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Monday, 22 June 2015

Lone Star Funds to Buy Home Properties in $7.6Bln Deal

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Commercial Real Estate Direct Staff Report

Lone Star Funds, which just recently raised $5.8 billion for an opportunistic investment fund, has struck a deal to buy most of Home Properties Inc. in a deal valued at $7.6 billion.

The Dallas investment manager will pay $75.23 for every outstanding Home Properties common share, which had closed on Friday at a price of $72.73. Shares for the Rochester, N.Y., REIT had traded at $68.91 on April 24, when talk of a possible deal first surfaced.

The proposed acquisition of Home Properties is the second of a substantial portfolio of apartment properties during the past year. In October, Lone Star paid $1.8 billion for 64 properties with 20,439 units from a venture of DRA Advisors and Bell Partners Inc of Greensboro, N.C., which continues to manage the portfolio that generally is comprised of class-B properties in markets with solid fundamentals.

Home Properties focuses on complexes along the East Coast and often buys assets in need of repositioning. It operates 121 properties with 41,917 units.

But Lone Star isn't buying all 121 properties. Home Properties, with Lone Star's assistance, has struck a deal to sell up to six of its properties, with up to 3,246 units, to UDR Inc. in a deal designed to provide holders of Home Properties' operating partnership units the ability to defer any potential capital-gains taxes resulting from Lone Star's acquisition.

In exchange for the properties, holders of Home Properties' partnership units will receive $3.01 from Lone Star for each unit held, plus 2.15 units in the newly formed UDR DownREIT, which is similar to the operating partnerships that REITs manage. But unlike those, a DownREIT actually owns properties that are held separately from a REIT's other assets.

That structure ought to provide Home Properties' partnership unit holders with up to 10 years of tax deferral. Unit holders that don't participate in the exchange with UDR will receive cash from Lone Star.

Home Properties' portfolio is concentrated in Washington, D.C., where it owns 28 properties with 11,221 units; Baltimore, with 23 properties totaling 10,477 units, and Philadelphia, with 20 properties and 5,859 units.

It had planned to invest up to $350 million in acquisitions this year and would continue pruning its portfolio. Last year, for instance, it sold three properties with 1,527 units for a total of $217 million. And it recently generated $76.1 million from the sale of the 469-unit Coves at Chesapeake in Glen Burnie, Md.

It recently decided to halt new developments and re-focus its efforts on buying and redeveloping class-B and -C apartment properties.

Last year, its portfolio of core properties - those it owned in 2014 as well as 2013 - was 95.2 percent occupied on average and generated average monthly rental income of $1,329, which was up 2.7 percent from a year earlier.

The REIT invested a total of $5.6 billion to accumulate its portfolio. It has held some of its properties, which are an average 39 years old, since the late 1990s.

Last year, Home Properties generated $189.5 million of net income, which includes an $81.8 million gain from the sale of properties. Property-level net operating income for its core portfolio of 113 properties with 39,253 units amounted to $405.1 million, which would give Lone Star's purchase a capitalization rate of 5.33 percent. When you add properties that were either placed into service last year or acquired last year, NOI increases to $422 million, giving the proposed purchase a cap rate of 5.55 percent.

Home Properties carries $2.5 billion of debt that Lone Star will assume. The debt pays a weighted average 4.16 percent and average maturity of 3.4 years. Roughly 84 percent carries a fixed rate. While it has issued unsecured notes, the last of which was in 2011, the bulk of its indebtedness - $1.6 billion - is in the form of mortgages. It also carries a $269 million balance against an unsecured line of credit.

The REIT's board has approved the deal with Lone Star, which is expected to be completed by the end of the year. Lone Star has lined up a $6.1 billion financing commitment from Goldman Sachs, which is also financial adviser to the investment manager.

The REIT will be able to shop around for another potential acquirer over the next month. It's being advised by BofA Merrill Lynch, which also provided a fairness opinion with Houlihan Lokey. Gibson, Dunn & Crutcher LLP is legal adviser, Hunton & Williams LLP is real estate legal adviser and Skadden, Arps, Slate, Meagher & Flom LLP is tax legal adviser to Lone Star.

Sidley Austin LLP is legal adviser to BofA Merrill Lynch, and Cleary Gottlieb Steen & Hamilton LLP acted as legal adviser to Goldman.

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




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Additional Info

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  • Subject: Mergers & Acquisitions (M&A), Property Acquisitions (ACQ)
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Read 2110 times Last modified on Tuesday, 23 June 2015

Data Digest







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




cppichart FP



CMBS 2.0 Spreads


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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