Many of you are aware of Starwood Capital Group’s $5.4B purchase of 23,262 multifamily units owned by Equity Residential. This comes on the heals of the additional purchase of some 67,800 units during the past year and the merger with Colony America Homes, which will result in the addition of some 30,000 single family housing units. These purchases come at a time of historically high rent and valuation levels in the housing sector. What drives such purchase decisions?
According to a recent #BloombergBusiness article (Starwood Bets $5.4 Billion that Apartment Rents will keep Rising, Oshrat Carmiel, October 27, 2015), Starwood’s CEO, Barry Sternlicht, indicated that the purchase decision was made not on the presumption of strong rental growth, but on a rent growth that is projected to increase just marginally over inflation. Sternlicht appears to be betting his investor’s money on continued low inflation and the lack of increasing yields for many years to come.
However, #Starwood’s future growth projections appear to lie in direct opposition to those of Sam Zell’s Equity Residential. The #Equity Residential game plan appears to be based on the assumption that rent growth/valuations have topped out in a number of markets (this sale included 10 Washington DC properties along with 33 properties in South Florida, 18 in Denver, 8 in Seattle, and 3 in California). Equity Residential’s CEO, David Neithercut, indicated that there were no plans to replace the assets, but a $9-$11/share special dividend would be distributed to shareholders. His concern over tenant concessions and oversupply is likely to lead to the further sale of all of Equity’s Connecticut assets as well.
So how does one reconcile such differing business plans? Starwood’s Sternlicht indicated that holding period is the only difference between the two strategies. Is locking up your investments at all time highs a reasonable and responsible use of investor capital? Equity Residential’s Neithercut believes not as he indicated that the sale of their assets at historically high levels was the best capital-allocation decision he could make for his shareholders.
What is your take? Would you invest today with Starwood or Equity Residential?
#Richard McRae provides acquisition/disposition consulting and commercial brokerage services across the Mid Atlantic region
I think this is an interesting question and can be tackled in a number of ways. First off, the fact that two firms involved in a trade have differing opinions is to be expected. That is the reason why one is a buyer and one is a seller.
Personally, I would rather invest with Equity Residential/the investor who looks to free up capital when yields are low. With that said, I think it is more about investment goals than anything else. Large insurance companies, endowment funds, etc. are probably looking for mid single digit consistent yields, as well as a safe place to park capital. If so, what Starwood is doing makes a ton of sense. Put another way, is this investment a replacement for long-term bonds, or a replacement for another investment (value-add real estate, stocks, etc.)?
Also, we don't know who the transaction was financed. I assume both players have access to favorable debt, but if someone can purchase at a 5 cap, and finance the majority of the purchase with long term debt between 3-4%, the equity yields are actually reasonable and should grow (even modestly) over time.
I am not sure if this answers the question, but I think what both groups are doing probably makes a ton of sense in satisfying the goals of their investors.
Thanks for the reply Evan. You are certainly correct in that it takes two to tango! And it is quite interesting to see how two giants invest - both of whom have a large investor base to satisfy. Personally, I am not sure I want to lock in long-term bond-like returns with real estate purchases that are not liquid. Starwood has locked in their investor returns for quite some time. As you say, we each have our own investment needs/parameters!
I, personally, favor Equity's model, although full disclosure: I am biased because my company does a good amount of business with their Seattle portfolio.
What they are doing currently, is shedding their outlying, sub-urban properties and concentrating on maintaining/upgrading their high-rise, urban core buildings. I like this method because for most of the large cities, demand for housing in the downtown, high-rise areas remains very strong, and they have now generated a massive influx of capital they can use to take advantage of a short-term blip or screaming deals that come their way.