Now we know: KKR acquired a $2B multifamily portfolio last month at a "low 4%" cap rate.
When deals like this are announced we attempt to triangulate the buyer's perspective. How did they underwrite income? Capital source? Targeted returns? We post our analysis to share our perspective on market pricing/yields.
These posts often spark great discussions between market participants, but they can be inherently frustrating because buyers rarely pull back the curtain on their assumptions.
...but KKR just did something that buyers rarely do. They publicly confirmed their underwriting assumptions on their big Quarterra acquisition.
---- Flashback ----
Here's what we said last month about KKR's acquisition of Quarterra:
"Yesterday, KKR announced it has agreed to buy $2 billion of apartments from Lennar. Two months ago, Blackstone agreed to pay $10 billion for AIRC. We think these trades suggest a new watermark for higher-quality apartments between 5% and 5.5%."
"Those who weren't loading up on class B and C apartments with excess floating rate debt are back in the game and aren't as distracted by interest near-term maturities, loan paydowns, and rate cap renewals."
"The fix-and-flip hangover is just beginning, as are the opportunities for well-capitalized buyers."
"...clarity and increased activity represent a meaningful step toward the industry's new normal."
---- KKR's commentary ----
KKR announced 2Q24 earnings yesterday.
Real estate, infrastructure, and a growing RIA network stole the show.
...and KKR specifically commented on the Lennar/Quarterra acquisition, which it purchased in an insurance subsidiary.
[Sidenote: Investment managers are increasingly leaning on insurance subsidiaries to bring in steady investible cash flow. More to come on this.]
Key takeaways from KKR:
-- Lack of core capital is creating strong acquisition opportunities.
-- The pricing equated to a low 4% cap rate and an 8% unlev IRR.
-- This was clearly a bet on growth.
---- Our perspective ----
The Blackstone/AIRC trade (April 2024) suggested that apartment cap rates are in the low/mid 5s. The KKR/Quarterra transaction suggests this range may be conservative. Here's why...
1. Falling supply pipelines = clear path to income growth
2. More constructive debt markets (more debt, falling spreads)
3. More constructive equity markets (REITs, ins co's, sovereigns)
4. Positive leverage can exist when interest rates > cap rates.
---- On the road to clarity ----
Kudos to JLL for making a market for this deal, despite the challenging environment. You can bet they (and their peer brokers) have been feeding multifamily owners with the "its-not-that-bad" perspective.
Given the line of jaded borrowers looking to close out their Covid purchases, we wouldn't be surprised to see a meaningful pick up in deals coming to market.
...which means we'll likely have much more clarity (for better or worse) in the second half of 2024.
Read the full report on KKR here.
COMMENTS