"Overall this transaction appears to be positive," says KeyBanc, reiterating its Hold on Essex Property (ESS) following the agreement to buy BRE Properties. The roughly 5.0% cap rate seems fair and the deal being accretive to FFO is encouraging, but operating upside and expense synergies will be offset by a Prop 13 tax adjustment - a disappointment. Essex's exposure to SoCal markets will increase from 45% to 50% of NOI and that of Northern California will fall to 33% from 37%.
Maybe a more interesting take is BMO Capital, which muses about the possibility of topping bids. A $60 per share offer implies a 4.5% cap rate (after Prop 13) - "expensive, but still reasonable for a West Coast multifamily portfolio ... the math for an all-in cash offer in that range could pencil for a leveraged private buyer."
If it weren't for Avalon Bay (AVB) and Equity Residential (EQR) "having a lot of wood to chop" with the Archstone integration, they would be natural suitors for BRE, says BMO. Standing in the way of a better offer is the $170M break-up fee - just 3.9% of the deal's equity value, but a big number nevertheless.