Not all buyers are built the same. From traded and non-traded REITs to investment banks, private regional operators, and under-the radar foreign investors, the top five apartment purchasers* of the first half of 2010 embrace different business models and acquisition strategies, but they are all looking to close out the year with a bang.
* In transaction dollar volume, per Real Capital Analytic’s U.S. Capital Trends Apartment Mid-Year Review, July 2010
1. The Traded REIT
Company: Equity Residential
2010 first-half volume: $805.2 million across eight properties
Portfolio size: 131,091 units
Markets of interest: National high-barrier-to-entry markets, such as New York, California, and Washington, D.C.
David Neithercut doesn’t mince words when he explains how his firm closed nearly a billion dollars worth of apartment transactions in the first half of 2010. “All you have to do to be the biggest buyer is be willing to pay the most money,” says the president and CEO of Chicago-based real estate investment trust (REIT) Equity Residential, which plowed $805.2 million into eight apartment deals despite executives acknowledging on a first-quarter earnings call that acquisitive opportunities may be few and far between.
“There was just not an expectation at the time of the first-quarter earnings call that there would be additional acquisition opportunities in the pipeline,” Neithercut says. “But here at the end of the second quarter, we have seen a reversal of that.”
Neithercut notes that Equity executives for some time have indicated that they did not expect bottom-feeding opportunities like those experienced during the RTC [Resolution Trust Corp] days of the late ’80s and early ’90s. “For much of 2009, the public companies, including Equity, continued to be concerned about liquidity, so even if there were deals to be had, I think the priority for these companies was more focused on balance sheet and less on opportunistic investing,” he says.
Toward the end of 2009, however, several market forces collided that allowed Equity to assume a more aggressive stance on acquisitions: The REIT raised some $2.2 billion in GSE credit; the unsecured senior debt market was stabilizing and showing signs of normalcy; the firm’s rent fundamentals were beginning to recover; and—most importantly—attractive deals were starting to hit the market.
“Our business metrics were turning, and there was an expectation in real improvements in operating fundamentals that enabled us to think differently about 2010 rents. I think that gave us a leg up,” Neithercut explains. “We were finally seeing large and complex deals where we were only one of a handful of firms that could do them, so towards the end of last year and early into this year, we moved in and hit it pretty hard.”
In the first six months of 2010, Equity acquired more than 2,209 units, including the purchase of three luxury Manhattan apartment complexes—River Tower, 777 Sixth Street, and Longacre House—from New York-based Macklowe Properties in a deal totaling $475 million. The firm also purchased assets in Arlington, Va., in the first quarter, and turned once again to the Washington, D.C., metro in April with the $167 million acquisition of the 559-unit 425 Mass, a planned condo community that the REIT will convert to apartments with an expected stabilized yield of 8.5 percent in the third year of ownership. And the REIT may yet have some deal making left to do in 2010—guidance on Equity’s second-quarter earnings call suggested a year-end transaction total of $1.25 billion.
“Right now we are managing the delta between what we can buy at and what we can sell at. If we can find the right bid for assets we don’t care to own and the right investment opportunity to redeploy capital into, we will transact,” Neithercut says. “So far, we have moved pretty quickly and found the bottom. Not only did we get some exceptional assets that we are going to own and operate and make money on for some time, but we got them at very low prices.”