Dive Brief:

• One of the largest actively managed shareholders of Independence Realty Trust has come out in opposition to its proposed acquisition of Centerspace, according to a Sept. 29 press release. The REIT didn’t respond to Multifamily Dive’s request for comment.
• Irenic Capital Management, which has approximately 2% ownership of the REIT, sent a Sept. 29 letter to IRT’s board of directors outlining why it believes a sale of IRT represents greater value for shareholders, and it urged the board to engage with any serious buyer that demonstrates interest in acquiring the Philadelphia-based apartment owner.
• IRT’s proposed acquisition of Centerspace, announced on Sept. 9, will create a middle-market apartment REIT with 44,354 units across 17 states and an enterprise value of approximately $8.1 billion. Its portfolio will have 58% of pro forma net operating income derived from Sun Belt markets, 27% from Midwest markets and 15% from Mountain West markets.

Dive Insight:

Irenic took aim squarely at IRT’s intention to create a more diversified portfolio in lower-growth markets. Right now, IRT is nearly 80% exposed to the Sun Belt, according to Irenic. 

“Over the long term, these markets have favorable demographic and macroeconomic tailwinds,” it said in the letter. “In the near term, the recent wave of new supply is beginning to ebb, and rents should start to increase. Trading this well-positioned portfolio for inferior markets in the Midwest and Mountain West makes little sense.”

In addition, Irenic said IRT was paying a premium to acquire Centerspace, which made “even less sense,” as its Sun Belt exposure fell to less than 60%.

“The acquisition lacks industrial logic, runs counter to the Company’s long-stated strategy of maintaining its predominantly Sunbelt exposure, and, most importantly, is a far inferior alternative to a better course for IRT shareholders: selling IRT itself,” Irenic said in the letter.

On a Sept. 9 call with analysts, IRT CEO Scott Schaeffer said adding properties in the Midwest would give his firm geographic diversity.

“The Midwest is much more stable and [has] less volatility, while the Sun Belt seems to be higher growth, but also a little more volatile,” Schaeffer said. “So that’s why they’re complementary.”

Minneapolis and Denver play a major role in Centerspace’s portfolio, which IRT execs found attractive. “Those markets, especially Minneapolis, have been very stable and [have experienced] low volatility in rent growth,” Schaeffer said. “And if you look at the data sources, there’s actually a fairly robust rent growth trajectory over the next few years, all at lower volatility.”

In the letter, Irenic suggests IRT should conduct a full strategic review, as Centerspace did this year. If that happens, Irenic believes the Philadelphia-based firm would find buyers to purchase it “at a meaningful premium ($18 to $20 per share) to the current share price,” it said in the letter.

Irenic claimed shareholders would prefer selling IRT rather than “undertaking a risky and unwise acquisition of Centerspace,” in the letter. Furthermore, it claimed a price of $18 or more per share would command substantial shareholder support. 

Looking at other multifamily transactions, Irenic says the cap rates for IRT’s properties range from 5.4% to 5.8%. 

“We believe a sale price of $18 to $20 per share is achievable – a premium of approximately 22% to 36% to IRT’s current share price – and a compelling outcome even after the $60 million Centerspace deal termination fee, equivalent to roughly $0.25 per IRT share,” Irenic said.

After the sale announcement, Irenic said IRT’s stock has fallen by nearly 8%.

“Like many IRT shareholders, Irenic made its investment in the Company believing in both the near-term and long-term opportunity in its predominantly Sunbelt portfolio,” Irenic said in the letter. “The proposed Centerspace transaction imposes a fundamentally different proposition: own a less coherent portfolio of assets, in worse markets, with added execution risk.”

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