Sometimes one deal can make all the difference. That's certainly the case for UDR, a REIT based in Highlands Ranch, Colo.
In March, the company sold an 86-property, 25,684-unit portfolio to a joint venture owned by New York-based DRA Advisors and Greensboro, N.C.-based Steven D. Bell & Co. for $ 1.7 billion. Since then, UDR's stock has shot up 30 percent and its average rents rose from $750 a month to close to $1,200 a month. For analysts like Rod Petrik, managing director with Stifel Nicolaus, a regional brokerage and investment banking firm based in St. Louis, that means a lot. Petrik believes that a REIT's stock multiple strongly correlates to the quality of the portfolio, that means a lot.
“It's completely transformed the company,” Petrik adds. “The quality of the remaining portfolio was up substantially. They've gone out and spent $800 million on additional properties, bought back $130 million of stock, and paid down $300 million in debt. It turned out to be a great deal for the company.”
UDR's management also improved with the deal, according to Mark Wallis, senior executive vice president of acquisitions, dispositions, and development for the REIT, which now owns 44,089 apartment homes nationwide. For one thing, the deal helped the company shave the older assets off of its portfolio. By ridding itself of those units, the company saves on repair costs.
“We're more efficient,” Wallis says. “We're doing better in the Inland Empire (Calif.) and Phoenix. We can spend more focus on the tougher markets. That just makes the tougher markets better.”
ROCKY ROADS AHEAD Despite the impact of the deal on UDR's bottom line, Wallis thinks the buyer made out OK as well. Part of the reason was the timing. In late February, Wallis estimates that Bell & Co. got a below-5 percent interest rate on the portfolio. Now, he estimates that they would lock in around 6 percent.
“In late February, the buyer was able to lock rates in a little better than what the underwriting was,” Wallis says. “The price on our side improved. Our deal got better, and their deal [got] better. ”
Wallis breathes a sigh of relief because he knows both the buyer and seller could have come out much worse if the deal got “fatigued” and didn't wrap up quickly. He estimates that the deal would sell for about $200 million less today with cap rates moving up about 50 basis points. “Part of it was the timing and the transaction,” Wallis says. “In real estate, that's so important.”
Brokers out on the market see this as well. David Mitchell, a principal in the Houston office of Apartment Realty Advisors (ARA), brokered a $300 million acquisition by New York-based Trimarchi Management and Chicago-based Capri Capital Partners, which bought 3,039 units from San Antonio-based Internacional Realty in the Dallas metro in February. He knows that the deal, the fourth-largest so far in 2008, may have not happened later on in the year.
“We started marketing the deal a while ago,” Mitchell says. “It would be very difficult to do this deal today.”