Equity Residential (NYSE: EQR) announced Oct. 26 that it has agreed to sell more than 23,000 apartment units in mainly suburban locations to private equity firm Starwood Capital Group for $5.37 billion.
The deal involves 72 properties located in South Florida, Denver, Washington, Seattle and California’s Inland Empire. The sale is expected to close in the first quarter of 2016. Starwood will pay approximately $230,634 per unit.
“This is an extremely opportune time for Equity Residential to monetize our investments in this portfolio of assets,” said David Neithercut, president and CEO at Equity Residential. The deal, he added, allows the company to narrow its focus on high-density urban markets. This approach “will fulfill our strategic vision and drive EQR performance for many years to come,” Neithercut said.
Analysts took a favorable view of the deal for Equity Residential.
“We view this strategic deal as a positive as it improves and concentrates EQR’s portfolio while trimming the size of the company to allow future deals to be more impactful,” said Michael Bilerman, managing director at Citi Research.
Alexander Goldfarb, managing director at Sandler O’Neil & Partners, pointed out that “EQR is getting good pricing for assets that don’t fit their geographic strategy anymore.”
Goldfarb said he expects to see other REITs follow Equity Residential’s example.
“The pricing in the private market is very healthy,” he observed. “There’s no reason for REITs not to take advantage of that.”
During a conference call, Neithercut said that on a long-term basis, risk-adjusted returns in urban core markets will outpace other markets. Looking at the multifamily sector more broadly, he commented that fundamentals remain favorable for apartment landlords. “It’s a very good time to be in the multifamily business,” he said.
Equity Residential also plans to sell an additional 26 assets in 2016, or more than 4,700 units. The bulk of those units represent all of the company’s assets in Connecticut and part of its holdings in Massachusetts. The company expects to sell those assets for approximately $700 million in individual and small portfolio deals. Additional assets in core markets may be sold in 2016, according to the company.
Equity Residential said it intends to use the majority of the proceeds from the sales to Starwood as well as those anticipated in 2016 to pay a special dividend to shareholders of between $9.00 and $11.00 per share during the second quarter of 2016. The company said it also expects to use proceeds to reduce its debt.