LaSalle, UDR $510M JV to Acquire Apartments With "Operational Upside"

Lasalle Investment Management and UDR announced the completion of a multifamily joint venture valued at approximately $510 million. The two companies are initially starting with a seed portfolio of four communities comprising 1,328 apartment units across four communities. The partners then plan to expand the holdings by acquiring ”high-quality, well-located communities with operational upside,” according to an announcement.

UDR sells a 49% interest in the properties, so continues to hold 51%, and also gets about $250 million in cash. Initially the venture has no debt, and according to Green Street, the joint venture doesn’t plan to start using debt as “LaSalle — an Asian pension fund — is under allocated to real estate and has ample dry powder to deploy” and targets an approximately 7.5% unlevered internal rate of return.

The initial value is based on a low-5% effective forward yield. UDS said that it “expects the transaction to be accretive to FFOA and cash flow per share in the first year of the venture.”

LaSalle points to “a unique opportunity to partner with a best-in-class operator in a preferred sector with immediate and diversified scale in multifamily markets that are ranked highly by LaSalle’s global Research and Strategy group,” adding, “The partnership capitalizes on the secular shift to product in high-barrier-to-entry markets in addition to attractive rent price points, strong operating history, and long-term expected NOI growth.”

The properties are in Seattle, WA; Orange County, CA; Boston, MA; and Washington, D.C.  They range in age from 9 to 20 years, with an average monthly revenue of $2,513 per unit and average 97.6% occupancy.

Green Street says that the deal pricing represents an approximately 5.0% forward nominal cap rate with a price of $385,000 a unit.

The firm says the venture is structured as an open-ended agreement. UDR will receive fees for asset and property management, constructions, and acquisitions, initially 50 basis points on the $510 million, but those can increase. The two companies aim to increase assets in the joint venture by about $500 million annually over the next few years.

The deal could also “set the stage for future conflicts of interest” between the JV partners and REIT shareholders, Green Street wrote. “To the extent UDR’s cost of capital doesn’t improve (~10% GAV discount), shrinking its balance sheet further and returning capital to shareholders should take priority over future net external growth via the JV.”