AvalonBay has announced the acquisition of three apartment communities by its AvalonBay Value Added Fund II, a private investment fund in which the Alexandria, Va.-based REIT holds a 31 percent equity interest. Bought between November 2010 and January 2011, the communities add 1,366 units to the fund. The goal? To make value-added improvements through redevelopment, enhanced operations, or by realizing improved market fundamentals. However, that value-add activity won't be starting any time soon.
According to AvalonBay executive vice president of investments and asset management Sean Breslin, value-add activity on the fund’s recent acquisitions is not likely to commence in the immediate future.
As a whole, the fund has dropped $569 million since its deployment to acquire a total of 3,936 apartment homes across nine communities in AvalonBay’s traditional high-barrier-to-entry markets. Of the three recent acquisitions, the 140-unit Canyonwoods in Lake Forest, Calif. (acquired November 2010 for $24.7 million) and the 776-unit Fox Run community in Plainsboro, N.J. (acquired December 2010 for $86.5 million) are both '70s-era developments. Acquired in early January 2011 for $78.1 million, the 450-unit Waterstone Carlsbad in Carlsbad, Calif., was built in 1986.
In a press release, AvalonBay said it plans to complete interior renovations at Fox Run, which were begun in 2003. A renovation at the Waterstone property has likewise been underway since 2006, and there is an indeterminate timeline for turning those units that have yet to be renovated. “Each of the properties that we acquired and the Fox Run and the Waterstone deals in particular have had varying degrees of renovations in the past 10 years,” Breslin says. “Our plan is not to go in and immediately renovate the assets. Our expectation is to operate them as-is in the near term but we expect over the next three to five years that there will certainly be some type of value-added play.”
According to Florham Park, N.J.-based commercial real estate financial intermediary and Holliday Fenoglio Fowler, AvalonBay assumed the existing Fannie Mae financing on the Fox Run Community. Holliday Fenoglio Fowler also assisted AvalonBay in obtaining an additional $10 million fixed-rate, securitized acquisition loan for the REIT through PNC Real Estate. “The $10 million is a supplemental to an existing Fannie Mae execution that was already on the asset,” Breslin says. “In terms of the PNC supplemental, it was a resizing, it was not a CMBS issuance.”
The AvalonBay Value Added Fund II has equity commitments of $400 million with leverage levels of 65% that can push its investment capacity to approximately $1.1 billion. AvalonBay provides property management services to assets owned by the fund, and although the REIT holds an equity stake in the investments, the acquisitions are considered off-balance-sheet transactions. “We have the REIT platform and we have an investment management business that has two funds,” Breslin says. “These acquisitions are attributable to the investment management platform as opposed to the REIT balance sheet."