Dealmaker: Starwood to Purchase 23,000 Apartments from Equity for $5.4B

Starwood Capital Group, Greenwich, Conn., agreed to acquire 23,000 apartment units in 72 communities across the United States from Equity Residential, Chicago.

The $5.36 billion acquisition includes mid-rise and garden-style apartment buildings in five states with concentrations in South Florida, Denver, Colorado, Washington, D.C., Seattle and Inland Empire, Calif. The firms expect the deal to close in first-quarter 2016.

Equity Residential sold the portfolio unencumbered with debt, giving Starwood flexibility for new acquisition financing.

Starwood Capital Group Chairman and CEO Barry Sternlicht said the purchase proves his confidence in the continuing ability of apartments 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,” he noted.

Equity Residential Chairman Sam Zell founded another firm, Equity Office Properties Trust, in 1979. He sold Equity Office to private equity firm Blackstone, New York, in 2007 for $39 billion in the largest leveraged buyout until that time. The L.A. Times reported that Zell earned the nickname “Gravedancer” for his ability to buy low and sell high and is currently writing a memoir with that title. 

The deal means Starwood Capital Group will control more than 88,000 units, placing it among the top 10 largest apartment owners in the country. “The two largest markets in this new portfolio, South Florida and Denver, are both seeing very impressive and sustainable indications of growth, driven by compelling demographics, affordability and fundamentals,” said Starwood Senior Managing Director Christopher Graham.

The portfolio includes 33 South Florida properties totaling 10,742 units, 18 Denver communities with 6,635 units, 10 assets in Washington, D.C. with 3,020 units, 1,721 apartments in eight Seattle properties and three Inland Empire communities with 1,144 units. Graham said all five markets represented in the portfolio demonstrate strong market rent growth of 5.4 percent annually over the last five years, well above the national average.

Equity Residential President and CEO David Neithercut said his real estate investment trust will realize an unlevered internal rate of return of 11.1 percent on the sale. “We have also narrowed our focus which will now be entirely directed toward our core, high-density urban markets,” he said. Equity Residential intends to sell an additional 26 assets in Connecticut and Massachusetts totaling nearly 5,000 units in 2016.