Starwood Capital Makes Big Waves with Equity Residential Portfolio

By Gail Kalinoski, Contributing Editor

Barry Sternlicht, chairman and CEO of Starwood Capital Group.

Sam Zell’s Equity Residential is selling a national multifamily portfolio with more than 23,300 units in 72 communities in five states for $5.4 billion to Starwood Capital Group making it Starwood’s largest non-hotel acquisition in its history.

The blockbuster deal comes one week after another multifamily mega-transaction made news: the $5.3 billion sale of Stuyvesant Town and Peter Cooper Village in Manhattan, with a total of 11,200 units, to Blackstone Group, L.P.

For Chicago-based Equity Residential the sale comes as the REIT continues to shift its multifamily portfolio from suburban and non-core assets to high-density urban holdings. So far, the deals have been more piecemeal, like the sale of Alexander on Ponce, a 330-unit complex in Atlanta in February 2014. But the firm apparently felt the time was right to make a big sale and to use the majority of the proceeds from this and future dispositions to pay a special dividend to its shareholders next year between $9 and $11 per share.

“This is an extremely opportune time for Equity Residential to monetize our investments in this portfolio of assets,” David Neithercut, Equity Residential’s president & CEO, said in a prepared statement. “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 percent, 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 EQR performance for many years to come.”

The breakdown of the assets being sold to Starwood Global Opportunity Fund X, through a controlled affiliate, is: 33 properties, 10,742 units in South Florida; 18 properties, 6,635 units in Denver; 10 properties, 3,020 units in Washington, D.C.; eight properties, 1,721 units in Seattle; and three properties, 1,144 in the Inland Empire of California.

Equity Residential also plans to sell 26 more assets totaling 4,728 units next year. The REIT said the assets are all of its Connecticut holdings and some non-core Massachusetts submarkets. These sales will be made individually or in small portfolio dispositions. When those sales are complete, Equity Residential will have exited the South Florida and Denver markets along with the New England submarkets.

The REIT may sell some core market assets in 2016 with the intention of reinvesting those proceeds in new assets.

The deal with Starwood is expected to close in the first quarter of 2016.

When the deal is completed, Starwood will control more than 88,000 units, making it one of the largest owners of multifamily housing in the United States. Over the last 12 months, Starwood has acquired or is under contract to purchase approximately 67,800 multifamily units. In May, the firm acquired three multifamily properties in the Raleigh-Durham markets in North Carolina getting 942 units for $72 million.

“The size of this transaction underscores our conviction in multifamily housing’s continuing ability to offer superior risk-adjusted returns. The strong underlying demographics for apartments and positive leverage – resulting in robust cash-on-cash yields – make this portfolio a very attractive investment,” Barry Sternlicht, chairman & CEO of Starwood Capital Group, said in a prepared statement. “We are excited to increase our exposure to these growth markets, and to add such high-quality assets to our rapidly expanding portfolio of multifamily properties.”

Starwood said the markets have had strong market rent growth of 5.4 percent annually over the last five years, noting it was well above the national average. They are also markets projected to have employment and income growth above the forecasted national average. The firm stated those factors, along with shifts in household formation and homeownership rates, should continue to drive demand and provide consistent rent growth across the portfolio.

“Our existing multifamily portfolio provides us with tremendous insights into market fundamentals and developing trends, allowing us to recognize and capitalize upon the dynamic growth across these markets,” Christopher Graham, senior managing director and head of real estate acquisitions for the Americas at Starwood, said in a prepared statement. “The two largest markets in this new portfolio – South Florida and Denver – are both seeing very impression and sustainable indications of growth, driven by compelling demographics, affordability and fundamentals.”

Market research from Yardi Matrix shows U.S. multifamily rents have been climbing this year with the September increase of $5 marking a new record of $1,167, according to the September issue of Matrix Monthly. The report noted that September’s year-over-year increase of 6.8 percent was 30 basis points higher than the previous two months and the highest growth in the post-recession cycle. Markets in the West and Pacific Northwest led the way with increases in September with rents in Portland, Ore., rising the most at 16.3 percent year over year, followed by San Francisco, Denver, Sacramento, Calif., and Seattle.