UDR, Inc. and AvalonBay Communities recently completed a $500 million asset exchange that helps to realize the property allocation goals of both REITs. The transaction includes the swap of three AvalonBay apartment communities in San Francisco and Boston and one land parcel for six UDR communities in California and $26 million in cash.
At the beginning of April, AvalonBay exchanged assets valued at $260 million for UDR apartment communities in Southern California, where UDR’s portfolio was overweighted and AvalonBay’s was light.
The assets UDR traded are located in metropolitan Los Angeles, Orange County and San Diego with a total of 1,418 units valued at $234 million, with the cash the REIT is adding to the deal making up the difference in value between the two portfolios.
The properties AvalonBay contributed to the transaction include a 227-unit community on the West Coast and two communities on the East Coast with a total of 833 units and a small land parcel.
The deal not only adds to AvalonBay’s underweighted Southern California holdings, but also shifts some capital into lower price point Class B product and submarkets that the REIT expects will outperform over the next five to 10 years, said AvalonBay President Tim Naughton.
“The asset exchange was a win-win for both companies,” said UDR CEO Tom Toomey. “The exchange allowed us to increase our exposure in key markets by reducing our exposure in certain Southern California submarkets.”
The trade added a high-rise in San Francisco to UDR’s portfolio. 388 Beale consists of two 20-story towers in the urban Rincon Hill neighborhood of the City by the Bay. The 227-unit community, where rents average $2,908, brings UDR’s ownership in metro San Francisco to 12 communities consisting of 2,676 apartments.
388 Beale, which consists of one-, two- and three-bedroom units is located within walking distance of the city’s financial district, Embarcadero and the Bay Bridge.
San Francisco is one of UDR’s strongest growth markets, with new leases up 4.4 percent in April and renewals north of seven percent. “San Francisco’s going to end up being stronger than D.C.,” predicted Sr. VP of Operations Jerry Davis.
The two East Coast communities UDR acquired in trade are located in Massachusetts–the 387-unit 14 North in Peabody and the 446-unit Inwood West in Woburn, which is adjacent to the land parcel where a future expansion of Inwood West is planned. The number of units in that phase of the community’s development has yet to be decided.
The transaction with AvalonBay will increase UDR’s ownership in the Boston metro area to eight communities consisting of 2,481 homes and 12 communities with a total of 2,676 apartments in the San Francisco metro area. It will reduce the REIT’s Southern California holdings to 30 communities consisting of 8,095 units.
As part of the deal, AvalonBay will assume a $55.4 million, fixed-rate mortgage with a 5.24 percent interest rate that will mature in June 2013. In exchange, the REIT will relinquish a $55.8 million mortgage loan with a fixed rate of 5.86 percent that matures in May 2019.
The net reportable tax gain for AvalonBay is $24 million and consists of the difference in value between the two REITs’ assets and the difference in the amount of debt relinquished versus assumed.
When the exchange took place, AvalonBay Chairman and CEO Bryce Blair said the transaction was consistent with the REIT’s portfolio goals. “We are re-allocating capital from markets where we have a large portfolio of higher-price-point assets into a currently under-allocated region with assets that offer multiple price points.”
In this case, he said, AvalonBay, which has robust development pipelines in both Boston and San Francisco, will benefit from increasing the REIT’s holdings in the southern half of the Golden State just as the economic recovery takes hold there.
As of the end of Q1 of this year, AvalonBay’s Boston portfolio consisted of 4,866 units with average rents of $1,937, which is 4.2 percent higher than the average of $1,859 at the end of Q1 2010, when occupancy averaged 95.8 percent across the REIT’s Beantown apartments.
On the development front in the market, the REIT has almost completed the $18.4 million development of the 91-unit Phase II at Avalon at the Pinehills in Plymouth, about 30 miles south of Boston and the 220-unit Avalon Cohasset, about 20 miles north of the city that is scheduled for completion in Q2 2012 At the end of the quarter, the REIT’s holdings in Northern California included 4,829 units, of which 2,790 were in the San Jose area, 1,569 in the East Bay-Oakland market and 470 in San Francisco. Average occupancy was 96.4 percent across the Northern California communities and rents averaged $1,702, with San Francisco lease rates the highest in the region at $2,391.
The REIT was underway on one community in the Bay Area in Q1–the $61.1 million, 173-unit Avalon Ocean Avenue in San Francisco, which started in Q4 2010 and is scheduled for completion in the second quarter of 2012. Rents at that community are expected to average $2,485. AvalonBay has development rights for two communities totalling 505 units in the East Bay and one in the San Francisco for 174 units.
San Francisco was among the six markets where UDR saw double-digit rent growth over the 12 months prior to the REIT’s earnings call at the beginning of May.
The Southern California apartment communities UDR contributed to the trade include three garden-style assets in metro Los Angeles–the 501-unit The Crest at Phillips in Pomona, where units rent average $1,391; the 156-unit The Villas at San Dimas with price points averaging $1,326 and the 102-unit The Villas at Bonita that offers apartments for an average of $1,250, both of which are in San Dimas; a 225-unit Orange County apartment community where rents average $1,406 and the 184-unit Rancho Vallecitos in San Marcos and the 250-unit Milazzo in San Diego, where rents average $1,370 and $1,335, respectively.
Among other recent REIT portfolio enhancement plays is Camden Property Trust’s June acquisition of an eight-community apartment portfolio in Texas for $261 million. The communities, purchased through the REIT’s discretionary investment funds, of which Camden owns a 20 percent interest, are located in Houston, Dallas, Austin and San Antonio metros and include 2,957 apartments with an average age of three years and average occupancy of 95 percent.
“We are pleased to have acquired a high-quality portfolio of apartment homes, located in some of the nation’s highest employment and population growth markets,” said Camden Chairman and CEO Ric Campo at the end of June.
He added that the fund has another three communities from the same portfolio, located in the Houston and San Antonio metros, under contract for around $59 million and he expected those acquisitions to close during the third quarter of this year.
The communities purchased in the first round include the 272-unit Camden Brushy Creek and 496-unit Camden Shadow Brook in Austin; the 310-unit Camden Cypress Creek, the 312-unit Camden Lakemont and the 384-unit Camden Northpoint in Houston; the 295-unit Camden Panther Creek and and the 600-unit Camden Riverwalk in Dallas and the 288-unit Camden Westover Hills in San Antonio.
Also in July, UDR announced the recent acquisition of the 185-unit View 14 in Washington, D.C. for $106 million and the pending acquisition of two more East Coast communities. The $443 million purchase of the 26-year-old, 706-unit Rivergate and the $138 million deal for the 10-year-old, 210-unit 21 Chelsea, both located in New York City continues UDR’s portfolio transformation strategy, said CEO Tom Toomey.
The off-market acquisitions of Rivergate and 21 Chelsea provide the REIT with the opportunity to substantially increase rents through implementation of UDR’s operating platform and redevelopment of the communities, he said.
“In Washington D.C., the acquisition of View 14 was an opportunity to own a recently developed asset with luxury condominium-style finishes and amenities directly across the street from our 2400 14th Street Development.
The 35-story Rivergate, built in the Murray Hill neighborhood of Manhattan in 1985, occupies a city block between 34th and 36th Streets, FDR Drive and 1st Avenue. Located within easy access to FDR Drive, the community is four blocks from a subway stop and within walking distance of Grand Central Station, the NYU Medical Center and U.N. headquarters.
The REIT plans to invest between $40 million and $60 million in redevelopment of the one-, two- and three-bedroom apartments, including high-end kitchens and bathrooms with new cabinets, granite countertops, stainless steel appliances, new windows and hardware. Community upgrades will include a new, glass-enclosed, 6,000 sq. ft. rooftop fitness center and deck, updated lobby and building entryway and the addition of a business center and resident lounge.
UDR expects to see a 35 percent boost to rents over the current average rate of $3,262.
The REIT plans to invest between $6 million and $8 million over the next two years for improvements at the 14-story 21 Chelsea that is located within walking distance of a number of major retailers like Trader Joe’s and Whole Foods, two blocks from a subway stop and within walking distance of High Line Park, Hudson River Park and Chelsea piers.
Redevelopment of the apartments will include new kitchens and baths with new cabinets, granite countertops and stainless steel appliances. A redesigned lobby and new landscaping and furniture for the rooftop space also will help boost rents at 21 Chelsea to an average of $3,226 or 20 percent more than the current rate.
In addition to those redevelopment activities, UDR plans to start development on four new communities–three in California and one in Maryland–totaling 1,306 apartments for an estimated cost of $375 million or $274,000 per unit, with completions anticipated in 2013.
The 467-unit, $150 million Village at Bella Terra in Huntington Beach, Calif., located next door to the Bella Terra lifestyle center that includes more than 70 shops and restaurants and more than 428,000 sq. ft. of office space in the Towers at Bella Terra, will be the first market-rate rental product to deliver in the submarket in more than 20 years, when it is completed in Q2 2013.
The REIT plans to complete the 320-unit Los Alisos two years later in Mission Viejo, Calif. The 320-unit, $87 million community will be within easy access of freeways and job centers in Orange County, Irvine and Santa Ana and next door to Mission Foothill Marketplace.
The other two planned communities represent pre-sale joint ventures. The $76 million, 236-unit 13th and Market will be built in the East Village of San Diego, directly across the street from a planned four-acre public park, within walking distance of PETCO Park.
And, finally, UDR entered into a $62 million pre-sale joint venture to develop the 256-unit Domain College Park immediately adjacent to The Robert H. Smith School of Business at the University of Maryland in College Park, Md. Expected to be the only privately-owned, market-rate community located directly adjacent to the University of Maryland campus.