Equity Residential and Toll Brothers, through its Toll Brothers Apartment Living division, have established a partnership to develop new rental apartment communities in key U.S. markets.
Through the partnership, the parties initially intend to focus on selectively acquiring and developing sites for apartment rental communities in six metro markets where both parties have a significant or growing presence: Atlanta; Austin; Boston; Denver; Orange County/San Diego; and Seattle, as well as in Dallas-Fort Worth, a market that Equity Residential has recently re-entered.
Over the next three years, Equity Residential will invest 75% of the equity for each selected project and Toll Brothers will invest 25%. It is expected that each project will also be financed with approximately 60% leverage. Equity Residential will have the option to acquire each property upon stabilization.
The parties have targeted an initial minimum co-investment of approximately $750 million in combined equity, or nearly $1.9 billion capacity, assuming 60% leverage. These targets, which are subject to identifying mutually acceptable properties, could increase if additional opportunities are identified. Three properties currently controlled by Toll Brothers, with a total anticipated project cost of approximately $242 million, are expected to jump-start the venture.
Toll Brothers will act as managing member of each project, overseeing approvals, design and construction for which it will receive development, construction management, and financing fees, as well as a promoted interest to be realized upon the sale of each property and has, with limited exceptions, agreed to develop apartment projects exclusively with Equity Residential in the designated metro markets. Equity Residential will receive fees for property management, leasing and marketing services, as well as construction oversight.
“We are delighted to be working again with Toll Brothers and their experienced apartment development team, with whom we’ve had a long and successful business relationship,” said Mark J. Parrell, President and CEO of Equity Residential.
“This venture will marry Equity Residential’s market knowledge and balance sheet strength with Toll Brothers’ existing deep development capability to produce high quality apartment properties in our expansion markets and predominantly suburban locations in our existing markets that appeal to our affluent renter demographic. We expect this venture to create significant value for our shareholders, to accelerate our diversification efforts and to allow us to efficiently scale up our development efforts,” he added.
“We are thrilled to join with Equity Residential in this exciting partnership which offers tremendous benefit to both of our organizations,” said Douglas C. Yearley, Jr., Chairman and CEO of Toll Brothers. “This venture will increase the capital efficiency of our Toll Brothers Apartment Living platform, allowing us to develop more apartments with less capital. Having Equity Residential co-investing with us at initial site acquisition and being the likely purchaser of developed properties at stabilization will enable our Apartment Living business to improve return on equity and to generate a higher and more predictable income stream through consistent and recurring fees and property sales.”