Independence Realty Trust (IRT +3.1%) shareholders approve the issuance of shares toward the company's acquisition of Trade Street Residential (TSRE +1.5%), and in a separate vote, TSRE owners approve the company's sale.
The deal is expected to close on Thursday, and TSRE shareholders will receive $3.80 in cash and 0.4108 shares of IRT for each share of TSRE they own.
TSRE will be delisted after the close on Thursday.
According to Zillow, renters spent 30.2% of income on rent in Q2, the highest percentage since as far back as the data go (1979). In comparison, the average between 1995 and 2000 was just over 24%.
Los Angeles is tops for unaffordability at 49%, with San Francisco not far behind at 47%. In NYC, renters historically have paid about 25% of income for rent, but that has gone up to 41%. Known for being more affordable than other major cities, the luxury condo market has transformed Miami, and renters there now pay 44.5%.
The solution, naturally says Zillow, is to buy. In most cities, buyers can expect to pay less than 30% of income towards mortgage payments. "Rents are crazy right now," says Zillow Chief Economist Dr. Svenja Gudell.
For apartment REITs, one is left to wonder how much more room there is to boost rents. Names of interest: Equity Residential (NYSE:EQR), AvalonBay (NYSE:AVB), and Essex Property (NYSE:ESS) - a big player on the West Coast - are the most sizable companies. Also: UDR, Post Properties (NYSE:PPS), Aimco (NYSE:AIV), Camden Property (NYSE:CPT), Mid-America (NYSE:MAA), Trade Street Residential (NASDAQ:TSRE), Investors Real Estate (NYSE:IRET), Independence Realty (NYSEMKT:IRT), Bluerock Residential (NYSEMKT:BRG), NexPoint Residential (NYSE:NXRT).
Independence Realty Trust (NYSEMKT:IRT) speeds its scale-up with an agreement to purchase Trade Street Residential (NASDAQ:TSRE) for cash and stock. The deal will boost the number of properties owned by IRT to 50 from 31, with the number of units increasing 55% to 14,044.
IRT's average property age will dip to 20 years from 25, and average base rents, occupancy levels, and operating margins will all rise.
The deal is expected to be accretive to 2016 core FFO and AFFO per share.
The TSRE chairman and CEO will each join IRT's board, expanding the size to 7 from 5.
Consideration: $3.80 in cash and 0.4108 shares of IRT for each share of TSRE. At IRT's $8.57 close on Friday, it values TSRE at just $6.21 per share vs. its most recent close of $7.08. At IRT's "reference price" of $9.25 - a 1% premium to 45-day average - it values TSRE at $7.60 each. IRT has the option to increase the cash portion of the consideration to $4.56 per share, with a corresponding cut in the stock portion.
IRT's property manager is RAIT Financial (NYSE:RAS) - also an owner of 23% of IRT - and it supports the deal
REITs in general have cooled of late - off 1.7% in February, with apartments off 1.1% as some analysts ring the register.
Morgan Stanley's Haendel St. Juste says slowing growth combined with pricey stock prices isn't the best combination. He notes the names are trading at 10-15% premiums to NAV vs. 10-15% discounts one year ago.
Then there's oversupply, especially in company towns like D.C. and in the Texas oil belt. Over the past six months, builders have broken ground on multifamily apartments at an average pace of 357K units per year - 26% more than the 30-year average.
Expect plenty of foreign capital to continue flowing into the sector, says MLV analyst Ryan Meliker. This will contribute to cap rate compression, making it more difficult for REITs to make accretive purchases.
The West Coast should lead the country in job generation, and thus rent growth, making Essex Property Trust (ESS) - essentially a pure-play on major markets there - an interesting pick.
The Northeast is split - with Boston and NYC expected to outperform on rent growth, but Philadelphia, Baltimore, and D.C. predicted to lag.
Strength in the Southeast will be led by Atlanta, and Central and South Florida. Meliker's top pick, Preferred Apartments (APTS +0.6%) has a strong presence in Atlanta.
"Conference participants agreed that Houston was in for difficult times ahead – there was no sugar coating how oil prices might affect job growth and therefore demand for multifamily housing."
Others of interest: Aimco (AIV +0.6%), Associated Estates (AEC +3.1%), AvalonBay (AVB -0.2%), Post Properties (PPS +0.3%), UDR (UDR +0.3%), Camden Property (CPT -0.3%), Home Properties (HME +0.2%), Mid-America (MAA +0.1%), Trade Street Residential (TSRE -0.6%), Equity Residential (EQR +0.3%).