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REIT to Scoop Up Apartment Complexes

Virginia-based United Dominion Realty agrees to buy about 6,000 units, mostly in the Southland, for $897 million.

September 08, 2004|Annette Haddad | Times Staff Writer

Even with sky-high housing prices, Southern Californians have to live somewhere. A Virginia-based real estate investment trust is betting that will be in apartments.

United Dominion Realty Trust Inc., the nation's fourth-largest REIT, said Tuesday it would spend $897 million to buy more than 6,100 units, mostly in the Southland. The acquisitions would shift the bulk of the company's portfolio to California, where it expects to generate 25% of net operating income by next year, mostly on the strength of the Southern California market.

United Dominion said it agreed to buy 22 apartment complexes in California, North Carolina, Oregon and Texas in four separate deals, some of which will close next year.

The largest transaction will involve the purchase of 16 "garden-style" communities from an affiliate of Palo Alto-based Essex Property Trust Inc. for $756 million, the REIT said. They include 13 properties with 100 units or more in Los Angeles, Orange and San Diego counties, where the occupancy rates are above 95% and the average rent is $1,295 a month, considered about the middle of the market.

Chief Executive Thomas Toomey said rents in Southern California had room to grow.

With demand for housing high, the supply of new multi-family units limited, vacancy levels low and the economy expected to keep adding jobs, "you've got to say there's a great prospect there for rent growth," Toomey told a conference call of analysts and investors.

If rents were raised by $25 a month, occupancy rates might tick down slightly, Toomey said. But with house and condo prices skyrocketing, many people have few alternatives to renting.

"If you look at some of the rent rolls, you can see a base of residents that have never moved," Toomey said. "They've been there five, seven, eight years and absorbing every rent increase along the way."

In the second quarter, apartment rents in Northern and Southern California ticked up slightly, 4.8%, according to RealFacts, a Novato, Calif.-based multifamily housing research firm.

"Housing prices have continued to climb and climb and rents have not," said William Ktsanes, RealFacts' director of research. He sees Southern California rents growing about 4% to 5% in the coming year.

With interest rates expected to rise in the next few months, many experts believe that the housing market will cool as the cost of financing a home becomes more expensive. That in turn will limit those who can transition from renter to homeowner and further deepen the pool of prospective renters.

United Dominion, which already owns about 5,000 units in California, appears to have acted in anticipation of such a shift, said Harvey Green, CEO of real estate brokerage Marcus & Millichap.

The company "has had a strategy of going in and upgrading properties to make them more desirable," Green said. "The money and time invested in that will pay off in the future."

In all, United Dominion said, it was buying 6,172 units -- more than 4,000 in California -- for an average price of $145,241 per apartment. That is 24% above the average per-unit sale price in California last year of $117,000, according to RealFacts.

That did not sit well with some investors and at least one analyst. United Dominion shares slipped 58 cents, or 2.7%, to $20.65 on the New York Stock Exchange.

David Rodgers, an analyst with KeyBanc Capital Markets in Cleveland, downgraded his rating on the company to a "hold" from a "buy," in part because of "concerns about the pricing of the acquisition," but also because of its size. The purchases would expand United's property holdings by 20%.

The company said it still expected 2004 funds from operations -- a key measure of REIT performance -- to be $1.52 to $1.56 a share, in line with analysts' expectations, according to Thomson First Call.

A REIT is similar to a mutual fund for owning real estate; investors get the benefit of a diversified portfolio with professional management. A REIT generally is not required to pay corporate income tax provided it distributes at least 90% of its annual taxable income to shareholders as dividends.

As part of its portfolio restructuring, United Dominion said it also sold about 3,500 units for $174 million in five markets, including Phoenix and Detroit, where rents are not rising as rapidly. The average price for the properties it sold was about $50,000 per apartment

The sales resulted in a gain of $17 million, or 13 cents a share. It was not immediately clear when the gain would be booked.

Richmond, Va.-based United Dominion owns about 80,000 apartments in more than 40 U.S. markets.

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