Highland Ranch, Colo.-based real estate investment trust UDR announced Nov. 5 that the company has entered into a $650 million joint venture with an “unnamed” large domestic institutional partner. According to an 8K report filed by UDR with the U.S. Securities and Exchange Commission on Nov. 9, the partner is Washington, D.C.-based federal mortgage originator Fannie Mae.
Under the terms of the partnership, Fannie Mae will assume an 80 percent ownership in 3,690 UDR units in Texas and another 302 units currently under development in Texas with a net asset value of $350 million. Fannie Mae is also providing $300 million in expansion monies for future acquisitions. In addition to retaining a 20 percent ownership stake, UDR will also manage the J.V., as well as provide property management, construction management, and development services.
The $300 million slated for acquisition will likely target stabilized properties with immediate value-add opportunities, although it might also be used for ground-up development. “The fund will probably not be going after the very top end of the market,” says UDR chief financial officer Michael A. Ernst. “The existing properties had rents around $815 per unit and we would expect the venture to target properties with average rents between $700 and $1,000 per unit per month.
According to Ernst, leveraging joint ventures is becoming an increasingly viable strategy for REITs that typically get little credit for development initiatives from Wall Street analysts, who ultimately see such development as dilutive to net asset values.
“Wall Street probably places slightly less value on development today than it once did, generally does not like aggressive acquisition programs unless done in a venture format, and, in the current environment, would like to see companies in many cases selling assets and buying back stock,” Ernst says, adding that this latest J.V. will allow UDR to better manage its portfolio concentration risk in Texas. Plus, the deal will free up capital that can be re-invested in higher value creation activities such as UDR's kitchen and bath upgrade program.
“We think all of these are good strategic moves for the company and should be positively received by Wall Street,” Ernst says.