Tom Toomey, CEO, UDR
Tom Toomey, CEO, UDR

Long before the rumors of Lone Star Funds entering into negotiations to buy Home Properties, the Rochester, N.Y.-based REIT had started preparing itself for a sale by shutting down development, improving its balance sheet, and curtailing any expansion plans.

“The posture of management was that they were open to deals,” says Conor Wagner, a research associate Green Street Advisors. 

And, last Monday that deal finally happened, with Lone Star agreeing to purchase Home for $7.6 billion. As part of the deal, UDR secured six properties in the Washington D.C. area. The Highlands Ranch, Col.-based REIT entered the picture because Home had investors that would lose their tax protection if Home’s entire portfolio went to Lone Star. For those investors to continue to enjoy tax advantages, a REIT, which was UDR, had to enter the picture.

UDR’s Haul

Many analysts peg UDR as a winner in the deal because of the assets it was able to secure.

“As a result, UDR is potentially buying $908 million of assets for only $65 million in cash plus the assumption of $90 million of debt. Three of the assets are new, one was just renovated and two are redevelopment candidates,” wrote Alexander D. Goldfarb, managing director at Sandler O’Neill + Partners in New York in a recent note. “Three are located near the Metro while another will be near a future Silver Line station, consistent with UDR's portfolio strategy.”

One observer commented that UDR got Home’s best six assets, but Wagner isn’t quite as convinced about UDR’s haul.

“We think they paid a fair price,” Wagner says. “UDR is a top operator. It’s likely they will squeeze more value out of those properties.”

Home’s Value

For Home the picture is a little more muddled. Haendel St. Juste, executive director at Morgan Stanley Research, says investors think Lone Star got an opportunistic price for Home since D.C., the REIT’s top market, has bottomed out and should grow in coming years. But the company’s assets weren’t really valued by investors either.  

“These assets weren’t appreciated in the public markets for a long time,” he says.

Wagner thinks the announcement of the deal was almost anti climatic after rumors had been circulating about Home for so long.

“They [investors] were non plussed by it,” Wagner says. “They weren’t blown away by it. It seems fair. It wasn’t one of these deals that came out of nowhere and the stock jumped 15%. Perhaps there was some slight disappointment.”

But he still thinks Home did well. “Overall we think it was it was a good deal,” he says. “It seems appropriately priced. Ultimately we think it was good for shareholders. It was a fair deal but it wasn’t overly exciting.”

And, with a “Go Shop” provision, it’s not of the question that a new bidder could enter the picture. “The 30-day ‘Go Shop’ confirms that if anybody was interested, they have an opportunity to make a bid,” Wagner says.

Post on Deck?

Even with Home and Cleveland-based Associated Estates going private, Wagner contends there could still be more M&A activity this year. “Apartment REIT takeout odds remain elevated and the most likely target is Post,” Wagner says.

In a recent report, Green Street pegged Atlanta-based Post with a 30% chance of being sold. Recently the company has made moves, such as buying back shares and improving its balance sheet, which would make it more attractive to a prospective suitor.

“Post isn’t going to actually look for someone to buy them,” Wagner says. “It’s more about the amount of private capital out there. The Gables deal shows that there is interest in that type of portfolio.”

But Goldfarb warns that whoever is buying Post will have to write a really big check. “Post is everyone’s favorite,” he says. “But when you run the math, it would be a very specific buyer that would accept the low yields for the board to say yes.”