Irvine Co. Will Offer the Public Part of Holdings

Shedding some of its privacy to raise a huge sum of cash, the Irvine Co. will sell part of its vast Orange County empire to the public.

The county’s biggest private landowner said Wednesday that it will sell a one-third stake in its apartment business--including 43 apartment complexes--for more than $200 million.

The Irvine Co., which turned a huge family ranching empire into a sprawling real estate giant, is the latest big property owner to go public through a real estate investment trust, or REIT. An REIT is a type of public company that packages buildings into portfolios for sale to investors.

The sale of apartment complexes in Irvine, Newport Beach and Tustin requires the secretive company to publicly report figures, such as revenue from its apartment buildings, for the first time.

But the company gains access to millions of dollars it can use to build or buy more apartments. That amount would have been difficult to borrow from the banks, which are shy of being burned again as they were in the late-1980s crash in commercial real estate.

Investment trusts, on the other hand, are popular these days with Wall Street, which likes their higher-than-average returns. REITs’ income is not taxed at the corporate level if 95% of it is distributed to the shareholders each year.

Since January, nearly two dozen REITs have raised a record $3.8 billion from the public.

“Banks aren’t putting money into real estate deals anymore,” said Gregory Lubushkin of the accounting firm Price Waterhouse.

“But Wall Street’s got the money, and the perception is that commercial real estate has touched bottom and is on its way up.”

The Irvine Co. declined to comment beyond a press release Wednesday on its proposed new REIT--Irvine Apartment Communities Inc. It cited federal Securities and Exchange Commission regulations that forbid companies from pumping up their new stock offerings.

A copy of the more detailed financial application to sell stock in the company that was filed with the SEC Wednesday was not available.

So it was not known, for instance, how much in rent and profits are generated by the company’s 11,334 apartments--enough to make it one of Orange County’s biggest landlords.

This is one of Southern California’s first big investment trusts in a boom that began several years ago. There have been so few, even in the latest cycle, because Wall Street is still wary of Southern California’s ailing economy.

“Investors have been reluctant to embrace Southern California real estate, which is why this is the first big new REIT from Orange County,” said Michael L. Meyer of real estate accountants Kenneth Leventhal & Co., which worked on the Irvine Co.’s public offering.

But the Irvine Co.’s apartment complexes tend to be in good, upscale locations: 8,156 units in Irvine, 1,760 in Newport Beach and 1,418 in Tustin. No list of all the company’s complexes was available.

And even though local apartment rents have been flat for several years, investors generally like apartments because their rents can be raised more quickly in good times than rents on office buildings or factories, which have leases that run as long as 10 years. That is considered one of the reasons the Irvine Co. may have chosen its apartment buildings for its first public offering.

The news prompted real estate experts to suggest that the company might eventually try a public offering of its shopping centers or office buildings, too, if those businesses improve.

Previous booms in real estate investment trusts in the last three decades petered out, partly because some developers burned investors by using them to unload their losing buildings or to raise money to keep troubled businesses afloat.

The Irvine Co. pointedly said in its press release that the more than $200 million it hopes to raise--before deducting underwriters’ fees and expenses--will stay within the trust for buying or building still more apartments. None of the money will go to the Irvine Co., which will own 65% of the trust.

“That’s not all that unusual, because most of the money being raised on Wall Street these days stays within the REITs,” said Mark C. Coleman of the accounting firm of Deloitte & Touche. “The developers can’t use them as a bailout strategy or to get all their money out because investors won’t go for it anymore.”

If the 10.6 million shares offered for sale--probably in late November--bring more than $200 million, that works out to a price as high as $21 or $22 a share.

Shares of the new real estate investment trust will probably trade on the New York Stock Exchange, the company said.

Under the terms of the offer, the trust will have options to buy five sites from the Irvine Co. to build 2,000 apartments. (Three are in the Westpark community of Irvine; one in the Newport Ridge neighborhood of Newport Coast, between Newport Beach and Laguna Beach, and one in Tustin Ranch.)

But deals between the Irvine Co. and the trust--such as buying these sites--will have to be approved by the five independent members of the trust’s nine-member board. Donald L. Bren, a publicity-shy billionaire who is chairman of the Irvine Co., will also be chairman of the trust. He has named to the board Norman J. Metcalfe, the Irvine Co.’s vice chairman and chief financial officer, and Raymond L. Watson, vice chairman and former president.

The Irvine Co., like other developers, has had difficulty in raising cash to build since the real estate crash began about four years ago in Southern California.

Until Bren bought control of the company in 1983, it had merely sold land for immediate profit and would have eventually liquidated itself.

In the 10 years since, Bren has feverishly built shopping centers, office towers and apartments, all controlled by him as the major shareholder in the privately held, billion-dollar company.

Normally the Irvine Co. raises much of its cash for development projects by selling bits of its enormous landholdings--which stretch across 100 square miles of Orange County--to other builders. But little is being built now, so the company is not selling much land.

That meant it had to begin selling some of the apartments and other buildings it had originally built as long-term investments for its own portfolio.

Now the venerable concern--which started off as a huge 19th-Century ranch--has taken yet another big step in the quest for cash: going public.

“This is a significant strategic decision in the Irvine Co.’s history,” said Bren in a written statement, “which will permit us to realize our long-held goal of gaining access to public capital markets for an important segment of our business.”