Unfortunately, the first four transactions may not be very helpful in determining the value of Gables. Owner Clarion Partners reportedly wants $3 billion for the Atlanta-based operator. With Gables large third-party management business and its status as a private operator, it’s much harder for outside observers to determine whether $3 billion is an accurate cost.
“Unless someone is publicly traded like EQR [Chicago-based Equity Residential], it will be very hard to get the color on that,” said one industry analyst.
While pricing may be a mystery to outside observers, private equity appears to be the most likely of a crowded field of buyers. Outside of the fact that a private institution could leverage its dollars further in pursuit of the company, a REIT would also take a hit on Funds from Operations (FFO) from analysts and investors because it would be supporting a large development pipeline that isn’t yet producing revenue.
“It going to be more likely a private investor that can load up on debt,” says Rod Petrik, real estate research analyst at Stifel Nicolaus and Co. “A private company wouldn’t have to be concerned with FFO. There would be no need to pull out cash. They can keep cash flow inside to pay for development.”
Earlier in the cycle, Petrik says it would have made sense for a REIT to chase a large development pipeline, but at this point it’s not as likely.
“With the exception of AVB, most companies have talked about stabilizing development activities over the remainder of this year and next year,” he says. “Two or three years ago it would have been a different story. People would have loved to have that development platform.”
Former CEO David Fitch actually addressed the development issue for REITs in an interview with Multifamily Executive in 2006, when he spoke about the company’s privatization by Clarion in 2005.
"There's a dividend machine and the measurement of success happens every quarter," he said. "One of the measurements of a public [apartment] company is FFO [funds from operations]. The gains generated from the sale of operating properties is not recognized in the FFO calculation. If you go make $20 million in development, that $20 million does not directly show up in the dividend machines. We went through a period where valuations were ascending, and we were unable to realize that value in a meaningful way."
Petrik says geography could be another barrier. Gables is strong in Texas, Florida, and Washington, D.C. REITs like Equity Residential and AvalonBay, which purchased Archstone last year, wouldn’t seem have an interest in Texas, and Washington, D.C is grappling with well-documented supply issues.
If a REIT were willing to take the FFO hit, many speculate Houston-based Camden, which has a platform in those markets, could be a possibility. Even Denver-based UDR has been mentioned as a possibility.
Two of the names most commonly mentioned are current owner Clarion Partners, who could reclaim the company with another fund, and Brookfield Property Partners, which recently bought 4,000 units in New York. Other names that might make sense are Hines, J.P. Morgan, Blackstone Group, and the big pension funds. Whether the buyer is one of these firms or someone else, the list of potential buyers seems long.
“Gables has a good brand and good people,” says one observer. “I think there’s going to be a lot of people kicking the tires.”