Sam Zell has agreed to sell more than 23,000 apartments
controlled by his real-estate company, Equity Residential, for $5.4
billion to Starwood Capital Group, the companies said.
The transaction, announced Monday, represents about a quarter of
the units in Equity Residential's portfolio of apartments and would
be one of the largest since the recession. It also comes on the
heels of Blackstone Group LP's announcement on Tuesday that it is
buying Stuyvesant Town and Peter Cooper Village in Manhattan for
$5.3 billion.
Across the commercial-property sector, which includes office,
retail and apartment buildings, growing numbers of investors have
begun to question how long good times can last after a steep run-up
in prices since the downturn.
Record values for offices and hotels in the U.S. and Europe,
fueled in part by central banks' multiyear efforts to keep interest
rates near record lows, have prompted some big investors to
reassess the market. Apartments have been especially hot, with
average U.S. rents climbing 20% over the past five years, according
to research firm REIS Inc.
The transaction brings together two savvy deal makers on
opposite sides of the trade, Mr. Zell and Starwood Capital Chairman
and Chief Executive Barry Sternlicht.
Mr. Zell, 74 years old, is credited for calling the top of the
real-estate market in 2007, when he sold another of his companies,
Equity Office Properties Trust, to Blackstone for $23 billion, not
including $16 billion in debt. Soon after, the commercial-property
market crashed as prices fell and debt defaults surged.
This deal is Mr. Zell's biggest since 2012. Back then, Equity
Residential was a buyer. The firm teamed with AvalonBay Communities
to purchase apartment giant Archstone for $6.5 billion, not
including about $9.5 billion in debt.
But Equity Residential has become "less aggressive as buyers of
assets" in recent years, Mr. Zell said in an interview late Friday.
Instead, it is getting out of suburban markets and into downtown
urban centers, where young people are moving and where it is more
difficult to build, he said.
Most of the 23,300 apartment units in the deal, roughly a
quarter of Equity Residential's total, are low-rise and mid-rise
units in suburban markets in and around southern Florida, Denver,
Seattle, Washington, D.C., and Southern California. Analysts expect
a significant amount of new supply to be concentrated in those
markets in coming years.
"There's an awful lot of apartments under construction," Mr.
Zell said, "and the majority of them are garden apartments in
suburban areas."
For Mr. Sternlicht, who made his name in the hotel industry, the
move represents a big wager on apartments. His Greenwich, Conn.,
company has bought or put under contract 67,800 apartment units
over the past year, including the Equity Residential deal.
"This is the healthiest U.S. apartment market in my lifetime,"
Mr. Sternlicht said in an interview Friday. "We don't see that
trend reversing."
Demographic shifts appear to be in his favor. The homeownership
rate has continued to fall, as younger households are putting off
buying homes and as the number of minority households, which have
historically low homeownership rates, is on the rise.
But real estate giants such as Boston Properties and Vornado
Realty Trust have dialed back acquisitions of commercial property,
saying they fear prices have grown unreasonably high compared with
rents.
"The easy money has been made in this cycle," Vornado CEO Steven
Roth said in an August investor call. "This is a time when the
smart guys are starting to build cash…we do acquisitions very
carefully at this point in the cycle."
Green Street Advisors wrote in a note to clients on Thursday
titled "The Ninth Inning" that signals from the markets for bonds
and real-estate investment trusts have begun to suggest that
"commercial real-estate prices may soon stall, and probably even
drift lower by the time 2016 winds down."
In the recessions of the 1970s and the early 1990s, Mr. Zell
made a name for himself scooping up vast swaths of office
buildings, apartments and malls across the U.S. on the cheap. As
the economy recovered, holdings soared in value, giving him a
collection of companies that were some of the country's largest
owners of commercial property.
Mr. Sternlicht, 54, became an active buyer of distressed
property after the financial crisis. His firm and its partners in
2009 invested $1.38 billion for the residential assets of failed
real estate lender Corus Bank, one of the most high-profile deals
during the downturn. Some rival bidders dismissed that price as too
high, even though about half the money came in the form of a
federal interest-free loan. Starwood created a property-management
firm, ST Residential, to oversee the apartments and sell some of
the units as condominiums. In April, Starwood announced its
consortium had sold the last major asset in the Corus portfolio.
Mr. Sternlicht said it more than doubled its initial investment
Starwood is paying about $230,600 per unit for the Equity
Residential portfolio. That price represents a so-called
capitalization rate—a measure of yield—of 5.5%, roughly on par with
recent deals. Mr. Sternlicht said he expects the Equity Residential
portfolio to deliver "solid double-digit returns."
Equity Residential said it plans to sell an additional 4,700
suburban apartments, mostly spread out over western Massachusetts
and Connecticut.
The suburban apartment market has been outperforming urban
markets of late. The vacancy rate in the urban core ticked up to 6%
in the second quarter of 2015, while continuing to hover around 4%
in the suburbs, according to REIS. But analysts said that
three-quarters of new apartment supply expected to come online in
2015 will be in the suburbs.
Until now, Equity Residential has been gradually selling off its
suburban properties and investing the proceeds in expanding its
portfolio of urban apartments in places such as Boston, New York
and urban areas of Southern California.
But seeing few additional opportunities to invest, Equity
Residential said it plans to deliver about $3.8 billion of the
proceeds it expects to generate as a dividend to shareholders in
the January 2016 second quarter.
Separately, Equity Residential also reported its third-quarter
results. The company posted normalized funds from operations of 87
cents a share, up from 81 cents a year earlier. Normalized funds
from operations excludes one-time items, such as acquisition- and
asset-sale impacts, and is a key metric for real-estate
companies.
The company raised its year per-share guidance for normalized
fund from operations to a range of $3.43 to $3.47 from its previous
estimate of $3.39 to $3.45.
Equity Residential reported third-quarter earnings of $195.9
million, or 53 cents a share, down from $220.7 million, or 61
cents, a year earlier. Revenue rose 4.9% to $696.3 million.
Analysts polled by Thomson Reuters had forecast earnings of 40
cents a share on $689 million in revenue.
Eliot Brown, Craig Karmin and Anne Steele contributed to this
article.
Write to Laura Kusisto at laura.kusisto@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires
(END) Dow Jones Newswires
October 26, 2015 08:05 ET (12:05 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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