David Neithercut
David Neithercut

Chicago-based Equity Residential, the largest of the public apartment REITs, has been busy scooping up assets in the first four months of 2010. Already, the firm has announced a deal for three apartments from Macklowe’s Properties in New York City; a 220-unit, 11-story apartment tower property in the hot Arlington submarket of Washington, D.C.; as well as the intention to build an 111-unit project in the Chelsea district of New York. And just this week, word trickled out that Equity is under contract to buy The Dumont, originally a condo project, out of bankruptcy.

David Neithercut, CEO of Equity Residential, took some time to chat with Multifamily Executive senior editor Les Shaver about the REIT's recent transactions and what’s he’s seeing in the rental markets. Here’s part one of that conversation.

MFE: Tell us about your decision to re-enter the acquisitions business.
NEITHERCUT: A lot of the deals that we have acquired we’ve tracked for many years. We know of them. We knew they could be potentially troubled, and we knew that they had potential for us. But it took two things for that to happen. First, it required us to be a buyer again. That really required us to feel comfortable with our ability to fund ourselves in the normal, ordinary course of business, which is something, frankly, that we didn’t feel we could do for much of 2009. Second, it required a lender who was willing to make something happen.

In early December, we got to a point where we became more confident in our ability to start to acquire. We found opportunities that might have been around for a year, but either we weren’t ready, or the lender wasn’t ready. But those two things came together and we were able to make a few deals happen over the past four months.

MFE: Do you think this extend-and-pretend phenomenon is starting to give? Will we push past this?
This is a very important question and it will have a lot to do with the deal flow and acquisition opportunities that we and others have in 2010.

Any well-built, well-conceived multifamily assets, even at 100 percent loan-to-value, can carry a bank loan. A well-conceived, stabilized multifamily asset can carry the debt as long as LIBOR stays where it is. We’ve been disappointed at the amount of deals that the banks seem content to extend and leave existing sponsorship in. I’ve contended that they have given their borrowers an option on upside while the banks have retained the risk on the downside.

So I do expect there to be opportunities sometime in the future for us to get access to bank loans. A senior bank official told me to be patient. The good news is that as long as banks are sitting on all of those loans, they’re not making new loans. The new starts in the multifamily space will be down, down, down this year, and that’s a good thing. There’s a silver lining in that activity.

MFE: There's a lot of investor appetite right now for multifamily. How have you been able to distinguish yourself as a buyer?
Cash. We don’t have a financing requirement. The deals we’ve done have all been pretty good sized. The $475 million dollar transaction in New York City; this Dumont transaction, which is pretty good sized; and we’ve done deals in Arlington that were pretty good sized. It’s also our ability to move quickly and be extremely nimble. It’s about acquiring assets in markets in which we already operate. That way, we’re able to step in and get a pretty good understanding for what we think we’ll be able to lease those things up at.

MFE: So has that given you the ability to take advantage hairy deals?
NEITHERCUT: Absolutely. Certainly the Macklowe situation was one. We’ve done other things that I think have just required a little bit effort.

MFE: Do you expect your acquisition pace to continue throughout the year? Or is that tough to predict?
It’s very hard to say. We’ve obviously been very active the past three to four months. It’s going to be very challenging for us to meet our goals by being the winning bidder in big, competitive auctions for core product of modest size in core markets. If we continue to be able to buy more this year, they’ll be larger properties with a little more complexity and less competition. That means if we exceed our acquisition goals for the year, it will be on a lumpy sort basis. It will be a big deal here or a big deal there. It will not be a series of modest-sized deals on a regular basis.

MFE: With all of these bidders out there, are you concerned that we may move back into a mini-bubble as far as asset valuations go?
I think we are at a trough of earnings. And I think that alone will have a huge impact on what cap rates mean today. People are talking about froth merely from a cap rate perspective. So what’s the yield? In many markets, rents are down 10 percent, 15 percent, maybe even 20 percent from previous high-water marks. What's a cap rate mean on a trough income level? What’s a cap rate mean when you can buy good quality assets at a discount to what replacement costs may be? What’s a cap rate today mean when properties are 94 percent or 95 percent occupied, the economy is beginning to recover, you have no new supply being added, and you have an unbelievable demographic picture?

MFE: Equity is obviously interested in D.C., New York, and Southern California. Any other places you’re looking?
Our core markets are Boston, New York, Washington, D.C., Southern California, the Bay area, and Seattle. We’ve done one large purchase in New York and one small deal. We have had opportunities to play in Washington, D.C., and we’ve jumped on those. We’ve bought one deal in Southern California, and we’re working on another. We have closed one small deal in Seattle. The Seattle and California deals were less than $50 million each. Those we’re relatively small. There’s nothing about Washington, D.C., or New York that is different than any of those markets except we jumped on the opportunities there. If similar opportunities presented themselves in Southern California or Seattle or San Francisco, we would have jumped on those too.

Editor's Note: Stay tuned for part two of the interview with Equity Residential's David Neithercut, coming soon.