Archstone Expands
Its Rental Portfolio
by Ray A. Smith
From The Wall Street Journal Online
March 04, 2005
In a deal that would expand its presence in the strongest rental-apartment markets in the U.S., Archstone-Smith, a big real-estate investment trust that specializes in apartment buildings, agreed to acquire 30 apartment communities, totaling more than 10,000 units, for about $1.4 billion from Oakwood Worldwide.
Archstone-Smith, based in Denver and the nation's seventh-largest owner of apartments, said 78% of the units it is acquiring are in its core markets, including Southern California and Washington, D.C.
"We're excited about this deal because of the locations and the quality of the assets," said Charles E. Mueller Jr., the company's chief financial officer. "These are locations that have very limited land on which to build new housing, very expensive single-family homes and strong diversified economies. Our objective is to increase our investments in those kinds of areas, and that's where this portfolio is concentrated."
The rental-apartment industry has struggled in recent years due to weak growth, overbuilding, and low mortgage rates, which have lured would-be renters into buying homes and condos.
Vacancy rates in many markets have crept up. The national apartment vacancy rate rose to as high as 6.7% at the end of 2004 from as low as 3.1% in 2000, according to real-estate research firm Reis Inc. in New York.
Archstone-Smith was one of a few apartment REITs able to fare better because its core markets of Southern California and Washington D.C., didn't suffer much through the economic slowdown. Last year, the average vacancy rate in those markets was lower than the national average, just 3.5% in the Southern California area and 5.2% in the Washington area, according to Reis.
Archstone-Smith said this deal will increase its presence in Southern California to about 22% of its total portfolio from about 19%. Under the agreement, Archstone-Smith would manage 15 of the communities. The units in these are primarily conventional apartments. Oakwood would lease back and manage the 15 other communities, which consist mostly of corporate apartments, for seven years under a master lease structure.
Oakwood, a closely held Los Angeles firm, owns and manages apartments that are rented to corporations, which use them as temporary housing for executives. Oakwood would pay Archstone-Smith a contractual rent that would be adjusted annually in line with the percentage change in net operating-income growth for Archstone-Smith properties in those markets.
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