Agreement and the
choice to develop, versus a third party developing on-ranch
The agreement was valued based upon the comparison of two DCF
analyses:
1. Third party developer develops on-ranch, rents increase 7%
in 1999, 4% in 2000, and 3% thereafter
2. Alpha stops developing on-ranch, rents increase over time,
at rates of 1% to 2% above rates for Analysis 1
-6-
<PAGE> 10
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
NAV SUMMARY
($MM)
<TABLE>
<CAPTION>
1998 Q4
Forecast NOI 1999 Projected NOI
Average Year ------------------ --------------------------------------
Properties Units Of Completion(1) Total Per Unit 7% Rent Growth(3) 12% Rent Growth(3)
---------- ------- ---------------- ------- -------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STABILIZED PROPERTIES:
Tier I(4) 19 6,775 1992(2) $19.5 $2,878 $ 82.2 $ 85.6
Tier II(5) 24 5,969 1984 $14.5 2,423 $ 61.0 $ 63.5
Tier III 13 3,573 1978 $ 7.7 2,149 $ 32.4 $ 33.7
---------- ------- ------- -------- ----------------- ------------------
TOTAL STABILIZED PROPERTIES 56 16,317 $41.6 $2,552 $175.6 $182.8
</TABLE>
<TABLE>
<CAPTION>
Selected Cap Rates Preliminary Value Range
------------------------- -------------------------
Low Case High Case Low Case High Case
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
STABILIZED PROPERTIES:
Tier I(4) 7.75% 7.25% $1,060.5 $1,180.7
Tier II(5) 8.00% 7.50% $ 761.6 $ 846.0
Tier III 8.25% 7.75% $ 392.4 $ 435.0
---------- --------- ---------- ----------
TOTAL STABILIZED PROPERTIES 7.93% 7.43% $2,214.5 $2,461.7
VALUE PER UNIT $135,714 $150,866
Properties Under Development(6) $ 267.2 $ 332.8
TOTAL ASSET VALUE $2,481.7 $2,794.5
Cash and Other Assets(7) 14.8 14.8
Other Liabilities(7) (46.4) (46.4)
Debt(7) (752.1) (752.1)
Tax Exempt Debt Value(8) 64.3 83.5
Preferred Stock (200.0) (200.0)
---------- ----------
NET ASSET VALUE $1,562.2 $1,894.3
DILUTED SHARES(9) 45,330,741 45,442,718
NAV/SHARE $34.46 $41.69
</TABLE>
Notes:
(1) For average unit in sub-portfolios, reflects first year of completion of
project.
(2) 1994 if Promontory Point is excluded (520 unit property built in 1974).
(3) Low Case assumed 7% rent growth, high case assumed 12% rent growth. Both
cases assume 3% expense growth and 70.0% operating margin in 1998 Q4.
(4) Includes recent acquisition of One Park Place and The Hamptons. $0.3 MM
subtracted from value for costs remaining on The Hamptons.
(5) Includes recent acquisition of Rancho Santa Fe, adjusted for remaining
costs to incur of $0.6 MM for renovation capital expenditures.
(6) Includes value of Land Rights Agreement.
(7) Proforma for 12/31/98, based on adjustments to 11/30/98 Balance Sheet.
(8) Interest rate savings of 250 bp on $334.2 MM of bonds capped at 10% and
13%.
(9) Options derived from Treasury Method using $35.00 purchase price for low
value, $45.00 purchase price for high value.
-7-
<PAGE> 11
DRAFT
PROJECT DELTA
Net Asset Value Back-Up
Properties Under Development
<TABLE>
<CAPTION>
Terminal Cap Rates
First Month ------------------
Property Location Stabilized Units Low Case High Case
-------- -------- ---------- ----- -------- ---------
<S> <C> <C> <C> <C> <C>
Champagne Towers Los Angeles Dec-99 119 7.75% 7.25%
Brittany Ranch May-00 393 8.00% 7.50%
Sonoma Ranch Apr-99 196 8.00% 7.50%
Stonecrest Irvine Oct-99 336 8.00% 7.50%
The Colony at Avventine San Diego Jun-00 232 8.00% 7.50%
Bair Island Redwood Dec-99 155 8.00% 7.50%
Park Place Ranch Aug-02 1,226 8.25% 7.75%
-----
2,657
</TABLE>
<TABLE>
<CAPTION>
Discount Rates
--------------
Property Low Case High Case Low Case(1) High Case(1)
-------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Champagne Towers 15.00% 13.00% $47,380 $53,365
Brittany 15.00% 13.00% 33,158 39,164
Sonoma 14.00% 12.00% 28,752 31,025
Stonecrest 14.00% 12.00% 31,522 35,430
The Colony at Avventine 15.00% 13.00% 15,697 19,372
Bair Island 15.00% 13.00% 19,020 22,148
Park Place 16.00% 14.00% 41,720 57,295
-------- --------
TOTAL PROPERTIES UNDER DEVELOPMENT $217,249 $257,799
</TABLE>
Notes:
(1) Valued as discounted cash flow as of 1/l/99.
<PAGE> 12
DRAFT
PROJECT DELTA
Notional Value of Land Rights Agreement
($MM)
Value of Below-Market Land Acquisition Prices
<TABLE>
<S> <C> <C> <C> <C> <C>
Average land cost/unit(1) $50,000 Inflation 3.0%
Units developed/year(2) 1,500 % of appraised value(3) 95.0%
% of third party value 100.0% Total Discount 5.0%
</TABLE>
<TABLE>
<CAPTION>
Units to be Land Appraised 3rd Party Total
Developed Purchase Price Value Value Difference Units
--------- -------------- ----- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
1999 1,476 $ 78.20 $ 91.17 $ 91.17 $ 12.97 1,476
2000 559 28.79 30.30 30.30 1.52 2,035
2001 1,075 57.02 60.02 60.02 3.00 3,110
2002 1,558 85.12 89.60 89.60 4.48 4,668
2003 1,220 68.66 72.27 72.27 3.61 5,888
2004 1,500 86.95 91.52 91.52 4.58 7,388
2005 1,500 89.55 94.27 94.27 4.71 8,888
2006 1,500 92.24 97.10 97.10 4.85 10,388
2007 1,500 95.01 100.01 100.01 5.00 11,888
2008 1,500 97.86 103.01 103.01 5.15 13,388
2009 971 65.25 68.68 68.68 3.43 14,359
</TABLE>
<TABLE>
<CAPTION>
Discount Rates
Average Total Units --------------
Land Cost Market Discount Developed 10% 11% 12% 13%
- --------- --------------- --------- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
$50,000 15% 1,000 $ 74.5 $ 71.0 $67.8 $64.8
$50,000 10% 1,250 $ 52.2 $ 49.9 $47.9 $45.9
$50,000 5% 1,500 $ 30.7 $ 29.6 $28.5 $27.5
$75,000 15% 1,000 $ 107.1 $ 101.9 $97.1 $92.7
$75,000 10% 1,250 $ 73.6 $ 70.3 $67.2 $64.3
$75,000 5% 1,500 $ 41.3 $ 39.7 $38.2 $36.7
</TABLE>
(1) Recent land sale comps are in the $50,000 to $75,000 per unit range. 1999
land purchase price includes actuals for Bonita Canyon 2 & 3.
(2) For 1999-2003, units developed according to Alpha business plan for Irvine
Ranch, 1,000 to 1,500 units per year assumed thereafter
(3) Per Land Rights Agreement
-9-
<PAGE> 13
DRAFT
PROJECT DELTA
Notional Value of Land Rights Agreement
($MM)
VALUE of NON-COMPETE
<TABLE>
<CAPTION>
DCF Analysis 1999 2000 2001 2002 2003
- ------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ANALYSIS I LOSS OF NON-COMPETE - THIRD PARTY DEVELOPERS
ON-RANCH
On-ranch land can be sold to third party
developers
On-ranch development is deducted from
Alpha company model
Projected Rental Growth: 7.0% 4.0% 3.0% 3.0% 3.0%
ANALYSIS II VALUE OF NON-COMPETE - ALPHA RIGHT TO DEVELOP
Alpha stops buying land and ends on-ranch
development, constricting supply
On-ranch development is deducted from Alpha
company model
Increase:
Incremental Rental Growth - 1.0% by year 5 0.2% 7.2% 4.4% 3.6% 3.8% 4.0%
Incremental Rental Growth - 1.5% by year 5 0.3% 7.3% 4.6% 3.9% 4.2% 4.5%
Incremental Rental Growth - 2.0% by year 5 0.4% 7.4% 4.8% 4.2% 4.6% 5.0%
</TABLE>
<TABLE>
<CAPTION>
Increase in Rent by Year 5
--------------------------
VALUE OF NON-COMPETE: Terminal Multiple 1.0% 1.5% 2.0%
- --------------------- ----------------- ---- ---- ----
<S> <C> <C> <C> <C>
9.Ox $50.7 $65.5 $91.4
9.5x $53.3 $68.8 $96.1
10.0x $55.9 $72.2 $100.8
10.5x $58.5 $75.5 $105.4
</TABLE>
-10-
<PAGE> 14
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Alpha Land Purchases
<TABLE>
<CAPTION>
Beta Alpha Difference Between % Difference
Project Date Sold Total Units Appraisal Price per Unit Appraisal Appraisals of Alpha & Beta
------- --------- ----------- ----------- -------------- ----------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Villa Coronado Jul-94 513 $15,900,000 $30,994 $5,400,000 $10,500,000 66%
Santa Rosa I Jul-94 368 12,100,000 32,880 5,700,000 6,400,000 53%
Santa Clara Jul-94 378 11,800,000 31,217 4,700,000 7,100,000 60%
Rancho Monterey Jul-94 436 11,400,000 26,147 9,200,000 2,200,000 19%
Newport Ridge Jul-94 512 14,800,000 28,906 13,000,000 1,800,000 12%
Baypointe Oct-95 300 NA NA NA NA NA
Santa Maria Feb-96 227 7,700,000 33,921 5,420,000 2,280,000 30%
The Colony Feb-96 245 5,900,000 24,082 4,230,000 1,670,000 28%
Santa Rosa II Dec-96 207 7,207,000 34,816 4,910,000 2,297,000 32%
Rancho Santa Fe Feb-97 316 9,800,000 31,013 5,920,000 3,880,000 40%
Sonoma Jul-97 196 6,687,000 34,117 5,954,000 733,000 11%
Brittany I Jul-97 393 12,280,000 31,247 11,033,000 1,247,000 10%
Bonita Canyon 2(1) Sep-98 351 24,300,000 69,231 18,000,000 6,300,000 26%
Bonita Canyon 3(1) Sep-98 188 17,500,000 93,085 13,000,000 4,500,000 26%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE $12,105,692 $31,055 $8,189,769 $3,915,923 32%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Average of Last Two Transactions $20,900,000 $81,158 $15,500,000 $5,400,000 26%
- ------------------------------------------------------------------------------------------------------------------------------------
Final Price
Difference Final Price per Unit
Third Party from Beta's Final Price Difference From % Difference
Appraisal Final Price Appraisal per Unit Beta's Appraisal of Final & Beta
----------- ------------ ----------- ----------- -------------------- ---------------
Villa Coronado $11,500,000 $5,842,000 $10,058,000 $11,388 $19,606 63%
Santa Rosa I 9,100,000 3,277,000 $8,823,000 8,905 $23,976 73%
Santa Clara 8,900,000 3,761,000 $8,039,000 9,950 $21,267 68%
Rancho Monterey 11,250,000 6,823,000 $4,577,000 15,649 $10,498 40%
Newport Ridge 14,500,000 9,542,000 $5,258,000 18,637 $10,270 36%
Baypointe NA 4,190,000 NA 13,967 NA NA
Santa Maria NA 3,343,000 $4,357,000 14,727 $19,194 57%
The Colony NA 3,545,000 $2,355,000 14,469 $9,612 40%
Santa Rosa II 6,210,000 5,999,000 $1,208,000 28,981 $5,836 17%
Rancho Santa Fe 7,900,000 8,408,000 $1,392,000 26,608 $4,405 14%
Sonoma 6,548,000 5,697,000 $990,000 29,066 $5,051 15%
Brittany I 11,819,000 10,325,000 $1,955,000 26,272 $4,975 16%
Bonita Canyon 2(1) 20,000,000 18,050,000 $6,250,000 51,425 $17,806 26%
Bonita Canyon 3(1) 14,900,000 13,252,500 $4,247,500 70,492 $22,593 24%
- ------------------------------------------------------------------------------------------------------------------------------------
AVERAGE $11,147,909 $7,289,607 $4,577,654 $24,324 $13,468 38%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Average of Last
Two Transactions $17,450,000 $15,651,250 $5,248,750 $60,958 $20,200 25%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) IAC has not yet purchased the Bonitas - land transfer planned for end of
January 1999
-11-
<PAGE> 15
DRAFT
PROJECT DELTA
Discounted Cash Flow Analysis Assumptions
Basic Assumptions
- Rent growth in 2001 and thereafter is assumed to be 3% (see below for 1999
and 2000).
- Expenses grown at 3% annually.
- Interest rate assumed to be 7.5% on all future debt.
- Development continues according to company projections but 1999 acquisitions
have been omitted.
-Rent growth and occupancy for off-ranch properties left at company projections
(rent growth ranging from 4% to 5%, occupancy averages 95%).
- Other income consists of income derived from projects such as the utility
billing service (RUBS) and the appliance rental service as well as late
charges and parking fees. For developments it is assumed to be 0.5% of total
gross scheduled rent and for existing properties it grows at 3% annually, as
per company projections. Also includes income derived from revenue sharing
projects such as cable and telecommunications as well as application,
termination, and pet fees, laundry service, and damage receipts. For
developments it is assumed to be 1% of total gross scheduled rent and for
existing properties it grows at 3% annually, as per company projections.
- For cases with current capital structure, company's projected dividends
increased by 100% of FFO percentage increase in 2000 through 2003 (FFO payout
ratio averages 69% in 1999 to 2003).
- For cases with leveraged capital structure, 50% of FAD paid quarterly as
dividends.
- Shares outstanding: 45,330,741 (assumes options converted by treasury method
using $35.00 per share value).
Variables
- Occupancy: targeted stabilization occupancy of on-ranch properties is 96%.
- 1999 rent growth: on-ranch property rent growth in 1999 is 7% (Conservative
Case) and 12% (Chairman's Case).
- Rent growth for 2000 according to Company projections (4%) except in
Chairman's Case where rate is 8%.
- G&A for leveraged scenarios is 55% of Company projections, as per separate
schedule.
- In leveraged recapitalization scenarios, Beta is assumed to borrow $550 MM
to buy shares of Alpha at $32.50 on 1/l/99.
-12-
<PAGE> 16
DRAFT
PROJECT DELTA
Summary of Discounted Cash Flow Analysis
<TABLE>
<CAPTION>
Conservative Chairman's
------------ ----------
Low High Low High
--- ---- --- ----
<S> <C> <C> <C> <C>
Dividend Discount(1)(2) $ 32.51 $ 40.63 $ 38.13 $ 47.79
Free Cash Flow(3)(4) 32.83 44.10 39.58 51.83
Leveraged Recapitalization(5)(6) 33.38 41.61 41.34 51.60
</TABLE>
Notes:
(1) Dividend discount method low value: 9.5 times 2004 FFO terminal value,
13.0% discount rate.
(2) Dividend discount method high value: 11.5 times 2004 FFO terminal value,
11.0% discount rate.
(3) Free cash flow method low value: 11.0 times 2004 EBITDA, 10.5% discount
rate.
(4) Free cash flow method high value: 12.5 times 2004 EBITDA, 9.5% discount
rate.
(5) Leveraged recap. low value: 8.0 times 2004 FFO terminal value, 16.0%
discount rate.
(6) Leveraged recap. high value: 10.0 times 2004 FFO terminal value, 14.0%
discount rate.
-13-
<PAGE> 17
DRAFT
PROJECT DELTA
- -------------------------------------------------------------------------------
Conservative Case--Dividend Discount
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004(1) CAGR
---- ---- ---- ---- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $135,743 $160,673 $186,294 $215,148 $241,424
Shares Outstanding 48,606 50,597 53,026 55,917 57,789
FFO/Share $ 2.79 $ 3.18 $ 3.51 $ 3.85 $ 4.18 $ 4.62 10.6%
Dividend/Share $ 1.90 $ 2.19 $ 2.43 $ 2.65 $ 2.89 11.1%
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT --------------------------------------------------------------------------------------
RATES 9.0x 9.5x 10.0x 10.5x 11.0x 11.5x 12.0x
- -------- ---- ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.0% Total Equity $1,592,706 $1,657,730 $1,722,753 $1,787,777 $1,852,801 $1,917,825 $1,982,849
Per Share $ 35.13 $ 36.57 $ 38.00 $ 39.44 $ 40.87 $ 42.31 $ 43.74
11.0% Total Equity $1,531,052 $1,593,200 $1,655,347 $1,717,494 $1,779,641 $1,841,789 $1,903,936
Per Share $ 33.77 $ 35.15 $ 36.52 $ 37.89 $ 39.26 $ 40.63 $ 42.00
12.0% Total Equity $1,472,506 $1,531,928 $1,591,350 $1,650,772 $1,710,194 $1,769,616 $1,829,038
Per Share $ 32.48 $ 33.79 $ 35.10 $ 36.42 $ 37.73 $ 39.04 $ 40.35
13.0% Total Equity $1,416,882 $1,473,720 $1,530,559 $1,587,398 $1,644,237 $1,701,075 $1,757,914
Per Share $ 31.26 $ 32.51 $ 33.76 $ 35.02 $ 36.27 $ 37.53 $ 38.78
14.0% Total Equity $1,364,006 $1,418,396 $1,472,785 $1,527,174 $1,581,563 $1,635,952 $1,690,342
Per Share $ 30.09 $ 31.29 $ 32.49 $ 33.69 $ 34.89 $ 36.09 $ 37.29
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
-14-
<PAGE> 18
DRAFT
PROJECT DELTA
- -------------------------------------------------------------------------------
Chairman's Case--Dividend Discount
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004(1) CAGR
---- ---- ---- ---- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $142,054 $180,389 $215,608 $247,538 $275,516
Shares Outstanding 48,600 50,530 52,705 55,179 56,777
FFO/Share $ 2.92 $ 3.57 $ 4.09 $ 4.49 $ 4.85 $5.51 13.5%
Dividend/Share $ 1.88 $ 2.45 $ 2.83 $ 3.09 $ 3.36 15.6%
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT --------------------------------------------------------------------------------------
RATES 9.0x 9.0x 9.5x 10.0x 10.5x 11.0x 11.5x
- -------- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10.0% Total Equity $1,869,057 $1,946,579 $2,024,100 $2,101,622 $2,179,144 $2,256,665 $2,334,187
Per Share $ 41.23 $ 42.94 $ 44.65 $ 46.36 $ 48.07 $ 49.78 $ 51.49
11.0% Total Equity $1,795,947 $1,870,039 $1,944,131 $2,018,223 $2,092,315 $2,166,407 $2,240,499
Per Share $ 39.62 $ 41.25 $ 42.89 $ 44.52 $ 46.16 $ 47.79 $ 49.42
12.0% Total Equity $1,726,529 $1,797,372 $1,868,215 $1,939,057 $2,009,900 $2,080,743 $2,151,586
Per Share $ 38.09 $ 39.65 $ 41.21 $ 42.77 $ 44.34 $ 45.90 $ 47.46
13.0% Total Equity $1,660,582 $1,728,345 $1,796,108 $1,863,871 $1,931,634 $1,999,398 $2,067,161
Per Share $ 36.63 $ 38.13 $ 39.62 $ 41.12 $ 42.61 $ 44.11 $ 45.60
14.0% Total Equity $1,597,901 $1,662,744 $1,727,587 $1,792,429 $1,857,272 $1,922,115 $1,986,958
Per Share $ 35.25 $ 36.68 $ 38.11 $ 39.54 $ 40.97 $ 42.40 $ 43.83
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
-15-
<PAGE> 19
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Conservative Case--Free Cash Flow
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004(1)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
EBITDA $406,081
Cash Flow Before Financing $(365,191) $(312,389) $(309,283) $(304,805) $(288,589)
Dividends 92,217 110,716 128,796 148,178 166,671
Preferred Shares 17,650 27,550 36,550 36,550 41,950
Interest Incurred $54,985 $68,593 $76,999 $96,034 $110,721
--------- --------- --------- --------- ---------
Free Cash Flow $(200,339) $(105,530) $(66,937) $(24,043) $30,754
</TABLE>
<TABLE>
<CAPTION>
Terminal 2004 EBITDA Multiple
Discount ------------------------------------------------------------------------------------------
Rates 10.5x 11.0x 11.5x 12.0x 12.5x 13.0x
- -------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
9.0% Total Equity $1,492,272 $1,624,234 $1,756,197 $1,888,159 $2,020,122 $2,152,084
Per Share $32.92 $35.83 $38.74 $41.65 $44.56 $47.47
9.5% Total Equity $1,431,451 $1,560,429 $1,689,406 $1,818,383 $1,947,360 $2,076,337
Per Share $31.58 $34.42 $37.27 $40.11 $42.96 $45.80
10.0% Total Equity $1,372,301 $1,498,373 $1,624,445 $1,750,517 $1,876,590 $2,002,662
Per Share $30.27 $33.05 $35.83 $38.62 $41.40 $44.18
10.5% Total Equity $1,314,767 $1,438,012 $1,561,258 $1,684,503 $1,807,749 $1,930,995
Per Share $29.00 $31.72 $34.44 $37.16 $39.88 $42.60
11.0% Total Equity $1,258,798 $1,379,293 $1,499,788 $1,620,283 $1,740,777 $1,861,272
Per Share $27.77 $30.43 $33.08 $35.74 $38.40 $41.06
</TABLE>
Notes:
(1) Assumes 2004 EBITDA is 4Q 2003 EBITDA grown at 6%.
-16-
<PAGE> 20
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Chairman's Case--Free Cash Flow
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004(1)
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
EBITDA $439,160
Cash Flow Before Financing ($358,229) ($304,691) ($299,836) ($294,533) ($277,825)
Dividends 91,565 122,880 148,790 170,565 190,318
Preferred Shares 17,763 28,900 37,900 37,900 43,300
Interest Incurred $54,632 $66,747 $74,482 $92,775 $106,684
--------- --------- --------- --------- ---------
Free Cash Flow ($194,270) ($86,163) ($38,664) $6,707 $62,477
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 EBITDA MULTIPLE
----------------------------------------------------------------------------------------------
DISCOUNT
RATES 10.5X 11.0X 11.5X 12.0X 12.5X 13.0X
- -------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
9.0% Total Equity $1,806,609 $1,949,321 $2,092,033 $2,234,745 $2,377,457 $2,520,169
Per Share $39.85 $43.00 $46.15 $49.30 $52.45 $55.59
9.5% Total Equity $1,739,453 $1,878,936 $2,018,419 $2,157,903 $2,297,386 $2,436,869
Per Share $38.37 $41.45 $44.53 $47.60 $50.68 $53.76
10.0% Total Equity $1,674,129 $1,810,471 $1,946,813 $2,083,155 $2,219,497 $2,355,839
Per Share $36.93 $39.94 $42.95 $45.95 $48.96 $51.97
10.5% Total Equity $1,610,581 $1,743,866 $1,877,151 $2,010,436 $2,143,721 $2,277,006
Per Share $35.53 $38.47 $41.41 $44.35 $47.29 $50.23
11.0% Total Equity $1,548,751 $1,679,061 $1,809,371 $1,939,681 $2,069,991 $2,200,302
Per Share $34.16 $37.04 $39.91 $42.79 $45.66 $48.54
</TABLE>
Notes:
(1) Assumes 2004 EBITDA is 4Q 2003 EBITDA grown at 6%.
-17-
<PAGE> 21
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
CONSERVATIVE CASE--LEVERAGED RECAPITALIZATION
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004(1) CAGR
-------- -------- -------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $90,477 $107,151 $127,226 $151,832 $176,087
Shares Outstanding 29,421 29,421 29,421 29,421 29,421
FFO/Share $3.08 $3.64 $4.32 $5.16 $5.99 $7.07 18.1%
Dividend/Share $1.47 $1.74 $1.98 $2.37 $2.78 17.3%
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT ------------------------------------------------------------------------------------------------------
RATES 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x
- ----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
13.0% Total Equity $1,049,144 $1,105,586 $1,162,027 $1,218,468 $1,274,910 $1,331,351 $1,387,792
Per Share $35.66 $37.58 $39.50 $41.42 $43.33 $45.25 $47.17
14.0% Total Equity $1,008,255 $1,062,263 $1,116,272 $1,170,281 $1,224,290 $1,278,299 $1,332,308
Per Share $34.27 $36.11 $37.94 $39.78 $41.61 $43.45 $45.28
15.0% Total Equity $969,394 $1,021,096 $1,072,797 $1,124,498 $1,176,199 $1,227,900 $1,279,602
Per Share $32.95 $34.71 $36.46 $38.22 $39.98 $41.74 $43.49
16.0% Total Equity $932,446 $981,956 $1,031,467 $1,080,978 $1,130,489 $1,179,999 $1,229,510
Per Share $31.69 $33.38 $35.06 $36.74 $38.42 $40.11 $41.79
17.0% Total Equity $897,297 $944,728 $992,159 $1,039,590 $1,087,020 $1,134,451 $1,181,882
Per Share $30.50 $32.11 $33.72 $35.34 $36.95 $38.56 $40.17
</TABLE>
Notes:
(a) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
-18-
<PAGE> 22
DRAFT
PROJECT DELTA
- -------------------------------------------------------------------------------
Chairman's Case--Leveraged Recapitalization
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004(1) CAGR
---- ---- ---- ---- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $96,352 $128,283 $157,720 $185,769 $212,476
Shares Outstanding 29,421 29,421 29,421 29,421 29,421
FFO/Share $ 3.27 $ 4.36 $ 5.36 $ 6.31 $ 7.22 $8.80 21.9%
Dividend/Share $ 1.57 $ 2.10 $ 2.46 $ 2.94 $ 3.39 21.3%
</TABLE>
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT --------------------------------------------------------------------------------------
RATES 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x
- -------- ---- ---- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
13.0% Total Equity $1,300,232 $1,370,499 $1,440,766 $1,511,032 $1,581,299 $1,651,566 $1,721,832
Per Share $ 44.19 $ 46.58 $ 48.97 $ 51.36 $ 53.75 $ 56.14 $ 58.52
14.0% Total Equity $1,249,262 $1,316,500 $1,383,739 $1,450,977 $1,518,216 $1,585,454 $1,652,692
Per Share $ 42.46 $ 44.75 $ 47.03 $ 49.32 $ 51.60 $ 53.89 $ 56.17
15.0% Total Equity $1,200,824 $1,265,189 $1,329,555 $1,393,920 $1,458,285 $1,522,651 $1,587,016
Per Share $ 40.81 $ 43.00 $ 45.19 $ 47.38 $ 49.57 $ 51.75 $ 53.94
16.0% Total Equity $1,154,770 $1,216,409 $1,278,047 $1,339,686 $1,401,324 $1,462,963 $1,524,601
Per Share $ 39.25 $ 41.34 $ 43.44 $ 45.53 $ 47.63 $ 49.72 $ 51.82
17.0% Total Equity $1,110,963 $1,170,012 $1,229,061 $1,288,110 $1,347,159 $1,406,208 $1,465,257
Per Share $ 37.76 $ 39.77 $ 41.77 $ 43.78 $ 45.79 $ 47.80 $ 49.80
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
<PAGE> 23
DRAFT
PROJECT DELTA
- -------------------------------------------------------------------------------
Selection of Comparable Companies
<TABLE>
<CAPTION>
COMPANY GEOGRAPHY REASON FOR INCLUSION
------- --------- --------------------
<S> <C> <C>
Archstone Southern California, selected states in the California exposure; current strategy
Pacific Northwest, Southeast and Southwest involves entering high-barrier-to-
entry markets
Avalon Bay Northern and Southern California, selected California exposure; high quality
states in the Mid-Atlantic, Northeast, properties; high-barrier-to-entry
Midwest and Pacific Northwest markets
BRE Properties California, Arizona, Washington, Oregon, Regional REIT; significant California
Nevada, New Mexico, Utah and Colorado exposure
Equity Residential In 35 states, including 64 properties in Largest publicly traded apartment
California company; improving portfolio quality
Essex Property Trust San Francisco, Seattle, Southern California California exposure; high-barrier-to-
and Portland entry markets
Post Properties Southeast and Southwest High quality properties; increasingly
in high-barrier-to-entry markets
</TABLE>
-20-
<PAGE> 24
DRAFT
PROJECT DELTA
---------------------------------------
Comparable Company Analysis(1)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Aggregate Value/
EBITDA LTM: 13.3x - 16.6x: $22.40------------------------$32.31
1999E FFO Multiple: 9.2x - 10.5x $27.42--------$30.89
1999E Normalized
FFO Multiple: 9.9x - 11.0x $29.21------$32.40
Pro Forma Dividend Yield(2): 5.8% - 7.5% $26.64--------------------$33.74
Multiple to Total Return: 0.52 - 0.73(3) $28.42------------------$36.30
----------------------------------------------------------------
$15.00 $20.00 $25.00 $30.00 $35.00 $40.00
</TABLE>
Notes: (1) Includes value of Land Rights Agreement estimated at $75MM or
$1.66 per share.
(2) Based on pro forma dividend of $1.89, expected to be paid
in late 1999 or in 2000.
(3) Based on 1999 FFO and long-term growth rate estimates from First
Call.
<PAGE> 25
DRAFT
PROJECT DELTA
- ------------------------------------------------------------------------------
Statistics for Selected Apartment REITS(1)
<TABLE>
<CAPTION>
Equity Total Total Aggregate
Apartment Market Market Market Cap/ Value(5)/ Price/FFO
Company (Ticker) Units(2) Value Capitalization(3) Unit(4) LTM EBITDA 1999E(6)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 69,582 $2,821.1 $ 5,159.2 $ 74,145 15.9x 9.8x
Avalon Bay Communities (AVB) 38,132 $2,173.0 $ 4,077.9 $106,942 16.6x 10.2x
BRE Properties (BRE) 20,375 $1,169.9 $ 1,872.7 $ 91,912 15.6x 10.5x
Equity Residential Properties Trust (EQR) 192,558 $5,345.3 $11,459.5 $ 59,512 13.6x 9.2x
Essex Property Trust (ESS) 12,266 $ 547.1 $ 947.6 $ 77,252 13.3x 9.4x
Post Properties (PPS) 26,737 $1,605.4 $ 2,542.7 $ 95,100 14.9x 10.2x
- --------------------------------------------------------------------------------------------------------------------------------
LOW $ 547.1 $ 947.6 $ 59,512 13.3x 9.2x
MEAN $2,276.9 $ 4,343.3 $ 84,144 15.0x 9.9x
MEDIAN $1,889.2 $ 3,310.3 $ 84,582 15.2x 10.0x
HIGH $5,345.3 $11,459.5 $106,942 16.6x 10.5x
- --------------------------------------------------------------------------------------------------------------------------------
ALPHA ASSUMPTIONS:
LTM EBITDA 1999E FFO
---------- ---------
$136,950 $2.79
- --------------------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE
LOW $20.74 $25.76
HIGH $30.65 $29.23
- --------------------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE INCLUDING VALUE OF THE LAND RIGHTS AGREEMENT(7)
LOW $22.40 $27.42
HIGH $32.31 $30.89
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Price/
Debt-to-Market Normalized FFO Dividend 5-year Total Multiple to
Company (Ticker) Capitalization 1999E(6) Yield(8) FFO Growth(6) Return Total Return
- ---------------------------------- -------------- -------------- -------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 40.0% 10.5x 7.5% 11.2% 18.7% 0.52
Avalon Bay Communities (AVB) 37.9% 11.0x 6.1% 11.5% 17.6% 0.58
BRE Properties (BRE) 37.5% 10.6x 5.8% 8.5% 14.3% 0.73
Equity Residential Properties Trust (EQR) 41.0% 10.4x 6.9% 9.2% 16.1% 0.57
Essex Property Trust (ESS) 38.0% 9.9x 6.8% 10.0% 16.8% 0.56
Post Properties (PPS) 31.0% 10.1x 6.9% 9.7% 16.6% 0.62
- --------------------------------------------------------------------------------------------------------------------------------
LOW 31.0% 9.9x 5.8% 8.5% 14.3% 0.52
MEAN 37.6% 10.4x 6.7% 10.0% 16.7% 0.60
MEDIAN 38.0% 10.4x 6.8% 9.8% 16.7% 0.58
HIGH 41.0% 11.0x 7.5% 11.5% 18.7% 0.73
- --------------------------------------------------------------------------------------------------------------------------------
ALPHA ASSUMPTIONS: Normalized 5-Year
1999E FFO Dividend FFO Growth
---------- -------- ----------
$2.80 $1.90 11.7%
- -------------------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE
LOW $27.55 $25.27 18.4% $26.76
HIGH $30.74 $32.82 16.9% $34.64
- -------------------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE INCLUDING VALUE OF
THE LAND RIGHTS AGREEMENT(7)
LOW $29.21 $26.64 $28.42
HIGH $32.40 $34.48 $36.30
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) All information as of 1/13/99
(2) Does not include units under construction.
(3) Equals the sum of equity market value, debt outstanding and preferred
stock at liquidation preference, in $MM.
(4) Actual dollar amounts shown.
(5) Aggregate Value equals Total Market Capitalization less cash.
(6) Estimates from First Call as of 1/13/99 unless otherwise noted.
(7) The Land Rights Agreement is valued at $1.66 per share, or $75MM
in aggregate.
(8) Based on dividend of $1.89, expected to be paid in late 1999 or 2000.
<PAGE> 26
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Ability-to-Pay Analysis
Break-Even Price
<TABLE>
<CAPTION>
SHARE PRICE ASSUMED
----------- COST OF 1999E
COMPANY 1/13/99 DEBT % EQUITY % DEBT FFO
------- ------- ------ -------- ---- ---
<S> <C> <C> <C> <C> <C>
Archstone Communities Trust $ 19.69 45.3% 54.7% 7.125% $ 2.02
Avalon Bay Communities $ 33.56 46.7% 53.3% 7.125% $ 3.30
BRE Properties $ 24.81 37.5% 62.5% 7.125% $ 2.37
Equity Residential Properties Trust $ 41.00 53.4% 46.6% 7.125% $ 4.44
Essex Property Trust $ 29.56 42.3% 57.7% 7.125% $ 3.15
Post Properties $ 37.75 36.9% 63.1% 7.125% $ 3.69
</TABLE>
<TABLE>
<CAPTION>
PRICE FFO MULTIPLE
1999E BREAK-EVEN AT 5% REQUIRED FOR
COMPANY FFO MULTIPLE PRICE(1) DILUTION(1) $35 VALUE(1)
------- ------------ --------- ------------ -------------
<S> <C> <C> <C> <C>
Archstone Communities Trust 9.7x $ 33.26 $ 34.92 11.0x
Avalon Bay Communities 10.2x $ 34.07 $ 35.77 11.1x
BRE Properties 10.5x $ 33.59 $ 35.27 11.1x
Equity Residential Properties Trust 9.2x $ 33.57 $ 35.25 10.9x
Essex Property Trust 9.4x $ 32.30 $ 33.91 11.1x
Post Properties 10.2x $ 33.10 $ 34.76 11.4x
Low $ 32.30 $ 33.91 10.9x
Median $ 33.41 $ 35.08 11.1x
High $ 34.07 $ 35.77 11.4x
</TABLE>
Note:
(1) Based on 1999E FFO of $2.79 from Alpha model, synergies of $6 MM, and $50
MM of transaction costs financed at 7%
-23-
<PAGE> 27
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Ability-to-Pay Analysis
Multiple Expansion
<TABLE>
<CAPTION>
Supportable Price given FFO Multiple Expansion
------------------------------------------------------------------------------
COMPANY 0.00X 0.25X 0.50X 0.75X 1.00X 1.25X 1.50X
------- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust $ 33.26 $ 33.65 $ 34.04 $ 34.42 $ 34.81 $ 35.20 $ 35.59
Avalon Bay Communities $ 34.07 $ 34.45 $ 34.83 $ 35.21 $ 35.59 $ 35.97 $ 36.34
BRE Properties $ 33.59 $ 34.03 $ 34.48 $ 34.92 $ 35.37 $ 35.81 $ 36.26
Equity Residential Properties Trust $ 33.57 $ 33.90 $ 34.23 $ 34.56 $ 34.89 $ 35.22 $ 35.56
Essex Property Trust $ 32.30 $ 32.71 $ 33.12 $ 33.53 $ 33.94 $ 34.35 $ 34.76
Post Properties $ 33.10 $ 33.55 $ 34.00 $ 34.45 $ 34.90 $ 35.35 $ 35.79
</TABLE>
-24-
<PAGE> 28
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Multifamily REIT Mergers & Acquisitions
Premiums Paid Analysis
<TABLE>
<CAPTION>
TARGET
---------------------- PREMIUM
PREMIUM TO TO ALL-
ANNOUNCED(1)/ ACQUIRER/ EQUITY AGGREGATE UNAFFECTED PREMIUM TO TIME
COMPLETED TARGET ASSET CLASS CONSIDERATION VALUE VALUE PRICE(2) 52-WEEK HIGH HIGH(4)
- ------------- -------------------------- ----------- ------------- ---------- --------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($MM) ($MM)
7/8/98 Equity Residential/ Multifamily Stock, Debt $1,366.8 $2,169.7 20.5% 5.4% 4.6%
10/19/98 Merry Land & Investment
Company
4/2/98 Security Capital Pacific Multifamily Stock, Debt 1,153.0 1,679.0 15.1% -4.4% -12.7%
7/6/98 Trust/Security Capital
Atlantic
3/8/98 Bay Apartment Multifamily Stock, Debt 1,260.3 2,013.6 -1.0% -6.5% -6.5%
6/4/98 Communities/Avalon
Properties
12/23/97 Apartment Investment and Multifamily Stock, Debt 269.6 649.5 4.1% -21.6% -21.6%
5/8/98 Management Co./
Ambassador Apartments
12/17/97 Camden Property Trust/ Multifamily Stock, Debt 394.4 833.9 11.0% -0.9% -13.1%
4/8/98 Oasis Residential
8/28/97 Equity Residential/ Multifamily Stock, Debt 627.0 1072.5 20.7% 16.0% -5.7%
12/23/97 Evans Withycombe
Residential
8/4/97 Post Properties/ Multifamily Stock, Debt 329.4 560.8 7.0% 5.0% 5.0%
10/24/97 Columbus Realty Trust
1/17/97 Equity Residential/ Multifamily Stock, Debt 478.7 1009.1 13.5% 11.8% 11.8%
5/30/97 Wellsford Residential
12/16/96 Camden Property Trust/ Multifamily Stock, Debt 338.3 338.6 14.2% -7.2% -17.5%
4/15/97 Paragon Group, Inc.
10/1/96 United Dominion Realty/ Multifamily Stock, Debt 274.4 479.5 10.4% 0.4% -58.0%
1/2/97 South West Property Trust
10/11/95 BRE Properties/ Multifamily Stock, Debt 177.7 265.0 13.3% 8.2% 8.2%
3/15/96 REIT of California
Low -1.0% -21.6% -58.0%
Mean 11.7% 0.6% -9.6%
Median 13.3% 0.4% -6.5%
High 20.7% 16.0% 11.8%
Beta/ Multifamily Cash $1,467.6 $2,353.5 19.1%(3) 1.0% -3.0%
Alpha
</TABLE>
Notes:
(1) Date announced is the date of the first significant press on the
transaction.
(2) Unaffected price represents the average stock price for the 10 trading days
ending five trading days prior to the announcement of the transaction.
(3) Based on current proposed price on $32.50. Unaffected price represents
the average stock price for the 10 trading days ending five trading days
prior to November 30, 1998.
(4) All-time high share price, not including share prices 10 days prior to the
announcement date.
-17-
<PAGE> 29
DRAFT
PROJECT DELTA
Summary of Precedent Minority Transactions
<TABLE>
<CAPTION>
Size of Initial Ownership 55-75%
Premium to
Unaffected
Deal Size Price
- ------ -------- ------------
<S> <C> <C>
1992-1996
1. PHL Corp. Inc. $100MM-$300MM 28%
2. Southeastern Public Service Co. less than $100MM -5%
3. Club Med $100MM-$300MM 42%
4. Roto Rooter Inc. larger than $300MM 11%
5. Allmerican Ppty. & Casualty Cos. larger than $300MM 15%
1997
6. Systemix Inc. larger than $300MM 22%
7. Faulding Inc. less than $100MM 31%
8. Wheelabrator Technologies Inc. larger than $300MM 28%
9. Rhone-Poulenc Rorer Inc. larger than $300MM 22%
Rhone-Poulenc SA
10. BET Holdings Inc. $100MM-$300MM 18%
1998
11. Rayonier Timberlands LP $100MM-$300MM 25%
12. NACT Telecommunications less than $100MM 8%
13. Bo Office Products $100MM-$300MM 19%
14. XL Connect Solutions $100MM-$300MM 12%
15. BET Holdings larger than $300MM 15%
16. Mycogen Corp. larger than $300MM 49%
</TABLE>
PROJECT DELTA
Summary of Precedent Minority Transactions
<TABLE>
<CAPTION>
Size of Initial Ownership less than 55%
Premium to
Unaffected
Deal Size Price
- ------ -------- ------------
<S> <C> <C>
1992-1996
1. Medical Marketing Group Inc. $100MM-$300MM -8%
2. Enquierer/Star Group Inc. larger than $300MM 2%
3. Lin Broadcasting Corp. larger than $300MM -7%
4. Applied Immune Sciences $100MM-$300MM 47%
1997
5. Systemix Inc. $100MM-$300MM 29%
6. Calgene Inc. $100MM-$300MM 43%
7. Zurich Reinsurance larger than $300MM 22%
1998
8. Life Technologies larger than $300MM 17%
9. J&L Specialty Steel Inc. larger than $300MM 72%
10. BRC Holdings Inc. larger than $300MM 17%
</TABLE>
-26-
<PAGE> 30
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Analysts' Valuation of Alpha
<TABLE>
<CAPTION>
SELECTED STATISTICS
---------------------------------------
ESTIMATED PRICE REPORT
FIRM / ANALYST NAV TARGET DATE OBSERVATIONS
-------------- --- ------ ---- ------------
<S> <C> <C> <C> <C>
Green Street Advisors $31.62 - $33.58 - 12/10/98 - Provide three ranges of NAV using cap
$35.28 $37.47(1) rates of 7.5%, 7.25% and 7.0% respectively
MSDW/Bloom $31.00 $34.10(2) 12/2/98 - Believes companies like Alpha should
trade above NAV. Statement made
12/3 that "$32.50 appears reasonable"
CIBC Oppenheimer/Zirakzadeh $27.34 $30.50 11/17/98 - "One of the best positioned companies
to weather most market difficulties,
given its: 1) monopoly on apartment
development on the Beta Ranch, 2)
attractive internal growth prospects, 3)
extensive development pipeline, and 4)
balance sheet strength"
Jefferies & Company / Wilson $24.00 $32.00 11/3/98
12/2/98
Sutro & Co. / Silvers -- $30.00 10/5/98
</TABLE>
Notes: (1) Price target based on appropriate premium to NAV suggested in report
dated November 30, 1998.
(2) Represents a 10% premium to NAV, based on comments made in research.
-27-
<PAGE> 31
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Analysts' Commentary
Following Announcement of Proposal
<TABLE>
<CAPTION>
REPORT
FIRM / ANALYST DATE OBSERVATIONS
- -------------- ---- ------------
<S> <C> <C>
Green Street Advisors 12/10/98 - NAV estimates: $31.62 at 7.5% cap; $33.39 at 7.25% cap rate; $35.28 at 7.00% cap
- "[Beta] is clearly paying a large premium to the value that the public market
ascribed to [Alpha], but the buyout price does not reflect the intrinsic value
of the company and operating partnership as a whole"
- Beta's offer ascribes no value to terminating the Land Rights Agreement, nor
any "franchise value"
- "At $32.50/sh, [Beta's] offer is at the lower-end of our estimate of the range
of [Alpha's] true NAV, and equates to an economic cap rate of 7.4% (a nominal
cap rate of 7.7%), representing a per unit value of approximately $130,000. The
per unit value may sound high, but other inferior apartment assets located in
Orange County have closed during the last few months at valuations of
$128,000-$148,000 per unit"
The Penobscot Group, Inc. 12/10/98 - "While it is still early, an affirmative answer on the fairness issue seems a
stretch"
</TABLE>
-28-
<PAGE> 32
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Analysts' Commentary
Following Announcement of Proposal
(continued)
<TABLE>
<CAPTION>
REPORT
FIRM / ANALYST DATE OBSERVATIONS
- -------------- ---- ------------
<S> <C> <C>
Realty Stock Review/ 12/4/98 - "...in our view, there's at least a 50/50 chance that
Barry Vinocur [Beta] will sweeten his offer"
- "An offer in the $34 to $35 range better reflects not only
[Alpha's] current value, but also gives investors who bought
the development story's potential something for their vote
of confidence in [Beta]"
- "We believe [Beta's] offer doesn't fully reflect the
future value that shareholders paid for when they bought
[Alpha]"
MSDW/Bloom 12/3/98 - "A competing offer is not anticipated, as the right to be
the exclusive multifamily developer may not be transferred to
another acquirer"
- "...a price of $32.50 appears reasonable"
- "An offer in the $34 to $35 range better reflects ... [Alpha's]
current value..."
</TABLE>
-29-
<PAGE> 33
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Analysts' Commentary
Following Announcement of Proposal
(continued)
<TABLE>
<CAPTION>
REPORT
FIRM / ANALYST DATE OBSERVATIONS
-------------- ------ -----------------------------------------------------------------
<S> <C> <C>
MSDW/Bloom 12/2/98 - "... [The proposal] confirms our belief that many companies are
trading at or below net asset value"
- "... [Beta] appears very well capitalized and clearly has the
wherewithal to carry out the transaction"
- "At $32.50 per share, we believe [Alpha's] income is being
valued at approximately 7.75% cap rate. We had used an 8% cap
rate in coming up with our $31 net asset value (NAV)"
- Believes companies with strong balance sheets, low payout ratios
and exposure to attractive markets should trade above NAV
Jefferies/Wilson 12/2/98 - "We believe that the $32.50 share price offer, a 21% premium
over the previous day's closing price, is a fair price for several
reasons: (i) it represents a small premium (1/8) over the stock's
all-time high of $32 7/16; (ii) at 12.7x our 1999 FFO/share
estimate, it represents a significant premium over the peer group
average multiple of 9.8x; and (iii) it is above our $32 price
target."
- "Given [Beta's] controlling ownership position in the REIT and
over the Beta Ranch, we do not expect any competing offers."
</TABLE>
-30-
<PAGE> 34
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Beta Analysis of Alpha
<TABLE>
<CAPTION>
11/25/98 12/30/98 1/13/99
-------- -------- -------
Approach Low High Low High Low High Comments
- -------- --- ---- --- ---- --- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PUBLIC MARKET ANALYSIS
Stock Trading History $25.95 $33.50 $27.20 $32.44
Public Comparables 23.68 25.43 23.68 25.43 23.68 25.43
M&A Comparables 19.96 30.37 19.96 30.37 19.96 30.37
Research Analyst Price Targets 32.00 34.00 26.00 34.00 32.00 34.00
TOTAL PUBLIC $19.96 $34.00 $19.96 $34.00 $19.96 $34.00
MEDIAN $28.16 $26.60 $27.90
PRIVATE MARKET ANALYSIS
Net Asset Value 30.76 32.50
Going Concern Cap Rate Analysis 23.94 26.66 22.00 24.00
Going Concern Analysis 21.57 24.09 19.50 21.75
Discounted Cash Flow 29.94 33.46
Research Analysts NAV Est. 24.50 28.71 24.00 28.46 24.00 28.71
Replacement Cost Analysis 23.00 24.00
TOTAL PRIVATE $24.50 $33.46 $21.57 $28.46 $19.50 $28.71
MEDIAN $30.35 $24.00 $23.00
LIQUIDATION CAP RATE ANALYSIS 22.90 25.62 22.25 24.25
</TABLE>
-31-
<PAGE> 35
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Key Analysis Differences
<TABLE>
<CAPTION>
MORGAN STANLEY NATIONS BANC
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
7% TO 12% 5%
RENT GROWTH O Company Base Model o Consultants project 3% to 6.2%
o Chairman's Case o Company Business Plan projects
3% to 6%
- -----------------------------------------------------------------------------------------------------------------
None 7.5% to 10%
LIQUIDITY DISCOUNT o Not appropriate to apply liquidity or o Size-oriented discount in sale
control discount o Time value
o Proposition 13 tax reassessment
- -----------------------------------------------------------------------------------------------------------------
$50 to $75 MM $10 MM
LAND RIGHTS AGREEMENT o Based on historical appraisal/final o Values land over 5 years, given future
price differences of 5 to 15 discounts bail-out is uncertain
o Includes value of non-corporate if no o Only 5% discount applied
units are developed
- -----------------------------------------------------------------------------------------------------------------
45% Reduction No reduction
G&A o Based on Management's projects of o A G&A reduction does not result in
Beta cost reductions value above $32.50 per share
- -----------------------------------------------------------------------------------------------------------------
7.25% to 8.25% 7.25% to 8.0%
CAP RATES Blended 7.43% to 7.93% Blended 7.62%
o Applied to NOI o Applied to Cash Flow
- -----------------------------------------------------------------------------------------------------------------
10% - 14% Cost of Equity 15% Cost of Equity
13% - 17% Cost of Equity in 11 - 13% Discount Rate
DISCOUNT RATES leveraged recap
9% - 11% Discount Rates o CAPM not appropriate
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
-32-
<PAGE> 36
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Property Breakdown: 55 Stabilized Properties
<TABLE>
<CAPTION>
1998 FORECASTED NOI
DATE OF NUMBER OF 1998 4TH QUARTER --------------------
PROPERTY TIER CITY COMPLETION UNITS FORECASTED NOI LOW HIGH
- --------------------- ---- ------------- ---------- --------- ---------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Santa Maria I Irvine 1997 227 $ 709 $ 2,987 $ 3,111
Turtle Rock Canyon I Irvine 1991 217 656 $ 2,767 $ 2,882
The Colony I Newport Beach 1997 245 1,200 $ 5,059 $ 5,269
Newport Ridge I Newport Beach 1996 512 1,667 $ 7,027 $ 7,318
Promontory Point I Newport Beach 1974 520 1,900 $ 8,011 $ 8,343
Baypointe I Newport Beach 1997 300 1,025 $ 4,319 $ 4,498
Rancho Monterey I Tustin 1996 436 1,256 $ 5,296 $ 5,516
Villas of Renaissance I La Jolla 1992 923 2,490 $ 10,496 $ 10,930
Amherst Court I Irvine 1991 162 317 $ 1,336 $ 1,391
One Park Place I Irvine 1998 216 400 $ 1,686 $ 1,756
San Mateo I Irvine 1990 283 564 $ 2,377 $ 2,476
San Paulo I Irvine 1993 382 789 $ 3,328 $ 3,466
Santa Clara I Irvine 1996 378 1,041 $ 4,389 $ 4,570
Santa Rosa I Irvine 1996 368 962 $ 4,056 $ 4,224
Santa Rosa II I Irvine 1997 207 800 $ 3,373 $ 3,512
Villa Coronado I Irvine 1996 513 1,341 $ 5,654 $ 5,888
The Hamptons I Cupertino 1998 342 1,160 $ 4,890 $ 5,093
Rancho Mariposa I Tustin 1992 238 533 $ 2,245 $ 2,339
Sierra Vista I Tustin 1992 306 692 2,917 3,037
--------------------------------------------------------------------
TIER 1 SUBTOTAL 1993 6,775 $19,501 $82,214 $85,619
--------------------------------------------------------------------
Berkeley Court II Irvine 1986 152 369 1,558 1,622
Cedar Creek II Irvine 1985 176 383 1,613 1,680
Columbia Court II Irvine 1984 58 132 555 578
Cornell Court II Irvine 1984 109 277 1,166 1,214
Cross Creek II Irvine 1985 136 307 1,295 1,348
Dartmouth Court II Irvine 1986 294 663 2,794 2,909
Harvard Court II Irvine 1986 112 245 1,032 1,075
Rancho San Joaquin II Irvine 1976 368 862 3,633 3,784
San Carlo II Irvine 1989 354 932 3,930 4,093
San Leon II Irvine 1987 248 579 2,441 2,542
San Marco II Irvine 1988 426 934 3,939 4,103
San Marino II Irvine 1986 200 426 1,795 1,869
San Remo II Irvine 1986/88 248 512 2,159 2,248
Stanford Court II Irvine 1985 320 735 3,100 3,228
Turtle Rock Vista II Irvine 1976/77 252 666 2,810 2,926
Woodbridge Willows II Irvine 1984 200 443 1,866 1,943
Bayport II Newport Beach 1971 104 242 1,022 1,064
Bayview II Newport Beach 1971 64 178 750 781
Baywood II Newport Beach 1973/84 388 988 4,167 4,339
Newport North II Newport Beach 1986 570 1,470 6,199 6,456
Rancho Alisal II Tustin 1988/91 356 821 3,463 3,607
Rancho Maderas II Tustin 1989 266 641 $ 2,702 $ 2,814
Rancho Santa Fe II Tustin 1998 316 1,025 $ 4,321 $ 4,500
Rancho Tierra II Tustin 1989 252 632 $ 2,664 $ 2,774
--------------------------------------------------------------------
TIER II SUBTOTAL 1985 5,969 14,463 $60,973 $63,498
--------------------------------------------------------------------
Deerfield III Irvine 1975/83 288 569 $ 2,397 $ 2,496
Northwood Park III Irvine 1985 168 363 $ 1,531 $ 1,595
Northwood Place III Irvine 1986 604 1,315 $ 5,544 $ 5,774
Orchard Park III Irvine 1982 60 150 $ 631 $ 657
Park West III Irvine 1970/71/72 880 1,870 $ 7,883 $ 8,210
Parkwood III Irvine 1974 296 593 $ 2,498 $ 2,602
The Parklands III Irvine 1983 121 314 $ 1,324 $ 1,379
Windwood Glen III Irvine 1985 196 462 $ 1,947 $ 2,028
Windwood Knoll III Irvine 1983 248 514 $ 2,169 $ 2,259
Woodbridge Oaks III Irvine 1983 120 290 $ 1,222 $ 1,272
Woodbridge Pines III Irvine 1976 220 471 $ 1,984 $ 2,066
Woodbridge Villas III Irvine 1982 258 508 $ 2,141 $ 2,229
Mariner Square III Newport Beach 1969 114 261 $ 1,099 $ 1,145
--------------------------------------------------------------------
TIER III SUBTOTAL 1978 3,573 $ 7,678 $ 32,370 $ 33,711
--------------------------------------------------------------------
TOTAL 16,317 $41,642 $175,557 $182,828
</TABLE>
<PAGE> 37
DRAFT
PROJECT DELTA
Balance Sheet
(Thousands)
<TABLE>
<CAPTION>
11/30/98 12/31/98
Balance Adjustments Proforma
------- ----------- --------
<S> <C> <C> <C>
ASSETS
Real Estate Assets $1,410,650 4,597 $1,415,247
Accumulated Depreciation (278,488) (278,488)
---------- ----------
1,132,162 1,132,162
Projects under development, incl land 201,204 201,204
---------- ----------
1,333,366 1,333,366
Cash 17,402 (16,000) 1,402
Restricted Cash 1,647 1,647
Deferred financing costs 12,303 12,303
Other Assets 14,396 14,396
---------- ------- ----------
TOTAL ASSETS $1,379,114 (11,403) $1,367,711
LIABILITIES
Conventional mortgage financings $129,775 $129,775
Mortgage notes payable to TIC 49,592 49,592
Tax-exempt assessment district debt 21,306 21,306
Unsecured tax-exempt bond financings 334,190 334,190
Tax-exempt Mortgage Debt 18,000 18,000
Unsecured notes payable 99,275 99,275
Unsecured line of credit 0 0
Wells Fargo Term Loan 100,000 100,000
---------- ----------
CURRENT DEBT BALANCE $752,138 $752,138
Accounts payable and accrued liabilities 44,985 (8,000) 36,985
Security deposits 9,446 9,446
Dividends and distributions payable 3,403 (3,403) 0
---------- ------- ----------
TOTAL LIABILITIES $809,972 (11,403) $798,569
PREFERRED STOCK
Redeemable Preferred - Series A 144,092 144,092
Redeemable Preferred - Series B 48,751 48,751
---------- ------- ----------
Total Preferred 192,843 0 192,843
TOTAL LIABILITIES AND PREFERRED $1,002,815 $1,002,815
Minority Interest 182,841 182,841
Shareholder's Equity 193,458 193,458
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $1,379,114 (11,403) $1,367,711
</TABLE>
-34-
<PAGE> 38
DRAFT
PROJECT DELTA
Other Assets / Other Liabilities
(Thousands)
<TABLE>
<CAPTION>
11/30/98 12/31/98
Balance Adjustments Proforma
------- ----------- --------
<S> <C> <C> <C>
OTHER ASSETS
Prepaid Fees/Insurance $1,126 $1,126
Accounts Receivables 2,495 2,495
Equipment 1,768 1,768
Tenant Improvements/Predevelopment 1,803 1,803
Organization/Due Diligence costs 570 570
Storm Relocation 193 193
Deposits 1,369 1,369
Tax Credit/Offering Costs 399 399
Notes Receivable 1,051 1,051
HUD Net Cash Flow 3,623 3,623
TOTAL OTHER ASSETS $14,396 $14,396
Less Non-Cash Assets:
Organization/Due Diligence costs (570) (570)
Tax Credit/Offering Costs (399) (399)
------- -------
NET OTHER ASSETS $13,427 $13,427
OTHER LIABILITIES
Insurance/Tax Liabilities $1,743 $1,743
Accounts Payable 5,516 5,516
Accrued Interest 3,456 3,456
Accounts Payable - CIP 13,754 13,754
Property Tax Liability 9,964 (8,000) 1,964
Deferred/Unearned Income 1,346 1,346
Due to Property Managers & Corp Housing 3,267 3,267
Payroll Liabilities 5,734 5,734
Other 195 195
------- ------ -------
TOTAL OTHER LIABILITIES $44,985 (8,000) $36,985
</TABLE>
-35-
<PAGE> 39
DRAFT
PROJECT DELTA
Stock Option Impact - Treasury Stock Method
<TABLE>
<CAPTION>
AT $45/SHARE
-----------------------------------------------------
WTD. AVE. CUMULATIVE
EXERCISE NO. EXERCISE CUMULATIVE GROSS REPURCHASED NET SHARES SHARES
SERIES PRICE OUTSTANDING PRICE OUTSTANDING PROCEEDS SHARES ISSUED ISSUED
------ -------- ----------- -------- ----------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4/20/1995 Stock Options $12.6250 4,000 $12.6250 4,000 $50,500 1,122 2,878 2,878
3/1/1995 Stock Options 16.1250 110,333 16.0026 114,333 1,779,120 39,536 70,797 73,675
12/8/1993 Stock Options 17.4400 20,000 16.2166 134,333 348,800 7,751 12,249 85,924
11/30/1993 Stock Options 17.5000 32,500 16.4666 166,833 568,750 12,639 19,861 105,785
1/25/1994 Stock Options 17.5000 15,000 16.5518 181,833 262,500 5,833 9,167 114,951
4/30/1996 Stock Options 20.0625 4,000 16.6274 185,833 80,250 1,783 2,217 117,168
4/25/1997 Stock Options 26.6250 20,000 17.5988 205,833 532,500 11,833 8,167 125,335
4/25/1997 Stock Options 26.7500 5,000 17.8159 210,833 133,750 2,972 2,028 127,363
2/4/1997 Stock Options 26.8750 110,000 20.9218 320,833 2,956,250 65,694 44,306 171,668
7/15/1997 Stock Options 29.5000 100,000 22.9602 420,833 2,950,000 65,556 34,444 206,113
6/1/1998 Stock Options 29.8125 10,000 23.1193 430,833 298,125 6,625 3,375 209,488
5/7/1998 Stock Options 30.1250 12,500 23.3168 443,333 376,563 8,368 4,132 213,620
3/12/1998 Stock Options 30.4375 100,000 24.6274 543,333 3,043,750 67,639 32,361 245,981
2/23/1998 Stock Options 30.6875 10,000 24.7369 553,333 306,875 6,819 3,181 249,161
4/22/1998 Stock Options 31.1875 10,000 24.8514 563,333 311,875 6,931 3,069 252,231
4/1/1998 Stock Options 31.3125 23,500 25.1101 586,833 735,844 16,352 7,148 259,379
2/6/1998 Stock Options 31.6250 38,000 25.5063 624,833 1,201,750 26,706 11,294 270,673
2/2/1998 Stock Options 32.0625 53,000 26.0190 677,833 1,699,313 37,763 15,238 285,910
TOTAL/WTD. AVE. $26.0190 677,833 $17,636,513 391,923 285,910
</TABLE>
<TABLE>
<CAPTION>
VALUE/SHARE
-------------------------------------------
$35.00 $40.00 $45.00
---------- ---------- ----------
<S> <C> <C> <C>
Option Share Equivalents 173,933 236,920 285,910
Shares and Units 45,156,808 45,156,808 45,156,808
---------- ---------- ----------
Total 45,330,741 45,393,728 45,442,718
</TABLE>
-36-
<PAGE> 40
DRAFT
PROJECT DELTA
General and Administrative Costs
<TABLE>
<CAPTION>
ADJUSTED
1998 BUDGET 1999 G&A
----------- --------
<S> <C> <C>
SALARIES & WAGES AND EMPLOYEE
RELATED COSTS
President's Dept $1,946.0 $1,946.0
CFO- Treasury Dept 1,867.0 0.0
Accounting Dept 1,311.0 865.3
Development & Construction Depts.- On Ranch 201.0 132.7
Development & Construction Depts.- Off Ranch 560.0 369.6
-------- --------
5,885.0 3,313.5
PUBLIC COSTS
Directors Fees/Board Meetings 325.0 162.5
Annual/Quarterly/Proxies Reports 235.0 0.0
Investor & Public Relations 220.0 0.0
Annual Audit/10-Q Filings 125.0 125.0
D&O Liability Insurance 180.0 180.0
Other 101.0 0.0
Special Board Committee 100.0 0.0
-------- --------
1,286.0 467.5
OFFICE EXPENSES & SUPPLIES 543 434.4
ABANDONMENTS 485.0 242.5
LEGAL
General 375.0 187.5
Special Board Committee 75.0 37.5
-------- --------
450.0 225.0
TIC PROVIDED SERVICES 133.0 133.0
RECRUITING 129.0 129.0
CONSULTING 71.0 0.0
OTHER 59.0 59.0
-------- --------
$9,041.0 $5,003.9
======== ========
55%
</TABLE>
-37-
<PAGE> 41
DRAFT
PROJECT DELTA
Comparable Companies Cost of Equity(1)
Assumptions
CAPM
ke=Rf + b(Rp)
Rfree 5.30%
Rpremium 8.00%
<TABLE>
<CAPTION>
BARRA BARRA k(e) k(e)
Beta Beta Predicted Historical k(e) k(e) BARRA BARRA
Company (Ticker) Adjusted Raw Beta Beta Adjusted Raw Predicted Historical
- ---------------- -------- --- ---- ---- -------- --- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMLI Residential Properties (AML) 0.58 0.37 0.43 0.28 9.94% 8.26% 8.71% 7.56%
Apartment Investment & Management (AIV) 0.55 0.33 0.75 0.35 9.70% 7.94% 11.32% 8.12%
Archstone Communities Trust (ASN) 0.56 0.34 0.64 0.35 9.78% 8.02% 10.40% 8.12%
Associated Estates Realty (AEC) 0.31 -0.3 0.61 0.15 7.78% 2.90% 10.14% 6.52%
Avalon Bay Communities (AVB) 0.59 0.38 0.56 0.38 10.02% 8.34% 9.81% 8.37%
Berkshire Realty Company, Inc. (BRI) 0.58 0.37 0.36 0.56 9.94% 8.26% 8.16% 9.74%
BRE Properties (BRE) 0.64 0.46 0.57 0.12 10.42% 8.98% 9.84% 6.28%
Camden Property Trust (CPT) 0.63 0.44 0.61 0.24 10.34% 8.82% 10.18% 7.25%
Charles E. Smith Residential (SRW) 0.54 0.31 0.54 0.13 9.62% 7.78% 9.65% 6.34%
Equity Residential Properties Trust (EQR) 0.60 0.4 0.71 0.51 10.10% 8.50% 10.99% 9.37%
Essex Property Trust (ESS) 0.5 0.25 0.54 0.34 9.30% 7.30% 9.61% 8.03%
Gables Residential Trust (GBP) 0.47 0.2 0.53 0.19 9.06% 6.90% 9.53% 6.78%
Home Properties of New York (HME) 0.5 0.25 0.60 0.25 9.30% 7.30% 10.06% 7.33%
Irvine Apartment Communities (IAC) 0.56 0.33 0.67 0.48 9.78% 7.94% 10.65% 9.16%
Mid-America Apartment (MAA) 0.53 0.29 0.50 0.19 9.54% 7.62% 9.29% 6.81%
Post Properties (PPS) 0.56 0.35 0.57 0.24 9.78% 8.10% 9.89% 7.20%
Summit Properties (SMT) 0.56 0.35 0.51 0.28 9.78% 8.10% 9.38% 7.54%
Town and Country Trust (TCT) 0.56 0.34 0.41 0.58 9.78% 8.02% 8.57% 9.94%
United Dominion Realty Trust (UDR) 0.48 0.22 0.56 0.28 9.14% 7.06% 9.75% 7.50%
Walden Residential Properties (WDN) 0.78 0.66 0.52 0.08 11.54% 10.58% 9.49% 5.91%
----- ----- ---- ---- ----- ----- ------- ----
Mean 0.554 0.317 0.56 0.30 9.73% 7.84% 9.77% 7.69%
Median 0.56 0.34 0.56 0.28 9.78% 8.02% 9.78% 7.52%
----- ----- ---- ---- ----- ----- ------- ----
</TABLE>
Note:
(1) All information as of 1/13/99
-38-
<PAGE> 42
DRAFT
PROJECT DELTA
- --------------------------------------------------------------------------------
Comparable Companies WACC(1)
<TABLE>
<CAPTION>
Total Preferred Equity
Market Stock Market Debt Preferred
Company (Ticker) Capitalization Outstanding Value Outstanding Interest Coupon
- ----------------------------------------- -------------- ----------- ---------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) $ 5,159.2 $ 275.5 $2,821.1 $2,062.6 7.0% 7.8%
Avalon Bay Communities (AVB) $ 4,077.9 $ 358.1 $2,173.0 $1,546.9 7.0% 8.7%
BRE Properties (BRE) $ 1,872.7 $ 0.0 $1,169.9 $ 702.8 7.0% 8.5% (2)
Equity Residential Properties Trust (EQR) $11,459.5 $1,411.3 $5,345.3 $4,702.9 7.0% 8.6%
Essex Property Trust (ESS) $ 947.6 $ 40.0 $ 547.1 $ 360.5 7.0% 8.8%
Post Properties (PPS) $ 2,542.7 $ 150.0 $1,605.4 $ 787.3 7.0% 7.8%
-------------- ----------- --------- ----------- -------- ---------
Mean $ 4,343.3 $ 372.5 $2,276.9 $1,693.8 7.0% 8.4%
Median $ 3,310.3 $ 212.8 $1,889.2 $1,167.1 7.0% 8.5%
============== =========== ========= =========== ========= =========
AMLI Residential Properties (AML) $ 937.1 $ 98.1 $ 435.4 $ 403.5 7.0% 9.0%
Apartment Investment & Management (AIV) $ 3,714.1 $ 335.0 $1,970.4 $1,408.7 7.0% 9.1%
Associated Estates Realty (AEC) $ 947.3 $ 56.3 $ 417.8 $ 473.2 7.0% 9.8%
Berkshire Realty Company, Inc. (BRI) $ 1,056.9 $ 68.4 $ 428.0 $ 560.5 7.0% 9.0%
Camden Property Trust (CPT) $ 2,315.5 $ 105.0 $1,245.8 $ 964.7 7.0% 9.2%
Charles E. Smith Residential (SRW) $ 1,859.8 $ 149.3 $ 958.0 $ 752.5 7.0% 8.3%
Gables Residential Trust (GBP) $ 1,758.1 $ 119.5 $ 790.1 $ 848.5 7.0% 8.2%
Home Properties of New York (HME) $ 1,074.1 $ 0.0 $ 668.4 $ 405.7 7.0% 9.1%
Mid-America Apartment (MAA) $ 1,387.2 $ 148.5 $ 515.7 $ 722.9 7.0% 9.3%
Summit Properties (SMT) $ 1,093.2 $ 0.0 $ 489.5 $ 603.7 7.0% 8.5% (2)
Town and Country Trust (TCT) $ 610.2 $ 0.0 $ 274.6 $ 335.6 7.0% 8.5% (2)
United Dominion Realty Trust (UDR) $ 2,943.7 $ 255.0 $1,139.8 $1,548.9 7.0% 8.9%
Walden Residential Properties (WDN) $ 1,392.0 $ 42.8 $ 589.6 $ 759.6 7.0% 9.2%
-------------- ----------- --------- ----------- -------- ---------
Mean $ 1,622.2 $ 106.0 $ 763.3 $ 752.9 7.0% 8.9%
Median $ 1,387.2 $ 98.1 $ 589.6 $ 722.9 7.0% 9.0%
============== =========== ========= =========== ========= =========
Irvine Apartment Communities (IAC) $ 2,325.0 $ 144.1 $1,445.0 $ 733.2 7.0% 8.4%
</TABLE>
<TABLE>
<CAPTION>
k(e) k(e) BARRA BARRA
k(e) k(e) BARRA BARRA Adjusted Raw Predicted Historical
Company (Ticker) Adjusted Raw Predicted Historical WACC WACC WACC WACC
- ----------------------------------------- -------- ----- --------- ---------- -------- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 9.8% 8.0% 10.4% 8.1% 8.6% 7.6% 8.9% 7.7%
Avalon Bay Communities (AVB) 10.0% 8.3% 9.8% 8.4% 8.8% 7.9% 8.6% 7.9%
BRE Properties (BRE) 10.4% 9.0% 9.8% 6.3% 9.1% 8.2% 8.8% 6.5%
Equity Residential Properties Trust (EQR) 10.1% 8.5% 11.0% 9.4% 8.6% 7.9% 9.1% 8.3%
Essex Property Trust (ESS) 9.3% 7.3% 9.6% 8.0% 8.4% 7.2% 8.6% 7.7%
Post Properties (PPS) 9.8% 8.1% 9.9% 7.2% 8.8% 7.7% 8.9% 7.2%
-------- ----- --------- ---------- -------- ------ --------- ----------
Mean 9.9% 8.2% 10.1% 7.9% 8.7% 7.8% 8.8% 7.5%
Median 9.9% 8.2% 9.9% 8.1% 8.7% 7.8% 8.8% 7.7%
======== ===== ========= ========== ======== ====== ========= ==========
AMLI Residential Properties (AML) 9.9% 8.3% 8.7% 7.6% 8.6% 7.8% 8.0% 7.5%
Apartment Investment & Management (AIV) 9.7% 7.9% 11.3% 8.1% 8.6% 7.7% 9.5% 7.8%
Associated Estates Realty (AEC) 7.8% 2.9% 10.1% 6.5% 7.5% 5.4% 8.5% 7.0%
Berkshire Realty Company, Inc. (BRI) 9.9% 8.3% 8.2% 9.7% 8.3% 7.6% 7.6% 8.2%
Camden Property Trust (CPT) 10.3% 8.8% 10.2% 7.3% 8.9% 8.1% 8.8% 7.2%
Charles E. Smith Residential (SRW) 9.6% 7.8% 9.6% 6.3% 8.5% 7.5% 8.5% 6.8%
Gables Residential Trust (GBP) 9.1% 6.9% 9.5% 6.8% 8.0% 7.0% 8.2% 7.0%
Home Properties of New York (HME) 9.3% 7.3% 10.1% 7.3% 8.4% 7.2% 8.9% 7.2%
Mid-America Apartment (MAA) 9.5% 7.6% 9.3% 6.8% 8.2% 7.5% 8.1% 7.2%
Summit Properties (SMT) 9.8% 8.1% 9.4% 7.5% 8.2% 7.5% 8.1% 7.2%
Town and Country Trust (TCT) 9.8% 8.0% 8.6% 9.9% 8.3% 7.5% 7.7% 8.3%
United Dominion Realty Trust (UDR) 9.1% 7.1% 9.8% 7.5% 8.0% 7.2% 8.2% 7.4%
Walden Residential Properties (WDN) 11.5% 10.6% 9.5% 5.9% 9.0% 4.8% 4.3% 2.8%
-------- ----- --------- ---------- -------- ------ --------- ----------
Mean 9.7% 7.7% 9.6% 7.5% 8.3% 7.1% 8.0% 7.0%
Median 9.7% 7.9% 9.5% 7.3% 8.3% 7.5% 8.2% 7.2%
======== ===== ========= ========== ======== ====== ========= ==========
Irvine Apartment Communities (IAC) 9.8% 7.9% 10.7% 9.2% 8.8% 7.7% 9.3% 8.4%
</TABLE>
Notes:
(1) All information as of 1/13/99.
(2) Assumes an 8.5% preferred coupon.
-39-
<PAGE> 43
DRAFT
PROJECT DELTA
TRADING STATISTICS FOR SELECTED APARTMENT REITS
<TABLE>
<CAPTION>
Equity Total Price/FFO(8)
1/13/99 52-Week Market Market ---------------------------
Company (Ticker) Price High/Low Value(1) Capitalization(2) LTM(3) 1999E(4) 2000E(4)
- ---------------- ------- ------------- -------- ----------------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) $19.69 $24.50/$17.88 $2,821.1 $ 5,159.2 8.8x 9.8x 9.0x
Avalon Bay Communities (AVB) $33.56 $39.13/$30.50 $2,173.0 $ 4,077.9 12.6x 10.2x 9.1x
BRE Properties (BRE) $24.88 $28.69/$21.50 $1,169.9 $ 1,872.7 12.1x 10.5x 9.4x
Equity Residential Properties Trust (EQR) $41.00 $52.56/$34.69 $5,345.3 $11,459.5 13.6x 9.2x 8.6x
Essex Property Trust (ESS) $29.56 $34.94/$26.94 $ 547.1 $ 947.6 10.7x 9.4x 8.4x
Post Properties (PPS) $37.75 $42.00/$35.81 $1,605.4 $ 2,542.7 11.5x 10.2x 9.3x
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN $2,276.9 $ 4,343.3 11.5x 9.9x 9.0x
MEDIAN $1,889.2 $ 3,310.3 11.8x 10.0x 9.1x
- ----------------------------------------------------------------------------------------------------------------------------------
AMLI Residential Properties (AML) $21.88 $24.00/$18.44 $ 435.4 $ 937.1 9.6x 8.6x 7.9x
Apartment Investment & Management (AIV) $36.19 $41.00/$30.00 $1,970.4 $ 3,714.1 10.4x 9.1x 7.9x
Associated Estates Realty (AEC) $12.13 $24.38/$11.50 $ 417.8 $ 947.3 6.0x 6.2x 5.9x
Berkshire Realty Company, Inc. (BRI) $ 9.38 $12.38/$ 8.13 $ 428.0 $ 1,056.9 8.4x 7.7x 7.3x
Camden Property Trust (CPT) $26.38 $31.06/$24.50 $1,245.8 $ 2,315.5 9.9x 8.2x 7.6x
Charles E. Smith Residential (SRW) $30.69 $34.94/$28.31 $ 958.0 $ 1,859.8 10.8x 9.7x 8.9x
Gables Residential Trust (GBP) $24.06 $28.31/$21.75 $ 790.1 $ 1,758.1 9.2x 8.3x 7.7x
Home Properties of New York (HME) $24.94 $28.06/$21.19 $ 668.4 $ 1,074.1 10.1x 9.2x 8.2x
Mid-America Apartment (MAA) $23.63 $29.88/$22.63 $ 515.7 $ 1,387.2 8.1x 7.5x 6.9x
Summit Properties (SMT) $16.50 $21.31/$16.25 $ 489.5 $ 1,093.2 8.4x 7.7x 7.1x
Town and Country Trust (TCT) $15.06 $17.94/$13.25 $ 274.6 $ 610.2 8.5x 8.0x 7.7x
United Dominion Realty Trust (UDR) $10.69 $14.75/$10.06 $1,139.8 $ 2,943.7 7.7x 7.5x 7.1x
Walden Residential Properties (WDN) $20.13 $27.13/$19.25 $ 589.6 $ 1,392.0 8.1x 7.4x 6.9x
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN $ 763.3 $ 1,622.2 8.8x 8.1x 7.5x
MEDIAN $ 589.6 $ 1,387.2 8.4x 7.7x 7.3x
- ----------------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities (IAC) $32.00 $32.44/$23.00 $1,445.0 $ 2,325.0 14.5x 12.5x 11.1x
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Payout Ratio 5-Year
Price/AFFO(5) Aggregate Value/EBITDA(7)(8) (1999E) FFO
------------------ ---------------------------- Dividend ------------- --------
Company (Ticker) 1999E(6) 2000E(6) LTM 1999E 2000E Yield FFO AFFO Growth(4)
- ---------------- -------- -------- --------- -------- ------- -------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 11.9x 10.8x 15.9x 15.5x 11.4x 7.5% 73.4% 89.2% 11.2%
Avalon Bay Communities (AVB) 12.0x 10.3x 16.6x 20.8x 11.8x 6.1% 61.7% 72.9% 11.5%
BRE Properties (BRE) 12.1x 10.9x 15.6x 14.1x 11.7x 5.8% 60.7% 69.9% 8.5%
Equity Residential Properties Trust (EQR) 11.3x 10.3x 13.6x N.A. N.A. 6.9% 64.0% 78.2% 9.2%
Essex Property Trust (ESS) 12.6x 11.5x 13.3x 11.3x 9.8x 6.8% 63.6% 85.5% 10.0%
Post Properties (PPS) 11.6x 10.8x 14.9x 14.2x 12.1x 6.9% 70.5% 79.8% 9.7%
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN 11.9x 10.7x 15.0x 15.2x 11.4x 6.7% 65.6% 79.2% 10.0%
MEDIAN 11.9x 10.8x 15.2x 14.2x 11.7x 6.8% 63.8% 79.0% 9.8%
- ----------------------------------------------------------------------------------------------------------------------------------
AMLI Residential Properties (AML) 10.3x 9.6x 14.7x 13.4x 10.7x 8.0% 69.2% 83.0% 6.5%
Apartment Investment & Management (AIV) 12.4x 10.7x 16.4x 13.3x 9.5x 6.2% 56.8% 77.1% 12.3%
Associated Estates Realty (AEC) 6.2x 6.1x 14.0x 10.6x 7.6x 15.3% 95.2% 95.4% 0.3%
Berkshire Realty Company, Inc. (BRI) 8.8x 8.6x 12.2x 11.7x 9.8x 10.3% 79.8% 91.5% 6.0%
Camden Property Trust (CPT) 9.5x 8.6x 11.6x 12.2x 10.5x 7.7% 62.9% 72.7% 9.1%
Charles E. Smith Residential (SRW) 12.3x 11.2x 13.0x 12.4x 10.9x 7.0% 67.3% 85.9% 9.0%
Gables Residential Trust (GBP) 9.8x 9.0x 15.5x 13.4x 11.5x 8.5% 70.4% 82.9% 7.8%
Home Properties of New York (HME) 12.1x 10.8x 12.5x 8.5x 6.1x 7.7% 70.7% 93.2% 0.0%
Mid-America Apartment (MAA) 9.0x 8.4x 11.8x N.A. N.A. 9.7% 73.0% 87.8% 7.1%
Summit Properties (SMT) 9.1x 8.5x 12.8x 11.8x 8.8x 9.9% 75.9% 89.6% 6.7%
Town and Country Trust (TCT) 9.4x 9.1x 11.1x N.A. N.A. 10.6% 85.3% 99.4% 4.5%
United Dominion Realty Trust (UDR) 8.8x 8.5x 11.5x 10.6x 8.5x 9.8% 73.5% 86.1% 6.5%
Walden Residential Properties (WDN) 8.8x 8.2x 9.7x 9.0x 8.8x 9.6% 71.3% 84.3% 8.3%
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN 9.7x 9.0x 12.8x 11.5x 9.3x 9.3% 73.2% 86.8% 6.5%
MEDIAN 9.1x 8.6x 12.5x 11.7x 9.5x 9.7% 71.3% 86.1% 6.7%
- ----------------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities (IAC) 15.6x 14.0x 16.9x N.A. N.A. 4.8% 60.0% 75.1% 10.2%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Includes shares and operating partnership units.
(2) Equals the sum of equity market value, debt outstanding and preferred stock
at liquidation preference, in $MM.
(3) For the 12 months ended September 30, 1998.
(4) Estimates from First Call as of January 13, 1999, unless otherwise noted.
(5) Adjusted Funds from Operations (AFFO) equals FFO less recurring capital
expenditures and straight-line rent adjustments.
(6) Estimates from Morgan Stanley Research as of November 2, 1998, unless
otherwise noted.
(7) Aggregate Value equals Total Market Capitalization less cash.
(8) Some FFO and EBITDA estimates reflecting recent M&A activity were not
available and are noted as N.A.
-40-
<PAGE> 44
DRAFT
PROJECT DELTA
CREDIT STATISTICS FOR SELECTED APARTMENT REITS
<TABLE>
<CAPTION>
Equity Total Debt-to- Debt-to-
1/13/99 Market Market Market Book
Company (Ticker) Price Value(1) Capitalization(2) Capitalization Capitalization(3)
- ---------------- ------- -------- ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) $19.69 $2,821.1 $ 5,159.2 40.0% 46.1%
Avalon Bay Communities (AVB) $33.56 $2,173.0 $ 4,077.9 37.9% 44.6%
BRE Properties (BRE) $24.88 $1,169.9 $ 1,872.7 37.5% 45.6%
Equity Residential Properties Trust (EQR) $41.00 $5,345.3 $11,459.5 41.0% 51.8%
Essex Property Trust (ESS) $29.56 $ 547.1 $ 947.6 38.0% 43.9%
Post Properties (PPS) $37.75 $1,605.4 $ 2,542.7 31.0% 45.2%
- ----------------------------------------------------------------------------------------------------------------------------------
Mean $2,276.9 $ 4,343.3 37.6% 46.2%
Median $1,889.2 $ 3,310.3 38.0% 45.4%
- ----------------------------------------------------------------------------------------------------------------------------------
AMLI Residential Properties (AML) $21.88 $ 435.4 $ 937.1 43.1% 58.0%
Apartment Investment & Management (AIV) $36.19 $1,970.4 $ 3,714.1 37.9% 50.8%
Associated Estates Realty (AEC) $12.13 $ 417.8 $ 947.3 50.0% 68.0%
Berkshire Realty Company, Inc. (BRI) $ 9.38 $ 428.0 $ 1,056.9 53.0% 61.4%
Camden Property Trust (CPT) $26.38 $1,245.8 $ 2,315.5 41.7% 45.3%
Charles E. Smith Residential (SRW) $30.69 $ 958.0 $ 1,859.8 40.5% 77.7%
Gables Residential Trust (GBP) $24.06 $ 790.1 $ 1,758.1 48.3% 60.6%
Home Properties of New York (HME) $24.94 $ 668.4 $ 1,074.1 37.8% 42.6%
Mid-America Apartment (MAA) $23.63 $ 515.7 $ 1,387.2 52.1% 63.7%
Summit Properties (SMT) $16.50 $ 489.5 $ 1,093.2 55.2% 63.5%
Town and Country Trust (TCT) $15.06 $ 274.6 $ 610.2 55.0% 89.0%
United Dominion Realty Trust (UDR) $10.69 $1,139.8 $ 2,943.7 52.6% 60.5%
Walden Residential Properties (WDN) $20.13 $ 589.6 $ 1,392.0 54.6% 50.9%
- ----------------------------------------------------------------------------------------------------------------------------------
Mean $ 763.3 $ 1,622.2 47.8% 60.9%
Median $ 589.6 $ 1,387.2 50.0% 60.6%
- ----------------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities (IAC) $32.00 $1,445.0 $ 2,325.0 31.7% 75.1%
</TABLE>
<TABLE>
<CAPTION>
LTM CREDIT STATISTICS(4) SENIOR DEBT
Secured Floating ------------------------------------ RATINGS
Debt/ Rate Debt/ EBITDA/ DEBT/ FFO/ -----------
Company (Ticker) Total Debt Total Debt INTEREST EBITDA DEBT MOODY'S/S&P
- ---------------- ---------- ---------- -------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 21.0% 42.1% 3.5x 6.4x 12.8% Baa1/A-
Avalon Bay Communities (AVB) 32.9% 25.3% 3.9x 6.3x 11.5% Baa1/BBB+
BRE Properties (BRE) 33.6% 30.4% 3.7x 5.9x 12.8% Baa2/BBB
Equity Residential Properties Trust (EQR) 45.8% 30.5% 2.9x 5.6x 12.9% A3/BBB+
Essex Property Trust (ESS) 82.5% 40.7% 4.0x 5.1x 15.5% N.R./N.R.
Post Properties (PPS) 35.5% 50.9% 5.4x 4.6x 16.1% Baa1/BBB+
- ----------------------------------------------------------------------------------------------------------------------------------
Mean 41.9% 36.6% 3.9x 5.7x 13.6%
Median 34.5% 35.6% 3.8x 5.8x 12.9%
- ----------------------------------------------------------------------------------------------------------------------------------
AMLI Residential Properties (AML) 62.8% 35.6% 3.4x 6.4x 12.4% Baa3/N.R.
Apartment Investment & Management (AIV) 96.4% 7.2% 2.4x 6.3x 11.8% Ba1/BB-
Associated Estates Realty (AEC) 13.5% 45.2% 2.4x 7.0x 7.9% Baa3/BBB-
Berkshire Realty Company, Inc. (BRI) 78.0% 23.8% 2.5x 6.5x 9.7% Baa2/N.R.
Camden Property Trust (CPT) 40.6% 42.8% 3.6x 4.9x 14.7% Baa2/BBB
Charles E. Smith Residential (SRW) 67.5% 33.1% 3.0x 5.3x 12.5% N.R./N.R.
Gables Residential Trust (GBP) 47.3% 34.2% 3.2x 7.5x 8.7% Baa2/BBB
Home Properties of New York (HME) 96.0% 4.0% 2.8x 4.7x 14.4% N.R./N.R.
Mid-America Apartment (MAA) 85.7% 22.2% 2.7x 6.2x 9.1% Ba1/BB+
Summit Properties (SMT) 33.2% 65.3% 2.8x 7.1x 9.2% Baa3/BBB-
Town and Country Trust (TCT) 100.0% 10.6% 2.5x 6.1x 9.6% N.R./N.R.
United Dominion Realty Trust (UDR) 41.8% 22.1% 2.6x 6.1x 8.7% Baa2/BBB
Walden Residential Properties (WDN) 61.6% 46.7% 2.7x 5.3x 10.2% Ba1/N.R.
- ----------------------------------------------------------------------------------------------------------------------------------
Mean 63.4% 30.2% 2.8x 6.1x 10.7%
Median 62.8% 33.1% 2.7x 6.2x 9.7%
- ----------------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities (IAC) 27.4% 15.9% 4.7x 5.4x 13.4%
</TABLE>
Notes:
(1) Includes shares and operating partnership units.
(2) Equals the sum of equity market value, debt outstanding and preferred stock
at liquidation preference, in $MM.
(3) Book capitalization equals the sum of debt outstanding, minority interest,
preferred stock at liquidation preference and shareholders' equity, in $MM.
(4) For the 12 months ended 9/30/98.
-41-
<PAGE> 45
DRAFT
DOCUMENTATION PROVIDED TO MORGAN STANLEY DEAN WITTER
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
DOCUMENT DATE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
IAC Monthly Financial Reports 10/98
- ----------------------------------------------------------------------------------------------
IAC 1998 Preliminary Business Plan 10/97
- ----------------------------------------------------------------------------------------------
IAC 1999 Preliminary Business Plan 9/98, 10/98
McFarland Memo to DLB (Business Plan Sensitivity) 10/2/98
- ----------------------------------------------------------------------------------------------
IAC 1999 Business Plan - Summary of Historical and 10/98
Projected Demand and Supply Analyses
- ----------------------------------------------------------------------------------------------
IAC 1999 Business Plan - Demand and Supply Analyses 10/98
- ----------------------------------------------------------------------------------------------
IAC First Quarter 1998 Business Plan Update 10/26/98
- ----------------------------------------------------------------------------------------------
IAC Board meeting packages 5/7/98
7/31/98
10/12/98
- ----------------------------------------------------------------------------------------------
IBA Board meeting - slide presentations 7/31/98
9/24/98
10/30/98
- ----------------------------------------------------------------------------------------------
IAC Economic Indicators and Trends Mid-year 98
- ----------------------------------------------------------------------------------------------
IAC Project Proforma booklet - Bonita Canyon and
Lower Peters Canyon
- ----------------------------------------------------------------------------------------------
IAC Scott Reinert memo to Board 8/12/98
- ----------------------------------------------------------------------------------------------
IAC Proformas
Lower Peters Canyon Site 5B - Lot 21 10/5/98
Lower Peters Canyon Site 5A - Lot 20 10/5/98
- ----------------------------------------------------------------------------------------------
IAC Five-Year Projections 4th Qtr 97
- ----------------------------------------------------------------------------------------------
IAC Public REIT Profitability 7/98
- ----------------------------------------------------------------------------------------------
IAC Acquisitions
Park Place - Investment Proposal 6/8/98
Park Place - Board write-up 6/30/98
Villa Serena - Rancho Santa Margarita 1/23/97
The Villas of Renaissance - La Jolla 1/23/97
La Jolla Point Apartments 12/20/96
Rick Lamprecht memo to Mike Goode 5/5/98
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Montgomery Private Eye Discussion Package 11/25/98
- ----------------------------------------------------------------------------------------------
Montgomery Valuation Discussion Package 12/30/98
- ----------------------------------------------------------------------------------------------
</TABLE>
-42-
<PAGE> 46
DRAFT
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Bank Research Reports - Before 12/1/98 Salomon Smith Barney 5/12/98
JP Morgan 6/1/98
Salomon Smith Barney 11/10/98
Legg Mason 11/24/98
NationsBanc Montgomery 11/3/98
CIBC Oppenheimer 8/19/98
JP Morgan
Donaldson, Lufkin 10/28/97
Smith Barney 10/24/97
Paine Webber 8/28/98
Morgan Stanley Dean Witter
Jefferies & Company 11/3/98
Merrill Lynch 11/4/98
Sutro 10/5/98
- --------------------------------------------------------------------------------------------
Investment Bank Research Reports - After 12/1/98 Morgan Stanley 12/3/98
JP Morgan 12/3/98
Paine Webber 12/4/98
Paine Webber 12/7/98
Everen Securities 12/4/98
NationsBanc Montgomery 12/3/98
Green Street Advisors 12/10/98
Bloomberg 12/2/98
Donaldson, Lufkin 12/2/98
AG Edwards 12/3/98
Sutro 12/2/98
Salomon Smith Barney 12/3/98
Salomon Smith Barney 12/2/98
Dresdner Kleinwert Benson 12/4/98
CIBC Oppenheimer 12/2/98
Realty Stock Review 12/7/98
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
TIC - Bren memo to IAC Board of Directors (IAC 10/27/98
Results for 1998 and Business Plan for 1999)
- --------------------------------------------------------------------------------------------
TIC - IAC Land Rights Agreement (Estimate of value 12/22/98
per share)
- --------------------------------------------------------------------------------------------
TIC - Net Asset Value Calculation 11/30/98
- --------------------------------------------------------------------------------------------
TIC - Joe Davis memo to DLB (IAC Business Plan) 9/24/98
- --------------------------------------------------------------------------------------------
TIC - Joe Davis memo to DLB (IAC Business Plan) 9/16/98
- --------------------------------------------------------------------------------------------
TIC - Apartment Inventory
- --------------------------------------------------------------------------------------------
</TABLE>
-43-
<PAGE> 1
PROJECT DELTA
Fairness Opinion
Committee Meeting
January 22, 1999
<PAGE> 2
PROJECT DELTA
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
SECTION I EXECUTIVE SUMMARY
Tab A Summary of Proposed Transaction
Tab B Alpha Company Overview
Tab C Transaction Rationale
SECTION II VALUATION OF ALPHA
Tab D Current Net Asset Value
Tab E Discounted Cash Flow Valuations
Tab F Comparable Company Trading Analysis
Tab G Ability-to-Pay Analysis
Tab H Comparable Transactions
Tab I Wall Street's View
APPENDIX A PROPOSED FAIRNESS OPINION LETTER
APPENDIX B ALPHA RESEARCH REPORTS
<PAGE> 3
- --------------------------------------------------------------------------------
EXECUTIVE SUMMARY
- --------------------------------------------------------------------------------
<PAGE> 4
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Proposed Transaction
DESCRIPTION: - Merger of Alpha public REIT with new Beta subsidiary,
with consideration to be paid to Alpha shareholders
(other than Beta and affiliates) of $34.00 per share,
all cash
BACKGROUND: - December 1, 1998: Beta published a bid (the "Proposal")
to purchase the shares of Alpha (or the "Company") not
owned by Beta in a going-private transaction at
$32.50/share, all cash. The Proposal requested a
response by December 31, 1998
- December 8, 1998: Morgan Stanley was notified that it
had been selected by the special committee (formed by
Alpha's Board of Directors to work with legal and
financial advisors in considering the Proposal and
formulating a response) as the Company's financial
advisor
- December 15, 1998: Morgan Stanley met with management
and local consultants of Alpha to discuss a number of
topics, including: business plan; projections / company
model; and market conditions and market studies
- December 22, 1998: Alpha's special committee and
advisors met to discuss the Proposal
- December 30, 1998: The financial advisors of Alpha and
Beta met to discuss valuation analyses of Alpha that
each had performed
- Early January: Proposal extended through January 18,
1999
- January 13, 1999: Morgan Stanley and NationsBank met to
discuss materials received from NationsBanc and the
respective financial advisors' analyses of Alpha
- January 14, 1999: Alpha's special committee and its
financial and legal advisors met to discuss valuation
and next steps
- January 18, 1999: Alpha's special committee met with
Beta, stating that $32.50 per share was not adequate
- January 19, 1999: Alpha's special committee and Beta
(and their respective financial advisors) to discuss
valuation of Alpha. Beta raised its offer for Alpha to
$33.50
- January 21, 1999: Beta raised its offer for Alpha to
$34 per share
<PAGE> 5
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Proposed Transaction
(continued)
<TABLE>
<CAPTION>
TRADING VALUATION OF ALPHA: PERIOD/DATE ALPHA PRICE PROPOSAL PREMIUM
<S> <C> <C> <C>
- Average Price 10-day average(1) $27.29 24.6%
- Average Price Two-month average(1) 26.24 29.6%
- Average Price Six-month average(1) 27.26 24.7%
- 1998 Average Price 1998(1) 28.91 17.6%
- 1998 High Price(1) 1/29/98 32 3/16 5.6%
- All-time High Price 10/8/97 33 1/2 1.5%
- 1998 Low Price(1) 10/8/98 23 3/8 45.5%
- IPO Price 12/8/93 17 1/2 94.3%
- Most Recent Offering Price 2/14/97 27 1/2 23.6%
</TABLE>
<TABLE>
<CAPTION>
FFO MULTIPLES: 1998E 1999E
<S> <C> <C> <C>
- FFO/Share $2.29 $2.56/$2.67 (First Call/Alpha management)
- Proposal Multiple 14.8x 13.3x/12.7x
- Multiples of Comps 11.3x 9.9x
</TABLE>
OTHER VALUATION CONSIDERATIONS: - In addition to considering
historical trading data and
performing the valuation
methodologies summarized on the
page which follows, the following
factors, among others, should be
given consideration in estimating
the value of Alpha
- Availability of alternative
transactions
- Likely resolution of ongoing
conflicts of interest between
Alpha and Beta, especially
with respect to the supply of
development land by Beta to
Alpha
- Resolution of worsening
management issues
Note: (1) Through December 1, 1998
<PAGE> 6
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Valuation Analyses
<TABLE>
Beta Offer Price
$34.00
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997-1998 Trading Range 23.38---------------------$33.50
Current Net Asset Value $33.00----------------$40.00
Discounted Cash Flow
- Dividend Discount $30.00------------------$39.00
- Free Cash Flow $30.00---------------------$40.00
- Leveraged Alternative $30.50-------------------$40.00
Comparable Company Analysis $26.00-----------$34.00
Ability-to-Pay Analysis $32.00---$34.50
Comparable Transactions $31.00-------$35.00
Wall Street's View $24.00----------------------$35.00
-----------------------------------------------------------------
$20.00 $25.00 $30.00 $35.00 $40.00 $45.00
</TABLE>
<PAGE> 7
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Proposed Transaction
(continued)
OWNERSHIP OF ALPHA: - Alpha is an umbrella partnership real
estate investment trust ("UPREIT")
- The public REIT owns approximately 45%
of the Alpha operating partnership
- Shareholders other than Beta own
approximately 83% of the common shares
of Alpha (37% fully diluted)
OPTION TREATMENT: - All Alpha options will vest at the time
of the merger
- All option holders will be required to
cash out all of their options
DEAL PROTECTION MECHANISMS: - No ability by Alpha to solicit,
encourage, initiate or participate in
discussions regarding any other
acquisition proposal, to release any
information in connection (unless
required by law), to enter into an
agreement in connection, or to make any
public statement of support -- no
fiduciary out whatsoever
TERMINATION EVENTS: - The partners may terminate by mutual
consent
- Either party may terminate if
- The merger is not consummated by
one year from the signing of the
merger agreement (not available to
party whose failure to fulfill its
obligations under the merger
agreement is the cause of the
delay)
- Prohibited by governmental
authority
- Alpha's shareholders do not approve
(only available to Alpha if its
Board had recommended the merger to
its shareholders)
- There is a material, uncured breach
of any covenant or agreement made
by the other party or any
representation or warranty made by
the other party is materially
untrue
<PAGE> 8
PROJECT DELTA
- --------------------------------------------------------------------------------
Alpha Company Overview
- - HISTORY
- Completed its IPO in December 1993 (11.8 million shares at $17.50)
- Completed follow-on offerings in August 1995 (4.5 million shares at
$17.25) and February 1997 (1.15 million shares at $27.50)
- Stock price appreciation from IPO to day prior to offering date of
55.6% and from IPO to present of 82.8% (at $32)
- Compounded annual return of 13.8%
- Compounded average annual dividend growth since December 1993 of 6.6%
- - ASSET REVIEW
- At IPO, Alpha had 43 stabilized communities containing 11,334 units,
all on the Ranch
- At present, Alpha has 56 stabilized communities containing 16,317
apartment units
- In addition, Alpha has seven communities currently under development
consisting of 2,657 units
- Alpha's largest single market is the 90-square mile Irvine Ranch in
Orange County. Properties are located in Irvine, Tustin and Newport
Beach and off-Ranch in Silicon Valley, coastal San Diego and Los
Angeles' Westside
- Land Rights Agreement gives Alpha exclusive right to develop
multifamily rental sites on the Irvine Ranch through July 2020
- - MANAGEMENT TEAM
- CEO resigned in 1997 and was replaced by Beta executive
- CFO announced resignation in 1998 and will depart January 22, 1999
- Alpha marked since IPO by significant senior management turmoil and
turn-over
- - DEVELOPMENT/ACQUISITION ACTIVITY
- Since 1993, Alpha has developed/acquired 4,983 apartment units
- 7 development communities consisting of 2,657 units located in Irvine,
Los Angeles, San Diego, Redwood and on the Ranch
- An active expansion program within California in San Diego, Northern
California and Los Angeles
<PAGE> 9
PROJECT DELTA
- --------------------------------------------------------------------------------
Alpha Company Overview
(continued)
- - MARKET VALUATION
- First Call 1999E and 2000E FFO multiples of 12.5x and 11.1x,
respectively
- Current dividend yield of 4.8% (approximately 5.7% pre-offer)
- - FINANCIAL PERFORMANCE
- Compound annual FFO growth rate of 16.5% from 1995 to 1998
- 1998E to 1999E FFO growth rate of 12.3% based on First Call estimates
- First Call long-term growth rate of 10.2%
- - BALANCE SHEET
- Equity market capitalization of $1.4 billion; total market
capitalization of $2.3 billion
- Total debt-to-market capitalization ratio of 31.7%
- Investment grade ratings: Baa2 (Moody's)/BBB+ (Fitch)
<PAGE> 10
PROJECT DELTA
================================================================================
Price/Volume Chart
IPO to Date
12/1/93
IPO - sells 11.8MM shares of
common stock priced at $17.50
per share, raising approximately
$206MM
12/6/94
Orange County, CA
announces it will file for
bankruptcy, following a
$1.5B loss
3/8/95
T. Patrick Smith announces
resignation as President
and CEO of Alpha
8/31/95
Sells 4.5MM shares
of common stock
priced at $17.25
per share, raising
approximately
$77MM
10/30/96
Richard Moran
announces resignation
as Vice President and
CFO of Alpha
2/13/97
Sells 1.15MM shares of
common stock priced at
$27.50 per share, raising
approximately $31MM
10/16/98
James Mead
announces
resignation as
CFO of Alpha
12/1/98
Mr. Beta announces offer
to buy shares of Alpha
not held for $540MM or
$32.50 per share
<PAGE> 11
PROJECT DELTA
- --------------------------------------------------------------------------------
Price/Volume Chart
IPO to Date
<TABLE>
<CAPTION>
Date Volume Close Date Volume Close Date Volume Close
- --------- ------ ----- --------- ------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1-Dec-93 4480600 17.5 7-Feb-94 19000 18.625 14-Apr-94 6100 19.875
2-Dec-93 832600 17.625 8-Feb-94 18200 18.875 15-Apr-94 34000 20.25
3-Dec-93 189900 17.5 9-Feb-94 94500 19.625 18-Apr-94 20600 20
6-Dec-93 69300 17.5 10-Feb-94 88000 19.625 19-Apr-94 45200 19.625
7-Dec-93 76100 17.375 11-Feb-94 74400 19.5 20-Apr-94 33200 19.875
8-Dec-93 34300 17.5 14-Feb-94 46400 19.5 21-Apr-94 2600 19.875
9-Dec-93 80400 17.375 15-Feb-94 61100 19.5 22-Apr-94 17700 20
10-Dec-93 99700 17.25 16-Feb-94 95600 19.875 25-Apr-94 39000 20.125
13-Dec-93 15400 17.25 17-Feb-94 296100 20 26-Apr-94 8400 20
14-Dec-93 68700 16.75 18-Feb-94 88200 20 27-Apr-94 #N/A 20
15-Dec-93 73600 16.75 21-Feb-94 #N/A 20 28-Apr-94 16000 20
16-Dec-93 38200 16.875 22-Feb-94 29700 20.125 29-Apr-94 16800 20.375
17-Dec-93 216200 16.875 23-Feb-94 33100 20.5 2-May-94 5400 20.125
20-Dec-93 89500 17 24-Feb-94 108900 20.75 3-May-94 8100 20.125
21-Dec-93 65300 17 25-Feb-94 110600 21 4-May-94 9600 19.875
22-Dec-93 166800 17.125 28-Feb-94 120800 21.75 5-May-94 5300 20
23-Dec-93 36400 17.25 1-Mar-94 164800 20.875 6-May-94 6300 20
24-Dec-93 #N/A 17.25 2-Mar-94 27800 20.875 9-May-94 2100 20
27-Dec-93 15500 17.375 3-Mar-94 43400 20.75 10-May-94 5900 19.875
28-Dec-93 11200 17.375 4-Mar-94 71500 19.875 11-May-94 4000 19.875
29-Dec-93 78100 17.75 7-Mar-94 32700 20.125 12-May-94 12700 19.875
30-Dec-93 16600 17.5 8-Mar-94 54700 20.5 13-May-94 18800 20.125
31-Dec-93 29200 17.875 9-Mar-94 101000 20.375 16-May-94 8800 20
3-Jan-94 16900 17.75 10-Mar-94 12000 20 17-May-94 5500 20
4-Jan-94 45900 17.5 11-Mar-94 28900 19.875 18-May-94 11000 20.125
5-Jan-94 102000 17.5 14-Mar-94 3700 20.125 19-May-94 9000 20
6-Jan-94 132500 17.75 15-Mar-94 74700 20.375 20-May-94 21200 20
7-Jan-94 17000 17.625 16-Mar-94 10000 20 23-May-94 1300 20
10-Jan-94 23200 17.75 17-Mar-94 19500 20.5 24-May-94 14100 20.125
11-Jan-94 42300 17.75 18-Mar-94 258000 20.5 25-May-94 15900 20
12-Jan-94 52500 17.75 21-Mar-94 5600 20 26-May-94 23200 20.125
13-Jan-94 127500 17.875 22-Mar-94 3600 20.125 27-May-94 8400 20.125
14-Jan-94 47700 17.75 23-Mar-94 9400 20.5 30-May-94 #N/A 20.125
17-Jan-94 51000 17.625 24-Mar-94 7800 20.25 31-May-94 22000 19.875
18-Jan-94 9000 17.625 25-Mar-94 12600 20.125 1-Jun-94 20100 19.75
19-Jan-94 42400 17.5 28-Mar-94 2800 20.25 2-Jun-94 2500 19.75
20-Jan-94 17200 17.625 29-Mar-94 14200 20.125 3-Jun-94 4500 19.875
21-Jan-94 30200 17.625 30-Mar-94 50700 19.875 6-Jun-94 21500 19.875
24-Jan-94 32200 17.625 31-Mar-94 43300 19.875 7-Jun-94 91100 19.75
25-Jan-94 21000 17.5 1-Apr-94 #N/A 19.875 8-Jun-94 4700 19.5
26-Jan-94 27800 17.75 4-Apr-94 20800 19.75 9-Jun-94 41600 19.375
27-Jan-94 19200 17.625 5-Apr-94 112700 20 10-Jun-94 122700 19.25
28-Jan-94 7800 17.625 6-Apr-94 2300 19.75 13-Jun-94 3100 19.375
31-Jan-94 49800 18 7-Apr-94 86100 19.5 14-Jun-94 3700 19.75
1-Feb-94 157500 18.125 8-Apr-94 36000 20 15-Jun-94 20000 20
2-Feb-94 60500 18.375 11-Apr-94 8600 19.875 16-Jun-94 16900 19.875
3-Feb-94 22800 18.5 12-Apr-94 25600 19.75 17-Jun-94 8400 19.75
4-Feb-94 83600 18.625 13-Apr-94 19700 19.875 20-Jun-94 13800 19.75
</TABLE>
<PAGE> 12
<TABLE>
<CAPTION>
Date Volume Close Date Volume Close Date Volume Close
- --------- ------ ----- --------- ------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
21-Jun-94 7900 19.5 29-Aug-94 33500 18.5 4-Nov-94 142800 17
22-Jun-94 32600 19.5 30-Aug-94 12800 18.5 7-Nov-94 8400 17.125
23-Jun-94 4700 19.75 31-Aug-94 11100 18.375 8-Nov-94 31300 17
24-Jun-94 12900 19.625 1-Sep-94 24800 18.25 9-Nov-94 6100 16.875
27-Jun-94 8100 19.625 2-Sep-94 48200 18.25 10-Nov-94 50900 16.625
28-Jun-94 1400 19.875 5-Sep-94 #N/A 18.25 11-Nov-94 76300 16.5
29-Jun-94 8500 20 6-Sep-94 21300 18.375 14-Nov-94 10300 16.75
30-Jun-94 22200 20 7-Sep-94 110500 18.5 15-Nov-94 60200 16.625
1-Jul-94 17300 20 8-Sep-94 42300 18.625 16-Nov-94 23300 16.625
4-Jul-94 #N/A 20 9-Sep-94 68000 18.25 17-Nov-94 65700 16.625
5-Jul-94 11300 20 12-Sep-94 11800 18.25 18-Nov-94 13900 16.375
6-Jul-94 18800 20.125 13-Sep-94 43800 18.375 21-Nov-94 5700 16.375
7-Jul-94 18800 20.125 14-Sep-94 33800 18.125 22-Nov-94 22700 16.25
8-Jul-94 49800 20 15-Sep-94 120800 18.5 23-Nov-94 18900 15.75
11-Jul-94 17800 20.125 16-Sep-94 6700 18.375 24-Nov-94 #N/A 15.75
12-Jul-94 34300 20.125 19-Sep-94 170400 18.125 25-Nov-94 17300 16
13-Jul-94 3800 20.25 20-Sep-94 73000 18.125 28-Nov-94 37600 16
14-Jul-94 13400 20.5 21-Sep-94 9700 18 29-Nov-94 25100 16
15-Jul-94 19400 20.5 22-Sep-94 69400 18.125 30-Nov-94 24700 15.875
18-Jul-94 11900 20.5 23-Sep-94 13900 17.875 1-Dec-94 9000 15.75
19-Jul-94 22200 20.75 26-Sep-94 20700 17.875 2-Dec-94 5400 15.875
20-Jul-94 37600 20.625 27-Sep-94 8200 17.75 5-Dec-94 18100 15.75
21-Jul-94 23100 20.375 28-Sep-94 7100 17.75 6-Dec-94 44100 15.375
22-Jul-94 59400 20.375 29-Sep-94 122400 17.75 7-Dec-94 521900 14.625
25-Jul-94 9300 20 30-Sep-94 6300 17.875 8-Dec-94 179200 15.25
26-Jul-94 37200 19.75 3-Oct-94 18000 17.875 9-Dec-94 198200 15.75
27-Jul-94 26100 19.75 4-Oct-94 35400 17.5 12-Dec-94 65700 16.125
28-Jul-94 5900 19.875 5-Oct-94 73900 17.375 13-Dec-94 144900 15.75
29-Jul-94 8800 20 6-Oct-94 26300 17.5 14-Dec-94 16800 15.875
1-Aug-94 18400 20.125 7-Oct-94 51700 17.375 15-Dec-94 73100 16.25
2-Aug-94 11200 20 10-Oct-94 20200 17.5 16-Dec-94 99900 16.5
3-Aug-94 9200 20 11-Oct-94 69100 17.375 19-Dec-94 13400 16.5
4-Aug-94 29500 20 12-Oct-94 99700 17 20-Dec-94 89800 16.75
5-Aug-94 8200 20 13-Oct-94 14500 16.875 21-Dec-94 32900 16.625
8-Aug-94 16600 20 14-Oct-94 34700 17.125 22-Dec-94 7100 16.375
9-Aug-94 11900 19.75 17-Oct-94 140000 17 23-Dec-94 48300 15.875
10-Aug-94 21000 19.875 18-Oct-94 67400 17.125 26-Dec-94 #N/A 15.875
11-Aug-94 61500 19.75 19-Oct-94 19800 17.25 27-Dec-94 1900 15.875
12-Aug-94 1100 19.75 20-Oct-94 51700 17.5 28-Dec-94 256300 16.5
15-Aug-94 13700 19.5 21-Oct-94 146800 17.75 29-Dec-94 24300 16.25
16-Aug-94 78700 19.125 24-Oct-94 34100 17.75 30-Dec-94 16900 16.375
17-Aug-94 15400 19 25-Oct-94 21100 17.375 2-Jan-95 #N/A 16.375
18-Aug-94 14100 19 26-Oct-94 13800 17.5 3-Jan-95 7400 16.625
19-Aug-94 45500 19.125 27-Oct-94 22300 17.625 4-Jan-95 13100 16.375
22-Aug-94 36000 19.125 28-Oct-94 13100 17.5 5-Jan-95 45600 16.25
23-Aug-94 50400 19 31-Oct-94 75700 17.75 6-Jan-95 20000 16.25
24-Aug-94 9600 19 1-Nov-94 58000 17.625 9-Jan-95 9700 16.5
25-Aug-94 85100 18.625 2-Nov-94 3700 17.5 10-Jan-95 21800 16
26-Aug-94 34900 18.625 3-Nov-94 5400 17.375 11-Jan-95 25400 16.125
</TABLE>
<PAGE> 13
<TABLE>
<CAPTION>
Date Volume Close Date Volume Close Date Volume Close
- --------- ------ ----- --------- ------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12-Jan-95 6200 16.25 22-Mar-95 14700 16.125 30-May-95 33800 17.625
13-Jan-95 19300 16.625 23-Mar-95 8000 16 31-May-95 11900 17.5
16-Jan-95 5800 16.375 24-Mar-95 9300 16.125 1-Jun-95 20500 17.75
17-Jan-95 14200 16.375 27-Mar-95 5700 16 2-Jun-95 135200 17.25
18-Jan-95 32300 16.375 28-Mar-95 1000 16.125 5-Jun-95 60300 17.25
19-Jan-95 2400 16.5 29-Mar-95 5400 16 6-Jun-95 514100 17
20-Jan-95 5500 16.5 30-Mar-95 29700 15.875 7-Jun-95 189700 16.875
23-Jan-95 9700 16.25 31-Mar-95 9600 15.625 8-Jun-95 34700 17
24-Jan-95 14400 16 3-Apr-95 15700 15.75 9-Jun-95 22400 17
25-Jan-95 3000 16 4-Apr-95 11500 15.625 12-Jun-95 12600 17
26-Jan-95 2600 15.875 5-Apr-95 8200 15.75 13-Jun-95 297900 17.25
27-Jan-95 3700 16 6-Apr-95 14600 15.625 14-Jun-95 10800 17.375
30-Jan-95 4800 15.625 7-Apr-95 53900 15.5 15-Jun-95 212100 17.125
31-Jan-95 17100 15.875 10-Apr-95 55000 15.375 16-Jun-95 8400 17
1-Feb-95 43300 15.875 11-Apr-95 27600 15.5 19-Jun-95 13600 17
2-Feb-95 13100 15.875 12-Apr-95 12600 15.75 20-Jun-95 125000 16.875
3-Feb-95 132200 15.875 13-Apr-95 7200 15.75 21-Jun-95 43700 17
6-Feb-95 221900 16.25 14-Apr-95 #N/A 15.75 22-Jun-95 15500 16.875
7-Feb-95 2000 16 17-Apr-95 4700 15.625 23-Jun-95 36400 17.375
8-Feb-95 4100 16 18-Apr-95 7000 15.875 26-Jun-95 22200 17.25
9-Feb-95 16400 15.75 19-Apr-95 7200 15.875 27-Jun-95 9400 17.125
10-Feb-95 53100 15.75 20-Apr-95 50000 15.375 28-Jun-95 5700 17.25
13-Feb-95 61800 15.625 21-Apr-95 40300 15.375 29-Jun-95 8200 17.125
14-Feb-95 5400 15.75 24-Apr-95 12100 15.375 30-Jun-95 7100 17.25
15-Feb-95 8800 15.75 25-Apr-95 14200 15.625 3-Jul-95 4300 17.375
16-Feb-95 7400 15.625 26-Apr-95 26700 15.375 4-Jul-95 #N/A 17.375
17-Feb-95 14700 15.5 27-Apr-95 9800 15.75 5-Jul-95 13100 17.625
20-Feb-95 #N/A 15.5 28-Apr-95 13300 15.75 6-Jul-95 6100 17.375
21-Feb-95 27100 15.625 1-May-95 6700 15.875 7-Jul-95 10000 17.75
22-Feb-95 43800 15.5 2-May-95 56400 16.125 10-Jul-95 18000 17.5
23-Feb-95 73500 15.875 3-May-95 28700 16 11-Jul-95 5700 17.625
24-Feb-95 41000 15.625 4-May-95 78200 16.25 12-Jul-95 7500 17.875
27-Feb-95 16700 15.875 5-May-95 54100 16.75 13-Jul-95 8600 17.875
28-Feb-95 29700 15.875 8-May-95 75400 17.125 14-Jul-95 12000 17.875
1-Mar-95 27400 16.125 9-May-95 47500 17.75 17-Jul-95 4200 17.875
2-Mar-95 9600 16.25 10-May-95 185300 17.5 18-Jul-95 14300 17.375
3-Mar-95 68700 16.25 11-May-95 16200 17.25 19-Jul-95 9100 17.5
6-Mar-95 15900 16.25 12-May-95 7100 17.5 20-Jul-95 8100 17.375
7-Mar-95 22100 16.25 15-May-95 19600 17.375 21-Jul-95 25800 17.25
8-Mar-95 27300 16 16-May-95 14900 17 24-Jul-95 8900 17.375
9-Mar-95 7300 16 17-May-95 3600 17.125 25-Jul-95 10000 17.5
10-Mar-95 6800 16 18-May-95 40700 17 26-Jul-95 6100 17.25
13-Mar-95 1800 16 19-May-95 16000 16.75 27-Jul-95 8500 17.125
14-Mar-95 11200 16 22-May-95 5200 17.25 28-Jul-95 5700 17.25
15-Mar-95 8800 15.625 23-May-95 23000 17.375 31-Jul-95 8700 17.5
16-Mar-95 13100 16 24-May-95 9100 17.25 1-Aug-95 10000 17.375
17-Mar-95 7200 16 25-May-95 3800 17.25 2-Aug-95 3800 17.5
20-Mar-95 4700 16.125 26-May-95 16400 17.125 3-Aug-95 16600 17.25
21-Mar-95 18200 16.25 29-May-95 #N/A 17.125 4-Aug-95 622600 17.625
</TABLE>
<PAGE> 14
<TABLE>
<CAPTION>
Date Volume Close Date Volume Close Date Volume Close
- --------- ------ ----- --------- ------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7-Aug-95 162000 17.75 13-Oct-95 20000 18.125 21-Dec-95 21400 18.5
8-Aug-95 261600 17.625 16-Oct-95 21300 17.875 22-Dec-95 15500 19
9-Aug-95 197600 17.5 17-Oct-95 43500 18.125 25-Dec-95 #N/A 19
10-Aug-95 300800 17.625 18-Oct-95 23200 18.125 26-Dec-95 23900 19.125
11-Aug-95 99500 17.75 19-Oct-95 16100 18.125 27-Dec-95 51000 19.75
14-Aug-95 42300 17.5 20-Oct-95 18200 18 28-Dec-95 65900 19.875
15-Aug-95 139000 17.6875 23-Oct-95 33200 18 29-Dec-95 16000 19.25
16-Aug-95 168000 17.5 24-Oct-95 45400 17.75 1-Jan-96 #N/A 19.25
17-Aug-95 39800 17.5 25-Oct-95 10000 17.75 2-Jan-96 15600 19.5
18-Aug-95 38900 17.625 26-Oct-95 10200 18 3-Jan-96 27500 19.375
21-Aug-95 97200 17.875 27-Oct-95 9900 17.875 4-Jan-96 21000 19.5
22-Aug-95 70000 17.875 30-Oct-95 56700 17.75 5-Jan-96 24900 19.375
23-Aug-95 108700 17.875 31-Oct-95 14800 17.875 8-Jan-96 21700 19.5
24-Aug-95 47800 17.875 1-Nov-95 28300 17.25 9-Jan-96 17900 18.875
25-Aug-95 31100 18 2-Nov-95 11800 17.5 10-Jan-96 40200 19
28-Aug-95 60400 18.125 3-Nov-95 40000 17.125 11-Jan-96 57800 18.875
29-Aug-95 39100 18.25 6-Nov-95 37200 17.25 12-Jan-96 31100 18.75
30-Aug-95 55200 18.125 7-Nov-95 65300 17.125 15-Jan-96 14000 19
31-Aug-95 135600 18.125 8-Nov-95 40100 17.125 16-Jan-96 98700 19
1-Sep-95 60400 18.375 9-Nov-95 84800 17.125 17-Jan-96 112700 19.25
4-Sep-95 #N/A 18.375 10-Nov-95 18600 16.875 18-Jan-96 17200 19.5
5-Sep-95 44100 18.125 13-Nov-95 49600 17 19-Jan-96 13900 19.625
6-Sep-95 26900 18.125 14-Nov-95 48000 17.375 22-Jan-96 42000 19.5
7-Sep-95 29200 18.25 15-Nov-95 28400 17.5 23-Jan-96 15500 19.75
8-Sep-95 71100 18.5 16-Nov-95 35200 17.625 24-Jan-96 19300 19.75
11-Sep-95 46500 18.4375 17-Nov-95 14100 17.25 25-Jan-96 38400 19.75
12-Sep-95 18400 18.5 20-Nov-95 5700 17.375 26-Jan-96 26900 19.625
13-Sep-95 52600 18.625 21-Nov-95 10800 17.375 29-Jan-96 38100 19.625
14-Sep-95 18400 18.625 22-Nov-95 63800 17.25 30-Jan-96 10800 19.625
15-Sep-95 16900 18.625 23-Nov-95 #N/A 17.25 31-Jan-96 79600 20
18-Sep-95 39500 18.75 24-Nov-95 6600 17.25 1-Feb-96 61400 20
19-Sep-95 31500 18.625 27-Nov-95 99500 17.5 2-Feb-96 124500 20.125
20-Sep-95 42000 18.625 28-Nov-95 33800 18.125 5-Feb-96 98600 19.875
21-Sep-95 29600 18.125 29-Nov-95 15100 18.375 6-Feb-96 32000 20
22-Sep-95 64300 18 30-Nov-95 8700 18 7-Feb-96 33000 20
25-Sep-95 6700 18 1-Dec-95 34200 18.125 8-Feb-96 120100 19.875
26-Sep-95 17600 17.875 4-Dec-95 17500 18.1875 9-Feb-96 62100 19.875
27-Sep-95 13600 17.75 5-Dec-95 79900 18.75 12-Feb-96 64000 20.125
28-Sep-95 37800 17.25 6-Dec-95 92800 19 13-Feb-96 18200 20.25
29-Sep-95 15500 17.625 7-Dec-95 43600 18.625 14-Feb-96 90200 21
2-Oct-95 2700 17.75 8-Dec-95 36200 18.375 15-Feb-96 235500 20.25
3-Oct-95 14600 17.75 11-Dec-95 19000 19.125 16-Feb-96 29800 20.125
4-Oct-95 19800 17.625 12-Dec-95 37800 18.5 19-Feb-96 #N/A 20.125
5-Oct-95 24300 18.25 13-Dec-95 69600 18.125 20-Feb-96 48700 20
6-Oct-95 9700 18 14-Dec-95 90700 18.25 21-Feb-96 22800 20.25
9-Oct-95 12100 17.875 15-Dec-95 24700 18.375 22-Feb-96 11600 20.375
10-Oct-95 11600 17.625 18-Dec-95 16600 18.375 23-Feb-96 110800 20
11-Oct-95 23900 17.75 19-Dec-95 21000 18.375 26-Feb-96 36800 20
12-Oct-95 6900 17.875 20-Dec-95 33200 18.375 27-Feb-96 41800 20.375
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
Date Volume Close Date Volume Close Date Volume Close
- --------- ------ ----- --------- ------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
28-Feb-96 15700 20.375 7-May-96 13800 19.875 15-Jul-96 29600 20.625
29-Feb-96 23100 20 8-May-96 70500 19.75 16-Jul-96 40000 20.625
1-Mar-96 12900 20.125 9-May-96 54600 19.8755 17-Jul-96 142000 20.625
4-Mar-96 13500 19.875 10-May-96 22200 19.8755 18-Jul-96 28800 20.875
5-Mar-96 20700 20.125 13-May-96 19100 19.8755 19-Jul-96 12100 21
6-Mar-96 162500 20.25 14-May-96 28400 19.75 22-Jul-96 9700 21
7-Mar-96 76800 20.5 15-May-96 19000 19.75 23-Jul-96 6500 21
8-Mar-96 101700 19.875 16-May-96 18300 19.75 24-Jul-96 14000 20.75
11-Mar-96 139200 19.875 17-May-96 407900 19.75 25-Jul-96 20400 20.75
12-Mar-96 120600 19.875 20-May-96 89200 20 26-Jul-96 17200 20.625
13-Mar-96 128900 20 21-May-96 125900 20 29-Jul-96 11700 20.625
14-Mar-96 27000 19.75 22-May-96 45700 20 30-Jul-96 10800 20.625
15-Mar-96 27300 19.75 23-May-96 15000 20 31-Jul-96 112300 21
18-Mar-96 22000 20.125 24-May-96 7300 20 1-Aug-96 33600 21.125
19-Mar-96 75100 20.125 27-May-96 #N/A 20 2-Aug-96 74300 22
20-Mar-96 38000 19.875 28-May-96 13400 20 5-Aug-96 36600 21.75
21-Mar-96 16800 20 29-May-96 24200 20 6-Aug-96 26900 22
22-Mar-96 19600 19.875 30-May-96 24000 20.1255 7-Aug-96 46600 22
25-Mar-96 7900 19.875 31-May-96 15200 20.25 8-Aug-96 31900 21.75
26-Mar-96 18300 19.75 3-Jun-96 79800 20.25 9-Aug-96 24600 22.125
27-Mar-96 135800 19.625 4-Jun-96 23200 20.25 12-Aug-96 32900 21.75
28-Mar-96 24700 19.5 5-Jun-96 11600 20.3755 13-Aug-96 49900 21.625
29-Mar-96 58700 19.125 6-Jun-96 13900 20.5 14-Aug-96 31200 21.375
1-Apr-96 62000 19.125 7-Jun-96 32600 20.25 15-Aug-96 119100 21.5
2-Apr-96 62500 19.25 10-Jun-96 16200 20.3755 16-Aug-96 18400 21.875
3-Apr-96 23300 19.875 11-Jun-96 39500 20.6255 19-Aug-96 24800 21.5
4-Apr-96 269600 19.5 12-Jun-96 38700 20.3755 20-Aug-96 64500 21.625
5-Apr-96 #N/A 19.5 13-Jun-96 27800 20.6255 21-Aug-96 25900 21.5
8-Apr-96 9500 19.375 14-Jun-96 77200 20.6255 22-Aug-96 20600 21.75
9-Apr-96 13700 19.375 17-Jun-96 8400 20.5 23-Aug-96 20400 21.625
10-Apr-96 32100 19.25 18-Jun-96 18800 20.6255 26-Aug-96 45200 21.875
11-Apr-96 25800 19 19-Jun-96 12300 20.3755 27-Aug-96 50000 22.375
12-Apr-96 25200 19.375 20-Jun-96 22700 20.1255 28-Aug-96 58300 22.375
15-Apr-96 13300 19.25 21-Jun-96 35000 20.3755 29-Aug-96 54900 22.75
16-Apr-96 15600 19.375 24-Jun-96 117900 20.1255 30-Aug-96 47300 22.5
17-Apr-96 51200 19.625 25-Jun-96 22700 20.25 2-Sep-96 #N/A 22.5
18-Apr-96 18600 19.75 26-Jun-96 47700 20.3755 3-Sep-96 30500 22.625
19-Apr-96 35300 19.75 27-Jun-96 21700 20.25 4-Sep-96 23300 22.5
22-Apr-96 26400 20 28-Jun-96 41200 20.1255 5-Sep-96 12600 22.25
23-Apr-96 28300 19.75 1-Jul-96 10800 20.25 6-Sep-96 52500 22.5
24-Apr-96 54200 19.875 2-Jul-96 123800 20.3755 9-Sep-96 82300 23.125
25-Apr-96 30900 20 3-Jul-96 4900 20.6255 10-Sep-96 40000 23.125
26-Apr-96 6100 20 4-Jul-96 #N/A 20.6255 11-Sep-96 38100 22.875
29-Apr-96 22900 20.125 5-Jul-96 4700 20.3755 12-Sep-96 51400 23.375
30-Apr-96 52800 20 8-Jul-96 62300 20.5 13-Sep-96 24900 22.75
1-May-96 22000 20 9-Jul-96 112700 20.6255 16-Sep-96 61000 22.375
2-May-96 70800 20 10-Jul-96 17900 20.6255 17-Sep-96 33800 22
3-May-96 22600 20 11-Jul-96 39000 20.6255 18-Sep-96 21500 22.25
6-May-96 43700 20.125 12-Jul-96 35000 20.6255 19-Sep-96 18600 22.375
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
Date Volume Close Date Volume Close Date Volume Close
- --------- ------ ----- --------- ------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
20-Sep-96 22000 22.5 28-Nov-96 #N/A 24 5-Feb-97 76400 27.125
23-Sep-96 12000 22.5 29-Nov-96 23700 24.5 6-Feb-97 116800 27.25
24-Sep-96 9700 22.5 2-Dec-96 31600 24.375 7-Feb-97 52000 27.5
25-Sep-96 12500 22.625 3-Dec-96 50600 24.875 10-Feb-97 25900 27.75
26-Sep-96 68800 22.375 4-Dec-96 43000 24.5 11-Feb-97 17700 27.625
27-Sep-96 50500 22.375 5-Dec-96 18700 24.25 12-Feb-97 23500 27.375
30-Sep-96 42500 22.125 6-Dec-96 18700 24 13-Feb-97 26500 27.5
1-Oct-96 33900 22.125 9-Dec-96 37300 24 14-Feb-97 464500 27.5
2-Oct-96 19200 22.125 10-Dec-96 20700 24.375 17-Feb-97 #N/A 27.5
3-Oct-96 26700 22.25 11-Dec-96 40700 24.25 18-Feb-97 72800 27.25
4-Oct-96 37900 22.25 12-Dec-96 32400 24.625 19-Feb-97 82900 27.375
7-Oct-96 20500 22.125 13-Dec-96 22100 24.75 20-Feb-97 110500 27.125
8-Oct-96 36100 22.375 16-Dec-96 38500 24.5 21-Feb-97 87400 27
9-Oct-96 23500 22.375 17-Dec-96 31300 24.375 24-Feb-97 35100 27
10-Oct-96 4100 22.375 18-Dec-96 33500 24.375 25-Feb-97 39100 26.875
11-Oct-96 17600 22.625 19-Dec-96 58200 25 26-Feb-97 27800 26.75
14-Oct-96 10600 22.5 20-Dec-96 52700 24.75 27-Feb-97 37700 26.75
15-Oct-96 31100 22.5 23-Dec-96 13900 24.75 28-Feb-97 22500 27
16-Oct-96 26800 22.75 24-Dec-96 41600 24.75 3-Mar-97 46100 27.25
17-Oct-96 5000 22.5 25-Dec-96 #N/A 24.75 4-Mar-97 50200 27.625
18-Oct-96 28900 22.5 26-Dec-96 26200 24.75 5-Mar-97 128300 27.75
21-Oct-96 20800 22.25 27-Dec-96 72400 24.75 6-Mar-97 69200 27.75
22-Oct-96 11100 22.75 30-Dec-96 46000 24.875 7-Mar-97 61500 27.875
23-Oct-96 2800 22.875 31-Dec-96 47300 25 10-Mar-97 55000 28.125
24-Oct-96 43100 23.25 1-Jan-97 #N/A 25 11-Mar-97 49100 28.125
25-Oct-96 6600 23.125 2-Jan-97 49500 24.875 12-Mar-97 34500 28
28-Oct-96 18300 23 3-Jan-97 47200 25.25 13-Mar-97 56200 28
29-Oct-96 5900 23.125 6-Jan-97 77200 25.375 14-Mar-97 25100 28.25
30-Oct-96 11700 23.125 7-Jan-97 82900 26.5 17-Mar-97 43000 28.375
31-Oct-96 17800 23 8-Jan-97 68000 26.375 18-Mar-97 85900 29.375
1-Nov-96 14400 23 9-Jan-97 74600 26.125 19-Mar-97 110300 28.625
4-Nov-96 43900 23.625 10-Jan-97 34000 26.25 20-Mar-97 32600 28.375
5-Nov-96 56500 24 13-Jan-97 39300 26.75 21-Mar-97 47500 28.5
6-Nov-96 44900 24.25 14-Jan-97 57800 27.375 24-Mar-97 34300 28.125
7-Nov-96 77300 24.75 15-Jan-97 59500 27.5 25-Mar-97 94300 28.25
8-Nov-96 29400 24.875 16-Jan-97 40300 27.375 26-Mar-97 90400 28.125
11-Nov-96 19600 24.75 17-Jan-97 68500 27.5 27-Mar-97 90100 28.375
12-Nov-96 19100 24.875 20-Jan-97 58600 27.625 28-Mar-97 #N/A 28.375
13-Nov-96 22300 25 21-Jan-97 49100 27.5 31-Mar-97 41500 28.375
14-Nov-96 25900 25 22-Jan-97 35400 27.375 1-Apr-97 85500 28.625
15-Nov-96 19400 24.5 23-Jan-97 30900 27.25 2-Apr-97 279700 28.375
18-Nov-96 15500 24.625 24-Jan-97 34500 26.75 3-Apr-97 255200 28.375
19-Nov-96 8900 24.625 27-Jan-97 36600 26.375 4-Apr-97 175500 28
20-Nov-96 19800 24.5 28-Jan-97 25100 26.625 7-Apr-97 18100 28
21-Nov-96 52400 24.125 29-Jan-97 44800 26.25 8-Apr-97 21400 28
22-Nov-96 68000 24.125 30-Jan-97 31300 26.75 9-Apr-97 17200 27.625
25-Nov-96 41300 24 31-Jan-97 20300 26.75 10-Apr-97 32600 27.625
26-Nov-96 20800 23.75 3-Feb-97 30900 26.75 11-Apr-97 31900 27.625
27-Nov-96 8000 24 4-Feb-97 28800 26.875 14-Apr-97 39200 27.5
</TABLE>
<PAGE> 17
<TABLE>
<CAPTION>
Date Volume Close Date Volume Close Date Volume Close
- --------- ------ ----- --------- ------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
15-Apr-97 40200 27.625 23-Jun-97 20400 29.375 29-Aug-97 49900 28.625
16-Apr-97 40600 28.125 24-Jun-97 21000 29.4375 1-Sep-97 #N/A 28.625
17-Apr-97 30000 28.125 25-Jun-97 13600 29.4375 2-Sep-97 19200 28.75
18-Apr-97 34600 28 26-Jun-97 16300 29.25 3-Sep-97 34700 28.6875
21-Apr-97 50100 27.875 27-Jun-97 13900 29.4375 4-Sep-97 15900 28.6875
22-Apr-97 23400 28 30-Jun-97 54800 29.375 5-Sep-97 27700 28.5625
23-Apr-97 16400 27.875 1-Jul-97 111600 29.5625 8-Sep-97 41800 28.4375
24-Apr-97 34400 26.75 2-Jul-97 38000 29.375 9-Sep-97 32500 28.6875
25-Apr-97 23400 26.625 3-Jul-97 14200 29.625 10-Sep-97 122600 28.625
28-Apr-97 68800 26.5 4-Jul-97 #N/A 29.625 11-Sep-97 34600 28.5
29-Apr-97 563100 26.625 7-Jul-97 67900 29.8125 12-Sep-97 12600 28.9375
30-Apr-97 56800 26.75 8-Jul-97 46400 29.375 15-Sep-97 11600 29.125
1-May-97 61900 26.375 9-Jul-97 43700 29.0625 16-Sep-97 27600 29.625
2-May-97 54500 26.375 10-Jul-97 35400 29.5 17-Sep-97 27000 29.875
5-May-97 29500 26.75 11-Jul-97 104900 29.6875 18-Sep-97 26600 30.1875
6-May-97 45900 26.625 14-Jul-97 26000 29.375 19-Sep-97 62800 30.75
7-May-97 26200 26.125 15-Jul-97 108200 29.5 22-Sep-97 49900 30.875
8-May-97 35700 25.75 16-Jul-97 13000 29.5 23-Sep-97 79000 31.1875
9-May-97 348300 25.625 17-Jul-97 50700 29.5 24-Sep-97 34200 31.75
12-May-97 78600 26.125 18-Jul-97 62300 29.5625 25-Sep-97 28100 32
13-May-97 48800 26.5 21-Jul-97 11200 29.5625 26-Sep-97 40500 32.125
14-May-97 16600 26.625 22-Jul-97 23000 29.6875 29-Sep-97 30700 32.375
15-May-97 24800 27.125 23-Jul-97 48100 29.8125 30-Sep-97 53000 33.375
16-May-97 33800 27 24-Jul-97 57400 30 1-Oct-97 69500 33.125
19-May-97 17800 27.25 25-Jul-97 24300 30.0625 2-Oct-97 78700 33.1875
20-May-97 42400 27.5 28-Jul-97 33900 29.9375 3-Oct-97 35700 33.1875
21-May-97 79900 28 29-Jul-97 9400 30 6-Oct-97 55300 33.125
22-May-97 25500 28.125 30-Jul-97 22000 30.1875 7-Oct-97 70500 33.125
23-May-97 35900 28.125 31-Jul-97 15100 30 8-Oct-97 59300 33.5
26-May-97 #N/A 28.125 1-Aug-97 16500 29.875 9-Oct-97 22600 32.875
27-May-97 38100 28.25 4-Aug-97 12700 29.8125 10-Oct-97 37900 31.75
28-May-97 25300 28.375 5-Aug-97 115700 29.75 13-Oct-97 24600 31.4375
29-May-97 74500 28 6-Aug-97 8000 29.625 14-Oct-97 27400 31.1875
30-May-97 78200 28.125 7-Aug-97 124700 29.5 15-Oct-97 20300 31.1875
2-Jun-97 42300 28 8-Aug-97 86600 29.5 16-Oct-97 20200 31
3-Jun-97 35600 28.125 11-Aug-97 97400 29 17-Oct-97 17400 30.6875
4-Jun-97 15100 28.25 12-Aug-97 141300 29 20-Oct-97 18400 30.75
5-Jun-97 13300 28.125 13-Aug-97 39900 28.75 21-Oct-97 15200 30.6875
6-Jun-97 41800 28.25 14-Aug-97 13100 28.875 22-Oct-97 11300 30.6875
9-Jun-97 10100 28.375 15-Aug-97 5200 28.875 23-Oct-97 24300 30.4375
10-Jun-97 22700 28.25 18-Aug-97 6900 28.8125 24-Oct-97 38800 30.375
11-Jun-97 43600 28.25 19-Aug-97 22300 28.9375 27-Oct-97 96300 29.75
12-Jun-97 63800 28.5 20-Aug-97 20400 28.75 28-Oct-97 56900 29.875
13-Jun-97 101400 29.375 21-Aug-97 20000 28.75 29-Oct-97 31700 30.125
16-Jun-97 22500 29.875 22-Aug-97 14800 28.6875 30-Oct-97 28700 30.25
17-Jun-97 88800 30 25-Aug-97 39700 28.625 31-Oct-97 21700 30.75
18-Jun-97 60100 29.75 26-Aug-97 16900 28.25 3-Nov-97 18800 30.9375
19-Jun-97 34100 29.625 27-Aug-97 15200 28.4375 4-Nov-97 12800 31
20-Jun-97 56000 29.625 28-Aug-97 24000 28.5625 5-Nov-97 19800 31.25
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
Date Volume Close Date Volume Close Date Volume Close
- --------- ------ ----- --------- ------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
6-Nov-97 9700 31.125 14-Jan-98 65400 32 24-Mar-98 19300 30.4375
7-Nov-97 63900 31.5 15-Jan-98 37400 31.75 25-Mar-98 59100 30.75
10-Nov-97 36500 31.6875 16-Jan-98 36600 31.5625 26-Mar-98 39400 31.1875
11-Nov-97 12300 31.625 19-Jan-98 #N/A 31.5625 27-Mar-98 10800 31.0625
12-Nov-97 18900 31.5 20-Jan-98 17700 32 30-Mar-98 15100 31.125
13-Nov-97 82700 31.1875 21-Jan-98 9700 32.1875 31-Mar-98 32800 31.5
14-Nov-97 25200 31 22-Jan-98 30500 32.0625 1-Apr-98 15600 31.3125
17-Nov-97 38500 31.1875 23-Jan-98 14200 32 2-Apr-98 14400 31.25
18-Nov-97 95700 30.75 26-Jan-98 11100 32.125 3-Apr-98 6500 31.4375
19-Nov-97 12400 30.9375 27-Jan-98 14700 31.625 6-Apr-98 24800 31.4375
20-Nov-97 7300 31 28-Jan-98 25100 32.0625 7-Apr-98 57800 31.875
21-Nov-97 15400 31.0625 29-Jan-98 11200 32.1875 8-Apr-98 16100 31.4375
24-Nov-97 36900 30.875 30-Jan-98 9400 32.0625 9-Apr-98 22300 31.375
25-Nov-97 33600 31 2-Feb-98 24100 32.0625 10-Apr-98 #N/A 31.375
26-Nov-97 33500 31.0625 3-Feb-98 28600 31.9375 13-Apr-98 48700 31.375
27-Nov-97 #N/A 31.0625 4-Feb-98 17500 31.8125 14-Apr-98 39500 31.25
28-Nov-97 20600 31.0625 5-Feb-98 20900 31.8125 15-Apr-98 108200 31.25
1-Dec-97 54100 31.25 6-Feb-98 22100 31.625 16-Apr-98 18000 31.0625
2-Dec-97 67000 31 9-Feb-98 19200 31.5625 17-Apr-98 48400 31.25
3-Dec-97 109800 30.875 10-Feb-98 48000 31.625 20-Apr-98 31300 31.1875
4-Dec-97 200700 31.1875 11-Feb-98 39600 31.8125 21-Apr-98 73300 31.125
5-Dec-97 38900 31 12-Feb-98 32300 31.1875 22-Apr-98 86500 31.1875
8-Dec-97 146000 31.0625 13-Feb-98 98800 30.75 23-Apr-98 221100 30.9375
9-Dec-97 176600 31.1875 16-Feb-98 #N/A 30.75 24-Apr-98 54400 30.9375
10-Dec-97 14400 31.1875 17-Feb-98 48500 30.75 27-Apr-98 11700 30.5
11-Dec-97 77900 31.0625 18-Feb-98 40900 30.4375 28-Apr-98 18600 30.5
12-Dec-97 42400 31.1875 19-Feb-98 23100 30.3125 29-Apr-98 5800 30.5
15-Dec-97 38700 31.1875 20-Feb-98 39000 30.4375 30-Apr-98 53900 30.5625
16-Dec-97 13400 31.0625 23-Feb-98 19500 30.6875 1-May-98 22700 30.4375
17-Dec-97 112300 31 24-Feb-98 36600 30.5625 4-May-98 98000 30.375
18-Dec-97 43900 30.9375 25-Feb-98 18600 30.875 5-May-98 58200 30.4375
19-Dec-97 52800 31 26-Feb-98 15700 30.8125 6-May-98 62500 30.0625
22-Dec-97 89100 31.0625 27-Feb-98 40400 30.5 7-May-98 48500 30.125
23-Dec-97 9900 31.125 2-Mar-98 70200 30.4375 8-May-98 35100 30.125
24-Dec-97 26200 31.0625 3-Mar-98 18900 30.625 11-May-98 53400 30.4375
25-Dec-97 #N/A 31.0625 4-Mar-98 30200 30.625 12-May-98 60300 30.3125
26-Dec-97 4900 31.1875 5-Mar-98 19900 30.5625 13-May-98 142900 30.3125
29-Dec-97 27200 31.3125 6-Mar-98 22500 30.875 14-May-98 9500 30
30-Dec-97 32900 32 9-Mar-98 47900 30.5625 15-May-98 35200 29.9375
31-Dec-97 11900 31.8125 10-Mar-98 76400 30.4375 18-May-98 26900 29.75
1-Jan-98 #N/A 31.8125 11-Mar-98 248600 30.625 19-May-98 54000 29.9375
2-Jan-98 4400 32.0625 12-Mar-98 11900 30.625 20-May-98 16700 30
5-Jan-98 12000 32 13-Mar-98 42000 30.5 21-May-98 108800 29.875
6-Jan-98 22900 31.875 16-Mar-98 31700 30.625 22-May-98 40100 29.8125
7-Jan-98 9600 31.875 17-Mar-98 12700 30.5625 25-May-98 #N/A 29.8125
8-Jan-98 13300 31.9375 18-Mar-98 10800 30.4375 26-May-98 46800 29.75
9-Jan-98 126700 32 19-Mar-98 24700 30.5625 27-May-98 12100 29.5
12-Jan-98 31200 31.875 20-Mar-98 20500 30.5625 28-May-98 38400 29.5625
13-Jan-98 33800 32.0625 23-Mar-98 15000 30.4375 29-May-98 30600 29.875
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
Date Volume Close Date Volume Close Date Volume Close
- --------- ------ ----- --------- ------ ----- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1-Jun-98 49500 29.8125 18-Aug-98 63200 27.25 4-Nov-98 75000 26.5625
2-Jun-98 22800 29.9375 19-Aug-98 22400 27.25 5-Nov-98 24100 26.9375
3-Jun-98 232600 29.8125 20-Aug-98 42300 27.3125 6-Nov-98 28100 26.625
4-Jun-98 6700 29.875 21-Aug-98 56800 26.875 9-Nov-98 30200 26.5625
5-Jun-98 22100 29.75 24-Aug-98 71500 27.0625 10-Nov-98 1042600 27
8-Jun-98 13500 29.9375 25-Aug-98 80900 26.875 11-Nov-98 25300 27.125
9-Jun-98 26900 29.75 26-Aug-98 51100 26.875 12-Nov-98 31400 27.3125
10-Jun-98 39300 29.625 27-Aug-98 117500 26.75 13-Nov-98 45900 26.9375
11-Jun-98 165000 29.9375 28-Aug-98 53000 26.375 16-Nov-98 54200 27.375
12-Jun-98 63200 29.5 31-Aug-98 100900 25.5 17-Nov-98 20400 27.75
15-Jun-98 54300 29.3125 1-Sep-98 69100 25.4375 18-Nov-98 22300 27.5
16-Jun-98 46300 29.25 2-Sep-98 68500 25.6797 19-Nov-98 11100 27.4375
17-Jun-98 7100 29.3125 3-Sep-98 29500 25.375 20-Nov-98 7600 27.25
18-Jun-98 11700 29.25 4-Sep-98 58400 25.1875 23-Nov-98 13600 27.125
19-Jun-98 17700 29.0625 7-Sep-98 #N/A 25.1875 24-Nov-98 20800 27.0625
22-Jun-98 41800 29.125 8-Sep-98 59900 25.625 25-Nov-98 25700 27.125
23-Jun-98 21800 29.25 9-Sep-98 62500 24.75 26-Nov-98 #N/A 27.125
24-Jun-98 20500 28.5625 10-Sep-98 42500 24.125 27-Nov-98 13000 27.4375
25-Jun-98 33900 28.625 11-Sep-98 76300 23.5 30-Nov-98 52300 26.8125
26-Jun-98 30200 28.3125 14-Sep-98 94400 24.125 1-Dec-98 56500 27.375
29-Jun-98 29000 28.4375 15-Sep-98 107900 24.0625 2-Dec-98 968200 31.5625
30-Jun-98 76800 28.9375 16-Sep-98 114200 24.375 3-Dec-98 439000 31.625
1-Jul-98 164400 28.8125 17-Sep-98 7500 24.5 4-Dec-98 445400 31.5
2-Jul-98 30500 28.875 18-Sep-98 54500 25.3125 7-Dec-98 294900 31.6523
3-Jul-98 #N/A 28.875 21-Sep-98 123900 25.4375 8-Dec-98 247100 31.75
6-Jul-98 79000 29 22-Sep-98 112700 26.4375 9-Dec-98 59500 31.8125
7-Jul-98 146200 29.5 23-Sep-98 64100 26.875 10-Dec-98 109000 31.875
8-Jul-98 62200 29.5 24-Sep-98 95800 27 11-Dec-98 343000 31.6875
9-Jul-98 8800 29.5 25-Sep-98 11300 26.75 14-Dec-98 138400 31.75
10-Jul-98 32500 29.5 28-Sep-98 27600 26.6875 15-Dec-98 50700 31.8125
13-Jul-98 38000 29.625 29-Sep-98 22100 26.5625 16-Dec-98 22000 31.9375
14-Jul-98 19900 29.6875 30-Sep-98 56700 26.875 17-Dec-98 135700 31.9375
15-Jul-98 72600 29.6875 1-Oct-98 15200 26.25 18-Dec-98 89700 32
16-Jul-98 43000 29.75 2-Oct-98 23400 26 21-Dec-98 14400 32
17-Jul-98 27100 29.625 5-Oct-98 77900 25.375 22-Dec-98 80200 31.75
20-Jul-98 24700 29.625 6-Oct-98 29700 24.75 23-Dec-98 26300 31.875
21-Jul-98 43100 29.5 7-Oct-98 48400 24.4375 24-Dec-98 23700 31.8125
22-Jul-98 87200 29.25 8-Oct-98 50400 23.375 25-Dec-98 #N/A 31.8125
23-Jul-98 32000 29.0625 9-Oct-98 70400 23.9375 28-Dec-98 28400 31.8125
24-Jul-98 22800 28.9375 12-Oct-98 116700 24.5 29-Dec-98 81900 31.875
27-Jul-98 22800 28.6875 13-Oct-98 46000 24.5625 30-Dec-98 13400 31.75
28-Jul-98 67100 28.5625 14-Oct-98 11300 24.625 31-Dec-98 10900 31.875
29-Jul-98 63500 28.625 15-Oct-98 36100 25.375 1-Jan-99 #N/A 31.875
30-Jul-98 62500 28.625 16-Oct-98 25600 25.625 4-Jan-99 32300 31.8125
31-Jul-98 20900 28.25 19-Oct-98 34100 25.875 5-Jan-99 93500 31.875
3-Aug-98 43900 28.1875 20-Oct-98 38600 25.875 6-Jan-99 354200 32.0625
4-Aug-98 57200 27.3125 21-Oct-98 61900 26 7-Jan-99 133700 32
5-Aug-98 27700 27 22-Oct-98 55100 26 8-Jan-99 16100 32
6-Aug-98 92000 27 23-Oct-98 35100 26.4375 11-Jan-99 79000 32.0625
7-Aug-98 112200 27.25 26-Oct-98 17500 26.625 12-Jan-99 89000 32.1875
10-Aug-98 13100 27.3125 27-Oct-98 16400 26.25 13-Jan-99 70900 32
11-Aug-98 39300 27.0625 28-Oct-98 21200 26.25 14-Jan-99 98700 32
12-Aug-98 91800 27.25 29-Oct-98 160100 26.1875 15-Jan-99 179700 32.375
13-Aug-98 75700 27.25 30-Oct-98 149700 26.25 18-Jan-99 #N/A 32.375
14-Aug-98 42200 27.125 2-Nov-98 98900 26.1875 19-Jan-99 184000 32.125
17-Aug-98 61500 27.25 3-Nov-98 135500 26.1875 20-Jan-99 82800 32
</TABLE>
<PAGE> 20
PROJECT DELTA
- --------------------------------------------------------------------------------
Analysis of All Shareholdings(1)
<TABLE>
<CAPTION>
CUMULATIVE
RANK INSTITUTION CHANGE CURRENT HOLDINGS %TSO %TSO REPORT DATE
------- ------------------------------------- ---------- ---------------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
1 Beta(2) - 28,260,443 62.4% 62.4% 12/02/98
2 ABKB/LaSalle Securities Ltd. 11,100 1,246,300 2.8% 65.1% 9/30/98
3 Morgan Stanley Dean Witter (3) 319,800 1,098,400 2.4% 67.5% 9/30/98
4 Lend Lease ERE Rosen Real Estate Sec 88,750 804,500 1.8% 69.3% 9/30/98
5 Prudential Mutual Fund Invt. Mgmt. - 787,400 1.7% 71.1% 9/30/98
6 Capital Guardian Trust Company (33,300) 648,400 1.4% 72.5% 9/30/98
7 Franklin Resources, Inc. 82,537 590,017 1.3% 73.8% 9/30/98
8 Smith Barney Investment Advisors (21,356) 583,486 1.3% 75.1% 9/30/98
9 ABN AMRO Asset Management (4) 150,700 1,009,900 2.2% 77.3% 9/30/98
10 Merrill Lynch Asset Management(5) (72,975) 583,625 1.3% 78.6% 9/30/98
11 Barclays Global Investors, N.A. 83,377 391,272 0.9% 79.5% 9/30/98
12 State Teachers Retirmnt Syst. - Ohio - 300,000 0.7% 80.1% 9/30/98
13 The Vanguard Group (2,100) 294,700 0.7% 80.8% 12/31/98
14 United States Trust Co. of New York (12,900) 242,138 0.5% 81.3% 9/30/98
15 Pioneering Management Corporation (10,000) 237,000 0.5% 81.8% 9/30/98
16 John McStay Investment Counsel 37,200 205,700 0.5% 82.3% 9/30/98
17 Fidelity Management & Research Co. - 192,200 0.4% 82.7% 9/30/98
18 Northwestern Mutual Life Ins. Co. - 190,800 0.4% 83.1% 9/30/98
19 State Street Bank and Tr. Co. Boston 43,000 164,025 0.4% 83.5% 9/30/98
20 Alliance Capital Management L.P. 900 157,400 0.3% 83.8% 9/30/98
21 Cohen & Steers Capital Mgmt. Inc. (1,165,400) 118,000 0.3% 84.1% 9/30/98
22 Colorado Public Employees Retirement 47,600 105,800 0.2% 84.3% 9/30/98
23 Mellon Bank, N.A. 900 89,234 0.2% 84.5% 9/30/98
24 Duff & Phelps Investment Management - 81,100 0.2% 84.7% 9/30/98
25 Foreign & Colonial Emerging Markets 80,927 80,927 0.2% 84.9% 6/30/98
Top 25 Shareholders 38,462,767 84.9%
Remaining Holders 6,853,153 15.1%
----------- ------
Total Shares and Units Outstanding 45,315,920 100.0%
</TABLE>
Notes:
(1) Includes both common shares and OP units redeemable for common shares.
Fully diluted for options at $34.00.
(2) Includes 183,325 shares held by Mr. Beta
(3) Includes 287,400 shares held by Van Kampen.
(4) Includes 492,800 shares held by ABN AMRO Bank.
(5) Includes 142,000 shares held by Merrill Lynch Capital Markets.
<PAGE> 21
PROJECT DELTA
- --------------------------------------------------------------------------------
Transaction Rationale
ALPHA
- - Attractive price relative to numerous valuation methodologies
- - Provides shareholders approximately 20% compounded annual return, including
dividends, for shareholders who purchased shares in IPO
- - Future performance and valuation of Alpha would likely be negatively
impacted given conflicts of interest with Beta
- - Financing development plan may be difficult, and would be if current equity
market conditions continued
- - Management uncertainty prior to, and after, Proposal
- - Delivery of multi-family parcels on the ranch may be slowed
- - Public real estate market has softened as investors have left the market
BETA
- - 100% control and ownership of Alpha
- receive all of projected earnings and cash flow growth
- control of management and all decision-making
- alignment of Alpha's and Beta's interest should maximize combined
valuation
- capture full development profit and the right to develop on the Irvine
Ranch
- - Finance company better without public company debt limitations
- access less expensive, private sources of capital
- - Eliminate public scrutiny and disclosure requirements
- Also reduces overhead associated with a public company
<PAGE> 22
- --------------------------------------------------------------------------------
VALUATION OF ALPHA
- --------------------------------------------------------------------------------
<PAGE> 23
PROJECT DELTA
NAV Summary
($MM)
<TABLE>
<CAPTION>
Average 1998 Q4 Selected Preliminary
Year Forecast NOI 1999 Projected NOI Cap Rates Value Range
--------------- ------------------- ----------- ----------------------
Prop- Of Comp- 5% Rent 9% Rent Low High
erties Units letion(1) Total Per Unit Growth(3) Growth(3) Case Case Low Case High Case
------ ----- --------- ----- -------- ------------------- ---- ---- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STABILIZED PROPERTIES:
Tier I(4) 19 6,775 1993(2) $19.5 $2,878 $ 80.8 $ 83.6 7.75% 7.25% $ 1,042.8 $ 1,152.5
Tier II(5) 24 5,969 1985 $14.5 2,423 $ 60.0 $ 62.0 8.00% 7.50% $ 748.8 $ 825.9
Tier III 13 3,573 1978 $ 7.7 2,149 $ 31.8 $ 32.9 8.25% 7.75% $ 385.8 $ 424.6
-- ----- ---- ----- ------ ------ ------ ---- ---- ---------- ---------
TOTAL STABILIZED
PROPERTIES 56 16,317 $41.6 $2,552 $172.6 $178.5 7.93% 7.43% $ 2,177.5 $ 2,403.0
VALUE PER UNIT $ 133,447 $ 147,272
Properties Under
Development(6) $ 242.2 $ 307.8
TOTAL ASSET VALUE $ 2,419.7 $ 2,710.8
Cash and Other Assets(7) 14.8 14.8
Other Liabilities(7) (46.4) (46.4)
Debt(7) (752.1) (752.1)
Tax Exempt Debt Value(8) 64.3 83.5
Preferred Stock (200.0) (200.0)
---------- ---------
NET ASSET VALUE $ 1,500.2 $ 1,810.6
DILUTED SHARES(9) 45,315,920 45,315,920
NAV/SHARE $ 33.11 $ 39.96
</TABLE>
Notes:
(1) For average unit in sub-portfolios, reflects first year of completion of
project.
(2) 1994 if Promontory Point is excluded (520 unit property built in 1974).
(3) Low Case assumed 5% rent growth, high case assumed 9% rent growth. Both
cases assume 3% expense growth and 70.0% operating margin in 1998 Q4.
(4) Includes recent acquisition of One Park Place and The Hamptons. $0.3 MM
subtracted from value for costs remaining on The Hamptons.
(5) Includes recent acquisition of Rancho Santa Fe, adjusted for remaining
costs to incur of $0.6 MM for renovation capital expenditures.
(6) Includes value of Land Rights Agreement of $25-50 MM.
(7) Pro forma for 12/31/98, based on adjustments to 11/30/98 Balance Sheet.
(8) Interest rate savings of 250 bp on $334.2 MM of bonds capped at 10% and
13%.
(9) Options derived from Treasury Method using $34.00.
-10-
<PAGE> 24
PROJECT DELTA
KEY NAV ASSUMPTIONS
STABILIZED PROPERTIES
The 56 stabilized properties including recent acquisitions Park Place, Hamptons
and Rancho Santa Fe, were placed into three tiers based upon:
- year built - average rent
- location - quality
Each tier was ascribed a cap rate range:
Tier I Newer properties in prime locations with highest rents. Cap
rate range: 7.25% - 7.75%
Tier II Late 1980s product including the student housing properties.
Cap rate range: 7.5% - 8.0%
Tier III Older product, lower average rent. Cap rate range: 7.75% - 8.25%
Cap rates were applied to 1999E NOI
These ranges were evaluated and deemed appropriate in light of cash
flow yields (NOI less capital reserves) which would be about 96% as high
Net operating income was calculated based on:
- 4th quarter forecasted NOI was increased at a quarterly
compounded growth rate
- Operating margin is assumed to be 70% and annual revenues are
increased 5% to 9%
- Expenses are escalated at 3%
PROPERTIES UNDER DEVELOPMENT
Properties under development were valued as follows:
DCFs were performed for each property from 1/1/99 until stabilization
Cap rates were applied ranging from 7.25% to 8.25% to compute
terminal value at stabilization
Discount rates of 12% to 16% were utilized
LAND RIGHTS AGREEMENT
The Land Rights Agreement was calculated utilizing two methodologies:
I. Below-market land acquisition prices
Assuming the land is being transferred to Alpha at prices below what a
third party would pay, the value differential was calculated given Alpha
pays 95% of appraised value, with a total discount of 5% to 15% compared
to a third party. The agreement was valued based upon the following
variables:
<TABLE>
<S> <C> <C> <C>
Discount to market: 5% to 15% Average cost / unit: $50,000 to $75,000
Units Developed: 1,000 to 1,500 per year Discount Rates: 12% to 15%
</TABLE>
II. Value of Non-Compete
The value differential between Alpha having the Agreement and the
choice to develop, versus a third party developing on-ranch. The
agreement was valued based upon the comparison of two DCF analyses:
1. Third party developer develops on-ranch, rents increase 7% in 1999,
4% in 2000, and 3% thereafter
2. Alpha stops developing on-ranch, rents increase over time, at rates
of 1% to 2% above rates for Analysis I
-11-
<PAGE> 25
PROJECT DELTA
----------------------------------------------
Property Breakdown: 56 Stabilized Properties
<TABLE>
<CAPTION>
1999 Forecasted NOI
Date of Number of 1998 4th Quarter ---------------------
Property Tier City Completion Units Forecasted NOI Low High
-------- ---- ----- ----------- ---------- --------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Santa Maria I Irvine 1997 227 $709 $2,987 $3,111
Turtle Rock Canyon I Irvine 1991 217 656 $2,767 $2,882
The Colony I Newport Beach 1997 245 1,200 $5,059 $5,269
Newport Ridge I Newport Beach 1996 512 1,667 $7,027 $7,318
Promontory Point I Newport Beach 1974 520 1,900 $8,011 $8,343
Baypointe I Newport Beach 1997 300 1,025 $4,319 $4,498
Rancho Monterey I Tustin 1996 436 1,256 $5,296 $5,516
Villas of Renaissance I La Jolla 1992 923 2,490 $10,496 $10,930
Amherst Court I Irvine 1991 162 317 $1,336 $1,391
One Park Place I Irvine 1998 216 400 $1,686 $1,756
San Mateo I Irvine 1990 283 564 $2,377 $2,476
San Paulo I Irvine 1993 382 789 $3,328 $3,466
Santa Clara I Irvine 1996 378 1,041 $4,389 $4,570
Santa Rosa I Irvine 1996 368 962 $4,056 $4,224
Santa Rosa II I Irvine 1997 207 800 $3,373 $3,512
Villa Coronado I Irvine 1996 513 1,341 $5,654 $5,888
The Hamptons I Cupertino 1998 342 1,160 $4,890 $5,093
Rancho Mariposa I Tustin 1992 238 533 $2,245 $2,338
Sierra Vista I Tustin 1992 306 692 2,917 3,037
------ ------ ------- -------- --------
TIER I SUBTOTAL 1993 6,775 $19,501 $82,214 $85,619
------ ------ ------- -------- --------
Berkeley Court II Irvine 1986 152 369 1,558 1,622
Cedar Creek II Irvine 1985 176 383 1,613 1,680
Columbia Court II Irvine 1984 58 132 555 578
Cornell Court II Irvine 1984 109 277 1,166 1,214
Cross Creek II Irvine 1985 136 307 1,295 1,348
Dartmouth Court II Irvine 1996 294 663 2,794 2,909
Harvard Court II Irvine 1986 112 245 1,032 1,075
Rancho San Joaquin II Irvine 1976 368 862 3,633 3,784
San Carlo II Irvine 1989 354 932 3,930 4,093
San Leon II Irvine 1987 248 579 2,441 2,542
San Marco II Irvine 1988 426 934 3,939 4,103
San Marino II Irvine 1986 200 426 1,795 1,869
San Remo II Irvine 1986/88 248 512 2,159 2,248
Stanford Court II Irvine 1985 320 735 3,100 3,228
Turtle Rock Vista II Irvine 1976/77 252 666 2,810 2,926
Woodbridge Willows II Irvine 1984 200 443 1,866 1,943
Bayport II Newport Beach 1971 104 242 1,022 1,064
Bayview II Newport Beach 1971 64 178 750 781
Baywood II Newport Beach 1973/84 388 988 4,167 4,339
Newport North II Newport Beach 1986 570 1,470 6,199 6,456
Rancho Alisal II Tustin 1988/91 356 821 3,463 3,607
Rancho Maderas II Tustin 1989 266 641 $2,702 $2,814
Rancho Santa Fe II Tustin 1998 316 1,025 $4,321 $4,500
Rancho Tierra II Tustin 1989 252 632 $2,664 $2,774
------ ------ ------- -------- --------
TIER II SUBTOTAL 1985 5,969 $14,463 $60,973 $63,498
------ ------ ------- -------- --------
Deerfield III Irvine 1975/83 288 569 $2,397 $2,496
Northwood Park III Irvine 1985 168 363 $1,531 $1,595
Northwood Place III Irvine 1986 604 1,315 $5,544 $5,774
Orchard Park III Irvine 1982 60 150 $631 $657
Park West III Irvine 1970/71/72 880 1,870 $7,883 $8,210
Parwood III Irvine 1974 296 593 $2,498 $2,602
The Parklands III Irvine 1983 121 314 $1,324 $1,379
Windwood Glen III Irvine 1985 196 462 $1,947 $2,028
Windwood Knoll III Irvine 1983 248 514 $2,169 $2,259
Woodbridge Oaks III Irvine 1983 120 290 $1,222 $1,272
Woodbridge Pines III Irvine 1976 220 471 $1,984 $2,066
Woodbridge Villas III Irvine 1982 258 508 $2,141 $2,229
Mariner Square III Newport Beach 1969 114 261 $1,099 $1,145
------ ------ ------- -------- --------
Tier III Subtotals 1978 3,573 $7,678 $32,870 $33,711
------ ------ ------- -------- --------
TOTAL 16,317 $41,642 $175,557 $182,828
====== ======= ======== ========
</TABLE>
-12-
<PAGE> 26
PROJECT DELTA
Net Asset Value Back-Up
Properties Under Development
<TABLE>
<CAPTION>
First Month Terminal Cap Rates Discount Rates
--------------------- --------------------
Property Location Stabilized Units Low Case High Case Low Case High Case Low Case(1) High Case(1)
- -------- -------- ---------- ----- -------- --------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Champagne Towers Los Angeles Dec-99 119 7.75% 7.25% 15.00% 13.00% $ 47,380 $ 53,365
Brittany Ranch May-00 393 8.00% 7.50% 15.00% 13.00% 33,158 39,164
Sonoma Ranch Apr-99 196 8.00% 7.50% 14.00% 12.00% 28,752 31,025
Stonecrest Irvine Oct-99 336 8.00% 7.50% 14.00% 12.00% 31,522 35,430
The Colony at
Avventine San Diego Jun-00 232 8.00% 7.50% 15.00% 13.00% 15,697 19,372
Bair Island Redwood Dec-99 155 8.00% 7.50% 15.00% 13.00% 19,020 22,148
Park Place Ranch Aug-02 1,226 8.25% 7.75% 16.00% 14.00% 41,720 57,295
----- -------- --------
TOTAL PROPERTIES
UNDER DEVELOPMENT 2,657 $217,249 $257,799
</TABLE>
Notes:
(1) Valued as discounted cash flow as of 1/l/99.
-13-
<PAGE> 27
PROJECT DELTA
Notional Value of Land Rights Agreement(1)
($MM)
VALUE OF BELOW-MARKET LAND ACQUISITION PRICES
<TABLE>
<CAPTION>
Average land cost/unit(2) $50,000 Inflation 3.0%
Units developed/year(3) 1,000 % of appraised value(4) 95.0%
% of third party value 100.0% Total Discount 5.0%
Units to be Land Appraised 3rd Party Total
Developed(2) Purchase Price Value Value Difference units
------------ -------------- --------- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
1999 1,476 78.20 91.17 91.17 12.97 1,476
2000 559 28.79 30.30 30.30 1.52 2,035
2001 1,075 57.02 60.02 60.02 3.00 3,110
2002 1,558 85.12 89.60 89.60 4.48 4,668
2003 1,220 68.66 72.27 72.27 3.61 5,888
2004 1,000 57.96 61.01 61.01 3.05 6,888
2005 1,000 59.70 62.84 62.84 3.14 7,888
2006 1,000 61.49 64.73 64.73 3.24 8,888
2007 1,000 63.34 66.67 66.67 3.33 9,888
2008 112 7.31 7.69 7.69 0.38 10,000
</TABLE>
<TABLE>
<CAPTION>
Average Total Total Units Developed
------- ----- ---------------------
Land Cost Market Discount 4,000 7,000 10,000 14,000
--------- --------------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
$50,000 15% $35.4 $50.1 $61.0 $71.17
50,000 10% $25.2 $34.6 $41.5 $48.01
50,000 5% $16.1 $20.6 $24.0 $27.17
$75,000 15% $46.5 $68.5 $84.8 $100.11
75,000 10% $32.3 $46.3 $56.7 $66.45
75,000 5% $19.5 $26.3 $31.4 $36.15
</TABLE>
Notes:
(1) Present value at discount rate of 14%
(2) Recent land sale acquisition comps are in the $50,000 to $75,000 per unit
range. 1999 land purchase price includes actuals for Bonita Canyon 2 & 3.
(3) For 1999-2003, units developed according to Alpha business plan for Irvine
Ranch and according to total potential build-out of 4,000 to 8,000 units
(4) Per Land Rights Agreement
-14-
<PAGE> 28
PROJECT DELTA
Notional Value of Land Rights Agreement (1)
($MM)
VALUE OF NON-COMPETE
<TABLE>
<CAPTION>
DCF Analysis 1999 2000 2001 2002 2003
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Analysis I LOSS OF NON-COMPETE - THIRD PARTY DEVELOPERS
ON-RANCH
On-ranch land can be sold to third party
developers
On-ranch development is deducted from
Alpha company model
Projected Rental Growth: 7.0% 4.0% 3.0% 3.0% 3.0%
Analysis 11 VALUE OF NON-COMPETE - ALPHA RIGHT TO DEVELOP
Alpha stops buying land and ends on-ranch
development, constricting supply
On-ranch development is deducted from Alpha
company model
Increase:
---------
Incremental Rental Growth - 1.0% by year 5 0.2% 7.2% 4.4% 3.6% 3.8% 4.0%
Incremental Rental Growth - 1.5% by year 5 0.3% 7.3% 4.6% 3.9% 4.2% 4.5%
Incremental Rental Growth - 2.0% by year 5 0.4% 7.4% 4.8% 4.2% 4.6% 5.0%
</TABLE>
<TABLE>
<CAPTION>
INCREASE IN RENT BY YEAR 5
--------------------------
VALUE OF NON-COMPETE: TERMINAL MULTIPLE 1.0% 1.5% 2.0%
--------------------- ----------------- ---- ---- ----
<S> <C> <C> <C> <C>
9.Ox $50.7 $65.5 $ 91.4
9.5x $53.3 $68.8 $ 96.1
10.0x $55.9 $72.2 $100.8
10.5x $58.5 $75.5 $105.4
</TABLE>
Notes:
(1) Based on difference in present value of dividend discount models at 14%
discount rate
-15-
<PAGE> 29
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Alpha Land Purchases
<TABLE>
<CAPTION>
Difference % Difference
Beta Price Alpha Between of
Project Date Sold Total Units Appraisal per Unit Appraisal Appraisals Alpha & Beta
- ----------------- --------- ----------- ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Villa Coronado Jul-94 513 $15,900,000 $30,994 $ 5,400,000 $10,500,000 66%
Santa Rosa I Jul-94 368 12,100,000 32,880 5,700,000 6,400,000 53%
Santa Clara Jul-94 378 11,800,000 31,217 4,700,000 7,100,000 60%
Rancho Monterey Jul-94 436 11,400,000 26,147 9,200,000 2,200,000 19%
Newport Ridge Jul-94 512 14,800,000 28,906 13,000,000 1,800,000 12%
Baypointe Oct-95 300 NA NA NA NA NA
Santa Maria Feb-96 227 7,700,000 33,921 5,420,000 2,280,000 30%
The Colony Feb-96 245 5,900,000 24,082 4,230,000 1,670,000 28%
Santa Rosa II Dec-96 207 7,207,000 34,816 4,910,000 2,297,000 32%
Rancho Santa Fe Feb-97 316 9,800,000 31,013 5,920,000 3,880,000 40%
Sonoma Jul-97 196 6,687,000 34,117 5,954,000 733,000 11%
Brittany I Jul-97 393 12,280,000 31,247 11,033,000 1,247,000 10%
Bonita Canyon 2(1) Sep-98 351 24,300,000 69,231 18,000,000 6,300,000 26%
Bonita Canyon 3(1) Sep-98 188 17,500,000 93,085 13,000,000 4,500,000 26%
- -----------------------------------------------------------------------------------------------------------------
AVERAGE $12,105,692 $31,055 $ 8,189,769 $ 3,915,923 32%
- -----------------------------------------------------------------------------------------------------------------
Average of Last Two
Transactions $20,900,000 $81,158 $15,500,000 $ 5,400,000 26%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Final Price
Final Price per Unit % Difference
Third Party Difference from Final Price Difference From of
Project Appraisal Final Price Beta's Appraisal Per Unit Beta's Appraisal Final & Beta
- ----------------- ----------- ----------- ---------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Villa Coronado $11,500,000 $ 5,842,000 $10,058,000 11,388 $19,606 63%
Santa Rosa I 9,100,000 3,277,000 $ 8,823,000 8,905 $23,976 73%
Santa Clara 8,900,000 3,761,000 $ 8,039,000 9,950 $21,267 68%
Rancho Monterey 11,250,000 6,823,000 $ 4,577,000 15,649 $10,498 40%
Newport Ridge 14,500,000 9,542,000 $ 5,258,000 18,637 $10,270 36%
Baypointe NA 4,190,000 NA 13,967 NA NA
Santa Maria NA 3,343,000 $ 4,357,000 14,727 $19,194 57%
The Colony NA 3,545,000 $ 2,355,000 14,469 $ 9,612 40%
Santa Rosa II 6,210,000 5,999,000 $ 1,208,000 28,981 $ 5,836 17%
Rancho Santa Fe 7,900,000 8,408,000 $ 1,392,000 26,608 $ 4,405 14%
Sonoma 6,548,000 5,697,000 $ 990,000 29,066 $ 5,051 15%
Brittany I 11,819,000 10,325,000 $ 1,955,000 26,272 $ 4,975 16%
Bonita Canyon 2(1) 20,000,000 18,050,000 $ 6,250,000 51,425 $17,806 26%
Bonita Canyon 3(1) 14,900,000 13,252,500 $ 4,247,500 70,492 $22,593 24%
- -----------------------------------------------------------------------------------------------------------------------
AVERAGE $11,147,909 $ 7,289,607 $ 4,577,654 $24,324 $13,468 38%
- -----------------------------------------------------------------------------------------------------------------------
Average of Last Two
Transactions $17,450,000 $15,651,250 $ 5,248,750 $60,958 $20,200 25%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) IAC has not yet purchased the Bonitas - land transfer planned for end of
January 1999
- 16 -
<PAGE> 30
PROJECT DELTA
Other Assets / Other Liabilities
(Thousands)
<TABLE>
<CAPTION>
11/30/98 12/31/98
Balance Adjustments Pro Forma
-------- ----------- ----------
<S> <C> <C> <C>
OTHER ASSETS
Prepaid Fees/Insurance $1,126 $1,126
Accounts Receivables 2,495 2,495
Equipment 1,768 1,768
Tenant Improvements/Predevelopment 1,803 1,803
Organization/Due Diligence costs 570 570
Storm Relocation 193 193
Deposits 1,369 1,369
Tax Credit/Offering Costs 399 399
Notes Receivable 1,051 1,051
HUD Net Cash Flow 3,623 3,623
TOTAL OTHER ASSETS $14,396 $14,396
Less Non-Cash Assets:
Organization/Duc Diligence costs (570) (570)
Tax Credit/Offering Costs (399) (399)
------- -------
NET OTHER ASSETS $13,427 $13,427
OTHER LIABILITIES
Insurance/Tax Liabilities $1,743 $1,743
Accounts Payable 5,516 5,516
Accrued Interest 3,456 3,456
Accounts Payable - CIP 13,754 13,754
Property Tax Liability 9,964 (8,000) 1,964
Deferred/Unearned Income 1,346 1,346
Due to Property Managers &
Corp Housing 3,267 3,267
Payroll Liabilities 5,734 5,734
Other 195 195
------- ------ -------
TOTAL OTHER LIABILITIES $44,985 (8,000) $36,985
</TABLE>
-17-
<PAGE> 31
PROJECT DELTA
Balance Sheet
(Thousands)
<TABLE>
<CAPTION>
11/30/98 12/31/98
Balance Adjustments Pro Forma
------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Real Estate Assets $1,410,650 4,597 $1,415,247
Accumulated Depreciation (278,488) (278,488)
---------- ----------
1,132,162 1,132,162
Projects under development,
incl land 201,204 201,204
---------- ----------
1,333,366 1,333,366
Cash 17,402 (16,000) 1,402
Restricted Cash 1,647 1,647
Deferred financing costs 12,303 12,303
Other Assets 14,396 14,396
---------- ------- ----------
TOTAL ASSETS $1,379,114 (11,403) $1,367,711
LIABILITIES
Conventional mortgage financings $ 129,775 $ 129,775
Mortgage notes payable to TIC 49,592 49,592
Tax-exempt assessment district debt 21,306 21,306
Unsecured tax-exempt bond financings 334,190 334,190
Tax-exempt Mortgage Debt 18,000 18,000
Unsecured notes payable 99,275 99,275
Unsecured line of credit 0 0
Wells Fargo Term Loan 100,000 100,000
---------- ----------
CURRENT DEBT BALANCE $ 752,138 $ 752,138
Accounts payable and accrued
liabilities 44,985 (8,000) 36,985
Security deposits 9,446 9,446
Dividends and distributions payable 3,403 (3,403) 0
---------- ------- ----------
TOTAL LIABILITIES $ 809,972 (11,403) $ 798,569
PREFERRED STOCK
Redeemable Preferred - Series A 144,092 144,092
Redeemable Preferred - Series B 48,751 48,751
---------- ------- ----------
Total Preferred 192,843 0 192,843
TOTAL LIABILITIES AND PREFERRED $1,002,815 $1,002,815
Minority Interest 182,841 182,841
Shareholder's Equity 193,458 193,458
TOTAL LIABILITIES AND
SHAREHOLDER'S EQUITY $1,379,114 (11,403) $1,367,711
</TABLE>
-18-
<PAGE> 32
PROJECT DELTA
Stock Option Impact - Treasury Stock Method
<TABLE>
<CAPTION>
AT $34/SHARE
----------------------------------------------------
WTD. AVE. CUMULATIVE
EXERCISE NO. EXERCISE CUMULATIVE GROSS REPURCHASED NET SHARES SHARES
SERIES PRICE OUTSTANDING PRICE OUTSTANDING PROCEEDS SHARES ISSUED ISSUED
------ ----- ----------- ----- ----------- -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4/20/1995 Stock Options $12.6250 4,000 $12.6250 4,000 $50,500 1,485 2,515 2,515
3/1/1995 Stock Options 16.1250 110,333 16.0026 114,333 1,779,120 52,327 58,006 60,521
12/8/1993 Stock Options 17.4400 20,000 16.2166 134,333 348,800 10,259 9,741 70,262
11/30/1993 Stock Options 17.5000 32,500 16.4666 166,833 568,750 16,728 15,772 86,034
1/25/1994 Stock Options 17.5000 15,000 16.5518 181,833 262,500 7,721 7,279 93,313
4/30/1996 Stock Options 20.0625 4,000 16.6274 185,833 80,250 2,360 1,640 94,953
4/25/1997 Stock Options 26.6250 20,000 17.5988 205,833 532,500 15,662 4,338 99,291
4/25/1997 Stock Options 26.7500 5,000 17.8159 210,833 133,750 3,934 1,066 100,357
2/4/1997 Stock Options 26.8750 110,000 20.9218 320,833 2,956,250 86,949 23,051 123,409
7/15/1997 Stock Options 29.5000 100,000 22.9602 420,833 2,950,000 86,765 13,235 136,644
6/1/1998 Stock Options 29.8125 10,000 23.1193 430,833 298,125 8,768 1,232 137,876
5/7/1998 Stock Options 30.1250 12,500 23.3168 443,333 376,563 11,075 1,425 139,300
3/12/1998 Stock Options 30.4375 100,000 24.6274 543,333 3,043,750 89,522 10,478 149,778
2/23/1998 Stock Options 30.6875 10,000 24.7369 553,333 306,875 9,026 974 150,753
4/22/1998 Stock Options 31.1875 10,000 24.8514 563,333 311,875 9,173 827 151,580
4/1/1998 Stock Options 31.3125 23,500 25.1101 586,833 735,844 21,642 1,858 153,437
2/6/1998 Stock Options 31.6250 38,000 25.5063 624,833 1,201,750 35,346 2,654 156,092
2/2/1998 Stock Options 32.0625 53,000 26.0190 677,833 1,699,313 49,980 3,020 159,112
TOTAL WTD. AVE. $26.0190 677,833 $17,636,513 518,721 159,112
</TABLE>
-19-
<PAGE> 33
PROJECT DELTA
Summary of Discounted Cash Flow Analysis
<TABLE>
<CAPTION>
Conservative Moderate Aggressive
------------------- -------------------- ----------------
Low High Low High Low High
--- ---- --- ---- --- ----
<S> <C> <C> <C> <C> <C> <C>
Dividend Discount(1)(2) $28.86 $36.20 $30.86 $38.57 $31.91 $39.89
Free Cash Flow (3)(4) 28.96 39.73 29.77 40.71 30.82 41.91
Leveraged Recapitalization(5)(6) 29.47 38.50 31.34 40.89 33.37 43.54
</TABLE>
Notes:
(1) Dividend discount method low value: 9.5 times 2004 FFO terminal value, 14.0%
discount rate.
(2) Dividend discount method high value: 11.5 times 2004 FFO terminal value,
12.0% discount rate.
(3) Free cash flow method low value: 11.0 times 2004 EBITDA, 11.0% discount
rate.
(4) Free cash flow method high value: 12.5 times 2004 EBITDA, 10.0% discount
rate.
(5) Leveraged recap. low value: 8.0 times 2004 FFO terminal value, 17.0%
discount rate.
(6) Leveraged recap. high value: 10.0 times 2004 FFO terminal value, 15.0%
discount rate.
-20-
<PAGE> 34
PROJECT DELTA
Discounted Cash Flow Analysis Assumptions
Basic Assumptions
- Rent growth in 2000 is assumed to be 4%.
- Rent growth in 2001 and thereafter is assumed to be 3%.
- Expenses grown at 3% annually.
- Interest rate assumed to be 7.5% on all future debt.
- Development continues according to company projections but 1999
acquisitions have been omitted.
- Rent growth and occupancy for off-ranch properties left at company
projections (rent growth ranging from 4% to 5%, occupancy averages
95%).
- Other income consists of income derived from projects such as the
utility billing service (RUBS) and the appliance rental service as
well as late charges and parking fees. For developments it is assumed
to be 0.5% of total gross scheduled rent and for existing properties
it grows at 3% annually, as per company projections. Also includes
income derived from revenue sharing projects such as cable and
telecommunications as well as application, termination, and pet fees,
laundry service, and damage receipts. For developments it is assumed
to be 1% of total gross scheduled rent and for existing properties it
grows at 3% annually, as per company projections.
- Shares outstanding: 45,330,741 (assumes options converted by treasury
method using $35.00 per share value).
Variables
- Occupancy: targeted stabilization occupancy of on-ranch properties is
95% for conservative case, 96% for other cases.
- 1999 rent growth: on-ranch property rent growth in 1999 is 5% to 9%.
- G&A for leveraged scenarios is 55% of Company projections, as per
separate schedule.
- In leveraged recapitalization scenarios, Beta is assumed to borrow
$550 MM to buy shares of Alpha at $32.50 on 1/l/99.
- For conservative case with current capital structure, Company dividend
projection assumed.
- For other cases with current capital structure, company's projected
dividends increased by 100% of FFO percentage increase in 2000 through
2003 (FFO payout ratio averages 69% in 1999 to 2003).
- For cases with leveraged capital structure, 50% of FAD paid quarterly
as dividends.
-21-
<PAGE> 35
PROJECT DELTA
Conservative Case--Dividend Discount
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004(1) CAGR
---- ---- ---- ---- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $132,491 $157,583 $185,700 $218,794 $250,664
Shares Outstanding 49,539 52,302 55,601 59,694 62,932
FFO/Share $2.67 $3.01 $3.34 $3.67 $3.98 $4.40 10.5%
Dividend/Share $1.62 $1.83 $2.00 $2.21 $2.58 12.3%
</TABLE>
<TABLE>
<CAPTION>
Discount TERMINAL 2004 FFO MULTIPLE
Rates
- ----- -----------------------------------------------------------------------------------------------
9.0x 9.5x 10.0x 10.5x 11.0x 11.5x 12.0x
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
11.0% Total Equity $1,413,007 $1,472,194 $1,531,381 $1,590,567 $1,649,754 $1,708,940 $1,768,127
Per Share $31.17 $32.48 $33.78 $35.09 $36.39 $37.70 $39.00
12.0% Total Equity $1,358,173 $1,414,764 $1,471,355 $1,527,947 $1,584,538 $1,641,129 $1,697,720
Per Share $29.96 $31.21 $32.46 $33.71 $34.95 $36.20 $37.45
13.0% Total Equity $1,306,090 $1,360,221 $1,414,352 $1,468,483 $1,522,614 $1,576,745 $1,630,876
Per Share $28.81 $30.01 $31.20 $32.39 $33.59 $34.78 $35.98
14.0% Total Equity $1,256,596 $1,308,394 $1,360,192 $1,411,990 $1,463,788 $1,515,587 $1,567,385
Per Share $27.72 $28.86 $30.01 $31.15 $32.29 $33.43 $34.58
15.0% Total Equity $1,209,539 $1,259,123 $1,308,708 $1,358,293 $1,407,878 $1,457,463 $1,307,048
Per Share $26.68 $27.78 $28.87 $29.96 $31.06 $32.15 $33.24
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
-22-
<PAGE> 36
PROJECT DELTA
Moderate Case--Dividend Discount
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004(1) CAGR
-------- -------- -------- -------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $135,743 $160,673 $186,294 $215,148 $241,424
Shares Outstanding 48,606 50,597 53,026 55,917 57,789
FFO/Share $2.79 $3.18 $3.51 $3.85 $4.18 $4.62 10.6%
Dividend/Share $1.90 $2.19 $2.43 $2.65 $2.89 11.1%
</TABLE>
<TABLE>
<CAPTION>
Discount TERMINAL 2004 FFO MULTIPLE
------------------------------------------------------------------------------------------------
Rates 9.0x 9.5x 10.0x 10.5x 11.0x 11.5x 12.0x
- ---- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
11.0% Total Equity $1,508,675 $1,570,822 $1,632,969 $1,695,116 $1,757,264 $1,819,411 $1,881,558
Per Share $33.28 $34.65 $36.02 $37.39 $38.76 $40.14 $41.51
12.0% Total Equity $1,451,110 $1,510,532 $1,569,953 $1,629,375 $1,688,797 $1,748,219 $1,807,641
Per Share $32.01 $33.32 $34.63 $35.94 $37.25 $38.57 $39.88
13.0% Total Equity $1,396,415 $1,453,254 $1,510,093 $1,566,931 $1,623,770 $1,680,609 $1,737,448
Per Share $30.80 $32.06 $33.31 $34.57 $35.82 $37.07 $38.33
14.0% Total Equity $1,344,422 $1,398,811 $1,453,201 $1,507,590 $1,561,979 $1,616,368 $1,670,757
Per Share $29.66 $30.86 $32.06 $33.26 $34.46 $35.66 $36.86
15.0% Total Equity $1,294,973 $1,347,038 $1,399,103 $1,451,168 $1,503,234 $1,555,299 $1,607,364
Per Share $28.57 $29.72 $30.86 $32.01 $33.16 $34.31 $35.46
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
-23-
<PAGE> 37
PROJECT DELTA
- -------------------------------------------------------------------------------
AGGRESSIVE CASE -- DIVIDEND DISCOUNT
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004(1) CAGR
---------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $138,746 $165,950 $192,228 $221,479 $248,044
Shares Outstanding 48,603 50,584 52,924 55,693 57,502
FFO/Share $2.85 $3.28 $3.63 $3.98 $4.31 $4.78 10.9%
Dividend/Share $1.93 $2.27 $2.51 $2.74 $2.99 11.5%
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
- ---------- Terminal 2004 FFO Multiple
Discount ------------------------------------------------------------------------------------
Rates 9.0x 9.5x 10.0x 10.5x 11.0x 11.5x 12.0x
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
11.0% Total Equity $1,560,102 $1,624,432 $1,688,763 $1,753,093 $1,817,424 $1,881,754 $1,946,084
Per Share $34.42 $35.83 $37.25 $38.67 $40.09 $41.51 $42.93
12.0% Total Equity $1,500,524 $1,562,033 $1,623,542 $1,685,052 $1,746,561 $1,808,070 $1,869,580
Per Share $33.10 $34.46 $35.81 $37.17 $38.53 $39.89 $41.24
13.0% Total Equity $1,443,917 $1,502,752 $1,561,588 $1,620,423 $1,679,259 $1,738,094 $1,796,930
Per Share $31.85 $33.15 $34.45 $35.75 $37.04 $38.34 $39.64
14.0% Total Equity $1,390,107 $1,446,406 $1,502,706 $1,559,006 $1,615,306 $1,671,606 $1,727,905
Per Share $30.67 $31.91 $33.15 $34.39 $35.63 $36.87 $38.12
15.0% Total Equity $1,338,929 $1,392,823 $1,446,717 $1,500,612 $1,554,506 $1,608,400 $1,662,294
Per Share $29.54 $30.73 $31.91 $33.10 $34.29 $35.48 $36.67
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-20003 CAGR.
-24-
<PAGE> 38
PROJECT DELTA
- --------------------------------------------------------------------------------
Conservative Case--Free Cash Flow
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004(1)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
EBITDA $399,201
Cash Flow Before Financing $(356,288) $(300,344) $(292,147) $(284,850) $(274,728)
Dividends 80,081 95,372 110,890 131,669 161,959
Preferred Shares 17,763 28,900 37,900 37,900 43,300
Interest Incurred $53,104 $63,189 $69,914 $84,322 $93,535
--------- --------- --------- --------- ---------
Free Cash Flow $(205,341) $(112,882) $(73,442) $(30,959) $24,067
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Terminal 2004 EBITDA Multiple
Discount --------------------------------------------------------------------------------
Rates 10.5x 11.0x 11.5x 12.0x 12.5x 13.0x
- -------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
9.5% Total Equity $1,363,303 $1,490,095 $1,616,887 $1,743,678 $1,870,470 $1,997,262
Per Share $30.07 $32.87 $35.67 $38.46 $41.26 $44.06
10.0% Total Equity $1,305,404 $1,429,340 $1,553,276 $1,677,212 $1,801,148 $1,925,084
Per Share $28.80 $31.53 $34.26 $37.00 $39.73 $42.47
10.5% Total Equity $1,249,089 $1,370,247 $1,491,404 $1,612,562 $1,733,719 $1,854,876
Per Share $27.55 $30.23 $32.90 $35.57 $38.25 $40.92
11.0% Total Equity $1,194,311 $1,312,764 $1,431,217 $1,549,670 $1,668,123 $1,786,576
Per Share $26.35 $28.96 $31.57 $34.19 $36.80 $39.41
11.5% Total Equity $1,141,019 $1,256,840 $1,372,661 $1,488,482 $1,604,303 $1,720,124
Per Share $25.17 $27.73 $30.28 $32.84 $35.39 $37.95
</TABLE>
- --------------------------------------------------------------------------------
Notes:
(1) Assumes 2004 EBITDA is 4Q 2003 EBITDA grown at 6%.
<PAGE> 39
PROJECT DELTA
- -------------------------------------------------------------------------------
Moderate Case -- Free Cash Flow
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004(1)
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
EBITDA $406,081
Cash Flow Before Financing $(365,191) $(312,389) $(309,283) $(304,805) $(288,589)
Dividends 92,217 110,716 128,796 148,178 166,671
Preferred Shares 17,650 27,550 36,550 36,550 41,950
Interest Incurred $ 54,985 $ 68,593 $ 76,999 $ 96,034 $ 110,721
--------- --------- --------- --------- ---------
Free Cash Flow $(200,339) $(105,530) $ (66,937) $ (24,043) $ 30,754
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TERMINAL 2004 EBITDA MULTIPLE
DISCOUNT ------------------------------------------------------------------------------------------
RATES 10.5x 11.0x 11.5x 12.0x 12.5x 13.0x
- -------- ---------- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
9.5% Total Equity $1,399,690 $1,528,667 $1,657,644 $1,786,621 $1,915,598 $2,044,575
Per Share $30.88 $33.72 $36.57 $39.41 $42.26 $45.10
10.0% Total Equity $1,341,255 $1,467,327 $1,593,399 $1,719,471 $1,845,544 $1,971,616
Per Share $29.59 $32.37 $35.15 $37.93 $40.71 $43.49
10.5% Total Equity $1,284,417 $1,407,662 $1,530,908 $1,654,153 $1,777,399 $1,900,645
Per Share $28.33 $31.05 $33.77 $36.49 $39.21 $41.93
11.0% Total Equity $1,229,126 $1,349,621 $1,470,115 $1,590,610 $1,711,105 $1,831,599
Per Share $27.11 $29.77 $32.43 $35.09 $37.75 $40.40
11.5% Total Equity $1,175,334 $1,293,151 $1,410,968 $1,528,786 $1,646,603 $1,764,420
Per Share $25.93 $28.53 $31.13 $33.72 $36.32 $38.92
</TABLE>
- -------------------------------------------------------------------------------
Notes:
(1) Assumes 2004 EBITDA is 4Q 2003 EBITDA grown at 6%.
-26-
<PAGE> 40
PROJECT DELTA
- --------------------------------------------------------------------------------
Aggressive Case--Free Cash Flow
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004(1)
------ ------ ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
EBITDA $411,107
Cash Flow Before Financing $(363,751) $(311,411) $(306,920) $(301,577) $(286,487)
Dividends 93,815 114,392 132,892 152,556 171,272
Preferred Shares 17,763 28,900 37,000 37,900 43,300
Interest Incurred $53,460 $65,994 $74,236 $93,038 $107,564
--------- --------- -------- -------- --------
Free Cash Flow $(198,713) $(102,126) $(61,892) $(18,083) $35,648
</TABLE>
<TABLE>
TERMINAL 2004 EBITDA MULTIPLE
DISCOUNT -----------------------------------------------------------------------------
RATE 10.5x 11.0x 11.5x 12.0x 12.5x 13.0x
- -------- -------------- ---------- ----------- ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
9.5% Total Equity $1,448,625 $1,579,198 $1,709,772 $1,840,345 $1,970,918 $2,101,492
Per Share $31.96 $34.84 $37.72 $40.60 $43.48 $46.36
10.0% Total Equity $1,389,235 $1,516,868 $1,644,500 $1,772,133 $1,899,765 $2,027,398
Per Share $30.65 $33.46 $36.28 $39.09 $41.91 $44.72
10.5% Total Equity $1,331,467 $1,456,238 $1,581,009 $1,705,780 $1,830,551 $1,955,322
Per Share $29.37 $32.12 $34.88 $37.63 $40.38 $43.13
11.0% Total Equity $1,275,270 $1,397,256 $1,519,242 $1,641,228 $1,763,214 $1,885,200
Per Share $28.13 $30.82 $33.51 $36.20 $38.90 $41.59
11.5% Total Equity $1,220,594 $1,339,869 $1,459,145 $1,578,420 $1,697,695 $1,816,971
Per Share $26.93 $29.56 $32.19 $34.82 $37.45 $40.08
</TABLE>
Notes:
(1) Assumes 2004 EBITDA is 4Q 2003 EBITDA grown at 6%.
<PAGE> 41
PROJECT DELTA
- -------------------------------------------------------------------------------
CONSERVATIVE CASE--LEVERAGED RECAPITALIZATION
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004(1) CAGR
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $86,010 $99,474 $118,530 $142,641 $166,766
Shares Outstanding 29,421 29,421 29,421 29,421 29,421
FFO/Share $2.92 $3.38 $4.03 $4.85 $5.67 $6.69 18.0%
Dividend/Share $1.39 $1.60 $1.83 $2.20 $2.60 16.9%
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TERMINAL 2004 EBITDA MULTIPLE
DISCOUNT -----------------------------------------------------------------------------------------------------
RATES 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x
- -------- -------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
14.0% Total Equity $923,751 $974.853 $1,025,955 $1,077,057 $1,128,159 $1,179,261 $1,230,363
Per Share $31.40 $33.13 $34.87 $36.61 $38.35 $40.08 $41.82
15.0% Total Equity $888,214 $937,133 $986,051 $1,034,969 $1,083,888 $1,132,806 $1,181,725
Per Share $30.19 $31.85 $33.52 $35.18 $36.84 $38.50 $40.17
16.0% Total Equity $854,424 $901,270 $948,116 $994,962 $1,041,808 $1,088,654 $1,135,499
Per Share $29.04 $30.63 $32.23 $33.82 $35.41 $37.00 $38.60
17.0% Total Equity $822,280 $867,157 $912,035 $956,913 $1,001,791 $1,046,669 $1,091,547
Per Share $27.95 $29.47 $31.00 $32.53 $34.05 $35.58 $37.10
18.0% Total Equity $791,687 $834,695 $877,703 $920,712 $963,720 $1,006,728 $1,049,736
Per Share $26.91 $28.37 $29.83 $31.29 $32.76 $34.22 $35.68
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
<PAGE> 42
PROJECT DELTA
- --------------------------------------------------------------------------------
Moderate Case--Leveraged Recapitalization
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004(1) CAGR
------- -------- -------- -------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $90,477 $107,151 $127,226 $151,832 $176,087
Shares Outstanding 29,421 29,421 29,421 29,421 29,421
FFO/Share $3.08 $3.64 $4.32 $5.16 $5.99 $7.07 18.1%
Dividend/Share $1.47 $1.74 $1.98 $2.37 $2.78 17.3%
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
TERMINAL 2004 FFO MULTIPLE
DISCOUNT -----------------------------------------------------------------------------------------
RATES 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x
- -------- --------- ---------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
14.0% Total Equity $982,287 $1,036,295 $1,090,304 $1,144,313 $1,198,322 $1,252,331 $1,306,340
Per Share $33.39 $35.22 $37.06 $38.89 $40.73 $42.57 $44.40
15.0% Total Equity $944,536 $996,237 $1,047,938 $1,099,640 $1,151,341 $1,203,042 $1,254,743
Per Share $32.10 $33.86 $35.62 $37.38 $39.13 $40.89 $42.65
16.0% Total Equity $908,640 $958,151 $1,007,662 $1,057,173 $1,106,683 $1,156,194 $1,205,705
Per Share $30.88 $32.57 $34.25 $35.93 $37.62 $39.30 $40.98
17.0% Total Equity $874,492 $921,923 $969,354 $1,016,784 $1,064,215 $1,111,646 $1,159,077
Per Share $29.72 $31.34 $32.95 $34.56 $36.17 $37.78 $39.40
18.0% Total Equity $841,991 $887,446 $932,901 $978,356 $1,023,810 $1,069,265 $1,114,720
Per Share $28.62 $30.16 $31.71 $33.25 $34.80 $36.34 $37.89
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
<PAGE> 43
PROJECT DELTA
- -------------------------------------------------------------------------------
Aggressive Case--Leveraged Recapitalization
<TABLE>
<CAPTION>
1999-2003
1999 2000 2001 2002 2003 2004(1) CAGR
--------- --------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO $92,707 $114,340 $135,566 $161,031 $185,907
Shares Outstanding 29,421 29,421 29,421 29,421 29,421
FFO/Share $3.15 $3.89 $4.61 $5.47 $6.32 $7.52 19.0%
Dividend/Share $1.50 $1.86 $2.12 $2.53 $2.94 18.3%
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TERMINAL 2004 FFO MULTIPLE
DISCOUNT ----------------------------------------------------------------------------------------------------
RATES 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x
- -------- ---------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
14.0% Total Equity $1,046,334 $1,103,784 $1,161,234 $1,218,683 $1,276,133 $1,333,582 $1,391,032
Per Share $35.56 $37.52 $39.47 $41.42 $43.37 $45.33 $47.28
15.0% Total Equity $1,006,071 $1,061,066 $1,116,061 $1,171,055 $1,226,050 $1,281,045 $1,336,040
Per Share $34.20 $36.06 $37.93 $39.80 $41.67 $43.54 $45.41
16.0% Total Equity $ 967,786 $1,020,451 $1,073,116 $1,125,780 $1,178,445 $1,231,110 $1,283,775
Per Share $32.89 $34.68 $36.47 $38.26 $40.05 $41.84 $43.63
17.0% Total Equity $ 931,365 $ 981,817 $1,032,270 $1,082,722 $1,133,174 $1,183,627 $1,234,079
Per Share $31.66 $33.37 $35.09 $36.80 $38.52 $40.23 $41.95
18.0% Total Equity $ 896,702 $ 945,052 $ 993,403 $1,041,753 $1,090,103 $1,138,454 $1,186,804
Per Share $30.48 $32.12 $33.76 $35.41 $37.05 $38.70 $40.34
</TABLE>
- -------------------------------------------------------------------------------
Notes:
(1) Assumes 2004 FFO is grown at the 1999-2003 CAGR.
<PAGE> 44
PROJECT DELTA
- --------------------------------------------------------------------------------
General and Administrative Costs
<TABLE>
<CAPTION>
ADJUSTED
1998 BUDGET 1999 G&A
--------------- ------------
<S> <C> <C>
SALARIES & WAGES AND EMPLOYEE RELATED COSTS
President's Dept. $1,946.0 $1,946.0
CFO-Treasury Dept. 1,867.0 0.0
Accounting Dept. 1,311.0 865.3
Development & Construction Depts. - On Ranch 201.0 132.7
Development & Construction Depts. - Off Ranch 560.0 369.0
--------------- ------------
5,885.0 3,313.5
PUBLIC COSTS
Directors Fees/Board Meetings 325.0 162.5
Annual/Quarterly/Proxies Reports 235.0 0.0
Investor & Public Relations 220.0 0.0
Annual Audit/10-Q Filings 125.0 125.0
D&O Liability Insurance 180.0 180.0
Other 101.0 0.0
Special Board Committee 100.0 0.0
--------------- ------------
1,286.0 467.5
OFFICE EXPENSES & SUPPLIES 543 434.4
ABANDONMENTS 485.0 242.5
LEGAL
General 375.0 187.5
Special Board Committee 75.0 37.5
--------------- ------------
450.0 225.0
TIC PROVIDED SERVICES 133.0 133.0
RECRUITING 129.0 129.0
CONSULTING 71.0 0.0
OTHER 59.0 59.0
--------------- ------------
$9,041.0 $5,003.9
=============== ============
55%
</TABLE>
<PAGE> 45
PROJECT DELTA
- --------------------------------------------------------------------------------
Comparable Companies Estimated WACC(1)
Based on Market Expectations
<TABLE>
<CAPTION>
Consensus Implied Equity Preferred Debt
Dividend FFO Equity Share of Preferred Share of Interest Share of Implied
Company (Ticker) Yield Growth Cost Capital Coupon Capital Rate Capital WACC
- ----------------------- -------- --------- ------- -------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities
Trust (ASN) 7.6% 11.0% 18.6% 54.4% 7.8% 5.4% 7.0% 40.3% 13.4%
Avalon Bay Communities
(AVB) 6.0% 10.2% 16.2% 53.6% 8.7% 8.7% 7.0% 37.7% 12.1%
BRE Properties (BRE) 5.8% 8.0% 13.8% 62.4% 8.5%(2) 0.0% 7.0% 37.6% 11.3%
Equity Residential
Properties Trust (EQR) 6.8% 9.2% 16.0% 47.1% 8.6% 12.2% 7.0% 40.7% 11.4%
Essex Property Trust
(ESS) 6.9% 10.0% 16.9% 57.3% 8.8% 4.3% 7.0% 38.4% 12.7%
Post Properties (PPS) 6.8% 9.7% 16.5% 63.3% 7.8% 5.9% 7.0% 30.8% 13.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Mean 6.7% 9.7% 16.3% 56.4% 8.4% 6.1% 7.0% 37.6% 12.3%
Median 6.8% 9.8% 16.3% 55.8% 8.5% 5.6% 7.0% 38.0% 12.4%
- ------------------------------------------------------------------------------------------------------------------------------------
AMLI Residential
Properties (AML) 8.2% 6.5% 14.7% 46.0% 9.0% 10.6% 7.0% 43.5% 10.8%
Apartment Investment
& Management (AIV) 6.2% 12.9% 19.0% 53.3% 9.1% 9.0% 7.0% 37.8% 13.6%
Associated Estates Realty
(AEC) 15.4% 0.3% 15.8% 35.2% 9.8% 6.9% 7.0% 57.9% 10.3%
Berkshire Realty Company,
Inc. (BRI) 10.1% 6.0% 16.1% 41.1% 9.0% 6.4% 7.0% 52.5% 10.9%
Camden Property Trust
(CPT) 7.7% 8.8% 16.5% 53.7% 9.2% 4.5% 7.0% 41.7% 12.2%
Charles E. Smith
Residential (SRW) 7.1% 8.7% 15.8% 51.0% 8.3% 8.1% 7.0% 40.8% 11.6%
Gables Residential
Trust (GBP) 8.7% 7.8% 16.5% 44.3% 8.2% 6.9% 7.0% 48.8% 11.3%
Home Properties of
New York (HME) 7.6% 11.0% 18.6% 62.4% 9.1% 0.0% 7.0% 37.6% 14.3%
Mid-America Apartment
(MAA) 9.9% 7.1% 17.0% 36.7% 9.3% 10.8% 7.0% 52.5% 10.9%
Summit Properties (SMT) 9.6% 7.5% 17.1% 45.4% 8.5%(2) 0.0% 7.0% 54.6% 11.6%
Town and Country Trust
(TCT) 10.4% 7.0% 17.4% 45.6% 8.5%(2) 0.0% 7.0% 54.4% 11.7%
United Dominion Realty
Trust (UDR) 10.2% 6.5% 16.7% 37.9% 8.9% 8.8% 7.0% 53.3% 10.8%
Walden Residential
Properties (WDN) 9.2% 8.3% 17.5% 43.3% 9.2% 3.0% 7.0% 53.7% 11.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Mean 9.3% 7.6% 16.8% 45.8% 8.9% 5.8% 7.0% 48.4% 11.7%
Median 9.2% 7.5% 16.7% 45.4% 9.0% 6.9% 7.0% 52.5% 11.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Irvine Apartment
Communities (IAC) 4.8% 10.2% 15.0% 62.2% 8.4% 6.2% 7.0% 31.7% 12.1%
</TABLE>
Notes:
(1) all information as of 1/20/99.
(2) Assumes an 8.5% preferred coupon.
<PAGE> 46
PROJECT DELTA
- -------------------------------------------------------------------------------
COMPARABLE COMPANIES ESTIMATED COST OF EQUITY PER CAPM(1)
- ---------------------------
Assumptions
- ---------------------------
CAPM
ke=Rf + b(Rp)
Rfree 5.30%
Rpremium 8.00%
- ---------------------------
<TABLE>
<CAPTION>
BARRA BARRA Ke Ke
Beta Beta Predicted Historical Ke Ke BARRA BARRA
Company (Ticker) Adjusted Raw Beta Beta Adjusted Raw Predicted Historical
- --------------------------------------------- ---------- ------- -------- ------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMLI Residential Properties (AML) 0.58 0.37 0.43 0.28 9.94% 8.26% 8.71% 7.56%
Apartment Investment & Management (AIV) 0.55 0.33 0.75 0.35 9.70% 7.94% 11.32% 8.12%
Archstone Communities Trust (ASN) 0.56 0.34 0.64 0.35 9.78% 8.02% 10.40% 8.12%
Associated Estates Realty (AEC) 0.31 -0.3 0.61 0.15 7.78% 2.90% 10.14% 6.52%
Avalon Bay Communities (AVB) 0.59 0.38 0.56 0.38 10.02% 8.34% 9.81% 8.37%
Berkshire Realty Company, Inc. (BRI) 0.58 0.37 0.36 0.56 9.94% 8.26% 8.16% 9.74%
BRE Properties (BRE) 0.64 0.46 0.57 0.12 10.42% 8.98% 9.84% 6.28%
Camden Property Trust (CPT) 0.63 0.44 0.61 0.24 10.34% 8.82% 10.18% 7.25%
Charles E. Smith Residential (SRW) 0.54 0.31 0.54 0.13 9.62% 7.78% 9.65% 6.34%
Equity Residential Properties Trust (EQR) 0.60 0.4 0.71 0.51 10.10% 8.50% 10.99% 9.37%
Essex Property Trust (ESS) 0.5 0.25 0.54 0.34 9.30% 7.30% 9.61% 8.03%
Gables Residential Trust (GBP) 0.47 0.2 0.53 0.19 9.06% 6.90% 9.53% 6.78%
Home Properties of New York (HME) 0.5 0.25 0.60 0.25 9.30% 7.30% 10.06% 7.33%
Irvine Apartment Communities (IAC) 0.56 0.33 0.67 0.48 9.78% 7.94% 10.65% 9.16%
Mid-America Apartment (MAA) 0.53 0.29 0.50 0.19 9.54% 7.62% 9.29% 6.81%
Post Properties (PPS) 0.56 0.35 0.57 0.24 9.78% 8.10% 9.89% 7.20%
Summit Properties (SMT) 0.56 0.35 0.51 0.28 9.78% 8.10% 9.38% 7.54%
Town and Country Trust (TCT) 0.56 0.34 0.41 0.58 9.78% 8.02% 8.57% 9.94%
United Dominion Realty Trust (UDR) 0.48 0.22 0.56 0.28 9.14% 7.06% 9.75% 7.50%
Walden Residential Properties (WDN) 0.78 0.66 0.52 0.08 11.54% 10.58% 9.49% 5.91%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Mean 0.554 0.317 0.56 0.30 9.73% 7.84% 9.77% 7.69%
Median 0.56 0.34 0.56 0.28 9.78% 8.02% 9.78% 7.52%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note:
(1) All information as of 1/20/99.
-33-
<PAGE> 47
PROJECT DELTA
- -------------------------------------------------------------------------------
COMPARABLE COMPANIES ESTIMATED WACC PER CAPM(1)
<TABLE>
<CAPTION>
TOTAL PREFERRED EQUITY
MARKET STOCK MARKET DEBT PREFERRED Ke
COMPANY (TICKER) CAPITALIZATION OUTSTANDING VALUE OUTSTANDING INTEREST COUPON ADJUSTED
- ---------------- -------------- ----------- -------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities
Trust (ASN) $ 5,123.3 $ 275.5 $2,785.2 $2,062.6 7.0% 7.8% 9.8%
Avalon Bay Communities (AVB) $ 4,106.3 $ 358.1 $2,201.3 $1,546.9 7.0% 8.7% 10.0%
BRE Properties (BRE) $1,866.8 $ 0.0 $1,164.0 $ 702.8 7.0% 8.5%(2) 10.4%
Equity Residential
Properties Trust (EQR) $11,565.4 $1,411.3 $5,451.2 $4,702.9 7.0% 8.6% 10.1%
Essex Property Trust (ESS) $ 938.3 $ 40.0 $ 537.8 $ 360.5 7.0% 8.8% 9.3%
Post Properties (PPS) $ 2,556.0 $ 150.0 $1,618.7 $ 787.3 7.0% 7.8% 9.8%
--------- -------- -------- -------- --- --- ----
Mean $ 4,359.4 $ 372.5 $2,293.0 $1,693.8 7.0% 8.4% 9.9%
Median $ 3,331.1 $ 212.8 $1,910.0 $1,167.1 7.0% 8.5% 9.9%
========= ======== ======== ======== === === ====
AMLI Residential
Properties (AML) $ 928.4 $ 98.1 $ 426.7 $ 403.5 7.0% 9.0% 9.9%
Apartment Investment
& Management (AIV) $ 3,731.1 $ 335.0 $1,987.4 $1,408.7 7.0% 9.1% 9.7%
Associated Estates
Realty (AEC) $ 817.1 $ 56.3 $ 287.6 $ 473.2 7.0% 9.8% 7.8%
Berkshire Realty
Company Inc. (BRI) $ 1,068.3 $ 68.4 $ 439.4 $ 560.5 7.0% 9.0% 9.9%
Camden Property Trust (CPT) $ 2,312.5 $ 105.0 $1,242.8 $ 964.7 7.0% 9.2% 10.3%
Charles E. Smith
Residential (SRW) $ 1,842.2 $ 149.3 $ 940.4 $ 752.5 7.0% 8.3% 9.6%
Gables Residential
Trust (GBP) $ 1,737.6 $ 119.5 $ 769.6 $ 848.5 7.0% 8.2% 9.1%
Home Properties of
New York (HME) $ 1,079.2 $ 0.0 $ 673.5 $ 405.7 7.0% 9.1% 9.3%
Mid-America Apartment (MAA) $1,377.6 $ 148.5 $ 506.2 $ 722.9 7.0% 9.3% 9.5%
Summit Properties (SMT) $ 1,106.2 $ 0.0 $ 502.5 $ 603.7 7.0% 8.5%(2) 9.8%
Town and Country
Trust (TCT) $ 617.0 $ 0.0 $ 281.5 $ 335.6 7.0% 8.5%(2) 9.8%
United Dominion Realty
Trust (UDR) $ 2,903.7 $ 255.0 $1,099.8 $1,548.9 7.0% 8.9% 9.1%
Walden Residential
Properties (WDN) $ 1,414.0 $ 42.8 $ 611.6 $ 759.6 7.0% 9.2% 11.5%
--------- -------- -------- -------- --- --- ----
Mean $ 1,610.4 $ 106.0 $ 751.5 $ 752.9 7.0% 8.9% 9.7%
Median $ 1,377.6 $ 98.1 $ 611.6 $ 722.9 7.0% 9.0% 9.7%
========= ======== ======== ======== === === ====
Irvine Apartment
Communities (IAC) $ 2,325.0 $ 144.1 $1,445.0 $ 733.2 7.0% 8.4% 9.8%
</TABLE>
<TABLE>
<CAPTION>
Ke Ke BARRA BARRA
Ke BARRA BARRA ADJUSTED RAW PREDICTED HISTORICAL
COMPANY (TICKER) RAW PREDICTED HISTORICAL WACC WACC WACC WACC
- ---------------- ------- ----------- ---------- ----------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities
Trust (ASN) 8.0% 10.4% 8.1% 8.6% 7.6% 8.9% 7.7%
Avalon Bay Communities (AVB) 8.3% 9.8% 8.4% 8.8% 7.9% 8.7% 7.9%
BRE Properties (BRE) 9.0% 9.8% 6.3% 9.1% 8.2% 8.8% 6.5%
Equity Residential
Properties Trust (EQR) 8.5% 11.0% 9.4% 8.7% 7.9% 9.1% 8.3%
Essex Property Trust (ESS) 7.3% 9.6% 8.0% 8.4% 7.2% 8.6% 7.7%
Post Properties (PPS) 8.1% 9.9% 7.2% 8.8% 7.7% 8.9% 7.2%
---- ---- ---- ---- ---- ---- ----
Mean 8.2% 10.1% 7.9% 8.7% 7.8% 8.8% 7.5%
Median 8.2% 9.9% 8.1% 8.7% 7.8% 8.8% 7.7%
==== ==== ==== ==== ==== ==== ====
AMLI Residential
Properties (AML) 8.3% 8.7% 7.6% 8.6% 7.8% 8.0% 7.5%
Apartment Investment
& Management (AIV) 7.9% 11.3% 8.1% 8.6% 7.7% 9.5% 7.8%
Associated Estates
Realty (AEC) 2.9% 10.1% 6.5% 7.5% 5.7% 8.3% 7.0%
Berkshire Realty
Company Inc. (BRI) 8.3% 8.2% 9.7% 8.3% 7.6% 7.6% 8.3%
Camden Property Trust (CPT) 8.8% 10.2% 7.3% 8.9% 8.1% 8.8% 7.2%
Charles E. Smith
Residential (SRW) 7.8% 9.6% 6.3% 8.4% 7.5% 8.5% 6.8%
Gables Residential
Trust (GBP) 6.9% 9.5% 6.8% 8.0% 7.0% 8.2% 7.0%
Home Properties of
New York (HME) 7.3% 10.1% 7.3% 8.4% 7.2% 8.9% 7.2%
Mid-America Apartment (MAA) 7.6% 9.3% 6.8% 8.2% 7.5% 8.1% 7.2%
Summit Properties (SMT) 8.1% 9.4% 7.5% 8.3% 7.5% 8.1% 7.2%
Town and Country
Trust (TCT) 8.0% 8.6% 9.9% 8.3% 7.5% 7.7% 8.3%
United Dominion Realty
Trust (UDR) 7.1$ 9.8% 7.5% 8.0% 7.2% 8.2% 7.4%
Walden Residential
Properties (WDN) 10.6% 9.5% 5.9% 9.0% 4.9% 4.4% 2.8%
---- ---- ---- ---- ---- ---- ----
Mean 7.7% 9.6% 7.5% 8.3% 7.2% 8.0% 7.1%
Median 7.9% 9.5% 7.3% 8.3% 7.5% 8.2% 7.2%
==== ==== ==== ==== ==== ==== ====
Irvine Apartment
Communities (IAC) 7.9% 10.7% 9.2% 8.8% 7.7% 9.3% 8.4%
</TABLE>
Notes:
(1) All information as of 1/20/99.
(2) Assumes an 8.5% preferred coupon.
<PAGE> 48
PROJECT DELTA
- --------------------------------------------------------------------------------
Comparable Company Analysis(1)
<TABLE>
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Value /
EBITDA LTM: 13.2x - 16.7x: $21.18-------------------$31.83
1999E FFO Multiple: 9.2x - 10.4x $26.61---$29.91
1999E Normalized
FFO Multiple: 9.7x - 11.1x $28.06---$31.76
Pro Forma Dividend Yield(2): 5.8% - 7.6% $25.78-------------$33.49
Multiple to Total Return: 0.52 - 0.75(3) $26.51---------------$34.67
-------------------------------------------------------------------
$15.00 $20.00 $25.00 $30.00 $35.00 $40.00
</TABLE>
Notes: (1) Includes value of Land Rights Agreement estimated at $37.5MM or $0.83
per share.
(2) Based on pro forma dividend of $1.90, expected to be paid in late
1999 or in 2000.
(3) Based on 1999 FFO and long-term growth rate estimates from
First Call.
-35-
<PAGE> 49
PROJECT DELTA
- --------------------------------------------------------------------------------
Selection of Comparable Companies
<TABLE>
<CAPTION>
Company Geography Reason For Inclusion
- ------------------------- ------------------------------- -------------------------------
<S> <C> <C>
Archstone Southern California, selected California exposure; current
states in the Pacific Northwest, strategy involves entering
Southeast and Southwest high-barrier-to-entry markets
Avalon Bay Northern and Southern California, California exposure; high
selected states in the Mid- quality properties; high-
Atlantic, Northeast, Midwest and barrier-to-entry markets
Pacific Northwest
BRE Properties California, Arizona, Washington, Regional REIT; significant
Oregon, Nevada, New Mexico, Utah California exposure
and Colorado
Equity Residential In 35 states, including 64 Largest publicly traded
properties in California apartment company; improving
portfolio quality
Essex Property Trust San Francisco, Seattle, Southern California exposure;
California and Portland high-barrier-to-entry
markets
Post Properties Southeast and Southwest High quality properties;
increasingly in high-barrier-
to-entry markets
</TABLE>
-36-
<PAGE> 50
<TABLE>
<CAPTION>
PROJECT DELTA
- --------------------------------------------------------------------------------------------------------------------------
Statistics for Selected Apartment REITS(1)
Equity Total Total Aggregate
Apartment Market Market Market Cap / Value(5) / Price / FFO
Company (Ticker) Units(2) Value Capitalization(3) Unit(4) LTM EBITDA 1999E(6)
- ----------------- --------- -------- ----------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 69,582 $2,785.2 $ 5,123.3 $ 73,630 15.8x 9.6x
Avalon Bay Communities (AVB) 38,132 $2,201.3 $ 4,106.3 $107,685 16.7x 10.3x
BRE Properties (BRE) 20,375 $1,164.0 $ 1,866.8 $ 91,624 15.6x 10.4x
Equity Residential Properties Trust (EQR) 192,558 $5,451.2 $11,565.4 $ 60,062 13.7x 9.4x
Essex Property Trust (ESS) 12,266 $ 537.8 $ 938.3 $ 76,498 13.2x 9.2x
Post Properties (PPS) 26,737 $1,618.7 $ 2,556.0 $ 95,597 14.9x 10.3x
- --------------------------------------------------------------------------------------------------------------------------
LOW $ 537.8 $ 938.3 $ 60,062 13.2x 9.2x
MEAN $2,293.0 $ 4,359.4 $ 84,183 15.0x 9.9x
MEDIAN $1,910.0 $ 3,331.1 $ 84,061 15.3x 10.0x
HIGH $5,451.2 $11,565.4 $107,685 16.7x 10.4x
- --------------------------------------------------------------------------------------------------------------------------
IRVINE APARTMENTS 16,029 $ 1,378 $ 2,114.3 $131,907 15.4x 9.8x
- --------------------------------------------------------------------------------------------------------------------------
ALPHA ASSUMPTIONS:
LTM EBITDA 1999E FFO
---------- ---------
$136,950 $2.79
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE
LOW $20.34 $25.78
HIGH $31.00 $29.08
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE INCLUDING VALUE OF THE LAND RIGHTS AGREEMENT(7)
LOW $21.18 $26.61
HIGH $31.83 $29.91
- --------------------------------------------------------------------------------------------------------------------------
Price /
Debt-to-Market Normalized FFO Dividend 5-Year Total Multiple to
Company (Ticker) Capitalization 1999E(6) Yield(8) FFO Growth(6) Return Total Return
- ----------------- -------------- -------------- -------- ------------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 40.3% 10.5x 7.6% 11.0% 18.6% 0.52
Avalon Bay Communities (AVB) 37.7% 11.1x 6.0% 10.2% 16.2% 0.64
BRE Properties (BRE) 37.6% 10.7x 5.8% 8.0% 13.8% 0.75
Equity Residential Properties Trust (EQR) 40.7% 10.6x 6.8% 9.2% 16.0% 0.59
Essex Property Trust (ESS) 38.4% 9.7x 6.9% 10.0% 16.9% 0.55
Post Properties (PPS) 30.8% 10.1x 6.8% 9.7% 16.5% 0.63
- --------------------------------------------------------------------------------------------------------------------------
LOW 30.8% 9.7x 5.8% 8.0% 13.8% 0.52
MEAN 37.6% 10.5x 6.7% 9.7% 16.3% 0.61
MEDIAN 38.0% 10.5x 6.8% 9.8% 16.3% 0.61
HIGH 40.7% 11.1x 7.6% 11.0% 18.6% 0.75
- --------------------------------------------------------------------------------------------------------------------------
IRVINE APARTMENTS 31.6% 9.7x 7.0% 10.6% 17.6% 0.56
- --------------------------------------------------------------------------------------------------------------------------
ALPHA ASSUMPTIONS:
Normalized 5-Year
1999E FFO Dividend FFO Growth
---------- -------- ----------
$2.80 $1.90 10.6%
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE
LOW $27.22 $24.95 17.8% $25.68
HIGH $30.93 $32.66 16.1% $33.84
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
ALPHA IMPLIED VALUE RANGE INCLUDING VALUE OF THE LAND RIGHTS AGREEMENT(7)
LOW $28.06 $25.78 $26.51
HIGH $31.76 $33.49 $34.67
- --------------------------------------------------------------------------------------------------------------------------
Notes:
(1) All information as of 1/20/99.
(2) Does not include units under construction.
(3) Equals the sum of equity market value, debt outstanding and preferred stock at liquidation preference, in $MM.
(4) Actual dollar amounts shown.
(5) Aggregate Value equals Total Market Capitalization less cash.
(6) Estimates from First Call as of 1/20/99, unless otherwise noted.
(7) The Land Rights Agreement is valued at $0.83 per share, or $37.5MM in aggregate.
(8) Based on dividend of $1.90, expected to be paid in late 1999 or in 2000.
</TABLE>
<PAGE> 51
PROJECT DELTA
TRADING STATISTICS FOR SELECTED APARTMENT REITs
<TABLE>
<CAPTION>
Equity Total Price/FFO(8)
1/20/99 52-Week Market Market ---------------------------
Company (Ticker) Price High/Low Value(1) Capitalization(2) LTM(3) 1999E(4) 2000E(4)
- ---------------- ------- ------------- -------- ----------------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) $19.44 $24.50/$17.88 $2,785.2 $ 5,123.3 8.7x 9.6x 8.9x
Avalon Bay Communities (AVB) $34.00 $39.13/$30.50 $2,201.3 $ 4,106.3 12.8x 10.3x 9.3x
BRE Properties (BRE) $24.75 $28.69/$21.50 $1,164.0 $ 1,866.8 12.0x 10.4x 9.3x
Equity Residential Properties Trust (EQR) $41.81 $52.56/$34.69 $5,451.2 $11,565.4 13.8x 9.4x 8.7x
Essex Property Trust (ESS) $29.06 $34.94/$26.94 $ 537.8 $ 938.3 10.5x 9.2x 8.3x
Post Properties (PPS) $38.06 $42.00/$35.81 $1,618.7 $ 2,556.0 11.6x 10.3x 9.4x
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN $2,293.0 $ 4,359.4 11.6x 9.9x 9.0x
MEDIAN $1,910.0 $ 3,331.1 11.8x 10.0x 9.1x
- ----------------------------------------------------------------------------------------------------------------------------------
AMLI Residential Properties (AML) $21.44 $23.94/$18.44 $ 426.7 $ 928.4 9.4x 8.4x 7.8x
Apartment Investment & Management (AIV) $36.50 $42.00/$30.00 $1,987.4 $ 3,731.1 10.5x 9.2x 8.0x
Associated Estates Realty (AEC) $12.06 $24.38/$11.50 $ 415.7 $ 945.2 6.0x 6.2x 5.9x
Berkshire Realty Company, Inc. (BRI) $ 9.63 $12.38/$ 8.13 $ 439.4 $ 1,068.3 8.6x 7.9x 7.5x
Camden Property Trust (CPT) $26.31 $31.06/$24.50 $1,242.8 $ 2,312.5 9.9x 8.2x 7.6x
Charles E. Smith Residential (SRW) $30.13 $34.94/$28.31 $ 940.4 $ 1,842.2 10.6x 9.5x 8.7x
Gables Residential Trust (GBP) $23.44 $28.31/$21.75 $ 769.6 $ 1,737.6 8.9x 8.1x 7.5x
Home Properties of New York (HME) $25.13 $28.06/$21.19 $ 673.5 $ 1,079.2 10.1x 9.3x 8.3x
Mid-America Apartment (MAA) $23.19 $29.88/$22.63 $ 506.2 $ 1,377.6 8.0x 7.4x 6.8x
Summit Properties (SMT) $16.94 $21.31/$16.25 $ 502.5 $ 1,106.2 8.6x 7.9x 7.3x
Town and Country Trust (TCT) $15.44 $17.94/$13.25 $ 281.5 $ 617.0 8.7x 8.2x 7.9x
United Dominion Realty Trust (UDR) $10.31 $14.56/$10.06 $1,099.8 $ 2,903.7 7.5x 7.2x 6.9x
Walden Residential Properties (WDN) $20.88 $27.13/$19.25 $ 611.6 $ 1,414.0 8.4x 7.7x 7.2x
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN $ 761.3 $ 1,620.2 8.9x 8.1x 7.5x
MEDIAN $ 611.6 $ 1,377.6 8.7x 8.1x 7.5x
- ----------------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities (IAC) $32.00 $32.50/$23.00 $1,445.0 $ 2,325.0 14.5x 12.5x 11.1x
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Payout Ratio 5-Year
Price/AFFO(5) Aggregate Value/EBITDA(7)(8) (1999E) FFO
------------------ ---------------------------- Dividend ------------- --------
Company (Ticker) 1999E(6) 2000E(6) LTM 1999E 2000E Yield FFO AFFO Growth(4)
- ---------------- -------- -------- --------- -------- ------- -------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 11.7x 10.6x 15.8x 15.4x 11.3x 7.6% 73.4% 89.2% 11.0%
Avalon Bay Communities (AVB) 12.1x 10.4x 16.7x 21.0x 11.9x 6.0% 61.8% 72.9% 10.2%
BRE Properties (BRE) 12.0x 10.8x 15.6x 14.1x 11.7x 5.8% 60.6% 69.9% 8.0%
Equity Residential Properties Trust (EQR) 11.5x 10.5x 13.7x N.A. N.A. 6.8% 63.9% 78.2% 9.2%
Essex Property Trust (ESS) 12.4x 11.3x 13.2x 11.2x 9.7x 6.9% 63.6% 85.5% 10.0%
Post Properties (PPS) 11.7x 10.9x 14.9x 14.3x 12.1x 6.8% 70.5% 79.8% 9.7%
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN 11.9x 10.7x 15.0x 15.2x 11.4x 6.7% 65.6% 79.2% 9.7%
MEDIAN 11.9x 10.7x 15.3x 14.3x 11.7x 6.8% 63.8% 79.0% 9.8%
- ----------------------------------------------------------------------------------------------------------------------------------
AMLI Residential Properties (AML) 10.1x 9.4x 14.6x 13.3x 10.6x 8.2% 69.2% 83.0% 6.5%
Apartment Investment & Management (AIV) 12.5x 10.8x 16.4x 13.4x 9.5x 6.2% 56.8% 77.1% 12.9%
Associated Estates Realty (AEC) 6.2x 6.1x 13.9x 10.6x 7.6x 15.4% 95.2% 95.4% 0.3%
Berkshire Realty Company, Inc. (BRI) 9.1x 8.8x 12.3x 11.8x 9.9x 10.1% 79.8% 91.5% 6.0%
Camden Property Trust (CPT) 9.5x 8.6x 11.6x 12.2x 10.5x 7.7% 63.0% 72.7% 8.8%
Charles E. Smith Residential (SRW) 12.1x 11.0x 12.9x 12.3x 10.8x 7.1% 67.3% 85.95 8.7%
Gables Residential Trust (GBP) 9.5x 8.8x 15.4x 13.3x 11.4x 8.7% 70.4% 82.9% 7.8%
Home Properties of New York (HME) 12.2x 10.9x 12.5x 8.5x 6.1x 7.6% 70.7% 93.2% 11.0%
Mid-America Apartment (MAA) 8.9x 8.3x 11.7x N.A. N.A. 9.9% 73.0% 87.8% 7.1%
Summit Properties (SMT) 9.3x 8.7x 12.9x 11.9x 8.9x 9.6% 75.9% 89.6% 7.5%
Town and Country Trust (TCT) 9.6x 9.3x 11.2x N.A. N.A. 10.4% 85.3% 99.4% 7.0%
United Dominion Realty Trust (UDR) 8.5x 8.2x 11.3x 10.4x 8.3x 10.2% 73.5% 86.1% 6.5%
Walden Residential Properties (WDN) 9.1x 8.5x 9.9x 9.1x 9.0x 9.2% 71.3% 84.3% 8.3%
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN 9.7x 9.0x 12.8x 11.5x 9.3x 9.3% 73.2% 86.8% 7.6%
MEDIAN 9.5x 8.8x 12.5x 11.9x 9.5x 9.2% 71.3% 86.1% 7.5%
- ----------------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities (IAC) 15.6x 14.0x 16.9x N.A. N.A. 4.8% 60.0% 75.1% 10.2%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Includes shares and operating partnership units.
(2) Equals the sum of equity market value, debt outstanding and preferred stock
at liquidation preference, in $MM.
(3) For the 12 months ended 9/30/98.
(4) Estimates from First Call as of 1/20/99, unless otherwise noted.
(5) Adjusted Funds from Operations (AFFO) equals FFO less recurring capital
expenditures and straight-line rent adjustments.
(6) Estimates from Morgan Stanley Research as of 11/02/98, unless otherwise
noted.
(7) Aggregate Value equals Total Market Capitalizatin less cash.
(8) Some FFO and EBITDA estimates reflecting recent M&A activity were not
available and are notes as N.A.
<PAGE> 52
PROJECT DELTA
CREDIT STATISTICS FOR SELECTED APARTMENT REITs
<TABLE>
<CAPTION>
Equity Total Debt-to- Debt-to-
1/20/99 Market Market Market Book
Company (Ticker) Price Value(1) Capitalization(2) Capitalization Capitalization(3)
- ---------------- ------- -------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) $19.44 $2,785.2 $ 5,123.3 40.3% 46.1%
Avalon Bay Communities (AVB) $34.00 $2,201.3 $ 4,106.3 37.7% 44.6%
BRE Properties (BRE) $24.75 $1,164,0 $ 1,866.8 37.6% 45.6%
Equity Residential Properties Trust (EQR) $41.81 $5,451.2 $11,565.4 40.7% 51.8%
Essex Property Trust (ESS) $29.06 $ 537.8 $ 938.3 38.4% 43.9%
Post Properties (PPS) $38.06 $1,618.7 $ 2,556.0 30.8% 45.2%
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN $2,293.0 $ 4,359.4 37.6% 46.2%
MEDIAN $1,910.0 $ 3,331.1 38.0% 45.4%
- ----------------------------------------------------------------------------------------------------------------------------------
AMLI Residential Properties (AML) $21.44 $ 426.7 $ 928.4 43.5% 58.0%
Apartment Investment & Management (AIV) $36.50 $1,987.4 $ 3,731.1 37.8% 50.8%
Associated Estates Realty (AEC) $12.06 $ 287.6 $ 817.1 57.9% 68.0%
Berkshire Realty Company, Inc. (BRI) $ 9.63 $ 439.4 $ 1,068.3 52.5% 61.4%
Camden Property Trust (CPT) $26.31 $1,242.8 $ 2,312.5 41.7% 45.3%
Charles E. Smith Residential (SRW) $30.13 $ 940.4 $ 1,842.2 40.8% 77.7%
Gables Residential Trust (GBP) $23.44 $ 769.6 $ 1,737.6 48.8% 60.6%
Home Properties of New York (HME) $25.13 $ 673.5 $ 1,079.2 37.6% 42.6%
Mid-America Apartment (MAA) $23.19 $ 506.2 $ 1,377.6 52.5% 63.7%
Summit Properties (SMT) $16.94 $ 502.5 $ 1,106.2 54.6% 63.5%
Town and Country Trust (TCT) $15.44 $ 281.5 $ 617.0 54.4% 89.0%
United Dominion Realty Trust (UDR) $10.31 $1,099.8 $ 2,903.7 53.3% 60.5%
Walden Residential Properties (WDN) $20.88 $ 611.6 $ 1,414.0 53.7% 50.9%
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN $ 751.5 $ 1,610.4 48.4% 60.9%
MEDIAN $ 611.6 $ 1,377.6 52.5% 60.6%
- ----------------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities (IAC) $32.00 $1,445.0 $ 2,325.0 31.7% 75.1%
</TABLE>
<TABLE>
<CAPTION>
LTM Credit Statistics(4) Senior Debt
Secured Floating ------------------------------------ Ratings
Debt/ Rate Debt/ EBITDA/ Debt/ FFO/ -----------
Company (Ticker) Total Debt Total Debt Interest EBITDA Debt Moody's/S&P
- ---------------- ---------- ---------- -------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust (ASN) 21.0% 42.1% 3.5x 6.4x 12.8% Baa1/A-
Avalon Bay Communities (AVB) 32.9% 25.3% 3.9x 6.3x 11.5% Baa1/BBB+
BRE Properties (BRE) 33.6% 30.4% 3.7x 5.9x 12.8% Baa2/BBB
Equity Residential Properties Trust (EQR) 45.8% 30.5% 2.9x 5.6x 12.9% A3/BBB+
Essex Property Trust (ESS) 82.5% 40.7% 4.0x 5.1x 15.5% N.R./N.R.
Post Properties (PPS) 35.5% 50.9% 5.4x 4.6x 16.1% Baa1/BBB+
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN 41.9% 36.6% 3.9x 5.7x 13.6%
MEDIAN 34.5% 35.6% 3.8x 5.8x 12.9%
- ----------------------------------------------------------------------------------------------------------------------------------
AMLI Residential Properties (AML) 62.8% 35.6% 3.4x 6.4x 12.4% Baa3/N.R.
Apartment Investment & Management (AIV) 96.4% 7.2% 2.4x 6.3x 11.8% Ba1/BB-
Associated Estates Realty (AEC) 13.5% 45.2% 2.4x 7.0x 7.9% Ba3/BBB-
Berkshire Realty Company, Inc. (BRI) 78.0% 23.8% 2.5x 6.5x 9.7% Baa2/N.R.
Camden Property Trust (CPT) 40.6% 42.8% 3.6x 4.9x 14.7% Baa2/BBB
Charles E. Smith Residential (SRW) 67.5% 33.1% 3.0x 5.3x 12.5% N.R./N.R.
Gables Residential Trust (GBP) 47.3% 34.2% 3.2x 7.5x 8.7% Baa2/BBB
Home Properties of New York (HME) 96.0% 4.0% 2.8x 4.7x 14.4% N.R./N.R.
Mid-America Apartment (MAA) 85.7% 22.2% 2.7x 6.2x 9.1% Ba1/BB+
Summit Properties (SMT) 33.2% 65.3% 2.8x 7.1x 9.2% Baa3/BBB-
Town and Country Trust (TCT) 100.0% 10.6% 2.5x 6.1x 9.6% N.R./N.R.
United Dominion Realty Trust (UDR) 41.8% 22.1% 2.6x 6.1x 8.7% Baa2/BBB
Walden Residential Properties (WDN) 61.6% 46.7% 2.7x 5.3x 10.2% Ba1/N.R.
- ----------------------------------------------------------------------------------------------------------------------------------
MEAN 63.4% 30.2% 2.8x 6.1x 10.7%
MEDIAN 62.8% 33.1% 2.7x 6.2x 9.7%
- ----------------------------------------------------------------------------------------------------------------------------------
Irvine Apartment Communities (IAC) 27.4% 15.9% 4.7x 5.4x 13.4%
</TABLE>
Notes:
(1) Includes shares and operating partnership units.
(2) Equals the sum of equity market value, debt outstanding and preferred stock
at liquidation preference, in $MM.
(3) Book capitalization equals the sum of debt outstanding, minority interest,
preferred stock at liquidation preference and shareholders' equity, in $MM.
(4) For the 12 months ended 9/30/98.
<PAGE> 53
PROJECT DELTA
- -------------------------------------------------------------------------------
Ability-to-Pay Analysis
Break-Even Price
<TABLE>
<CAPTION>
Share Price Assumed Price
----------- Debt and Cost of 1999E 1999E Break-Even at 5%
Company 1/20/99 Preferred % Equity % Debt FFO FFO Multiple Price(1) Dilution
- ------------------------- ----------- ----------- -------- ------- ------ ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust $19.44 45.6% 54.4% 7.125% $2.02 9.6x $31.71 $33.30
Avalon Bay Communities $34.00 46.4% 53.6% 7.125% $3.30 10.3x $32.80 $34.44
BRE Properties $24.75 37.6% 62.4% 7.125% $2.37 10.4x $32.14 $33.75
Equity Residential Properties Trust $41.81 52.9% 47.1% 7.125% $4.44 9.4x $32.32 $33.93
Essex Property Trust $29.06 42.7% 57.3% 7.125% $3.15 9.2x $30.74 $32.27
Post Properties $38.06 36.7% 63.3% 7.125% $3.69 10.3x $31.83 $33.42
------------------------------
Low $30.74 $32.27
Median $31.99 $33.59
High $32.80 $34.44
------------------------------
</TABLE>
Note:
(1) Based on 1999E FFO of $2.67 from Alpha model, synergies of $6 MM, and
$50 MM of transaction costs financed at 7%
<PAGE> 54
PROJECT DELTA
- --------------------------------------------------------------------------------
Ability-to-Pay Analysis
Multiple Expansion
<TABLE>
<CAPTION>
SUPPORTABLE PRICE GIVEN FFO MULTIPLE EXPANSION
-------------------------------------------------------------
COMPANY 0.00X 0.25X 0.50X 0.75X 1.00X 1.25X 1.50X
- ----------------------------------- ----- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Archstone Communities Trust $31.71 $32.08 $32.45 $32.82 $33.19 $33.56 $33.93
Avalon Bay Communities $32.80 $33.16 $33.53 $33.89 $34.26 $34.62 $34.99
BRE Properties $32.14 $32.57 $32.99 $33.42 $33.84 $34.27 $34.69
Equity Residential Properties Trust $32.32 $32.64 $32.96 $33.28 $33.60 $33.92 $34.24
Essex Property Trust $30.74 $31.13 $31.52 $31.91 $32.30 $32.69 $33.08
Post Properties $31.83 $32.26 $32.69 $33.12 $33.55 $33.98 $34.42
</TABLE>
<PAGE> 55
PROJECT DELTA
- --------------------------------------------------------------------------------
Selected REIT Merger Transactions(1)
Premiums Paid Analysis
<TABLE>
<CAPTION> PREMIUM TO
ANNOUNCED(2)/ ACQUIRER/ UNAFFECTED PREMIUM TO PREMIUM TO
COMPLETED TARGET ASSET CLASS CONSIDERATION PRICE(3) 52-WEEK HIGH ALL-TIME HIGH(5)
- ------------- ------------------------------- ----------- ------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
7/8/98 Equity Residential/ Multifamily Stock, Debt 20.5% 7.5% 4.6%
10/19/98 Merry Land & Investment Company
9/15/97 Equity Office Properties/ Office Stock, Debt 16.0% 13.0% 13.0%
12/19/97 Beacon Properties Corp.
8/28/97 Equity Residential/ Multifamily Stock, Debt 20.8% 16.0% 8.7%
12/23/97 Evans Withycombe Residential
1/17/97 Equity Residential/ Multifamily Stock, Debt 13.5% 11.8% 11.8%
5/30/97 Wellsford Residential
3/26/96 Simon Property Group/ Retail Stock, Debt 22.4% 9.1% 3.8%
8/9/96 Debartolo Realty Corporation
Low 13.5% 7.5% 3.8%
Mean 18.6% 11.5% 8.4%
Median 20.5% 11.8% 8.7%
High 22.4% 16.0% 13.0%
Beta/ Multifamily Cash 24.6%(4) 5.6% 1.5%
Alpha
</TABLE>
Notes:
(1) Mergers selected based on the following: a) clear change of control, b)
target did have other options, including remaining independent and c) the
process did not tend to reduce valuation received.
(2) Date announced is the date of the first significant press on the
transaction.
(3) Unaffected price represents the average stock price for the 10 trading days
ending five trading days prior to the announcement of the transaction.
(4) Based on current proposed price of $34.00. Unaffected price represents
the average stock price for the 10 trading days ending five trading days
prior to November 30, 1998.
(5) All-time high share price, not including share prices 10 days prior to the
announcement date.
<PAGE> 56
PROJECT DELTA
- --------------------------------------------------------------------------------
Multifamily REIT Mergers & Acquisitions
Premiums Paid Analysis
<TABLE>
<CAPTION>
PREMIUM TO
ANNOUNCED(1)/ ACQUIRER/ UNAFFECTED PREMIUM TO PREMIUM TO
COMPLETED TARGET ASSET CLASS CONSIDERATION PRICE(2) 52-WEEK HIGH ALL-TIME HIGH(4)
- ---------------- ---------------------------------------- ----------- ------------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
7/8/98 Equity Residential/ Multifamily Stock, Debt 20.5% 7.5% 4.6%
10/19/98 Merry Land & Investment Company
4/2/98 Security Capital Pacific Trust/ Multifamily Stock, Debt 15.1% -4.4% -12.7%
7/6/98 Security Capital Atlantic
3/8/98 Bay Apartment Communities/ Multifamily Stock, Debt -1.0% -6.5% -6.5%
6/4/98 Avalon Properties
12/23/97 Apartment Investment and Management Co./ Multifamily Stock, Debt 4.1% -21.6% -12.6%
5/8/98 Ambassador Apartments
12/17/97 Camden Property Trust/ Multifamily Stock, Debt 11.0% -0.9% -13.1%
4/8/98 Oasis Residential
8/28/97 Equity Residential/ Multifamily Stock, Debt 20.7% 16.0% 8.7%
12/23/97 Evans Withycombe Residential
8/4/97 Post Properties / Multifamily Stock, Debt 7.0% 5.0% 5.0%
10/24/97 Columbus Realty Trust
1/17/97 Equity Residential/ Multifamily Stock, Debt 13.5% 11.8% 11.8%
5/30/97 Wellsford Residential
12/16/96 Camden Property Trust / Multifamily Stock, Debt 14.2% -7.2% -17.5%
4/15/97 Paragon Group, Inc.
10/1/96 United Dominion Realty/ Multifamily Stock, Debt 10.4% 0.4% -58.0%
1/2/97 South West Property Trust
10/11/95 BRE Properties/ Multifamily Stock, Debt 13.3% 8.2% 8.2%
3/15/96 REIT of California
---------------------------------------------------------
Low -1.0% -21.6% -58.0%
Mean 11.7% 0.8% -8.3%
Median 13.3% 0.4% -6.5%
High 20.7% 16.0% 11.8%
---------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Beta/ Multifamily Cash 24.6% (3) 5.6% 1.5%
Alpha
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Date announced is the date of the first significant press on the
transaction.
(2) Unaffected price represents the average stock price for the 10 trading
days ending five trading days prior to the announcement of the transaction.
(3) Based on current proposed price of $34.00. Unaffected price represents the
average stock price for the 10 trading days ending five trading days prior
to November 30, 1998.
(4) All-time high share price, not including share prices 10 days prior to the
announcement date.
<PAGE> 57
PROJECT DELTA
- --------------------------------------------------------------------------------
Summary of Precedent Minority Transactions
<TABLE>
<CAPTION>
Size of Initial Ownership 55-75%
Premium to
Unaffected
Deal Size Price
- ------ -------- ------------
<S> <C> <C>
1992-1996
1. PHL Corp. Inc. $100MM-$300MM 28%
2. Southeastern Public Service Co. less than $100MM -5%
3. Club Med $100MM-$300MM 42%
4. Roto Rooter Inc. larger than $300MM 11%
5. Allmerican Ppty. & Casualty Cos. larger than $300MM 15%
1997
6. Systemix Inc. larger than $300MM 22%
7. Faulding Inc. less than $100MM 31%
8. Wheelabrator Technologies Inc. larger than $300MM 28%
9. Rhone-Poulenc Rorer Inc. larger than $300MM 22%
Rhone-Poulenc SA
10. BET Holdings Inc. $100MM-$300MM 18%
1998
11. Rayonier Timberlands LP $100MM-$300MM 25%
12. NACT Telecommunications less than $100MM 8%
13. Bo Office Products $100MM-$300MM 19%
14. XL Connect Solutions $100MM-$300MM 12%
15. BET Holdings larger than $300MM 15%
16. Mycogen Corp. larger than $300MM 49%
</TABLE>
PROJECT DELTA
Summary of Precedent Minority Transactions
<TABLE>
<CAPTION>
Size of Initial Ownership Less Than 55%
Premium to
Unaffected
Deal Size Price
- ------ -------- ------------
<S> <C> <C>
1992-1996
1. Medical Marketing Group Inc. $100MM-$300MM -8%
2. Enquierer/Star Group Inc. larger than $300MM 2%
3. Lin Broadcasting Corp. larger than $300MM -7%
4. Applied Immune Sciences $100MM-$300MM 47%
1997
5. Systemix Inc. $100MM-$300MM 29%
6. Calgene Inc. $100MM-$300MM 43%
7. Zurich Reinsurance larger than $300MM 22%
1998
8. Life Technologies larger than $300MM 17%
9. J&L Specialty Steel Inc. larger than $300MM 72%
10. BRC Holdings Inc. larger than $300MM 17%
</TABLE>
<PAGE> 58
PROJECT DELTA
- --------------------------------------------------------------------------------
SUMMARY OF ANALYSTS' VALUATION OF ALPHA
<TABLE>
<CAPTION>
SELECTED STATISTICS
--------------------------------
ESTIMATED PRICE REPORT
FIRM/ANALYST NAV TARGET DATE OBSERVATIONS
- --------------------------- --------- ------ -------- --------------------------------------------
<S> <C> <C> <C> <C>
Green Street Advisors $31.62 - $33.58 - 12/10/98 - Provide three ranges of NAV using cap
$35.28 $37.47(1) rates of 7.5%, 7.25% and 7.0% respectively
MSDW/Bloom $31.00 $34.10(2) 12/2/98 - Believes companies like Alpha should
trade above NAV. Statement made
12/3/ that "$32.50 appears reasonable"
CIBC Oppenheimer/Zirakzadeh $27.34 $30.50 11/17/98 - "One of the best positioned companies
to weather most market difficulties,
given its: 1) monopoly on apartment
development on the Beta Ranch,
2) attractive internal growth prospects,
3) extensive development pipeline, and
4) balance sheet strength"
Jefferies & Company/Wilson $24.00 $32.00 11/3/98
12/2/98
Sutro & Co./Silvers -- $30.00 10/5/98
</TABLE>
Notes: (1) Price target based on appropriate premium to NAV suggested in report
dated November 30, 1998.
(2) Represents a 10% premium to NAV, based on comments made in research.
<PAGE> 59
<TABLE>
<CAPTION>
PROJECT DELTA
- ----------------------------------------------------------------------------------------
SUMMARY OF ANALYSTS' COMMENTARY
FOLLOWING ANNOUNCEMENT OF PROPOSAL
REPORT
FIRM/ANALYST DATE OBSERVATIONS
- --------------------------- -------- --------------------------------------------
<S> <C> <C>
Green Street Advisors 12/10/98 - NAV estimates: $31.62 at 7.5% cap; $33.39
at 7.25% cap rate; $35.28 at 7.00% cap
- "[Beta] is clearly paying a large premium
to the value that the public market
ascribed to [Alpha], but the buyout price
does not reflect the intrinsic value of
the company and operating partnership as
a whole"
- Beta's offer ascribes no value to
terminating the Land Rights Agreement, nor
any "franchise value"
- "At $32.50/sh, [Beta's] offer is at the
lower-end of our estimate of the range of
[Alpha's] true NAV, and equates to an
economic cap rate of 7.4% (a nominal cap
rate of 7.7%), representing a per unit
value of approximately $130,000. The per
unit value may sound high, but other
inferior apartment assets located in
Orange County have closed during the last
few months at valuations of $128,000-
$148,000 per unit"
The Penobscot Group, Inc. 12/10/98 - "While it is still early, an affirmative
answer on the fairness issue seems a
stretch"
</TABLE>
<PAGE> 60
PROJECT DELTA
- --------------------------------------------------------------------------------
SUMMARY OF ANALYSTS' COMMENTARY
FOLLOWING ANNOUNCEMENT OF PROPOSAL
(continued)
<TABLE>
<CAPTION>
REPORT
FIRM/ANALYST DATE OBSERVATIONS
- --------------------------- -------- --------------------------------------------
<S> <C> <C>
Realty Stock Review/ 12/4/98 - "...in our view, there's at least a 50/50
Barry Vinocur chance that [Beta] will sweeten his offer"
- "An offer in the $34 to $35 range better
reflects not only [Alpha's] current value,
but also gives investors who bought the
development story's potential something
for their vote of confidence in [Beta]"
- "We believe [Beta's] offer doesn't fully
reflect the future value that shareholders
paid for when they bought [Alpha]"
MSDW/Bloom 12/3/98 - "A competing offer is not anticipated,
as the right to be the exclusive multi-
family developer may not be transferred
to another acquirer"
- "...a price of $32.50 appears reasonable"
- "An offer in the $34 to $35 range better
reflects...[Alpha's] current value.."
</TABLE>
<PAGE> 61
PROJECT DELTA
- --------------------------------------------------------------------------------
SUMMARY OF ANALYSTS' COMMENTARY
FOLLOWING ANNOUNCEMENT OF PROPOSAL
(continued)
<TABLE>
<CAPTION>
REPORT
FIRM/ANALYST DATE OBSERVATIONS
- --------------------------- -------- --------------------------------------------
<S> <C> <C>
MSDW/Bloom 12/2/98 - "...[The proposal] confirms our belief
that many companies are trading at or below
net asset value"
- "...[Beta] appears very well capitalized
and clearly has the wherewithal to carry
out the transaction"
- "At $32.50 per share, we believe [Alpha's]
income is being valued at approximately
7.75% cap rate. We had used an 8% cap rate
in coming up with our $31 net asset value
(NAV)"
- Believes companies with strong balance
sheets, low payout ratios and exposure
to attractive markets should trade above
NAV
Jefferies/Wilson 12/2/98 - "We believe that the $32.50 share price
offer, a 21% premium over the previous
day's closing price, is a fair price for
several reasons: (i) it represents a small
premium (1/8) over the stock's all-time
high of $32 7/16; (ii) at 12.7x our 1999
FFO/share estimate, it represents a
significant premium over the peer group
average multiple of 9.8x; and (iii) it is
above our $32 price target."
- "Given [Beta's] controlling ownership
position in the REIT and over the Beta
Ranch, we do not expect any competing
offers."
</TABLE>
<PAGE> 62
DRAFT #1 JANUARY 21, 1999
[DATE OF DELIVERY OF LETTER]
Board of Directors
Irvine Apartment Communities
550 Newport Center Drive, Suite 300
Irvine, CA 92660
MEMBERS OF THE BOARD:
We understand that Irvine Apartment Communities (the "Company"), The Irvine
Company ("TIC") and TIC Acquisition LLC, a wholly owned subsidiary of TIC
("Acquiror"), propose to enter into an Agreement and Plan of Merger (the
"Merger Agreement") which provides, among other things, that each outstanding
share of common stock, par value $.01 per share (the "Company Common Stock"),
of the Company, other than shares held in treasury or held by Acquiror, TIC or
any affiliate of Acquiror, will be converted into the right to receive $34.00
per share in cash. The Company shall be merged with and into Acquiror (the
"Merger"), and the separate corporate existence of the Company shall cease and
Acquiror shall continue as the surviving entity. The terms and conditions of
the Merger are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the consideration to be received
by the shareholders of Company Common Stock pursuant to the Merger Agreement is
fair from financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company prepared by the management
of the Company;
(iii) analyzed certain financial projections prepared by the management of
the Company;
(iv) discussed the past and current operations and financial condition and
the prospects of the Company with senior executives of the Company;
(v) reviewed the reported prices and trading activity for the Common
Stock;
<PAGE> 63
(vi) compared the financial performance of the Company and the prices and
trading activity of the Common Stock with that of certain other
comparable publicly-traded companies and their securities;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(viii) participated in discussions and negotiations among representatives
of the Company and Acquiror and their financial and legal advisors;
(ix) reviewed the draft Merger Agreement dated ____________, 1999; and
__________;
(x) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purpose of this
opinion. With respect to the financial projections, we have assumed that they
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of the Company. We
have not made any independent valuation or appraisal of the assets or
liabilities of the Company, nor have we been furnished with any such appraisals.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit, interest from any party with respect to the acquisition of the Company
or any of its assets.
We have acted as financial advisor to the Company in connection with this
transaction and will receive a fee for our services. In the past, Morgan Stanley
& Co. Incorporated and its affiliates have provided financial advisory and
financing services for the Company and have received fees for the rendering of
these services.
It is understood that this letter is for the information of the Board of
Directors of the Company only and may not be used for any other purpose without
our prior written consent.
Based on the foregoing, we are of the opinion on the date hereof that the
consideration to be received by the shareholders of Company Common Stock
pursuant to the Merger Agreement is fair from a financial point of view to such
holders (other than Acquiror and its affiliates).
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By:
-------------------------------
Scott M. Kelley
Managing Director
<PAGE> 64
GREEN STREET ADVISORS, INC.
IRVINE APARTMENT COMMUNITIES
Irvine Company Buyout Proposal: Rich Price - No, Reasonable Price - Maybe
(N/IAC)
December 10, 1998 * Recent Price $31.81 * DJIA 9009 * RMS 305
I. SUMMARY
The Irvine Company (TIC), through a wholly-owned unit, recently proposed to
purchase the 16.6 million shares (83% of the common shares outstanding, or 37%
of the combined common shares and OP units outstanding) of Irvine Apartment
Communities (IAC) that it doesn't already own. The proposed price is $540
million, or $32.50/sh, a 19% premium to the prior day's closing price of $27.38.
TIC is clearly paying a large premium to the value that the public market
ascribed to IAC, but the buyout price does not fully reflect the intrinsic value
of the company and operating partnership as a whole.
TIC's offer is not subject to a financing contingency, and calls for IAC's
existing debt and preferred stock to remain outstanding. TIC announced that it
does not expect the debt or preferred stock to be affected by the transaction.
The offer will be financed from TIC's balance sheet, with the proceeds infused
into IAC as equity, thereby leaving IAC's debt and preferred stock unaffected
from a capital structure standpoint. What is less certain is how the rating
agencies will react as a result of "intangible" changes at IAC. The change in
the financial management team, the possible perception that the new IAC could
lack public market discipline, and the reduction in financing options available
to a private company may be discomforting to the agencies and could result in
negative rating implications. After the announcement of the offer, IAC was put
on credit watch for possible downgrade.
If IAC and the assets of the operating partnership were auctioned off in their
entirety, the company would likely fetch a higher price. However, TIC's majority
control, and the special voting rights that were afforded TIC at the formation
of the company, effectively preclude such an auction from taking place.
Therefore, evaluating the appropriateness of the pricing of the proposal raises
some interesting valuation issues, not the least of which is the disparity in
pricing that the public market ascribed to IAC versus what a private buyer might
pay.
IAC's Board of Directors may determine that the pricing is inadequate, but be
hard pressed to refute the proposal due to the robust premium being offered. At
the end of the day, we believe most shareholders would support the current
offer, but there could be some upside to the price if IAC's Board squawks loud
enough. Of course, squawking too much runs the risk of having TIC revoke its
offer entirely, although that risk is probably remote. In any event, it is hard
to envision a scenario where shareholders aren't at least paid a minimum of
$32.50/sh for their holdings.
The closing date of the transaction is uncertain, but is likely to fall sometime
near the end of the first quarter or early in the second quarter of 1999.
Assuming the company declares and pays a fourth quarter dividend, and the
transaction is completed at the stated price within fourth months, investors
would generate an annualized return of roughly 12% at the current share price.
The proposed buyout is interesting because it sends two messages to the REIT
industry. First, a savvy real estate industry veteran Donald Bren (TIC is
privately held and 100% owned by Mr. Bren), has suggested that the REIT
structure doesn't work for his company. Mr. Bren's conclusion may be alarming
to most REIT proponents, but it shouldn't be because his situation is unique. We
do not foresee a wholesale movement to de-REIT or go private by other REIT
management teams despite such speculation by others. Second, and perhaps more
importantly, Mr. Bren, one of the most successful real estate entrepreneurs in
recent history, determined that the public market valuation of his company was
at least 19% too low. While some may choose to ignore it, the signal being sent
by Mr. Bren should be bullish for REITs in general, and apartment REITs with
exposure to California in particular.
567 San Nicolas Drive, Suite 203 * Newport Beach, CA 92660
* (949) 640-8780 * Fax (949) 640-1773 * http://www.greenst.com *
<PAGE> 65
Page 2
Exhibit 1
STRUCTURE OF IAC AND RELATED ENTITIES
[DIAGRAM]
I. STRUCTURE
Exhibit 1 contains a chart depicting the structure of IAC and its operating
partnership. As can be seen, TIC has a sizable (63%) economic interest in the
operating partnership, directly through its limited partner interest and
indirectly through its ownership of IAC shares. The bottom line is that public
shareholders own a minority interest in the operating partnership, although
they own a majority interest in IAC, the sole general partner of the
partnership. Despite controlling a majority interest in the general partner,
public shareholders do not have complete control over the partnership.
The Operating Partnership Agreement, the Certificate of Incorporation, and
IAC's Bylaws effectively prohibit any sale, merger, or business combination of
IAC or the operating partnership without the approval of TIC. Thus, IAC is not
in a position to "auction" off the entire company, and is at a disadvantage
when it comes to ensuring that the best possible price is paid for its
interests. This is not to say that TIC's current offer is coercive or even
unreasonable in any way, but rather that other potential bidders are
effectively locked out of competing for the company. As a result, TIC is not
under as much pressure to offer the "best" price possible when proposing to buy
the company. All other things being equal, TIC has an incentive to pay only the
minimum price that gets the deal done. We have heard some argue that TIC may
have aspirations of someday returning to the public market, either with IAC's
portfolio or the balance of its commercial real estate holdings, and therefore
is motivated to pay an inflated price to leave public shareholders with a good
taste in their mouths. While the logic may be sound, $32.50/sh does not
represent premium pricing for a portfolio and company of IAC's quality.
III. NAV AND PRICING
In Exhibit 2, we present a range of NAV calculations for IAC as of 9/30/98
using various capitalization rates. Heretofore, we have used an economic cap
rate of 7.9% to value IAC's portfolio knowing that other apartment assets in
IAC's markets have traded hands at much lower cap rates (i.e. higher values).
We knowingly used an above-market cap rate for two primary reasons. First, the
7.9% rate, although not reflective of "market", was a full 30 basis points
lower than that used to value any other apartment REIT portfolio, and REIT
investors have displayed a discomfort with valuing fringe companies too
dissimilarly from the average. Second, despite the use of an above-market cap
rate, we have had a very strong buy on the company for some time, and recently
touted the company as the
<PAGE> 66
Page 3
Exhibit 2
Estimated range of NAVs for IAC using various capitalization rates. The values
reflect only operating apartment units and current development projects, with
no value given to future development opportunities off the Irvine Ranch or the
Land Rights Agreement covering development opportunities on the Irvine Ranch.
<TABLE>
<CAPTION>
Lower-end Mid-range Upper-end
<S> <C> <C> <C>
Estimated Economic NOI(1) $ 154,192 $ 154,192 $ 154,192
Economic Cap Rate 7.50% 7.25% 7.00%
Nominal Cap Rate 7.81% 7.55% 7.29%
Capitalized Real Estate Value $2,055.895 $2,126,788 $2,202,744
Development Projects(2) 258,021 266,918 276,451
Other Tangible Assets 28,441 28,441 28,441
---------- ---------- ----------
Total Assets $2,342,356 $2,422,146 $2,507,636
Total Liabilities $ 714,384 $ 714,384 $ 714,384
Preferred Stock $ 200,000 $ 200,000 $ 200,000
---------- ---------- ----------
Shareholders' Equity $1,427,972 $1,507,762 $1,593,252
Shares/Units Outstanding 45,157 45,157 45,157
NAV $ 31.62 $ 33.39 $ 35.28
========== ========== ==========
(1) Green Street Advisors' estimate, based on 3Q98 results, of forward 12 month NOI from
operating apartment units less a capital expenditure reserve of $400/unit.
(2) Development projects are valued assuming a 10.25% nominal NOI yield on costs incurred
as of 9/30/98 ($196.6 million) and using the nominal capitalization rate indicated in
each scenario, resulting in premiums to book value ranging from 30% in the lower-end
scenario to 40% in the upper-end scenario.
</TABLE>
- --------------------------------------------------------------------------------
cheapest apartment REIT, and possibly even the cheapest REIT overall. Herein,
we present a range of economic cap rates from 7.0% to 7.5%. While we present
three scenarios, our best guess is that the NAV of the company really falls
somewhere around the mid-range, namely $33.50/sh (rounded). In our calculations
we attempt to give credit for the current development projects, but ascribe no
specific value to the Land Rights Agreement between TIC and IAC which gives IAC
the exclusive right to develop apartments on TIC's extensive land holdings
through the year 2020.
The value of the agreement is difficult to quantify because TIC is not
obligated to sell land to IAC, but should it so desire, or be required, to have
apartments developed, it must sell such land to IAC at a price that is no more
than 95% of appraised value. Any appraisal based system is subject to abuse
and/or vagaries, but here the pricing mechanism seemed to work to IAC's
advantage because the third party "comps" that would presumably be used would
most likely be inferior properties. Also, if IAC wanted to play hardball, it
could preclude the development of any new apartments on TIC owned land, and
effectively "force" favorable pricing in the event that apartments had to be
developed (zoning authorities often require a minimum amount of affordable
housing). At the end of the day, it is nearly impossible to accurately estimate
the value of the agreement, but at the very least it is worth something to TIC
to buy itself out of the obligation.
At $32.50/sh, TIC's offer is at the lower-end of our estimate of the range of
IAC's true NAV, and equates to an economic cap rate of 7.4% (a nominal cap rate
of 7.7%), representing a per unit value of approximately $130,000. The per unit
value may sound high, but other inferior apartment assets located in Orange
County have closed during the last few months at valuations of
$128,000-$148,000 per unit. TIC's offer ascribes no value to terminating the
Land Rights Agreement nor any "franchise value" for IAC, which has been active
in creating value through development off the Irvine Ranch in San Diego and
Northern California. Thus, using an intrinsic value approach, the offer price
appears to represent a discounted value based on recent private transactions,
and should provide TIC with meaningful upside.
IV. CONCLUSION
This transaction is unique in several ways. TIC's majority ownership position
of the operating partnership effectively gives it control, and diminishes the
value of IAC's minority interest position. The pricing of REITs of late
provides an opportunity for TIC to offer a premium to the public market price,
but a dis-
<PAGE> 67
count to the private market value. The independent committee of IAC's Board
faces an interesting valuation issue, but should be motivated to maximize the
value of the offer. James Mead, IAC's CFO, recently announced his resignation
from the company, and may serve as a good advocate for shareholders; although
he no longer owns shares himself. Mr. Mead is arguably well suited to assess
the value of IAC, and doesn't appear to have a bias in determining the
appropriateness of the current offer.
How IAC's Board ultimately decides to proceed is anybody's guess. TIC's offer
is not fully-priced based on the public's pro rata share of the value of the
company as a whole, but it is not a low-ball offer either. At a 19% premium to
the public market's valuation of the company, TIC's offer is much more richly
priced than other acquisition or merger transactions that have occurred in
REITdom, suggesting that the price is more than reasonable on that measure. The
Board could determine that the offer is acceptable, and have a fairly good
defense for that conclusion. On the other hand, the Board could determine that
the offer must reflect IAC's pro rata share of the full value of the company or
something more close to it. If the Board takes this second stance, there is a
risk that TIC withdraws its offer and the shares trade back to their previous
range although we believe that risk is remote. More likely TIC would either up
its bid, or perhaps call a shareholder vote (which Mr. Bren can do as Chairman
of the Board) and allow investors to directly evaluate the merits of the
proposal.
The reality of the situation is that Mr. Bren will be the one to decide whether
a higher price will be paid. IAC's Board can bluster and posture for a fight,
but we think Mr. Bren will ultimately be successful even if the offer is not
increased. His offer is, by any definition, reasonable. However, he has
contended that the offer is actually rich, as a result of his desire to exit the
public market with a feeling of good will from the investment community. We,
however, strongly disagree with his contention that this offer is rich. If he
truly wants to leave investors with a favorable impression, the offer needs to
be increased. The odds of this happening are highly influenced by his own
perception of whether TIC, IAC or some combination thereof may later wish to
access public equity markets again. On this point, we think there is a
reasonable chance of an Irvine-related entity coming public at some point in the
future. Because of this, there is also a reasonable chance that he will choose
to up his offer. We would not suggest that this is a high probability, but we
believe it is a legitimate possibility.
At the recent price, we recommend investors continue to BUY shares of IAC. At a
minimum, they should provide close to a 12% annualized return and a sweetened
bid by TIC could enhance that return.
Craig Leupold
Mike Kirby
Jon Fosheim
- --------------------------------------------------------------------------------
IAC is a customer of Green Street Advisors regular research product.
(C) Copyright 1998, Green Street Advisors
This report was prepared from data believed reliable but not guaranteed by us,
without verification or investigation and does not purport to be complete. The
facts and opinions contained herein are not guaranteed to be complete or
error-free. The report is not to be considered as an offer to sell or
solicitation of an effort to buy the securities of the company(ies) covered by
this report. Opinions expressed are subject to change without notice.
- --------------------------------------------------------------------------------
Irvine Apartment Communities -- December 10, 1998
(C)1998, Green Street Advisors, Inc.
<PAGE> 68
THE PENOBSCOT GROUP INC.
REIT Byte
Irvine Proposes to Go Private. Is This the First of Many? Is the Deal Fair?
December 6, 1998
The answer to the first question is maybe some, but not many. There is a
lot that makes Irvine very different from most other REITs, particularly in
aspects which affect the probability of going private. Seeing what makes
Irvine different goes a long way to sorting out the probabilities of others
following its example. It also provides some insight into the second
question as to whether this deal is really good and fair for shareholders.
While it is still early, an affirmative answer on the fairness issue seems
a stretch.
The Facts
Late Tuesday, a special purpose affiliate of The Irvine Company proposed to
purchase all of the outstanding common shares of Irvine Apartment
Communities, Inc. (IAC: NYSE; hereinafter IAC, or the Company) at a price
of $32.50 per share, $5.69 or 21.2% over their closing price the prior day,
and $15.00, or 85.7% over their $17.50 price at their December 1993 IPO.
The Irvine Company and its affiliates, all largely controlled by Donald
Bren, owned IAC outright prior to the IPO, and afterwards continued to hold
an approximate 63% interest in IAC, largely in the form of Operating
Partnership units. Irvine Company management estimated the compound annual
return to shareholders since the IPO to a takeover at this price would be
19.8%, a number which would argue that the take-over was a good deal. But a
good deal is not necessarily a fair deal; there seem certain other
alternatives that would address the needs stated by Mr. Bren in a manner
shareholders might feel better serves their differing interest.
The Differences
An unusually large number of facts and circumstances make IAC quite
different from most other REITs and, in almost all these areas of
difference, make a similar privatization less likely. These include a
variety of factors reflecting both
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160 State Street, Boston, MA 02109 (617) 723-9600
- --------------------------------------------------------------------------------
<PAGE> 69
THE PENOBSCOT GROUP, INC.
the feasibility of going-private and incentives unique to The
Irvine Company for so doing.
FEASIBILITY CONSIDERATIONS: LEVERAGING THE PURCHASE. It seems
reasonable to assume that the aggregate purchase price of $540
million will be funded by a borrowing against the IAC assets,
or at least that would be preferable if it were feasible. The
feasibility of arranging this borrowing depends on both not
exceeding aggregate loan-to-value ratios at which most lenders
would balk and having collateral available to pledge to these
lenders. Both these considerations are made relatively more
easy by the shares to be purchased being less than a majority
of all outstanding shares and OP equivalents, more specifically
being 37% of shares and equivalents. Secondly, if the Company
is valued at a 9.0% cap rate, then existing liabilities
represent 41.3% of value and the $540 million to be borrowed
would represent 28.3%; the resulting post-privatization entity
would be leveraged at 69.6%, generally a quite feasible
level.(1) In an important sense, leveraging for this purchase
may be even easier than these ratios indicate because a great
deal of the Company's debt is very low cost debt. For the most
recent quarter, the Company had a very healthy interest
coverage ratio of 5.44 times; if it were to borrow the
$540 million at 7.0% - if anything, a slightly lower rate seems
feasible -- its coverage ratio would be 2.44 times, still very
acceptable to even the most cautious of lenders.
The last possible constraint is the availability of
unencumbered collateral to pledge to a lender. Based on the
Company's 1997 10K, secured indebtedness encumbers only 63% of
assets completed at that time, or 55.3% of assets including
(and treating as unencumbered) properties then under
development.(2) If all properties have uniform per-unit
valuations, then borrowing $540 million against unencumbered
assets would produce only an 87% loan-to-value on these pledged
assets, assuming these assets are valued at a 9.0% cap and
assuming no change in G & A, or a 73% LTV at a 8.0% cap with G
& A excluded as an operating expense. Including properties
under development, the LTV is 63% under the 9.0% cap/100% G&A
assumptions, or 53% under the 8.0% cap/0% G&A assumptions.
Very simply, even in today's difficult real estate borrowing
environment, financing this purchase looks like a no-brainer.
FEASIBILITY CONSIDERATIONS: BY-LAW TAKE-OVER IMPEDIMENTS. The
Company is a Maryland Corporation. Among the various reasons
that the Company, like many other REITs, elected this domicile
are the somewhat rigorous and time consuming procedures boards
of directors can impose on would-be acquirers to deter a
takeover proposal, procedures that are not available in all
other states. However, the Company's By-Laws explicitly exempt
Mr. Bren and his affiliates from complying with certain of
these standards and procedures.
- ---------------
(1) These figures are based on third quarter, 1998 results annualized valuing
property under development and other assets at book and treating G & A as a
property operating expense. Assuming savings of 50% of G & A and an 8.0% cap
rate, gross asset value increases 14% to $2.17 billion, and the resulting
post-privatization leverage reduces to very easy to obtain 61.1%.
(2) This measures assets by rental units. We are told by management that their
most recent tax exempt financing served to unencumber additional assets.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 2
<PAGE> 70
THE PENOBSCOT GROUP, INC.
INTERESTED STOCKHOLDERS. Maryland General Corporation Law (MGCL)
generally prohibits certain "business combinations" between an
Interested Stockholder or an affiliate thereof "for five years
after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. An Interested Stockholder is
defined as any person holding 10% or more of the voting stock.
Customarily, after the five-year period, any such combination
must be recommended by the vote of the board of directors of the
corporation and approved by at least (i) 80% of the votes
entitled to be cast by holders of outstanding voting shares and
(ii) two-thirds of the votes entitled to be cast by holders of
outstanding voting shares of the corporation other than shares
held by the Interested Stockholder, unless, among other
conditions, the corporation's common stockholders receive a
minimum price for their shares and the consideration is received
in cash or in the same form as previously paid by the Interested
Stockholder for its shares."(3)
SEC filings by the Company go on to say, "The Articles of
Incorporation and resolutions adopted by the Board of Directors
have exempted from these provisions any business combination
with The Irvine Company, or any affiliates of The Irvine Company
or Mr. Bren, or any members of the immediate family of Mr. Bren
and any other person acting in concert or as a group with any of
the foregoing. All other stockholders are subject to the
business combination statute."(4) Effectively, Mr. Bren is
excused from having to secure the affirmative vote of two-thirds
of the shares in the Company he does not own.
CONTROL SHARES. MGCL provides that at certain ranges of
percentage ownership by a potential acquirer, "control shares"
are established that "have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be
cast on the matter, excluding shares of stock owned by the
acquirer or by officers or directors who are employees of the
corporation." With his ownership of common shares currently at
17%, Mr. Bren does not have the minimum one-fifth common-share
ownership percentage that would normally trigger the "control
share" rule. But again, as reported in Company's SEC filings,
"the Company's bylaws adopted by the Board of Directors have
exempted control share acquisitions involving The Irvine
Company, or any affiliate of The Irvine Company or Mr. Bren, or
any members of the immediate family of Mr. Bren and any other
person acting in concert or as a group. All other stockholders
are subject to the control share acquisition statute." Mr. Bren,
unfettered by the control share statute, is now free to convert
enough of his interest in the Operating Partnership into common
shares (under the Exchange Rights granted to The Irvine Company)
to achieve the requisite voting control of the Company, and then
would not have these holdings subject to the Control Shares
provisions and restrictions as specified in the Company's
Articles of Incorporation.
These provisions make Mr. Bren different from other would-be
acquirers of the Company.(5) In the event his buy-out proposal is
contested then, Mr. Bren
- ---------------
(3) These provisions of Maryland law do not apply to business combinations that
are approved or exempted by the board of directors prior to the time that the
Interested Stockholder becomes an Interested Stockholder.
(4) Irvine Apartment Communities, Inc., Form S-3 as filed with the Securities
and Exchange Commission, May 14, 1997.
(5) Another item in the bylaws which is not especially unique but deserves some
small mention here because it could potentially have had a role in deterring a
contested takeover of the Company. The Company's bylaws require that "with
respect to an annual meeting of stockholders, the proposal of business to be
considered by stockholders... may be made only by advance written notice
procedures set forth in the Bylaws." The advance notice procedures also apply
to the nomination of persons for election to the Board. However, Company
filings make clear Mr. Bren's considerable advantages. "The advance notice
provisions are not applicable to The Irvine Company," which suggests that
competing offers to purchase the Company could potentially never be included in
Board business or presented at a shareholders' meeting.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 3
<PAGE> 71
THE PENOBSCOT GROUP, INC.
would not have to jump through various requirements that might be an
annoyance, if not a final deterrent, to others interested in taking
over the Company. While we have not made a similar survey of the
by-law provisions of other REITs, we strongly suspect that few give
similar privileges to their dominant shareholder.
FEASIBILITY CONSIDERATIONS: DEBT COVENANTS. There seems to be a good
chance that leveraging up might violate certain loan covenants,
especially leveraging up with secured debt. The Company's shelf
registration statement speaks of covenants not to permit debt to rise
above policy limits of 60%. Setting aside the problem of determining
how a private Company might determine debt to market cap ratios, it is
probably more relevant to consider what would be the consequences of a
violation of loan covenants. In most cases, the recourse of debt
holders is to call their loan, not to reset or establish any kind of
penalty interest rate. A decade ago, in the midst of a collapsing real
estate market, more than one lender who called a loan after a
technical default only to find the borrower appearing the next day
tendering repayment at a 100 cents on the dollar, having happily
avoided loan-maintenance prepayment penalties in repaying an expensive
loan. While IAC might not experience as large a windfall, there does
seem some possibility it might easily refinance existing indebtedness
at a lesser cost. The Company's existing $100 million of unsecured
notes, its liability most likely to contain covenants which would be
violated, bears interest at 7.0%, slightly higher than where it could
likely refinance this debt.
FEASIBILITY CONSIDERATIONS: DE-REITING AND OTHER TAX ISSUES. There are
likely a great many tax issues that complicate a takeover or
privatization, including the possibility that IAC could lose its REIT
tax-status, and/or that the IAC Operating Partnership might terminate
for tax purposes. In considering these topics we are swimming in
dangerous waters where tax-sharks more knowledgeable than we have
previously taken big bites of our flesh. However, to our amateur eye,
there seem to be important differences in the details that make a
privatization easier for Mr. Bren than it would be for other major
holders of other REITs.
De-REITing seems an inevitability for Mr. Bren and for many other
would-be acquirers of other REITs. De-REITing means that the tax-free
pass-through of cash flow would be lost; instead, any cash flow passed
through what was the IAC REIT would now be diluted by taxation. While
tax-free pass-through could be regained by exchanging the REIT shares
for OP Units, such an exchange seems unlikely to be deemed a
like-kind, and therefor tax-deferred exchange. Tax deferral should
make no difference for Mr. Bren because his basis in newly-acquired
REIT shares would be $32.50, meaning that the taxable gain and tax
liability would be minimal to non-existent.(6) So far, there is
nothing in Mr. Bren's position that makes him different from dominant
shareholders of other REITs.
- --------------------------------------------------------------------------------
(6) There would be gain only if the value of OP Units were deemed to be greater
than the $32.50 per share basis. Mr. Bren might, however, have a tax liability
with respect to shares owned by him to the extent that these shares had a lower
basis. A minority, but significant part of his holdings are in the form of
shares.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 4
<PAGE> 72
This moves to the second problem, where the facts and circumstances of the
Company vary significantly from other REITs. Assuming that the transaction
by which REIT shares are replaced by OP units is deemed for tax purposes a
transfer of OP Units, then, if 50% or more of the interests in the
Operating Partnership were so transferred, the Operating Partnership might
terminate for tax purposes, giving all former OP unit holders a taxable
gain to the extent of difference between the fair market value of their OP
units and their tax basis in these units. But in fact, the Irvine Company
holds an approximate 55% interest in Irvine Apartment Communities, L.P.,
the Operating Partnership, of which IAC is 45% general partner. Thus a
transfer of all of the OP units of IAC would not create a tax termination
of the Irvine Apartment Operating Partnership. In this respect, IAC is very
different from most other REITs. There may be other ways others could skin
their respective cats, but these methods seem unavailable at most other
REITs.
Very simply, the facts and circumstances unique to Mr. Bren and IAC seem to
suggest that tax issues and potential costs that others might face are
absent here.
SPECIAL INCENTIVES: LAND ISSUES. IAC had now come face to face, but not yet
come to grips with a zero-sum issue that would pit the interests of public
shareholders against controlling insiders. The issue is, of course, the
pricing of land to be purchased by IAC from Mr. Bren's Irvine Company, on
which IAC would develop additional apartment communities. At the IPO, under
what is known as The Land Rights Agreement, The Irvine Company agreed to
sell land to the Company for an interim period at prices which were
estimated to result in a total 10.0% to 10.5% return on the Company's total
investment. The Company's rights to buy under this arrangement lapsed with
the land previously purchased on which 1,884 apartments have been or are
now being constructed. Thereafter, purchase prices were simply not to
exceed 95% of appraised value.
Given history and the interests of parties concerned, value seems like a
fight waiting to happen, and, but for this privatization, likely to have
happen very soon. Mr. Bren and the Irvine Company would point to the same
thing they pointed to in announcing the buy-out proposal: "Accretive
acquisitions of Class A multi-family properties in California are difficult
to find." This means that cap rates are low and land should be priced to
reflect a similar low rate of return on investment. In fact, we think it
likely that they might argue that land on the Irvine Ranch should be priced
at an even lower cap and return on cost than land elsewhere. Other parties,
however, might point to the land for the 1,884 units bought most recently.
Absent some prior agreement that these transactions could not be deemed a
comparable, it could be argued that these are the most direct comparable,
even if slightly stale.
The difference, we strongly suspect, is quite large, perhaps 300 to 400 basis
points of return on total investment. A difference of 300 basis points could
amount to something like $60,000 per rental unit(7). Mr. Bren then faced the
pos-
- ---------------
(7) The figure of $60,000 is based on a pro forma valuation of the Company at
$127,000 per unit based on a 9.0% cap rate, and otherwise on the assumptions
more fully described above. If, alternatively, value were premised on a 6.0%
cap rate on the same average per unit NOI, per unit value would be $190,500
per unit or $63,500 per unit higher. This is an imperfect comparison in that
we are comparing implicit per unit valuation as between 9.0% and 6.0%, as
compared to a more likely range of dispute of between 10.0% and 7.0%; but it
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 5
<PAGE> 73
THE PENOBSCOT GROUP, INC.
sibility that if he ultimately won the value war, it would destroy the
economics of IAC which he owns a majority of, while at the same time
alienating all other holders of IAC shares(8). There is also the
possibility that he might have been advised that he wouldn't win the
valuation argument or that if he won in the short run, he could expect to
subject to all sorts of shareholder rights suits, some of which might seek
punitive damages. The fight was going to have costs, even if it was
ultimately won. There seems to be value simply in avoiding the fight as is
achieved by taking the Company private.(9)
SPECIAL INCENTIVES: COMFORT AS A PUBLIC COMPANY. Donald Bren's role at IAC
had very few, if any, parallels in the REIT industry. He has a stature as
an experienced and successful investor over a number of years, a reputation
similar to that held by Sam Zell, Mort Zuckerman, or Richard Rainwater. But
he did not choose to take a particularly visible role and rarely attended
industry functions or in other ways tried to extend the luster of his
reputation in any which might expand the pricing multiple of IAC shares.
But although his face was rarely seen, his hand was more visible. We saw
what appeared as his influence in the turnover of senior officers,
especially officers who seemed to develop an independent standing or
stature in the industry.
First was Dick Moran, who was nominally Executive Vice President and CFO at
the IPO but held the position of highest visibility initially. In March
1995, the nominal President as of the IPO, T. Patrick Smith, was gone and
Mr. Bren stepped in as Acting President. Many people, ourselves included,
expected Moran to be named President, thus formally acknowledging the role
he seemed already to have. In May 1995, Steven Albert joined IAC to become
President; in October 1996 Moran announced his departure and shortly
thereafter emerged as CFO at Kilroy Realty Corp. Moran was replaced as CFO
by Jim Mead who been at IAC in a less visible position for some time. Mead
then assumed a profile very similar to what Moran had held. By the time
IAC's 1996 Annual Report was released, Albert was no longer President and
Mr. Bren was once again, this time with no hyphenated "Acting" preceding
that title.
But that tenure was short-lived, and in 1997, William McFarland, who had
become a director in 1996 and had been associated with Irvine affiliates
since 1984 and with Mr. Bren previously, became President. Then, in October
1998, the departure of Jim Mead was announced, as of early 1999.
Admittedly, what we draw from these patterns is subjective, not conclusive
and subject to different interpretations. But what we see is a pattern of
those who have developed an eyeball-to-eyeball sense of trust with the
investing public not lasting long, while Mr. Bren seems to work his will
while avoiding the development of any relationship with other shareholders.
By no means does this suggest that Mr. Bren has or is about to willfully do
anything to harm the interests of public shareholders. Rather, it suggests
that he may not have
- --------------------------------------------------------------------------------
does nevertheless give some sense of the magnitude of the gap. At $60,000
per apartment unit, the $540 million purchase price would be fully recouped
with 9,000 units, roughly 52% of what the Company now has.
(8) Based on this possibility, an argument could be made that Mr. Bren is doing
shareholders a favor by buying them out now rather than later.
(9) On the other hand, if the argument that the 10.0% to 10.5% return is real
value was to win, there might also be a strong argument that the $32.50 per
share buyout price is inadequate.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 6
<PAGE> 74
developed a sense of being partners with shareholders to the
same extent as other, more visible REIT major-domos. In taking
IAC private, there is clearly no sense that, for better or
worse, we are all in this together.
IS THIS GOOD DEAL
A FAIR DEAL?
At the advertised 19.8% compound annual return, it seems that
investors have a deal that should elicit few complaints. A
19.8% return is considerably better than the NAREIT Equity
Total Return Index which produced an IRR we measure at a little
over 10% over that same period.(10) But on the other hand,
these have been times of strong cyclical recovery. And in
California that recovery lagged the rest of the country,
meaning that compared to REITs with assets elsewhere, a larger
part of the California recovery occurred during this period,
and a lesser portion at times preceding this. Thus a 19.8%
return could well be merely what is to have been expected from
California assets over this time, or maybe even less than what
should be expected.
No less important, a good return is not necessarily the same
thing as a fair return. There will be those who assume that
anytime an insider buys from outsiders, the outsiders are being
disadvantaged, that the buyer, who can be presumed to know
relevant facts than the seller, thinks there is value at the
price being paid. Going from raw paranoia to the numbers seems
to dissipate the case, but only very slightly.
PER UNIT VALUATIONS. At $32.50 per share, the valuation of the
Company is roughly $148,000 per apartment unit.(11) This
compares to roughly $153,000 per unit cost of recently
constructed or now under construction units on the Ranch (which
were built on land priced to yield a 10.0% return), or $211,000
off the Ranch.(12) Off the Ranch figures are skewed by a
119-unit development in Santa Monica, estimated to cost
$630,000 per unit, but then again, that Santa Monica asset is
included in what Mr. Bren proposes to soon own all of at a
valuation of $148,000 per unit.
CAP RATE VALUATIONS. Based on trailing NOI, the value seems to
imply a 6.8% cap rate.(13) There would be roughly 20 basis
points of incremental yield from halving G&A. Adding in the
development pipeline at a 10.0% yield, together with halving
G&A gives an indicated 8.16% yield. If the development pipeline
produces a yield 50 basis points higher (i.e. 10.5%), the
composite cap rate moves by a little over 10 basis points to
8.27%. And lastly, if forward-looking, rather
- ---------------
(10) We have calculated return on the NAREIT Index using an internal rate of
return over the same time frame.
(11) These calculations reflect (a) the sum of (1) 45.09 million shares and
equivalents times $32.50 each, plus (2) $789 million of liabilities, plus (3)
$144 million of redeemable preferred shares, plus (4) an estimated $333 million
to complete properties now under construction, less (5) $41 million of other
assets, divided by (b) 18,197 units. The figure of 18,197 units includes units
presently under construction. This data is drawn from Company reports as of the
end of its third quarter, 1998.
(12) It might be argued that newer units should have a value above existing
older units. But IAC's old units bring with them one almost unique difference
which positively influences their value: roughly $325 million of tax-exempt
mortgage bond financing bearing interest at a rate of 5.28%. Indeed, as of the
end of 1997, IAC's $704 million of debt bore interest at a weighted average rate
of 6.06%.
(13) This figure is based on $36.6 million of quarterly NOI, annualized to
$150.5 million divided by the value determined for per units calculations above.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 7
<PAGE> 75
than trailing NOI were used, as is customary, there might be 10 to 30 basis
points additional increase in return, especially given the strong movement
in rents in this market.
It would be interesting to compare these per unit and cap rate valuation
benchmarks with the specific examples that brought The Irvine Company to
conclude that "Accretive acquisitions of Class A multi-family properties in
California are difficult to find." It looks like Mr. Bren may have found a
quite accretive acquisition sitting right under his nose.
MORE EQUITABLE ALTERNATIVES. The leverage feasibility analysis above seems
to argue that, in full fairness, shareholders perhaps should be offered one
or two other alternatives to a buyout. The first alternative would be to
keep ownership as is, take down similar debt and distribute the proceeds to
shareholders. That would of course mean the $540 million would go to all
shareholders and thus be less than $32.50 per-share; we estimate it would
be roughly $11.98 per-share. And it would have a negative impact on per
share FFO which can be estimated at a reduction of roughly $0.84 per year.
While many shareholders might find this a not altogether attractive
alternative, in a roundabout way, thinking about this possibility brings up
another potential solution to the problems that seem to have brought Mr.
Bren to propose a buyout as being in the best interests of the Company.(14)
Part of the stated reason for going private is to be able to retain
capital. Buy by leveraging up to fund a privatization, there is actually
going to be less cash flow available, even if all of it could be retained
and reinvested. Despite this inconsistency with Mr. Bren's stated goals,
the transaction is attractive to him, largely because of a presumed cost of
the capital necessary to effectuate the buyout of 7.0% or less. Thus it
might more in the interest of shareholders to leave ownership unchanged,
but increase its leverage to extent of $540,000 million and invest those
proceeds in the opportunities Mr. Bren sees as being lost to the present
obligation to distribute all cash flow; then shareholders in addition to
Mr. Bren might enjoy the benefits of higher leverage at prevailing rates.
Or stated another way, there is more than one way to deal with the problems
Mr. Bren purports to be solving and many shareholders might find that
solution preferable to being bought out at $32.50 per share.
PROBABILITIES
ELSEWHERE
Very few other REITs seem to have similar facts and circumstances to make a
take-over by dominant insiders likely. In our coverage universe, REITs
where insiders hold a large percentage of effective ownership of the
consolidated enterprise include Boston Properties (19.4% owned by the
chairman, management and their families), Cousins (19.2%), Crescent
(13.0%), CBL (27.9%), General Growth (17.2%), Simon (23.6%, including
DeBartolo family interests), Urban (38.0%), and Taubman (17.7%).(15) All of
these are some distance from the
- -----------------
(14) At this point, the "Company" seems to have taken on a metaphysical quality
wholly separate from the interests of its various shareholders. It seems
to us a more constructive approach would be to view the interests of the
Company as equivalent to the aggregate interest of these owners.
(15) This is calculated based on shareholdings of the chairman and board as of
their most recent proxy and shares and equivalents as of the third quarter
of 1998.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 8
<PAGE> 76
level owned by Mr. Bren. Existing debt as a percentage of the fair market
value of assets, using a 9.0% cap rate on trailing NOI annualized, is
generally higher than IAC's level. At Boston Properties, liabilities equal
52% of FMV calculated on this method, at Cousins 31%, at Crescent 42%, at
CBL 66%, at General Growth 78%, at Simon 94%, at Taubman 58% and at Urban
70%. Using an 8.0% cap rate, the mall REIT's leverage is lower, 59% for
CBL, 70% for General Growth, 83% for Simon, 52% for Taubman, and 62% for
Urban. Very simply, the likelihood of the dominant shareholders of these
REITs following Mr. Bren's example seem quite low. The most plausible
exception seems to be Cousins, where there may also be hidden value in
non-income producing land holdings.
In a sense, this analysis seems to turn the convention wisdom that larger
ownership interests by management are better than smaller. But as we see it
the correct conclusion is more a refinement than a refutation of
conventional wisdom. In effect a corollary should be added to conventional
wisdom: when management's interest is so large as to give them effective
unilateral control, it is good to be attentive to all those signals which
indicate whether such a dominant shareholder views other shareholders as
either his partners, or as a convenient source of the interim financing for
his company.
TYING THIS DEAL TO
OUR MACRO
PERSPECTIVES STATED
ELSEWHERE
Our regular readers are no doubt aware of our recent speculations regarding
the possibility of deflation in real estate.(16) In those ruminations, we
have argued that certain types of property might be spared the negative
effects of deflation and instead experience land appreciation to arrive at
a full equilibrium between, on one hand, supply and demand as reflected in
rents and, on the other hand, replacement cost as factored by the cost of
capital, the long-term debt portion of which has recently declined
significantly and appears likely to remain low. We argued that the more
favorable scenario is more likely in circumstances where the providers of
space have some pricing control, some ability to avoid the other scenario
characterized by real declines in rents rather than land appreciation.
While we have also characterized urban properties as more likely to perform
in a manner consistent with the land appreciation scenario, not all urban
areas would enjoy this pattern and not all non-urban would not. One of the
more likely locations to perform well is the Irvine Ranch, a prospect that
argues that it, or more specifically, the Company should be valued
differently than real estate in other locations. It also means that IAC
might be especially missed by investors and those of us who like to try to
figure out what is really going on.
- --------------------------------------------------------------------------------
(c) 1998. The Penobscot Group, Inc. All rights reserved. Unauthorized copying
or distribution of this report or any portion hereof is prohibited.
- --------------------------------------------------------------------------------
(16) See "Deflation, New Capital Constituencies, and the Re-Sorting of the REIT
Industry," Relative Valuation Array Charts, December 1, 1998 and
"Recessions, Cheap Debt and Equilibrium," Relative Valuation Array Charts,
November 3, 1998.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 9
<PAGE> 77
THE PENOBSCOT GROUP, INC
The information herein, including that drawn from other publications of The
Penobscot Group, Inc., while drawn from sources deemed reliable, is not
guaranteed, may not be accurate and should not be relied on as such. Opinions
expressed are our current opinions and are subject to change without notice.
The Penobscot Group, Inc. reserves the right to discontinue this series of
Reports at any time without prior notice. The Penobscot Group, Inc., its
affiliates, and officers, directors, and employees of both may currently hold
long or short positions in and from time to time purchase or sell securities of
any or all of the companies mentioned.
IRVINE GOES PRIVATE DECEMBER 6, 1998 PAGE 10
<PAGE> 78
[REALTY STOCK REVIEW FRONT PAGE, DECEMBER 4, 1998]
Market Analysis of REITs & Real Estate Operating Companies
WATERSHED OR NO BIGGIE?
After the market closed on December 1, The Irvine Company, a private real
estate entity controlled by Donald Bren, announced an offer to buy the
approximately 16.6 million shares of Irvine Apartment Communities that it
doesn't already own for $32.50 per share. Simply put, in a deal valued at $540
million, Bren is proposing to take private the company that he took public in
December 1993 at $17.50 per share. The Irvine Company hopes to have the deal
approved by the end of this year.
The Irvine Company is the largest current stockholder of IAC. As of
December 1, it held approximately 17% of the outstanding common shares. It also
owns approximately 55% of the partnership interests of Irvine Apartment
Communities, L.P. of which IAC is a 45% general partner. In all, Bren owns an
approximate 63% economic interest in IAC. Bottom line: After roughly five years
in the public fishbowl, Bren has apparently decided that he wants it all!
In its press release announcing the proposal, The Irvine Company stated
that the bid is not subject to a financing contingency. In addition, The Irvine
Company noted that the existing debt and preferred stock of Irvine Apartment
Communities, L.P., IAC's operating partnership, will remain outstanding and are
not expected to be affected by the proposed transaction.
We have mixed feelings about Bren's offer. On one hand, Bren is paying a
"fair" price for IAC (more on that subject, in a bit). On the other hand,
though IAC has had its ups and downs -- a mind-boggling number of senior level
management changes hasn't helped matters -- it is the sort of company we'd like
to see in the public arena. Furthermore, it has delivered solid returns for
investors, and our view is that even "better times" lie ahead.
[GRAPH SHOWING STOCK PRICE AND VOLUME]
BIG QUESTIONS
Is Bren the first of many to pack it in and take his REIT private? We
don't think so. First, we never thought Bren's heart was really in being
public. (He shuns the spotlight.) His attitude toward the public market from
the outset was tentative, at best. We
<PAGE> 79
suspect Bren took IAC public -- and thought long and hard about taking other
pieces of The Irvine Company public -- not because he, like a Sam Zell, saw the
"equitization" of real estate as a long-term goal, but rather because it solved
shorter-term issues. (Though we suspect that had things gone differently he
might have stayed around, at least a while longer.) So, as we see it, Bren's
decision doesn't say anything about the resolve of those who came public over
the past five years or so to remain public.
Second, though some observers suggest the price Bren is offering -- roughly
a 20% premium to what IAC was going for before the announcement -- confirms that
REITs are under-valued by the market currently, we don't agree. REITs may be
cheap on a relative and possibly even on an absolute basis, but whatever price
Bren has to pay to get the shares of IAC he doesn't already own, it reflects the
uniqueness of the situation. Extrapolating from what Bren is willing to pay to
the market generally isn't warranted, though it would be nice to be able to do
so.
IAC RECAP
According to IAC's latest 10-Q (filed on November 11), the company had
20,129,873 common shares outstanding as of October 31. It owned 62 apartment
communities (it owned 42 when it came public) with 16,029 apartment units. (The
overwhelming majority of those are located in Orange County, California on the
Irvine Ranch.) It had 2,729 apartment units under development. The company broke
ground on its first apartment community, off the Irvine Ranch in Northern
California's Silicon Valley, in May of last year.
IAC reported third quarter FFO/share (diluted) of 60 cents vs. 51 cents in
the year-ago period. (It's 3Q98 FFO/share was a penny or two ahead of most
estimates, by the way.) FAD (funds available for distribution) was 57 cents vs.
49 cents in the year-ago period. (Weighted average shares/units outstanding was
45.157 million.) Same-store results -- 48 properties with 13,451 units owned and
stabilized before 1997 -- experienced a 10.1% increase in net operating income
over the year-ago period ($32.5 million vs. $29.5 million). Average monthly rent
went from $1,119 to $1,171 per unit. Physical occupancy went from 93.8% to
94.1%.
ISSUES TO WEIGH
Bren isn't trying to steal the company, but he's not overpaying either. His
offer of $32.50 per share is, as noted, well above the price IAC was changing
hands at immediately prior to the announcement. It's also a premium over "our
consensus NAV of $24.43 per share." (The high end of the consensus is in the
neighborhood of $28 to $29 per share.) However, recent conversations with
non-REIT folks in Orange County who are familiar with IAC's portfolio and local
economics lead us to believe that in some instances the cap rates being used to
value the portfolio are on the high side. (Something in the low 7% range seems
right to us.) More important, however, when IAC came public there was a good
deal of controversy about its valuation, generally, and specifically about the
company's unique development story. So, though an investor who bought IAC at the
IPO and held on to it has done well, we believe Bren's offer doesn't fully
reflect the "future" value that shareholders paid for when they bought IAC. It's
tough to nail down a hard number, though if IAC develops, say, $150 to $200
million in apartments per year and earns a 20% to 25% development profit on that
investment, it would add at least another $30 million to the mix annually. An
offer in the $34 to $35 range better reflects not only IAC's current value, but
also gives investors who bought the development story's potential something for
their vote of confidence in Bren.
It will be interesting (no, fascinating) to see how IAC's senior executives
and independent directors deal with Bren's offer. As one buy-sider put it, "Bren
casts a mighty large shadow, especially in Southern California." (This is yet
another test of corporate governance in the REIT sector.) Again, we wouldn't
accuse Bren of trying to steal the company, but given what he said when IAC came
public about the development story, we'd feel a lot better if he sweetened his
offer by $1.50 to $2.50 a share.
When we went to press, IAC was changing hands at $31? per share. Assuming a
transaction at $32.50 per share -- and counting IAC's fourth quarter dividend of
38.5 cents per share -- an investor could earn roughly a 4% total return in a
month. Not too shabby! Moreover, in our view, there's at least a 50/50 chance
that Bren will sweeten his offer. For those reasons, we're raising our rating on
IAC from DCA to a BUY.
<PAGE> 80
<TABLE>
<CAPTION>
<S> <C>
[DONALDSON, LUFKIN & JENRETTE(R) LOGO]
Donaldson, Lufkin & Jenrette Services Corporation
277 Park Avenue, New York, NY 10172-0002
EQUITY
RESEARCH
REAL ESTATE
INVESTMENT TRUSTS [PHOTO]
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 3, 1998 IRVINE APARTMENT COMMUNITIES (IAC)#
IRVINE COMPANY PROPOSES TENDER OFFER FOR IAC SHARES NOT ALREADY OWNED AT $32.50 PER SHARE; NOT MANY
MORE "LBOS" ANTICIPATED IN THE REIT GROUP
----------------------------------------------------------------------------------------------------
MARKET PERFORMANCE
AS OF 12/02/98 FFO PER SHARE(a) FAD PER SHARE(b)
------------------- ----------------------- ----------------------- REL. RETURN
PRICE S&P 500 12/97 12/98E 12/99E 12/97 12/98E 12/99E PROJECTION
------- ------- ----- ------ ------ ----- ------ ------ -----------
31 9/16 1171.25 $2.00 $2.30 $2.60 $1.87 $2.16 $2.40 0% TO 15%
PRICE AND TRADING DATA VALUATION DATA
------------------------------------------------ -------------------------------------------
52-Week Price Range 32 7/16-23 Relative 1998 P/FFO NA
Shares Outstanding (mil.) 45.1 Five-Year Relative P/FFO Range NA
Market Capitalization (bil.) $1.4 Net Asset Value NA
Avg. Daily Trading Volume (000) 68 Price/Net Asset Value NA
12-Month Target Price $32.50 Dividend $1.54
Current Yield 4.9%
P/FFO P/FAD Last 12-Month Total Return 7%
---------------------- --------------------- Last 12-Month S&P 500 Total Return 21%
12/98E 12/99E 12/98E 12/99E Last Five-Year EPS Growth 19%
------ ------ ------ ------ Five-Year EPS Growth Forecast 14%
13.7 12.1 14.6 13.2
(a) Funds from operations (FFO) represents net income plus real estate depreciation less capital
gains (losses).
(b) Funds available for distribution (FAD) equals FFO less recurring capital expenditures.
----------------------------------------------------------------------------------------------------
HIGHLIGHTS o On December 2, The Irvine Company, a privately held real estate concern controlled by Donald
Bren, announced a proposal to acquire the 16.6 million common shares of Irvine Apartment
Communities (IAC) that it does not already own for $32.50 per share in cash--a 21% premium to the
most recent closing price. 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.
o 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 an 8% cap rate equivalent--a 30%-plus premium to its peer
group multiple. On the qualitative 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.
o 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 $2.40 per share.
o In our view this is not the beginning of a wave of REIT LBOs.
LAWRENCE D. RAIMAN (212) 892-2380 [email protected]
ANTHONY PAOLONE (212) 892-2383 [email protected]
JOSEPH NADOL (212) 892-2376 [email protected]
MICHAEL W. MUELLER, CFA (212) 892-4272 [email protected] 2910-98
</TABLE>
<PAGE> 81
<TABLE>
<S><C>
[DONALDSON, LUFKIN & JENRETTE LOGO]
COMPANY Irvine Apartment Communities is an apartment real estate investment trust (REIT) based on the Irvine Ranch
DESCRIPTION in Southern California. The company was founded by Donald Bren and has acted as a financing vehicle for the
multifamily development activities of The Irvine Company (a privately held real estate organization). Through
this affiliation, IAC has an agreement giving it the right of first refusal on apartment development on the
Irvine Ranch until 2020. IAC also is active in the Silicon Valley, San Diego County and Los Angeles. At
September 30, 1998, IAC owned or had under development 62 apartment communities with 18,758 units.
SUMMARY
FINANCIAL DATA 1999E 1998E 1997 1996 1995 1994 FIVE-YEAR GROWTH
Revenues $250.0 $215.2 $182.6 $158.1 $135.7 $128.9 14.2%
Funds From Operations 117.4 100.8 82.0 68.3 48.1 33.3 28.7%
Funds Available for
Distribution 108.4 94.7 76.7 63.3 43.6 27.7 31.4%
FFO Per Share $ 2.60 $ 2.30 $ 2.00 $ 1.75 $ 1.45 $ 1.10 18.8%
FAD Per Share 2.40 2.16 1.87 1.62 1.31 0.92 21.1%
Gross Margin 70.0% 67.0% 67.0% 67.2% 65.9% 63.0% NA
FFO Margin 47.0% 46.8% 44.9% 43.2% 35.5% 25.8$ NA
Dividends Per Share $ 1.62 $ 1.54 $ 1.53 $ 1.44 $ 1.39 $ 1.11 7.8%
[DAILY CLOSING PRICES GRAPH] [RELATIVE DIVIDEND YIELDS GRAPH]
As of the Close 12/02/98
DONALDSON, LUFKIN $ JENRETTE IS A REGISTERED TRADEMARK OF DLJ LONG TERM INVESTMENT CORPORATION.
Copyright(C) 1998 Donaldson, Lufkin & Jenrette Securities Corporation Additional information is available upon request.
THIS REPORT HAS BEEN PREPARED FROM ORIGINAL SOURCES AND DATA WE BELIEVE TO BE RELIABLE BUT WE MAKE NO REPRESENTATION AS TO ITS
ACCURACY OR COMPLETENESS. THIS REPORT IS PUBLISHED SOLELY FOR INFORMATION PURPOSES AND IS NOT TO BE CONSTRUED EITHER AS AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OR THE PROVISION OF OR AN OFFER TO PROVIDE INVESTMENT SERVICES IN ANY STATE
WHERE SUCH AN OFFER, SOLICITATION OR PROVISION WOULD BE ILLEGAL. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION (DLJSC), ITS
AFFILIATES AND SUBSIDIARIES AND/OR THEIR OFFICERS AND EMPLOYEES MAY FROM TIME TO TIME ACQUIRE, HOLD OR SELL A POSITION IN THE
SECURITIES MENTIONED HEREIN. UPON REQUEST, DLJSC WILL BE PLEASED TO DISCLOSE SPECIFIC INFORMATION ON SUCH POSITIONS OR TRANSACTIONS.
DLJSC OR AN AFFILIATE MAY ACT AS A PRINCIPAL FOR ITS OWN ACCOUNT OR AS AN AGENT FOR BOTH THE BUYER AND THE SELLER IN CONNECTION WITH
THE PURCHASE OR SALE OF ANY SECURITY DISCUSSED IN THIS REPORT. OPINIONS EXPRESSED HEREIN MAY DIFFER FROM THE OPINIONS EXPRESSED BY
OTHER DIVISIONS OF DLJSC.
FOR INSTITUTIONAL CLIENTS OF THE EUROPEAN ECONOMIC AREA (EEA): THIS DOCUMENT (AND ANY ATTACHMENTS OR EXHIBITS HERETO) IS INTENDED
ONLY FOR EEA INSTITUTIONAL CLIENTS. THIS DOCUMENT MAY NOT BE ISSUED OR PASSED ON TO ANY PERSON IN THE EEA EXCEPT (A) A PERSON TO
WHOM IT MAY LAWFULLY BE ISSUED, OR (B) IN THE U.K., A PERSON WHO IS OF A KIND DESCRIBED IN ARTICLE 11(3) OF THE FINANCIAL SERVICES
ACT 1966 (INVESTMENT ADVERTISEMENTS)(EXEMPTIONS) ORDER 1995, AS AMENDED.
</TABLE>
<PAGE> 82
DONALDSON, LUFKIN & JENRETTE
IRVINE APARTMENT COMMUNITIES ACT (IAC)
RATING: MARKET PERFORMANCE
------------------------------------------------------------
VIEWPOINT On December 2, The Irvine Company, a privately held real
estate concern controlled by Donald Bren, announced a
proposal to acquire the 16.6 million common shares of
Irvine Apartment Communities (IAC) that it does not already
own for $32.50 per share in cash -- 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. It is
notable that the takeout price implies a total enterprise
value for IAC of $2.20 billion, of 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) 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
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 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 an
8% cap rate equivalent -- a 30%-plus premium to its peer
group multiple. Without knowing for sure, Mr. Bren is
obviously paying this premium for IAC shares based on his
more bullish view of the company's upcoming development
pipeline, asset values, and future growth prospects. On the
qualitative front, we are also surprised that The Irvine
Company is taking IAC out of the public fold and is willing
to forego access to both public and private capital. Mr.
Bren obviously believes -- maybe rightfully so -- 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.
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
$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 Is this the first in a wave of REIT LBOs? 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.
3 DONALDSON, LUFKIN & JENRETTE
<PAGE> 83
DONALDSON, LUFKIN & JENRETTE
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
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 its 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 also benefit
if Mr. Bren's confidence in his real estate markets manifests.
LAWRENCE D. RAIMAN (212) 892-2380 [email protected]
ANTHONY PAOLONE (212) 892-2383 [email protected]
JOSEPH NADOL (212) 892-2376 [email protected]
MICHAEL W. MUELLER, CFA (212) 892-4272 [email protected]
NOTE: PRICES ARE AS OF THE CLOSE, DECEMBER 2, 1998.
Archstone Communities (ASN): 20-5/8 Equity Residential (EQR)#: 42-3/8
Avalonbay Communities (AVB): 34-1/8 Essex Property Trust (ESS)+: 31-1/8
BRE Properties Inc. (BRE)#: 24-9/16 Pacific Gulf Properties (PAG): 19-1/2
+ WITHIN THE PAST THREE YEARS DONALDSON, LUFKIN & JENRETTE'S SECURITIES
CORPORATION HAS BEEN A MANAGING OR CO-MANAGING UNDERWRITER OF THE
COMPANY'S SECURITIES.
# AN AFFILIATE OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MAKES
A MARKET IN THIS SECURITY, HAS PERIODIC POSITIONS IN THIS SECURITY IN
CONNECTION WITH THIS ACTIVITY AND MAY BE ON THE OPPOSITE SIDE OF PUBLIC
ORDERS EXECUTED ON A REGIONAL STOCK EXCHANGE WHERE IT ACTS AS A
SPECIALIST.
DONALDSON, LUFKIN & JENRETTE
4
<PAGE> 84
DONALDSON, LUFKIN & JENRETTE
APARTMENT MARKETS WITH GREATEST FORWARD SUPPLY EXPOSURE
<TABLE>
<CAPTION>
SUPPLY GROWTH SELECTED
RISK IN EXCESS OF REITs WITH
RANKING MARKET DEMAND GROWTH EXPOSURE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1 Orlando, FL 2.07% UDR
2 Dallas, TX 1.55% AML, BRI, CPT, EQR, GBP, MAA,
PPS, UDR, WDN
3 Salt Lake City-Ogden, UT 1.40% BRE
4 Seattle-Everett, WA 1.32% ASN, BRE, ESS, PAG
5 Pittsburgh, PA 0.69% HME
6 Indianapolis, IN 0.63% AML, LFT
7 Tulsa, OK 0.56% ---
8 New Orleans, LA 0.40% SIZ
9 Nassau-Suffolk, NY 0.36% ---
10 San Jose, CA 0.30% AVB, ESS
58 City Average 0.55%
</TABLE>
APARTMENT MARKETS WITH LEAST FORWARD SUPPLY EXPOSURE
<TABLE>
<CAPTION>
SUPPLY GROWTH SELECTED
RISK IN EXCESS OF REITs WITH
RANKING MARKET DEMAND GROWTH EXPOSURE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
58 Riverside-
San Bernardino, CA -3.89% PAG
57 St. Louis, MO-IL -2.60% CPT
56 San Diego, CA -2.54% BRE, IAC, PAG
55 San Francisco, CA -2.21% BRE
54 Las Vegas, NV -2.18% CPT, GLB
53 Orange County, CA -1.97% AVG, ESS, IAC, PAG
52 Phoenix, AZ -1.82% AIV, ASN, BRE, EQR, WDN
51 Raleigh-Durham-
Chapel Hill, NC -1.70% BNP, SMT, TCR, UDR
50 Austin, TX -1.63% AML, WDN
49 San Antonio, TX -1.60% ---
58 City Average 0.66%
</TABLE>
* Threshhold for inclusion in this column is about 5% of a company's portfolio.
5
DONALDSON, LUFKIN & JENRETTE
<PAGE> 85
- --------------------------------------------------------------------------------
MORGAN STANLEY DEAN WITTER
[WORLD MAP] 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>
<CAPTION>
FY Ends ---FFO--- ---AFFO---
Dec Curr Prior P/E Curr Prior P/E
<S> <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>
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 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.
- --------------------------------------------------------------------------------
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> 86
2 MORGAN STANLEY DEAN WITTER
- --------------------------------------------------------------------------------
*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 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 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.
- --------------------------------------------------------------------------------
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> 87
MORGAN STANLEY DEAN WITTER 3
- --------------------------------------------------------------------------------
- ---------------
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 managed 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 authorised representative of Morgan
Stanley Australia Limited.
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
specific investment objectives and financial position. Private investors should
obtain the advice of their Morgan Stanley & Co. International Limited
representative about the investments concerned.
This publication is disseminated in Japan by Morgan Stanley Japan Limited and in
Singapore by Morgan Stanley Asia (Singapore) Pte.
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> 88
[LOGO] MORGAN STANLEY DEAN WITTER
EQUITY RESEARCH
BRIEFING NOTE
##.SBLO,.US,I/REA,AVB,BRE,BRI,IAC,SMT
Real Estate (I/REA): IAC COULD BE FIRST MULTIFAMILY REIT TO GO PRIVATE
Steven G. Bloom, CFA (212) 761- 6284
Date: December 2, 1998
Type: Industry Overview
KEY POINTS
- - The Irvine Company plans to take Irvine Apartment Communities, a multifamily
REIT, private at $32.50 per share. The decision to go private points to some
REIT limitations like the inability to retain and the high current cost of
raising capital.
- - In most ways, the situation is unique to this REIT. However, it does confirm
our belief that many multifamily REITs are trading at or below net asset value
(NAV).
- - In our universe, Berkshire Realty (BRI, $10, Outperform) and Summit Properties
(SMT, $17, Outperform) are trading about 20% below our estimated NAV.
- - We think the better-managed companies with exposure to strong markets ought to
trade at a slight premium to NAV. Our top picks include Avalon Bay Communities
(AVB, $33, Strong Buy) and BRE Properties (BRE, $24, Strong Buy).
DETAILS
IRVINE APARTMENT COMMUNITIES COULD GO PRIVATE. The Irvine Company (TIC), which
owns a majority 55% interest of Irvine Apartment Communities LP and 17% of the
shares of Irvine Apartment Communities Inc. (IAC, a real estate investment
trust), announced an offer to IAC's board to acquire the remaining 16.6 million
shares of IAC it does not already own. IAC is unusual in that the REIT is a
minority owner of the operating partnership. TIC intends to pay $32.50 per
share. The shares closed on December 1, 1998, just prior to the announcement, at
$27 3/8.
THE DECISION POINTS TO SEVERAL CHALLENGES FACING MULTIFAMILY REITS
TODAY. The Irvine Company offered several reasons for its decision. On one hand,
it believes a private company is better situated to handle development risks. On
the other, raising new capital has become expensive. The decision to take the
REIT private points to some of the limitations affecting multifamily REITs
today. We think it also confirms our belief that many companies are trading at
or below net asset value.
In general, distributing at least 95% of net income, and in most cases, 70-80%
of cash flow after reserving for recurring capital expenditures, leaves little
in the way of retained earnings to reinvest in the company. With many companies
trading at or below net asset value, selling new equity can be expensive.
Combined with historically low leverage levels, many multifamily REITs have lost
their low cost of capital advantage, especially if capital continues to flow to
private players.
WHILE GOING PRIVATE MAY SERVE AS A CATALYST FOR THE SECTOR... IAC is the first
company in our multifamily universe to commence with plans to go private. To the
degree management has stepped up and indicated it sees more value in the REIT
than the public markets give credit for, investors may pay greater attention to
the sector. Most of the companies in our universe are trading at or below our
estimate for net asset value. There are two stocks we have rated Outperform that
are trading approximately 20% below our estimated net asset value. They are
Berkshire Realty (BRI, $10) and Summit Properties (SMT, $17)
... IAC WAS A UNIQUE SITUATION. IAC was the only company we track whereby the
REIT owned a minority interest in the operating partnership. Moreover, the
Irvine Company appears very well capitalized and clearly has the
- -------------------------------------------------------------------------------
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> 89
MORGAN STANLEY DEAN WITTER
________________________________________________________________________________
wherewithal to carry out the transaction. By leaving the operating partnership
intact it does not have to refund the partnership's debt and preferred
securities. Even if another management team wanted to take its company private,
debt costs may still be prohibitive.
WE DERIVE A 7.75% CAP RATE FOR THE TRANSACTION. At $32.50 per share, we believe
the company's income is being valued at approximately a 7.75% cap rate. We had
used an 8% cap rate in coming up with our $31 net asset value (NAV). Assets in
California are generally valued more highly than other areas of the country
given favorable demographics and high barriers to new construction. IAC was
particularly interesting because the Irvine Company owns the Irvine Ranch in
Orange County, which is the largest master planned community in the U.S. The
REIT had an exclusive right to develop multifamily communities on the ranch,
effectively giving it a local monopoly on new development. We presume that the
Irvine Company saw even greater value to the REIT or future development to
justify the price offered for the shares.
WE BELIEVE BETTER-QUALITY COMPANIES OUGHT TO TRADE AT PREMIUMS TO NAV. We think
the better-managed companies with strong balance sheets, low payout ratios, and
exposure to attractive markets ought to be able to trade at a premium to NAV.
Alternatively, when a company's strategy is not embraced by investors the stock
may trade below NAV. Over time, the difference may determine which multifamily
REITs can issue equity on a cost-effective basis and continue to grow through
acquisitions and development compared to those that may be precluded from
raising cheap capital.
We maintain our cautious near-term outlook for companies with exposure to
markets that may experience oversupply problems during 1999 such as Dallas,
Houston, and Orlando. While we expect apartment starts to slow by year-end and
through the early part of next year, recent increases in starts could contribute
to market weakness during 1999 as new communities are completed. We think the
supply outlook ought to improve in 2000.
TOP PICKS: AVB and BRE. We would continue to focus on companies with exposure to
markets that have been undersupplied and with high barriers to entry. Our top
picks include Strong Buy rated Avalon Bay Communities (AVB, $33) and BRE
Properties (BRE, $24). Avalon Bay has a national presence through exposure to
West Coast, Midwest, Mid-Atlantic, and Northeast markets. BRE's portfolio is
located primarily in West Coast markets.
<TABLE>
<CAPTION>
FFO/Share MSDWE MSDWE Prem/
Company Sym. Rating Price 98E 99E Cap Rate NAV Disc.
- ------- ---- ------ ----- ---------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Avalon Bay AVB SB 33.38 2.87 3.25 8.50% 35.47 0.94
BRE Prop. BRE SB 24.56 2.11 2.35 8.25% 24.63 1.00
Berkshire BRI OP 9.50 1.14 1.17 9.50% 12.97 0.73
Irvine IAC OP 27.38 2.29 2.55 8.00% 30.86 0.89
Summit SMT OP 17.56 2.00 2.12 9.00% 22.46 0.78
</TABLE>
MSDWE: Morgan Stanley Dean Witter Estimate
________________________________________________________________________________
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. Pease refer to the notes at the end of this report.
________________________________________________________________________________
<PAGE> 90
MORGAN STANLEY DEAN WITTER 3
- --------------------------------------------------------------------------------
- -----------------------
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.
Morgan Stanley & Co. Incorporated, Dean Witter Reynolds Inc. and/or their
affiliates or their employees have or may have a long or short position or
holding in the securities, options on securities, or other related investments
of issuers mentioned herein.
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
Stanley Australia Limited.
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 specific investment objectives and
financial position. Private investors should obtain the advice of their Morgan
Stanley & Co. International Limited representative about the investments
concerned.
This publication is disseminated in Japan by Morgan Stanley Japan Limited and
in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte.
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.
- --------------------------------------------------------------------------------
