Newport REIT to Sell Portfolio

Pacific Gulf Properties Inc., looking to close the gap between its stock price and the value of its properties, agreed Tuesday to sell its industrial portfolio for $812 million in cash to a venture led by a California pension fund.

The Newport Beach-based real estate investment trust said it will sell the 72-property portfolio, which has 15 million square feet of space, to the California Public Employees Retirement System and pension fund advisor RREEF. The two also will assume $117 million of debt.

“We felt the value in our shares was not going to be recognized in the public markets for quite some time,” said Pacific Gulf Chairman and Chief Executive Glenn Carpenter. He said his company’s shares have been trading at a significant discount to its net asset value, which he estimates at $27 to $28 a share.

Pacific Gulf’s shares rose to a 52-week high of $25.13 Tuesday before settling back to close at $24.75, up $1.69, on the New York Stock Exchange. At Monday’s closing price of $23.06, the shares were at a discount of more than 17% to the value of Pacific Gulf’s holdings, the biggest discount among similar REITs, according to Salomon Smith Barney Inc.

Pacific Gulf Properties wasn’t planning to sell its industrial portfolio, but the offer was too good to ignore, Carpenter said.

The executive said CalWest, the joint venture between pension fund CalPERs and pension fund advisor RREEF, initially began discussing the possibility of doing a joint venture with Pacific Gulf in the industrial sector. But after reviewing Pacific Gulf’s industrial portfolio, CalWest made an offer to acquire the properties “at a price that was close to its private sector value,” Carpenter said.

“It was an emotional decision for me,” said Carpenter, who founded the company in 1984 and built it from a $100-million concern to one whose assets were valued at more than $1 billion. But he said he had to consider the best interests of shareholders.

“It was an opportunity to sell real estate at full private market value,” he said. “It was too good not to bring to shareholders.”

CalPERS and RREEF teamed up in 1998 to form CalWest Industrial Properties LLC to buy industrial and warehouse properties in the western U.S. With this purchase, the venture will own about $2 billion of assets.

The sale is expected to close in the fall and is subject to shareholder approval.

Pacific Gulf will continue managing the warehouses, which are in California, Washington, Nevada, Arizona and Oregon. The properties are mainly leased to small and mid-sized businesses.

Pacific Gulf also wants to sell its 1,631 apartments and said it’s looking at alternatives for its almost 1,500 assisted-living units.

Carpenter said a short list of bidders for the apartments has been drawn up and he expects to have a deal in place within the next few weeks. The segment is expected to fetch $128 million to $130 million, he said.

The company said it expects the sale of the two businesses to result in a fourth-quarter cash distribution of as much as $26 a share to shareholders.

Carpenter said the company must also decide within the next 180 days if it will sell its assisted-living portfolio. This business, when its development pipeline is included, is expected to go for about $130 million.

Analyst Jay Leupp at Robertson Stephens said the sale of the senior housing units could generate another $2 to $3 a share for shareholders once severance packages, overhead and transaction costs are factored in.

REIT shares slumped in 1998 and 1999, in part because of concerns that the companies were overbuilding and paying too much for assets. The stock slumps, for the most part, prevented these companies from acquiring assets. That caused earnings growth to slow, exacerbating the slump.

Frustrated by the gap between what the public is paying for their shares and the private market values for real estate, many REIT managers have decided the only way to close the gap is to sell properties in bulk, or sell out entirely.

“The pressure is coming from shareholders urging this to happen,” Leupp said.

Most of the activity, so far, has centered on mid-size REITs, which may not be as nimble as their smaller counterparts or have the same clout with suppliers and tenants as the large national developers. Pacific Gulf’s warehouse portfolio is less than a tenth the size of industry leader ProLogis Trust.

Last month, Bradley Real Estate Inc., a REIT based in Northbrook, Ill. agreed to sell out to a private operator for $1.12 billion in cash and assumed debt. And in April, Philips International Realty Corp. agreed to sell the bulk of its shopping center properties to Kimco Realty Corp. for $206 million.

Dow Jones News Services and Bloomberg News were used in compiling this report.