WASHINGTON, DC-At a time when most real estate companies are turning to the public markets and issuing IPOs to access capital, one smaller, public company has decided to go the private route. At year’s end, American Community Properties Trust took itself off the stock exchange, thanks to its acquisition by Federal Capital Partners.The transaction comes about after two years of strategizing by ACPT board members on the various ways to potentially unlock value in the company, reveals Steve Greissel, the former REIT’s chief executive officer. The firm was having liquidity issues not only due to the tightness in the credit markets but also because of its micro-cap REIT status–namely, the significant costs associated with being a public company and a lack of cash flow in its shares.

ACPT tapped FBR Capital Markets as its advisor and drilled into its options. “We came to the realization that the best way to move forward was to see whether we could find a private equity group or another entity who could take us private.”

FBR approached about 50 different groups and after numerous meetings the final contenders were whittled down to three. “We selected FCP because they are very focused on the Mid-Atlantic area, where most of our assets are; they were one of the few funds that had raised fresh capital in this environment; and they really bought into our strategy,” shares Greissel.

As for FCP, a large multifamily owner in itself, acquiring ACPT was a rare opportunity to acquire quality assets in bulk, and at a “fair valuation,” notes Stephen M. Walsh, the firm’s senior vice president of capital markets. “We thought ACPT was undervalued or under-appreciated, most likely because it’s strategy wasn’t very clear to outsiders. We followed the company for a while, looking at it closely.”

More than three-quarters (77.1%) of ACPT shareholders approved the deal, valued at $320 million and effected through a cash merger between FCP Fund I LP and ACPT. FCP provided shareholders $43.6 million in cash and assumed ACPT debt, including apartment debt that is non-recourse and long term and long-term financing on land in the form of 15-year county bonds. “FCP was attracted to the way our balance sheet is structured,” says Greissel.

That, along with its considerable real estate holdings. “We were attracted to a great multifamily portfolio and, of course, we have been trying to invest in residential land, too, which was undervalued in the DC area,” says Walsh. “ACPT really had several components of business we were very interested in.”

The centerpiece of the portfolio is the St. Charles, a 9,100-acre, master-planned community in Charles County, MD that is about halfway complete. The project currently features 3,200 apartments and 230,000 square feet of commercial property, as well as 4,000 acres of land entitled for 2,500 apartments, 8,500 homes and five million square feet of commercial development. It houses some 40,000 residents and over four million square feet of commercial property. One-quarter of the residential units at St. Charles can be rental apartments, while the balance is single-family and townhomes. ACPT has also donated land to the county, which has built eight schools on site. Other features at the development include a 1.1-million-square-foot Simon mall, seven neighborhood centers and a minor-league baseball stadium.

While the firm also has a pair of 500-acre residential/retail projects in Puerto Rico’s San Juan area and owns half of a small home building business in Central Florida, its focus remains on St. Charles. In December, the company announced plans to make the development into an international model for green communities by dedicating the balance of the land at the site to house a “model green city” built to high environmental standards, minimizing the carbon footprint of future homes and businesses.

The capital infusion by FCP will help ACPT further those goals. “It absolutely helps us to drive our strategy to become this model 21st century green city,” says Greissel. “Although we’re working with many partners to achieve our goals, we need a strong balance sheet to do that.”

Bolstering its balance sheet was the driving factor is going private–a unique move given current market conditions. But Greissel maintains it’s just the nature of the game. “A lot of microcaps are finding it’s costing you over $2 million a year to be a public company; the amount of money in relation to your size is a huge issue,” he explains. “Secondly, if you don’t have the liquidity in the stock, you don’t have the access to capital because there are very few players. It’s impossible to do a secondary offering, so you have to do a pipe transaction. And when you do a pipe transaction, there again are very few players, and they’re also looking for liquidity. And without shareholder permission, you can only issue 19.99% of your stock.”

Most of these limitations are a function of micro-caps’ size, which itself is debated; there is no set definition of what constitutes a micro-cap, and most sources define them as companies with market capitalizations of between $50 million and $300 million. These entities are sometimes referred to as the ignored, red-headed stepchildren of the investment world, since investors generally gravitate toward the bigger public companies.

In fact, growing ACPT was an alternative when the firm initially began looking at strategic options. “Believe it or not, as a public company, we really did struggle for the past 10 years in terms of access to capital. We thought maybe we could merge with a small cap in order to get to the size and liquidity we need,” says Greissel. “The crazy thing is we’ve accessed capital by going private. It’s actually much easier for us to do that at this size. I guess that’s the nature of the market right now. The larger companies have an easier time than us.”

So with the capital backing by FCP, with its strong financial relationships with lenders including Fannie Mae, Freddie Mac and regional banks, ACPT will be able to reduce its operating costs and improve its financial flexibility while accelerating its growth. “We can move a lot quicker than we were able to do as a public company,” says Greissel. “The board of a public company has to spend an enormous amount of time on issues that don’t relate to the business, such as the small corporate governance issues, those that make you a lot less flexible. FCP and its $240-million fund gives us the firepower we need to drive our strategies.” While the firm’s board is now disbanded, the 100 ACPT employees are expected to remain with the company.

While all of this is good news to ACPT management, there have been some grumblings from some in the market over whether the deal was fair to shareholders. FCP bought ACPT for $7.75 per share in cash, representing a 17% premium to the firm’s closing price on Sept. 14, 2009, the last trading day before ACPT announced that it was considering various strategic alternatives, including a possible sale, according to the company.

In early October, Thomas Kirchner, manager of the Pennsylvania Avenue Event-Driven Fund, pointed out that while ACPT stock trades at between $8.35 and $8.50, the buyout will nevertheless happen at $7.75. In the interests of full disclosure, the PAED Fund owns shares of ACPT and is in litigation with the firm.

“The sudden sale at a discount to the market price comes out of the blue for shareholders, who still remember the failed attempt by the Wilson family, the 50.68% owners, to take the company private in 2007,” he wrote. Since that failed attempt in July 2007, Kirchner notes the stock has significantly underperformed the greater REIT space—the Dow Jones REIT index has fallen 45%, whereas ACTP shares have lost 60% of their value.

The big question, asks Kirchner, is why the Wilsons–which initially tried to sell their own stock in the company—are willing to sell at the depressed price rather than try their other alternatives. “We suspect that the sudden sale at a discount may have more to do with the Wilsons’ own need for liquidity rather than anything else,” he related.

Those thoughts were exposed in a letter of resignation submitted in September 2009 by board chairman J. Michael Wilson, filed by the company in an 8-K: “I have been troubled by the current strategic process of the company and I do not believe that it is in the best interest of the company’s shareholders. Given that ACPT is under no particular pressure to sell itself, if the company is to be sold, I believe that the company should be marketed as widely as is practicable. The board seems to be relying on the fact of a preceding Wilson family stake sale process as a de facto marketing of the whole company justifying a less-than-exhaustive company process. I believe this is a flawed reliance because the Wilson process excluded a particular identifiable potential bidder and excluded the universe of potential bidders for the whole company uninterested in bidding on only the Wilson family stockholding. I believe that a higher price would be realized for the company’s shareholders if the company were marketed as a whole in a more open process.

“I have made my analyses and observations known in an increasingly strident fashion to the Board and the company’s counsel. I do not appear to be having the degree of beneficial influence necessary to justify my continued involvement with the company as a Trustee and I cannot abide the company’s current course.”

In a November proxy filing by ACPT, the firm disclosed that members of the Wilson family, who own 50.68% of the outstanding voting shares of ACPT, voted in favor of the transaction. ACPT also revealed that one of its shareholders, Paul J. Isaac, owns some 15.4% of the company’s outstanding common shares. Isaac struck a deal with FCP to make a passive indirect investment in the surviving entity and agreed to vote in favor of the merger. Combined, the Wilsons and Isaac account for “69% of outstanding fully diluted common shares of ACPT and represent a sufficient number of votes required to approve the merger…” says the proxy.

The family’s control over the company seems to be what limited its options. Since the IRS requires a diverse investor base before it grants a company REIT status, ACPT was unable to quality as a REIT with the Wilson’s share ownership. When it was not able to bring in additional shareholders, the Wilsons tried to sell their stake—unsuccessfully. FCP then came in and made an offer, but it wanted control of the whole company.

While all mergers inevitably bring to surface a number of lawsuits disputing the sale price’s fairness to shareholders, FCP’s Walsh believes the decision was the best one all around, in the end. “Because the company was closely controlled by the Wilson Family, it would not have been able to get into the market because people don’t know what they’re up to,” he explains. “They own over 50% of the stock, so from a public standpoint, it’s very difficult for them to raise equity. And most equity buyers would not be interested in that.”

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