The long rumored Lone Star Funds-Home Properties deal became a reality when the Rochester-based REIT announced on Monday that it entered into a definitive agreement to be acquired by Lone Star Funds for about $7.6 billion.
The deal was greeted with positive reviews by analysts. “We believe this represents a 5.8% cap rate on Home’s forward NOI,” wrote Stifel Nicolaus & Co. analyst Rod Petrik. “The deal contains a 30 day go-shop provision, but we don’t expect another bidder to come over the top."
As part of the deal, Home entered into an agreement to contribute a portfolio of up to six properties containing as many as 3,246 units to Denver-based REIT UDR. Petrik wrote that UDR is paying a 5.2% cap rate for the properties.
The Home deal, which should be completed in the fourth quarter, is the second REIT privatization in the last couple of months, following Brookfield Asset Management’s approximately $2.5 billion purchase of Cleveland-based REIT Associated Estates Realty. Analysts wouldn’t be surprised to some more consolidation and even more REIT privatization on the horizon as a truly distinctive public company leaves the space.
Home, piloted by CEO Ed Petinella, operated a Mid-Atlantic and Northeastern portfolio. Norman and his brother Nelson Leenhouts formed Home Leasing Corporation in 1967. In a March 2009 story, we explained the company’s past.
In 1967, the Leenhouts brothers founded Home Leasing, the predecessor company to Home Properties, by investing in single-family homes and renting them out. In the early 1970s, they began buying properties in partnerships and buying garden-style units in upstate New York and renovating them. “We hardly ever developed anything from ground up,” says Norman Leenhouts, who now serves as the company’s co-chairman of the board. “We found upgrades more profitable for us.”
Through the ’70s and ’80s, in good and bad times, the Leenhouts pushed the company’s growth. By the early ’90s, apartment firms such as Equity Residential in Chicago and Houston-based Camden Property Trust were going public. At the time, the Leenhouts had about 400 limited partnerships with a mix of office, retail, and multifamily properties. By going public in 1994, they were able to merge these partnerships and provide liquidity for their partners.
Petinella came in from the banking industry to learn under the Leenhouts brothers in 2001. Here’s more from our 2009 story.
“He [Petinella] had spent his time on operational matters,” Norman says. “We had grown to the size where we needed more emphasis on that area. He was a solid financial guy, and he had significant experience in real estate for a banker.” Pettinella worked under the brothers as executive vice president and a board member for almost three years prior to taking over.
Over the years, many of the firms that went public in the early 90s were either swallowed up in mergers or privatizations or changed strategies—pursuing newer deals on the coasts. Home, however, stuck to its knitting—taking older, inexpensive Class C apartments in high-barrier markets and renovating them to B class units. In 2001, Norman Leenhouts explained the strategy to MFE.
"We are the only public company focused on improving the country's housing stock over 10 years of age and using private sector funds as opposed to federal, municipal or state funds," he said.
And, at certain points in the cycle, it was even a hedge against downturns, as Stephen Swett, now Managing Director at ICR and at the time an analyst with Keefe, Bruyette and Woods, an investment banking and security brokerage firm based in New York, told MFE in 2009:
“It’s a portfolio that has, in the past, proven to be fairly defensive,” Swett said. “They own moderately priced apartments in the very expensive markets. Owning moderately priced apartments in a recession, you should be relatively better off.”
And for almost 50 years, it’s hard to argue that Home wasn’t better off with the strategy originally chartered by the Leenhouts brothers.