A month after Denver-based REIT Aimco announced it was exploring a potential sale, Bethesda, Maryland-based REIT Elme Communities has “initiated a formal evaluation of strategic alternatives to maximize shareholder value,” according to its fourth-quarter earning release earlier this month.
Elme’s board of trustees is working with independent financial and legal advisors to assess all options. However, there is no assurance that the process will result in the REIT pursuing a transaction or any other strategic outcome.
Over the past several years, Elme, which was known as WashREIT until 2022, has expanded its presence outside the Washington, D.C., metro area by adding Atlanta properties.
“We remain very confident about the long-term prospects of our portfolio and the continued success of our value add, renovation, pipeline and platform initiatives,” Elme President and CEO Paul T. McDermott said during the REIT’s Q4 earnings call earlier this month.
Despite Elme’s moves to improve its portfolio, its stock continues to trade at a discount to values in the private market, which is forcing the REIT to look at alternatives, according to McDermott.
Analyst reaction
In January, Michael Lewis, an analyst for Truist, identified Elme as one of the most likely merger-and-acquisition candidates in the apartment industry. “We agree with management’s statement that it has transformed the company over the past several years and yet the stock continues to trade at a material discount to private market values,” he wrote.
Lewis estimated that Eme’s 7.2% implied cap rate is well below private market values, where cap rates would be below 6%. Others agree.
“We have for some time highlighted the idea that Elme’s stock trades at a meaningful discount to underlying asset value, especially for a small cap name in a segment of CRE that has significant private market liquidity,” wrote Anthony Paolone, executive director at JPMorgan, in a research note shared with Multifamily Dive.
With a simple debt stack, Elme should be relatively easy to recast as a private company, giving it a high sale event probability, according to Paolone. However, there is one hurdle.
“What has given us some pause of late is the Trump administration and its efforts to reform the government/DOGE,” Paolone wrote. “This could create some uncertainty around demand and pricing power, resulting in some natural buyers pausing.”
A second REIT evaluating options
Elme’s statement is similar to one issued by Aimco in January, signifying that public investors aren’t valuing apartments at the same level as their private counterparts.
Since spinning off Denver-based Apartment Income REIT Corp. in December 2020, Aimco has generated a net operating income of more than 7.6%, completed more than $1.3 billion of development projects and closed more than $1.7 billion of asset sales, among other accomplishments.
“However, our shares continue to trade at a meaningful discount to our estimate of the private market value of our assets and investment platform, which we believe has limited our ability to fund new investment opportunities and accelerate growth, ” Aimco said in the press release.
Elme has retained Goldman Sachs & Co. and Jones Lang LaSalle Securities as financial advisors and Hogan Lovells US is serving as legal counsel. The REIT said there is no assurance of it “pursuing a transaction or any other strategic outcome.”
“As is always the case with this type of process, there is no guarantee the review will result in any transaction, or specific outcome, and we don't intend to disclose developments unless and until the company determines that disclosure is appropriate or required,” McDermott said on the call.
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