What interests Steadfast apartment REIT are
multifamily properties. In 2015, Steadfast bought 75 percent of its current
portfolio at an average price per unit of $126,000. And now the non-publicly traded
REIT is raising capital by issuing ten million shares at a price of about $14.
The ask-price is attractive at first glance. Net
Operating Income per share was $1.74 and $1.67 in 2015 and 2014,
respectively. Because multifamily properties trade between seven to nine
percent capitalization rates, the offering capitalization rate is twice as
cheap. Also the ask-price represents a 20 percent discount to the value
of Steadfast’s almost fully occupied multifamily portfolio.
It is a good time to raise equity. Apartment REITs are trading at high multiples and except for Equity
Residential (NYSE:EQR), all apartment REITs found in iShares U.S. Real
Estate ETF have increased in value in the past twelve months. The rise in
market value is likely due to an increase in demand to rent homes alongside a decline in home ownership during the second quarter of
2016, noted Louis Rosenthal of Axiometrics, an analytics company.
“Today, thirty percent of Millennials are still living with their parents,” noted Rodney Emery, boss of Steadfast. “When they get a job, Millennials will rent moderate income apartments, creating a housing demand." Institutional investors are taking an interest. The single-family
market consisted of about 12 million homes in 2008 and has now increased to 15
million homes. Institutional investors own a mere fraction of that - less than two
Yet Steadfast variable rate debt is lurking around the
corner. Only two of Steadfast’s multifamily properties were financed with fixed
rate debt. The remaining 28 multifamily properties were financed with variable
interest rate debt. It was indexed based on a 1-month LIBOR plus 170 basis
points. While the 1-month LIBOR rate is now 51 basis, it was not too long ago
when it was tenfold higher.
Interest rate risk exposure is not the only
concern. Steadfast spent $30 million in the past two years on
acquisition-related fees and expenses. It resulted in a two-year loss in Funds
from operations. In 2015, the company lost 38 cents a share; in 2014, the
company lost $2.51 a share. And while acquisition fees are often classified as non-recurring expenses, they do affect a company’s ability to service debt and to distribute dividends.