The Real Deal New York

Is $5.4B sale Sam Zell’s way of saying the party’s over?

After megadeal with Starwood, Multifamily REIT sees Big Apple as a better long-term bet

October 26, 2015 03:25PM
By Konrad Putzier

Sam Zell

Sam Zell

In 2007, Sam Zell struck a deal to sell his entire office-building portfolio to the Blackstone Group for $39 billion, then the biggest leveraged-buyout deal ever. By the end of the following year, the collapse of Lehman Brothers sent the real estate market on a tailspin. The deal earned Zell the reputation of being unusually good at predicting market swings. And it means observers tense up every time one of his companies makes a big sale.

Behind the story:

Equity Residential
Sam Zell

Monday’s announcement that Zell’s Equity Residential is selling a multifamily portfolio to Starwood Capital Group for $5.37 billion is no exception. During the real estate investment trust’s earnings call Monday, UBS analyst asked: “Should people be reading in this that Sam is calling the top of the market twice in a row?”

David Neithercut, Equity Residential’s CEO, dismissed the suggestion. “We are not selling the company,” he said. “We are selling a portfolio of assets, and remain committed to what we do in core urban markets.”

Urban is the key word. The 72 properties and 23,000 apartments the company is selling – about a quarter of its holdings – are mostly suburban and in secondary cities. The REIT will now focus more strongly on gateway cities like New York, where its holdings include rental buildings such as 180 Montague Street in Brooklyn Heights and 71 Broadway in the Financial District.

“Our belief is that long-term risk-adjusted returns in the urban core will exceed those in other markets,” Neithercut said on the call. He argued that prices in secondary cities might be more vulnerable, in the short term, to the effects of an interest-rate hike by the Federal Reserve and policy shifts by Fannie Mae and Freddie Mac, and, in the long term, to an increase in housing supply.

Equity Residential’s stock price trades at a discount relative to the value of its property holdings, and this predicament — shared by other REITs — factored into the decision to sell, Neithercut said. Work on the deal began in spring, and after approaching a small number of private buyers who the REIT believed would be able to close quickly, it settled on Starwood.

The deal’s $5.3 billion price tag – very close to the price Blackstone and Ivanhoe Cabridge are paying for Stuyvesant Town – prompted one analyst to ask if it was originally designed to raise cash for a potential Stuy Town bid. But Nethercut insisted the REIT hadn’t looked at the Manhattan housing complex, “not this time, and not the last time.”