NEW YORK ( TheDeal) -- Following months of speculation of merger talks, residential focused REIT Home Properties (HME on Monday agreed to be acquired by Lone Star Funds in an all-cash, take-private transaction valued at $7.6 billion.
Dallas-based private equity firm Lone Star will pay $75.23 a share for Home Properties common stock, representing a 9 percent premium on the target's closing price April 24, the day before merger rumors first emerged. The transaction value includes the target's debt--$2.5 billion, according to Bloomberg data.
Based in Rochester, N.Y., Home Properties is a multifamily real estate investment trust that owns, operates and acquires residential apartment communities in East Coast cities. The REIT currently owns and operates 121 communities with a total of 41,917 apartment units.
The quality of the properties Lone Star will procure through this acquisition average out to a grade B, according to RBC Capital Markets analyst Wes Golladay. He explained that industry followers typically grade the quality of properties, with the highest grade being A. The higher quality properties have higher rents and are located in the better part of the market, which is split into primary/secondary or A/B quality.
In a separate transaction, announced along with the sale to Lone Star, Home Properties also said it reached an agreement to sell a portfolio of six properties to UDR (UDR - Get Report) for an undisclosed amount in a part-stock, part-cash transaction. These properties consist of 3,246 apartments in the Washington D.C. metropolitan region. According to RBC's Golladay, these properties are a grade A portfolio.
Under terms of the agreement with Highlands Ranch, Colo.-based UDR, Home Properties unit holders will receive 2.15 units of a newly established subsidiary UDR DownREIT for each of their Home Properties units, plus $3.01 per unit in cash from Lone Star Funds.
Home Properties will have a 30-day "go-shop" period to solicit bids from other interested parties.
"A competing offer is an unlikely scenario," RBC analyst Golladay said in a phone interview Monday. "Rumors of the merger started in April, so people have been viewing the deal as already in motion since then, plus the part with UDR makes the transaction too complicated for someone else to step in."
Nevertheless, if a competing bid were to emerge within the next 30 days, Golladay said the other interested party will likely be a fund similar to Lone Star and not a strategic REIT.
The transaction, which is contingent on Home Properties shareholder approval, is expected to close in the fourth quarter. Lone Star said it received fully committed financing of $6.1 billion from Goldman Sachs (GS.
For Lone Star, the purchase fits into the Dallas-based firm's strategy to expand in the multifamily real estate space.
"This is Lone Star Funds' second large, recent apartment purchase following the 2014 acquisition of a 64-property, 20,439-unit portfolio, and is consistent with our strategy of buying primarily Class B apartments, including workforce housing, located in in-fill markets with strong underlying fundamentals," said Hugh Ward, co-head of Lone Star Real Estate Investment in a statement Monday.