This morning Long Bias name EQR announced a new JV with Toll Brothers (TOL) to acquire and develop apartment communities in six select U.S. markets, including Austin, Atlanta and the Dallas-Fort Worth market which was a recent re-entry by EQR. Some thoughts around the venture:
- EQR is using a JV structure to leverage returns to shareholders via a smaller equity check and fees on top of EQR's participation in levered cash flow
- Total investment capacity of $1.9 billion assuming 60% leverage; EQR will contribute ~75% of the equity, will earn construction, management and leasing fees, and has a ROFO on each asset upon stabilization
- Thinking through the math a bit, assuming deals stabilize at a ~5% unlevered yield, a 3-4% management fee % on revenues and a 3% average cost of debt financing, we estimate the periodic levered earnings yield to EQR could approach 8-9% prior to a sale/acquisition by EQR and any promoted interest granted to TOL
- This would translate to roughly $0.12-$0.13/share of Core FFO, or ~4.5% accretion prior to any equity/debt issuance by EQR to fund its portion of the equity
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
Twitter: @HedgeyeREITs
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