Buyout firms are apartment hunting again.
An affiliate of private equity firm Lone Star Funds agreed this week to acquire apartment real estate investment trust Home Properties Inc. for about $7.6 billion including debt. It marks the largest takeover of a U.S. apartment REIT since the buyout boom of 2007, and more may be on the way.
Apartments are now one of the best-performing segments of the real estate market as younger tenants put off home ownership, driving near-record occupancy and rising rents. While property values have soared, some REITs are still trading below their net asset value.
“There is potential for something more to happen,” said David Auerbach, institutional REIT trader at Esposito Securities in Dallas. “The smaller, local operators could be potential targets.”
Apartment REITs are attractive for private equity firms looking to get a piece of the renting boom and put growing piles of cash to work. In addition to Lone Star’s big purchase, a unit of Brookfield Asset Management Inc. agreed in April to buy Associated Estates Realty Corp. for about $2.5 billion. Blackstone Group LP’s LivCor apartment real estate business is hunting for acquisitions.
“If Blackstone gets behind it, you’ve got something working there,” Auerbach said. “If Lone Star gets behind it -- because those guys are really smart folks -- they see something there.”
Potential targets may include Post Properties Inc., Mid-America Apartment Communities Inc., or Camden Property Trust, according to Jeffrey Langbaum of Bloomberg Intelligence.
Those companies, with market values ranging from $3 billion for Post Properties to $6.5 billion for Camden, operate in the southern U.S. where property values have further to climb than in prime markets like New York City. All three trade at a discount to the median multiple for peers based on price to funds from operations.
“Those are probably the next names that private equity types would start to look at,” Langbaum said.
Bluerock Residential Growth REIT Inc. and Preferred Apartment Communities Inc. also could become targets. With market values of around $200 million, they are some of the most digestible U.S. apartment REITs.
Representatives for Post Properties, Camden, Mid-America, Bluerock and Preferred didn’t respond to requests for comments.
Any deal would probably have to be a friendly transaction as hostile deals are rare in the REIT industry, said Nick Yulico, a New York-based analyst at UBS Group AG.
Just recently, shopping-mall owner Simon Property Group Inc. chose to withdraw its $23 billion proposal to buy Macerich Co. -- rather than go directly to shareholders -- after being rejected by its smaller rival.
Getting management teams on board for a sale is going to be the one hitch in getting deals done, Langbaum of Bloomberg Intelligence said. Companies such as Mid-America, which doubled its size through the acquisition of Colonial Properties Trust in 2013, may see themselves as more of a consolidator than a target.
The buyers are there and ready, though.
“The amount of private equity capital chasing real estate now is off the charts,” Langbaum said. “It certainly seems like there would be plenty of potential interested parties -- if you can get a buyer and a seller together.”