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Monday, 26 October 2015

Starwood to Pay $5.4Bln for 72 Equity Residential Properties

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Commercial Real Estate Direct Staff Report

Starwood Capital Group has agreed to buy 72 apartment properties with 23,262 units from Equity Residential for $5.4 billion, marking its largest non-hotel acquisition ever.

According to Equity Residential, the price results in a capitalization rate of 5.5 percent.

For Starwood Capital, a Greenwich, Conn., investment manager, the announcement comes just after it struck a deal to buy 63 properties with 19,615 units from Landmark Apartment Trust Inc., a non-traded REIT, for $1.4 billion. Those properties are concentrated in Texas, Florida and North Carolina. The latest purchase would bring its portfolio to 88,000 units, making it among the largest apartment owners in the country.

Including its two latest deals, it would have purchased 67,800 units over the last 12 months along.

"The size of this transaction underscores our conviction in multifamily housing's continuing ability to offer superior risk-adjusted returns," explained Barry Sternlicht, chairman and chief executive of Starwood.

In contrast, EQR, as Equity Residential is commonly referred to, owns 392 properties with 109,347 units, before its latest deal. But the Chicago REIT is shrinking its portfolio as it increasingly focuses on owning properties in urban markets and that are close to transportation venues.

To that end, it's planning to sell another 26 properties with 4,728 units next year. More than 70 percent of those units represent the company's entire Connecticut portfolio and are in what it considers non-core submarkets in Massachusetts. The bulk of those properties were inherited through the REIT's 2000 purchase of Grove Property Trust.

Those assets, which would be sold as small portfolios and individual properties, will bring EQR's total proceeds from asset sales to roughly $6.1 billion. It will use about $3.8 billion of that to pay a special dividend of $9-$11/share, $2 billion to repay debt, including possibly all its 2016 maturities, and $300 million to invest in additional properties through tax-deferred exchanges.

The properties Starwood is buying from EQR are in South Florida, with 33 properties that have 10,742 units; Denver, with 18 properties that have 6,635 units; Washington, D.C., with 10 properties that have 3,020 units; Seattle, and California's Inland Empire. They're being purchased unencumbered by debt, giving Starwood plenty of flexibility to line up fresh debt financing.

It's buying the portfolio through its Starwood Global Opportunity Fund X, through which it raised $5.6 billion of equity commitments earlier this year. The EQR properties are a mix of mid-rise and garden-style apartments.

Christopher Graham, senior managing director and head of real estate acquisitions for the Americas at Starwood, said South Florida and Denver, the two markets with the largest representation in the portfolio, have had 5.4 percent rent growth over the past five years, which he said was greater than the national average.

Sternlicht noted that the company would be able to line up financing that would pay coupons lower than the portfolio's cap rate, providing positive leverage, "resulting in robust cash-on-cash yields - mak(ing) this portfolio a very attractive investment," he said.

That, in fact, was one of the drivers behind EQR's sales strategy.

Explained David Neithercut, the company's president and chief executive: "These properties are better owned by a leveraged buyer." He noted the "pretty decent bid today" for apartment properties and the plentiful financing available, helped prompt the sale. But those same reasons would have made redeploying the proceeds into properties that EQR would consider core to its portfolio extremely challenging. That's okay, he said. "Whether we're a $40 billion capitalization company or $35 billion company doesn't matter."

He called the markets that it's effectively exiting "terrific markets," but more susceptible to supply additions.

EQR executives said it had initiated an effort to sell the properties it's selling to Starwood last spring. It spoke with a small number of potential investors and ended up settling with Starwood a few weeks ago. They said the company was driven to sell because the assets don't fit its long-term strategy. The sale will increase EQR's net operating income from mid- to high-rise properties by 21 percentage points to 69 percent of its total NOI and its urban assets would account for 78 percent of NOI, up from 65 percent.

"This was a reaction to the recognition that we owned assets that we didn't think were long-term assets," said Neithercut. He also shot down talk that the sale might be chairman Sam Zell's call of a market peak. He called such speculation "crazy."

Zell is well known for effectively calling a market peak in 2007, when he orchestrated the sale of Equity Office Properties Trust to Blackstone Group for $38.3 billion. The real estate market, along with broader capital markets, collapsed soon after.

Neal, Gerber & Eisenberg is EQR's legal adviser.

Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.



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Data Digest

 

CMBS DELINQUENCY VOLUME

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CMBS SPECIAL SERVICING VOLUME

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Top Bookrunners Domestic, Private-Label CMBS - 2017
Investment Bank #Deals Vol$mln MktShr%
Goldman Sachs 17.59 11,819.34 13.68
JPMorgan Securities 14.52 10,968.11 12.70
Citigroup 12.04 10,012.71 11.59
Wells Fargo Securities 14.02 9,936.06 11.50
Deutsche Bank 12.55 9,879.74 11.44

 

RCA CPPI

 

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CMBS 2.0 Spreads

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Top CMBS Loan Contributors - 2017
Lender #Loans Vol$mln MktShr%
Goldman Sachs 146.89 11,719.34 13.63
JPMorgan Chase Bank 117.68 10,114.14 11.76
Deutsche Bank 198.48 9,689.97 11.27
Morgan Stanley 166.18 8,539.78 9.93
Citigroup 199.05 8,088.24 9.41

 

 

 

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