UDR’s LaSalle deal shows continued appetite from international investors, analysts say

Dive Brief:

Denver-based UDR, the No. 17 largest apartment owner in the country, announced in June that it closed a $510 million joint venture with Baltimore-based LaSalle Investment Management to acquire high-quality, well-located communities with operational upside.
UDR started the search for a joint venture partner in late 2022, according to a research note from investment bank and financial services company Piper Sandler & Co. “Management wouldn't comment on the entity's name, but noted LaSalle is acting as a manager for this foreign entity, who is under-allocated to real estate, especially multifamily,” wrote Alexander Goldfarb, managing director and senior research analyst of REITs, and Connor Mitchell, research analyst at Piper Sandler & Co. The analysts believe the fund is Asian.
UDR will initially contribute four properties, located in Orange County, California; Seattle; Boston and Washington, D.C., totaling 1,328 units, at a 5% effective forward yield to seed the joint venture, according to a news release. The REIT will retain 51% ownership in the joint-venture communities and receive approximately $250 million in cash proceeds. The joint venture will initially have no debt.

Dive Insight:

This isn’t UDR’s first major joint venture. In 2010 and 2012, it formed two separate partnerships with insurance company MetLife. Eventually, in 2019, it closed a $1.76 billion transaction with MetLife that has reduced the size of the partnership.

However, it was seeking new partners by 2022. On the REIT’s Q4 2022 earnings call, Joe Fisher, UDR’s president and CFO, remarked that the company would like to find a future partner similar to MetLife.

“It’s a way for us to continue to expand the enterprise, utilize our operational and transaction skill sets to grow accretively and continue to gain scale overall,” Fisher said.

Goldfarb and Mitchell wrote that UDR received interest from U.S., Canadian, European, Asian and Middle Eastern funds that were targeting 7.5% or more in unlevered returns.

“Because UDR wanted an open-ended vehicle, many U.S. funds were eliminated as they were looking for a recap,” according to the analysts.

UDR will serve as the manager of the LaSalle joint venture and will earn asset management, property management, financing and construction management fees. It will also earn acquisition fees for new purchases and it will have the potential to earn a promoted return should certain return hurdles be achieved.

Tom Toomey, UDR’s chairman and CEO, said the new venture with LaSalle validates his company’s operating platform, innovation and value-creation mechanisms.

“Additionally, the venture expands UDR’s strategy of diversifying among capital sources that provide the company the ability to execute accretive investment opportunities across economic and market cycles,” Toomey said in the press release.

Mitchell and Goldfarb wrote that the deal shows that “equity-rich capital is on the hunt” and that groups from other countries may have different investment criteria than American entities in these volatile times.

“We note many overseas funds tend to be lower-levered investors who can make the math work for deals that may otherwise appear to be negative leverage,” the analysts wrote.

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