While many apartment REITs have hunkered down waiting for the sales market to settle, Highlands Ranch, Colorado-based UDR remained active over the summer.
Most recently, it acquired six properties totaling 1,753 units in the Dallas and Austin, Texas, metros for $401.9 million in August. This acquisition came on the heels of the company’s $510 million joint venture with Baltimore-based LaSalle Investment Management announced in July.
After the Texas deal, UDR combined two properties that were across the street from each other into one, effectively adding five properties to its portfolio. They include:
- The Flats at Palisades in Richardson.
- Central Square at Frisco in Frisco.
- Estancia Villas in Austin.
- Villaggio in Mansfield.
- Palo Verde in Austin.
UDR funded the purchase with $172.5 million of its operating partnership units, which are equivalent to REIT shares, issued at $47.50 per unit; $20 million in cash; and the assumption of $209.4 million of below-market debt at an average coupon rate of 3.8% with an average of 6.3 years to maturity, according to the REIT’s second-quarter earnings release.
“When you look at that [interest rate] relative to the market today in the low 5’s, we've got six-plus years of 150-basis-point advantage on that debt, which if you think about a debt for market value it translates into about a 25 basis point benefit in terms of asset pricing,” CFO Joe Fisher said on UDR’s second-quarter earnings call.
Finding efficiencies
The operating margins across the properties were “approximately 800 basis points on average below UDR communities in the same markets, illustrating the potential to drive future upside” with the REIT’s platform, CEO Tom Toomey said in the earnings release.
Fisher said the 800-basis-point differential was the widest the REIT has seen of the $3.5 billion that it bought over the last four or five years. “I think this is going to be a very fun test for the operational team to take what has been under-managed assets and really lean into the operational upside there,” Fisher said.
UDR has been an industry leader in centralization and has a number of properties without staffers on site. It expects to find labor efficiencies with these new acquisitions.
“Four of these assets are basically in our backyard right next door to one of our wholly owned assets,” UDR Senior Vice President of Operations Mike Lacy said on the earnings call. “So we intend to get a lot of efficiencies just as it relates to just the personnel side of the business and we expect to capture that again in the next six to 12 months.”
UDR expects the transaction to be cash flow neutral in year one and accretive in year two as its initiatives are implemented. The REIT typically runs its properties around an 84% operating margin. Its new Texas acquisitions sit at around 75% or 76%, according to Lacy.
The REIT plans to add smart home technology and in-unit washers and dryers to some of the properties. It will also add package lockers, which Lacy calls “low-hanging fruit.” Over the next six months, it will look at adding Wi-Fi and will bring in its revenue management platform.
“[With] the fact that we can get in there and do more of our surgical pricing on in-units, we think there's a lot of upside,” Lacy said. “So I think it's safe to say that 700, 800 basis points will be captured in the next 12 to 18 months.”
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