Price REIT Share Sale Off to Swift Start : Spinoff: $40 million of $73-million offering is sold on first day of spinoff of Price Co.’s real estate holdings.
Investors snapped up $40 million of the $73 million Price REIT initial public stock offering on Monday, the first working day after federal regulators gave discount retailer Price Co. clearance to spin off part of its real estate holdings to the public.
Investors bought Price REIT shares in $1,000 increments directly from the company and will be paid 9% dividends on their investments. Price is taking the unusual approach of selling the shares on a “best efforts” basis, or directly to investors without the use of brokers or investment bankers as intermediaries to save commissions and overhead. Price has been marketing the shares to Price Club members, but is selling to non-members as well.
After completion of the offering, the Price REIT will purchase and then lease back to Price the land and buildings at four existing Price Club locations in Chula Vista, Alhambra, Phoenix and North Haven, Conn. The Price Clubs involved will sign 50-year leases with Price REIT.
In addition, the REIT will enter into a joint venture with Price Co. to acquire five shopping centers now owned and operated by Price, which are 98% leased. Four of the centers are next to the same Price Club locations being purchased by the REIT. The fifth is a Sacramento retail center that is anchored by a Home Depot outlet.
The formation of Price’s real estate investment trust was generally praised by stock market analysts as an effective means for Price to realize the increased value of its real estate holdings. Unlike most retail and warehouse chains, Price has insisted on owning its locations, holding title to 70 of its 72 Price Clubs in the United States and Canada. Price also has developed and owns a dozen shopping centers next to Price Clubs.
Price has said it will use the $71 million in net proceeds from the Price REIT offering to step up its expansion of Price Clubs in new areas, including Texas. Price also plans to build 30 or more additional shopping centers on sites next to Price Clubs.
“The implications are that Price will use the money (raised in the offering) to accelerate the expansion,” said Daniel D. Barry, a retailing analyst with Kidder, Peabody & Co. in New York. “They will be concentrating underlying assets in their balance sheet into shareholder value by converting those assets into cash and using that to accelerate expansion.”
But Craig Silvers, an analyst with Crowell, Weedon & Co. investment bankers in Los Angeles, said now is generally not an auspicious time for a new real estate investment trust to come along, particularly one with real estate properties in California.
“Real estate in general is a pretty tough business right now, especially for companies with assets in California because there is a perception that California’s economy is weakening. I think that’s a justifiable conclusion,” Silvers said. Five of the nine properties that the Price REIT is buying are in California.
Nevertheless, Price Co. stock rose $1.75 to $59 in New York Stock Exchange trading on Monday. Price has lined up market makers to facilitate trading of Price REIT shares over the counter once the offering is complete. Volume will be extremely light, however, as only 73,000 Price REIT shares are being sold. After the offering, all Price REIT shares will be owned by the public.
There are no current plans for acquisitions of Price Clubs or shopping centers beyond those already announced, said William Birdsall, the former head of Price Co.’s real estate operation, who has been named chief executive of the REIT.
Although Birdsall said he “hopes” that the Price REIT makes further acquisitions, analysts speculated on Monday that Price Co. may create separate REITs for each group of properties that its spins off in the future.
More than $44 million of the money raised in the Price REIT stock offering will go to the formation of the joint venture with Price Co. to buy the shopping centers. Price REIT will own 50.4% of the joint venture, and Price Co. will own a 49.6% interest.
The new REIT shareholders will be paid a cash return of 9% of the initial offering price in the first full year of operations, increasing to 9.5% over a five-year period, the company said. Investors are to receive the dividend even if the cash income from the properties is not sufficient to cover it, Birdsall explained.
The guaranteed return is due in part to the subordination of the Price Co.’s interest in the joint venture to that of Price REIT’s interest.
Birdsall said he has no experience in running REITs but that he will be assisted by a board of directors with real estate backgrounds. Price REIT board members include Roy Drachman, a Tucson shopping center developer who is a former board member of several REITs and a past president of the Urban Land Institute.
Also on the Price REIT board is William Jones, a former San Diego city councilman now with Prudential Property Co. in San Francisco. Other board members include Frank Alessio, former president of Pepsi-Cola Bottling of San Diego and a trustee of University of San Diego. Board members will receive an annual stipend of $15,000 each.
