'90s REIT offering is part of a restructuring for Town & Country


June 14, 1993|By Timothy J. Mullaney | Timothy J. Mullaney,Staff Writer

For anyone who needed more evidence that the 1980s are over, all they need do is look at Alfred Lerner's latest deal, the proposed public offering of the Town & Country real estate investment trust, backed by the largest empire of apartment complexes in Baltimore.

The company, which had run for years at a loss, was apparently counting on cashing in on tax breaks and the rising value of Town & Country's 26 apartment complexes from Virginia to Pennsylvania.

But this new plan -- offering shares in a REIT that will own a 74 percent interest in the company's apartment complexes and $290 million in bonds -- is part of a sharp restructuring of the company that the prospectus for the stock offering suggests began last year.

The 1980s were about fast asset appreciation, booming real estate market growth in Baltimore and a lot of new apartment construction. The 1990s are shaping up as a decade of investing for income and total returns, a reasonably brisk real estate recovery in Washington but not in Baltimore, and making money by buying older real estate rather than building new.

The Town & Country plan is set to exploit all three changes. But how well?

"I'd characterize our interest in it as neutral," said Robert A. Frank, a stock analyst who follows real estate investment trusts for Alex. Brown & Sons Inc. in Baltimore. "It seems to be an OK deal. It's not a table-pounder."

The company won't talk publicly about its plan. Executive Vice President Michael Rosen said federal securities laws bar the company from giving interviews while the offering, whose exact date has not been announced, is pending.

The plan's prospectus makes clear, however, that the transactions will push the company in a distinctly '90s direction in several ways.

First, Town & Country will cut debt. Town & Country will use $85 million of the $215 million from the equity offering to cut its $375 million in mortgages to $290 million. The $290 million will then be effectively refinanced with bonds, which typically carry lower interest rates than mortgages.

Second, Town & Country is cutting its reliance on the Baltimore market. Five of the six new apartment complexes set to be bought with almost $119 million of the remaining money from the stock offering are in Northern Virginia, and the sixth is in southern Pennsylvania, bringing the company's total to 32 complexes including 12,735 apartments. None of the new projects is in or around Baltimore, where Town & Country already owns 15 complexes that include 6,917 apartments.

That makes sense, a new report by the accounting firm of Ernst & Young indicates. That study said Washington-Baltimore is expected to be the nation's fourth-strongest apartment market (behind Atlanta, Dallas and Houston) through 1995. But the report also notes that "suburban Baltimore [is] particularly weak."

"This is going to continue to be a growth area, but more at the D.C. and [Interstate 95] corridor area than the other end of Baltimore," said Joe Cronyn, an associate at Legg Mason Realty Group in Baltimore.

Third, investors who are buying Town & Country aren't exactly buying 1980s flash. Most of the company's projects date from well before; in contrast to the building industry's late-1980s drive to build ever-more-upscale homes, Town & Country apartments aim squarely at the middle of the market, with an average monthly rent of $502. But that may be a good thing.

"There's a better investment market for Class B and C apartments and middle-of-the-road type of rents," said Mr. Cronyn. "Those things are staying relatively full."

All of this is designed to make Town & Country profitable enough to pay a steady dividend that Mr. Frank said will start off between 7 and 7.9 percent, which he said is comparable to or slightly better than payouts on other REITs that own mostly apartments.

Return to profitability

Profitability will be a change for Town & Country. From 1984 to 1991, the company's operating income every year was less than the interest on its debt. Even though much of the blame belonged to noncash charges like depreciation and deferred interest, the company lost money every year, from as little as $10 million in 1987 to as much as $20 million in 1989.

Last year, that began to change. For the first time in years, the company's operating profits were more than the interest bill, mostly due to lower interest rates. The net income loss, after noncash items like depreciation, narrowed to $4 million.

But if the six complexes the company is buying had been part of last year's results, the operating profit after interest payments would have reached $23 million, the prospectus indicates. Even net income would have been in the black by nearly $5 million. The company paid $28.8 million in interest last year.

"They're going to run this more like a business and less to maximize the tax benefits," Mr. Frank said.

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