By Carol Ryan
After a hiatus, Blackstone is shoving its chips into U.S. apartments again. But this time, the private-equity giant is betting on a particularly safe group of tenantsthose with six-figure household incomes and perfect credit scores who like to live in plush homes without the hassle of owning them.
On Monday, Blackstone said it had agreed to buy American Income REIT at a 25% premium to the property companys most recent closing price. The offer values AIR Communities at around $10 billion including debt and is expected to close in the third quarter.
News of the deal caused a rally in U.S. residential REITs. Apartment stocks including Camden Property Trust, Equity Residential and Mid-America Apartment Communities ended the days up 3% to 6%.
Apartment landlords have been under pressure since interest rates started rising two years ago. Record rent growth during the pandemic caused a valuation bubble that has since popped spectacularly. Apartment values are down 28% from their early 2022 peak, according to Green Streets Commercial Property Price Index. Only office values have been hit harder, dropping 37%.
Some markets now have too many apartments after a building boomespecially Sunbelt cities. Nearly 1 million new apartments were under construction at the start of this year, which is close to a record high, according to John Burns Research & Consulting.
Landlords have to offer more perks to fill their properties. Today, 12% of units offer concessions such as rent-free periods to prospective tenants, compared with 5% back in July 2022.
AIR Communities is a bit more insulated from these trends, though. It specializes in apartments for wealthy tenants and charges an average of $2,900 a month in rent, nearly double the national norm. Its tenants have a household income of almost $240,000 on average, so are less likely to balk at further hikes. And most of the companys properties are in coastal areas such as Miami and Boston, where the oversupply issue isnt as intense.
It looks like Blackstone paid a good price. AIRs shares were trading at a 15.5% discount to the value of its underlying property portfolio before the deal was announced, according to Green Street data. That compares with a 10% discount on average for peers. Beefy rents and higher-than-normal tenant retention rates mean AIR is more profitable than its rivals.
Blackstones latest purchase isnt necessarily a sign that all is well again in the apartment rental business. Rent growth nationally is expected to be weak for a few years until new supply is absorbed. And Blackstones non-traded real-estate investment trust, BREIT, is very exposed to Sunbelt apartments, where tenants now have the upper hand.
Although the AIR Communities deal is being financed using a different fund, diversifying into more luxurious apartments could help to offset some of the drag to Blackstones earnings overall.
The era of record residential rent hikes is over, but private equitys latest $10 billion splurge suggests the worst is over for plunging property values.
This item is part of a Wall Street Journal live coverage event. The full stream can be found by searching P/WSJL (WSJ Live Coverage).
(END) Dow Jones Newswires
April 09, 2024 06:55 ET (10:55 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments