United Dominion Spending $900M, Mostly in California

RICHMOND, VA-United Dominion Realty Trust Inc. says it is in the process of closing $897 million of acquisitions in four separate transactions representing 6,172 housing units in California. The locally based company says the transactions will make Southern California its largest market, generating 16% of the company’s proforma 2005 NOI.The vast majority of the units being acquired are in Southern California, with the remainder in Northern California and other markets. UDRT says 82% of the acquisitions’ NOI is generated from Southern California and 9% is generated from Northern California.The largest transaction involves the purchase of 16 garden-style communities in California and Oregon, with 4,646 units, from Essex Apartment Value Fund, an affiliate of Essex Property Trust Inc., for $756 million. UDRT estimates the blended capitalization rate of the investment at 5.7% based on forward 12-month NOI and recurring capital expenditures. In a conference call regarding the acquisition, UDRT says the in-place cap rate is closer to 5.5%.Thomas Toomey, UDRT president and CEO, says the transactions are part of the company’s strategy of acquiring properties in markets with high-job growth, expanding economies and high barriers to new construction and home ownership. In a conference call on Tuesday, UDRT officials said the Southern California region is ripe for rental growth for a variety of reasons, including: –41% of the Southern California population lives in rental housing, which is higher than most other markets;
–a significant portion of that population cannot afford to buy a house, so they are long-term renters;
–population is growing at 1.5% while the number of new units is growing at 0.5%;
–current vacancy is at 4%; and
–employment growth is expected to be 3.5%, which compares to a national average of 1.1%.

“With demand high, new supply low and vacancy low, you’ve got to say the market has great prospects for rent growth,” said one company executive. “We’ve got a lot of room to grow rent and improve operations without bumping up against housing or even condo sales.”The acquisitions are expected to be financed through the assumption of $181 million of 5.2% secured debt with a weighted average term to maturity of eight years. The balance will be paid in cash to be generated from several sources including an existing $500-million credit facility, sale of communities under contract and in the future, as well as potentially issuing equity or other securities. Concurrent with the acquisition, the company says it has completed or is under contract to sell $174 million of properties encompassing 3,515 units in five separate transactions. The aggregate sales price represents a blended capitalization rate of 7.5% based on trailing 12-month NOI less a capital expenditure reserve of $470 per unit and an implied management fee. After the transactions are completed, UDRT will own and operate 80,000 units in 42 markets.