Amid a flurry of M&A deals by publicly-traded REIT space, Philadelphia-based Independence Realty Trust (IRT) last month announced a proposed merger with non-traded Steadfast Apartment REIT, based in Irvine, Calif., that IRT hopes will add new fuel to its value-added redevelopment program.
Both companies own portfolios of older, largely-class-B and B+ apartment properties. For several years, IRT has focused on value-added redevelopments, according to CEO Scott Schaeffer, and if the proposed deal with Steadfast closes, IRT will boast a pipeline of approximately 20,000 units available for future redevelopment.
“Our value-added programs have generated an unlevered weighted average return on investment in excess of 17 percent since the program began,” Schaeffer says. “We believe we can continue to achieve these returns across the combined companies value-add pipeline.”
The merger is expected to close in the fourth quarter. After that the combined company will operate as IRT, with a combined portfolio of 131 apartment properties with more than 38,000 units with an enterprise value of about $7 billion, according to IRT. That works out to about $184,000 per unit. The combined company will operate under the Independence Realty Trust name and continue to trade on the New York Stock Exchange.
That’s a relative bargain, compared to the valuations of the two apartment companies that are “the two closest, though imperfect, geographic comps, according to analysis from the REIT-watchers at Green Street Advisors. Camden Property Trust (CPT), a REIT based in Houston, has a portfolio of 60,000 apartments and an enterprise value of $18.5 billion, or about $308,000 per unit. MAA, a REIT based in Germantown, Tenn., has 101,000 apartments and an enterprise value of $27.6 billion, or about $272,000 per unit.
To help fund the deal, IRT conducted a public offering of 16.1 million shares of common stock at a $17.75 per share, including 2,100,000 shares sold pursuant to the exercise in full of the underwriters’ option to purchase additional shares of common stock.
"IRT is a capable operator with a solid total return track record, and greater economies of scale for the pro-forma portfolio will likely engender an improved cost of capital for the company over time," according to Green Street.
In the all-stock deal, STAR shareholders will receive about 0.91 shares or OP units of IRT stock for each STAR share, pegging the estimated enterprise value of STAR at $4 billion. Steadfast was a new target for acquisition. The non-traded REITs had just completed mergers with two other, non-traded apartment REITs in late 2020.
The portfolio of apartments that Steadfast had assembled is likely to merge easily with IRT’s existing portfolio of class-B apartments, largely spread through the Southeast. “They are very similar, high-quality portfolios complimentary portfolios,” says Schaeffer.
The deal was announced just less than a year after Steadfast Companies—the firm that sponsored Steadfast Apartment REIT—restructured several of its non-traded REITs into a single entity. In August 2019, Steadfast Apartment REIT acquired Steadfast Income REIT and Steadfast Apartment REIT III to form a single REIT with about $3.3 billion in assets.
The new merger between IRT and Steadfast is projected to create further synergies that reach $28 million a year. Those kinds of synergy savings often prove to be achievable in mergers of apartment companies compared to mergers of other kinds of real estate companies. "Synergy math often pencils more easily," according to Green Street.
Apartments are a "scalable business," in which large portfolios absorb fixed costs with relative ease, such as centralized revenue management systems, executive salaries and back-office functions.
The merger math becomes easier for portfolios with considerable geographic overlap like IRT and STAR,” according to Green Street.
The merger will also expose Steadfast's properties to a greater range of potential investors. "The listed REIT market is usually a superior vehicle for investors to access real estate," says Green Street. In contrast, non-traded REIT structures "can bring heavy fees and conflicts of interest along with them."