What’s the deal?
On October 26, Equity Residential (EQR) announced its plans to sell 72 properties in five markets. This includes 23,262 apartment units. It will sell the units to Starwood Capital for $5.37 billion. The deal involves 21.3% of Equity Residential’s total apartment portfolio in the country. The average price paid by Starwood per apartment unit is $230,634. The 72 properties are located in the South Florida, Denver, suburban Seattle, suburban Washington DC, and California’s Inland Empire markets.
Shrinking the footprints
Equity Residential plans to sell an additional 26 assets consisting of 4,728 apartment units for ~$700 million in 2016. Most of these assets are in Connecticut and non-core submarkets in Massachusetts. After this deal, Equity Residential will exit from the South Florida, Denver, and New England submarkets.
Rationale of the deal
The company believes that the fundamentals of the apartment business are very strong. It believes that the fundamentals will be strong for the foreseeable future. As a result, Equity Residential plans to exit some of the non-core markets and concentrate on higher growth core markets. The deal’s rationale, as explained by Equity Residential, is as follows:
- Equity Residential’s strategy is to own assets in high-density urban environments
- These 72 assets don’t fit into its long-term strategic vision
- There’s a great demand to own multifamily assets
- Competitive pricing for limited assets in its core markets makes reinvesting these proceeds extremely difficult and highly dilutive
- Equity Residential expects to remain leverage neutral through debt repayment
Equity Residential will pay a special dividend
Equity Residential intends to use most of the proceeds from the asset sales to pay a special dividend to shareholders in the range of $9–$11 in 2Q16. The company also plans to reduce its debt level in order to make the transaction leverage neutral.
Management’s upbeat about the deal
In a statement, Equity Residential’s president and CEO David Neithercut said, “This is an extremely opportune time for Equity Residential to monetize our investments in this portfolio of assets. In doing so, not only have we demonstrated the enormous value created for our shareholders through the realization of an unlevered internal rate of return of 11.1%, but we have also narrowed our focus which will now be entirely directed towards our core, high-density urban markets that will fulfill our strategic vision and drive performance for many years to come.”
Equity Residential accounts for 4.8% of the SPDR DJ Wilshire REIT ETF’s (RWR) portfolio. Peers like AvalonBay Communities (AVB), Essex Property Trust (ESS), and UDR (UDR) have weights of 4.1%, 2.5%, and 1.6%, respectively, RWR’s portfolio.