When charleston, s.c.–BASED GREYSTAR IRONED OUT THE DETAILS ON A monster deal to start off 2013, the firm made one of the biggest, boldest moves likely to be seen this year.
In January, Greystar teamed with the Real Estate Principal Investment Area of Goldman, Sachs & Co. to buy a 27-property portfolio worth $1.5 billion from Equity Residential. But aside from the size, perhaps the most noteworthy aspect of the deal is how quickly it was finalized—before the ink was even dry on Equity’s own behemoth acquisition.
In November, the Chicago-based REIT announced its industry-shocking $16 billion joint venture with Arlington, Va.–based AvalonBay to purchase the entire, 45,000-unit-plus portfolio of Englewood, Colo.–based Archstone. At the time, the transaction was the biggest apartment sector deal in five years.
But the agreement also meant Equity Residential would need to speed up its disposition efforts to drum up enough capital to close the blockbuster deal. So it was “out with the old, in with the new.”
Greystar saw an opportunity therein that would benefit both firms, and the operator capitalized on it. By adding 8,010 new units from Equity, with a transaction value of approximately $187,000 per unit and a capitalization rate in the mid– to high–5 percent range, Greystar made a massive leap forward in the targeted expansion of its core operating markets.
“When [Equity] announced its transaction with Archstone, it was pretty obvious to us that they’d probably have to accelerate some of their dispositions because they were going to need the capital to be able to close that deal,” says Bob Faith, founder and CEO of Greystar. “So I picked up the phone and we explored the option of putting together a fairly large transaction in a very short time frame. We were able to go through and kind of handpick that portfolio.”
Historical Ties
Faith’s history with EQR goes all the way back to the REIT’s initial public offering (IPO) days, in 1993. Faith was one of the co-founders of Starwood Capital Partners, which merged its apartment portfolio with Equity co-founder Sam Zell’s for the IPO.
Alan George, who is now Equity’s chief investment officer, was someone Faith had been staying in touch with over the years as each company grew. And for Greystar’s deal with Equity, luckily, George was the guy on the other side of the table.
“Our first conversation was around Dec. 14,” recalls Faith. “For this to work for Alan, we had to be able to go hard a significant amount of money so he knew he wouldn’t have to market those assets and would have a certain chunk of capital. We negotiated the transaction where we could go hard $150 million within two weeks.”
In all, Greystar selected 2,105 units in Washington, D.C., and northern New Jersey; 1,896 units in South Florida; 1,575 in Phoenix; 1,003 in Denver; 720 in Southern California; and 711 in the San Francisco Bay Area (see list below).
Greystar’s national reach gave it a unique platform to even attempt to close 27 assets in that short time and enabled the company to finish its due diligence by very early January.
“There was some give-and-take with Alan putting this portfolio together, but we focused on the markets we really wanted to be in and already operate in,’’ says Faith. “Fortunately, there was enough we wanted to buy that they also wanted to sell, so we were able to get it crafted.”
Refresher Course
Greystar is approaching $2 billion in development across the country, in many of the same markets in which the new acquisitions are located. Faith plans on giving some of the newly acquired properties a face-lift, but it’s a task the company is willing, and even excited, to take on.
“Some of these assets have been owned by Equity for a while, so we’ll probably be doing a bit of a refresher. But that’s part of our investment strategy,” says Faith, describing the company’s plans to rebrand the assets as soon as possible.
The joint venture with Goldman, Sachs may come as a surprise to some, but Greystar’s relationship with the firm, as with Equity, goes back a long way. In fact, when Greystar acquired JPI Management Services in 2008—a deal that vaulted the company toward the head of the property management pack—the deal was made possible partly by Goldman, Sachs, which took a 20 percent stake in Greystar at the time. The deal added more than 40,000 units to Greystar’s managed portfolio and made it a national operation in the process.
The Equity deal was a direct ripple, a trickle-down effect from the Archstone transaction. And it’s tempting to think the Archstone deal will breed similar megadeals throughout the year, especially given the investment appetite among many large apartment firms.
“Everyone’s seeing the same great story—low supply and a bias for renting,” says Andrew Goldfarb, REIT analyst at New York–based Sandler O’Neill + Partners. “I’d expect it to be not until mid-2014, at the earliest, for oversupply to become an issue.”
But as Faith points out, there aren’t that many multifamily companies that have the resources to complete a transaction of this magnitude.
“My perception is no, I don’t think you’re going to see tons of portfolios trading,” says Faith. “There was a unique set of circumstances that allowed EQR and AvalonBay to acquire Archstone, and EQR’s need for liquidity created a unique situation for us.”
