Since 2000, Equity purchased more than 67,000 units for a total of approximately $11.4 billion and sold more than 175,000 units for more than
$11.6 billion. “They were able to sell middle-of-the-country, low-growth, lower-quality assets at a time when the spread between As, Bs, and Cs had compressed so much that it made sense to sell the B-minus and C assets and reinvest in B-plus assets in high-barrier-to-entry, coastal markets,” says Haendel St. Juste, an analyst with Keefe, Bruyette & Woods (KBW), an investment banking and security brokerage firm in New York.
While the strategy makes sense long term, it wasn’t without some pain. When you’re selling deals at 7.5 percent cap rates and reinvesting the cash at 15 basis points, that’s a big spread. But Wall Street and the rating agencies approve of this company’s overall strategy. “It will cause a short-term dilution to a lot of their metrics, but over the long term, they’re moving into very strong markets,” says Steven Marks, managing director and head of New York-based Fitch Ratings U.S. REIT group.
Still Selling
Equity continues to unload units.
In 2000, Equity Residential undertook a plan to sell out of markets where it wasn’t seeing growth. In the 10 years since, it has sold more than 175,000 units for upwards of $11.6 billion—2,437 units (about $172 million) were sold in 2010 alone. And that was before its move at press time to sell 10 affordable housing properties (with 931 units) in the Boston area to Providence, R.I.-based Providence Realty Investments for $108 million. “We’re ahead of plan,” says Equity president and CEO David Neithercut. “But we still have a lot of work to do.”
Like most REITs, Neithercut says the company won’t ever not sell anything. But the company has successfully sold its way out of markets such as Texas, the Carolinas, and the Midwest. And it has publicly stated that it would like to get out of Tampa, Fla., and Portland, Ore.
Equity’s strategic view of selling showed up in a couple of ways over the past couple of years. In 2010, it expected a rebound in values and held off. “We back-loaded dispositions and front-loaded acquisitions, and I think we made a bunch of fabulous trades,” says Alan George, the REIT’s vice president of acquisitions and dispositions.
Neithercut says the company is also selling while the GSEs are still offering liquidity—right now, the GSEs provide financing for 80 percent of Equity’s buyers. George has also recently seen buyers bringing in life insurance debt. “There are also a significant amount of buyers who are all-cash players,” he adds.
Then came the heyday of housing, followed just as quickly by the credit freeze. With the subsequent collapse in values in late 2008, Equity hardened its balance sheet. “In 2008 and 2009, the company was very forward-looking and proactive in liquidity management,” Marks says. ”They were carrying a tremendous amount of cash on their books in anticipation of weaker credit markets and maybe some stress.”
In early 2009, everything came to a standstill, and the company had $1 billion in cash on its balance sheet and $1.5 billion on its line of credit. With the senior unsecured debt markets essentially shut down, Equity tapped into Fannie Mae and Freddie Mac for $2.2 million. It used those funds (along with some cash it had hoarded on its balance sheet) to pay off loans it had maturing in 2008, 2009, and 2010. “Our thinking was if these guys are lending today, let’s take it,” Neithercut says. “This is not a time to try and time the markets. If they’re lending, take the money.’”
Time to Strike
As 2009’s fourth quarter rolled around, most companies in the apartment sector either got their own houses in order or hunkered down to figure out exactly how much values had fallen and how to keep their residents in place. Equity, meanwhile, was starting to see recovery in a number of places. “As we got toward the end of 2009, we saw the credit markets improve, and we became more confident in the ability to fund ourselves. We could become more offensive and less defensive,” Neithercut says.
