Koger Sells 10 Sites in 6 Cities, 3 States

Four months after its initial announcement, Koger Equity Inc. has closed on its sale of 10 properties comprising 75 suburban office buildings and a retail center to AREIF Realty Trust Inc., an affiliate of Apollo Real Estate Advisors L.P., for $303 million.

AREIF shelled out $207 million in cash and 5.73 million shares of its Koger common stock (21.4 percent of outstanding shares). Koger will also receive a membership interest in an AREIF subsidiary, which will provide it with a 20 percent participation in the net cash flow from the disposed asset after AREIF has received a 15 percent internal rate of return on its equity investment.

The transaction allows Koger to sell assets at NAV in exchange for securities it believes to be at a discount to Koger's NAV. "It's a big deal for them (Koger). They have a discount between their underlying asset value and stock price," said Lee Schalop, an analyst at Banc of America L.L.C. "Anything they can do to sell assets and improve value, should help."

In turn, Apollo acquires a portfolio of assets and can aim to achieve target equity returns by utilizing higher leverage than REITs normally employ. It rid itself of an illiquid chunk of stock in a REIT that issues relatively low dividends for real estate it can actively own and manage.

The more than 3.9 million square feet of properties are located throughout San Antonio and Austin, Texas; Greensboro and Charlotte, N.C.; and Greenville and Birmingham, Ala. Koger will continue to pursue investments in these areas. CEO Tom Crocker said in a company-issued press release, "It (Koger) is now well positioned to execute our repositioning program. We have the liquidity and balance sheet strength to pursue investments in select, high-growth markets ... that are well-suited for buyers."

Koger will also repay some debt and fund a one-time special gain distribution to Koger shareholders. The REIT now owns and operates 12 suburban office parks and two freestanding buildings totaling 6.9 million square feet and manages another 4 million square feet. At the end of the third quarter, its funds from continuing operations were $17.82 million, up 11.9 percent from a year earlier; and NOI increased by 8 percent over the same period.