When news hit on Monday morning that a Blackstone entity was taking Apartment Income (AIM Communities) private, the market quickly tried to make sense of the $10 billion headline purchase price. The $39.12 per share price represents a 25% premium to where the stock had traded, but that is of little consequence to anyone not holding AIRC shares. What market participants really wanted to know was the implied cap rate the transaction represented.
A large transaction of geographically diverse, mostly Class A apartment buildings would be a bellwether in a commercial transaction market that has been tepid at best. Earliest reports suggested a cap rate in the high 5s (5.7-5.9) while others looked much lower and some exceptionally roughshod approaches put it well into 6s. Throughout the week I have received messages representing the entire range, confidently proclaiming what it “really was.”
My efforts here will be two-fold. First, I will as plainly as possible try to show how analysts arrived at these different outcomes for something that should be a relatively straightforward calculation of trailing Net Operating Income over Price. More importantly, I will hopefully demonstrate the shortcomings of cap rate as a stand-alone valuation metric. In the spirit of Box’s aphorism “All models are wrong but some are useful,” I will provide a framework for understanding implied cap rates concerning what Blackstone hopes/needs to happen to meet their hurdle rate on this deal.
A (Very) Brief AIMCO History
Apartment Investment and Management Company (Aimco) was founded in 1975 as a real estate investment trust (REIT) focused on the ownership, management, and redevelopment of apartment communities. In 2020, Aimco announced its plan to separate its business into two separate, publicly traded companies through a spin-off transaction creating Apartment Income (AIRC) and Aimco (AIV).
Apartment Income (AIRC) would focus on stabilized properties, mostly older vintage but higher-end in high-growth markets. Aimco (AIV) would retain the name and a smaller portfolio of more opportunistic property. AIV owns an enviable portfolio of Brickell development land for example. The idea was that as two separate companies, the value could be maximized as the market could better understand the strength and stability of the AIRC portfolio. In contrast, the AIV portfolio could potentially fetch a higher multiple for its growth prospects. The details of the spin, and specifically its rationale, will have salience later when we take a look at what Blackstone hopes to get out of this acquisition.
The Property Management Quirk – 5.7% (but not for you!)
AIRC, as a publicly traded company, discloses relatively granular financials. A quick search of the 10-K for the 4th Quarter supplemental will reveal a reported full-year net operating income of $567 million. Looking at this in light of the full capital stack, you can see that as of Q2 close AIRC was trading on the public markets with an implied cap rate of 4.87% using a market capitalization of $5.6 billion. In this light, Blackstone’s $10 billion offer, or $3.8 billion for the equity when accounting for debt assumption, looks like a rough 5.7% cap rate.
