Lone Star to buy US REIT for $7.6bn

As predicted by experts, more private equity firms are examining US REITs as potential takeover targets against a backdrop of less distress opportunities in the market

Lone Star Funds has agreed to take over US REIT, Home Properties, for $7.6 billion including debt in a huge multifamily property transaction.

Dallas-based Lone Star has entered into a definitive agreement with the Dallas and Denver REIT as the parties announced the private equity firm would acquire all outstanding shares in Home Properties for $75.23 each in an all-cash transaction.

The price represents a premium of around 11 percent above the share price for 60 days since April 24. 

Though the board has approved the transaction, the agreement contains a “go shop” provision allowing Home Properties to solicit alternative bids in the next 30 days, opening the way to a potential bidding war. 

Nevertheless, Hugh Ward, co-head of real estate investments at Lone Star Funds, said in a statement he was pleased to be entering into an agreement with Home Properties. He added this was Lone Star’s second large acquisition in the sector after buying 64 properties comprising 20,439 apartments in 2014 from DRA Advisors and Bell Partners. The multifamily sector has been popular with investors across the US as the sector recovers. A note on April 27 from Green Street Advisors said Home Properties' portfolio was similar to that of the portfolio Lone Star acquired in 2014, except that there was little geographic overlap. It wrote: “A purchase of Home would provide Lone Star with an operating platform, which provides more operational control and enhances fee-generation capabilities.”  

Meanwhile, Edward Pettinella, president and chief executive officer at Home Properties said of the agreement: “The Home Properties team has built a great company, as reflected by our strong platform, unique assets, and differentiated business strategy. We believe this transaction with Lone Star Funds provides our stockholders with compelling value for their investment, consistent with our long-term strategy. 

Home Properties owns, operates, acquires and repositions apartment communities in suburbs of major US metropolitan areas, primarily along the east coast. It has 121 communities containing 41,917 apartments.   

Concurrently with the Lone Star deal, Home Properties has agreed a side deal to sell a portfolio of six properties to a fellow US REIT, UDR, in exchange for cash and units. Welcoming the chance to buy the assets, Tom Toomey, president and chief executive officer of UDR, said: “We appreciate Home Properties and Lone Star Funds reaching out to create an opportunity for UDR to offer the Home Properties OP Unitholders an alternative that will allow them to continue to participate in the strong multifamily space and continued growth in UDR.”

In an announcement, it was also revealed that Goldman Sachs has committed $6.1 billion of finance for the acquisition, which implies $1.5 billion of equity in the transaction and an 80 percent loan-to-value though it is unknown if Lone Star has arranged further loans.

A bevy of advisors are involved in the transaction. Law firm Gibson Dunn is advising Lone Star as corporate legal adviser while Hunton & Williams is real estate legal advisor, and Skadden, Arps, Slate, Meagher & Flom are tax advisers. BofA Merrill Lynch is financial advisor to Home Properties. Goldman Sachs is also acting as exclusive financial advisor to Lone Star. 

The take-private comes at a time when many experts are predicting how REITs will increasingly become targets of private equity firms. As PERE reported in an opinion piece earlier this month, some suggest a fizzy point in the cycle has been reached similar to 2005 -2007 during which around 30 privatizations materialized. Fitch Ratings for example said in an interview with REIT.com recently that this time around the number could even reach 40.  

Factors suggesting conditions are ripe for a repeat of take-outs include the high level of private capital looking for real estate. In addition, the CMBS finance market is strong. And, most importantly, general real estate pricing is high and comparable to pre-GFC levels. There is also a perceived lack of distressed situations in US real estate.

Those factors are converging at a time when many shares of US REITs trade at a discount to their net asset values. Some of them are trading at double digit discounts encouraging shareholder activism. There is also a popular theory that REITs perform badly when interest rates rise, as they are tipped to do so this year. That is because REITs’ borrowing costs rise, thus pressuring the share price and creating an entry point for acquirers.