For such diverse companies as Home Properties, Equity Residential, and Merrill Gardens, it's all about selling off multifamily portfolios in particular geographic areas and using the proceeds to move in to more lucrative markets, or funding new opportunities for growth.
Chicago-based Equity Residential has sold more than 100,000 units since 2003 -- mostly in the center of the country -- at a price topping $7 billion; the firm cleared out more than 30,000 units last year alone.
Their ultimate goal? To unload properties in slower growth markets, and move into high barrier-to-entry coastal markets that will provide the best long-range financial returns, says Marty McKenna, assistant vice president of investor and public relations. "When we look at the markets, we look at where we believe will deliver long-term growth. That hasn't been markets in the Midwest."
Home Properties, a REIT based in Rochester, N.Y., exited the Detroit and upstate New York areas. Now, nearly its entire 38,000-unit portfolio is in high barrier-to-entry markets. That compares to about half of its properties just eight years ago. "We've realigned our geographic footprint ... to enhance our financial future," says Charis Warshof, Home Properties' vice president for investor relations. The company's strategy is to purchase Class B and C properties, upgrade and reposition them, and boost rents, Warshof says.
Meanwhile Merrill Gardens, a Seattle-based owner and operator of senior multifamily housing communities, sold 23 properties, primarily in the South, to fund projects in the West -- an area where they saw great growth opportunities, says company president Bill Pettit.
Of course, there can be other reasons for clearing out a portfolio in a certain market, or in its entirety. It could be a desire to diversify holdings, re-focus on core assets, or simply to subscribe to the traditional value-add business model of buying and upgrading multifamily properties, then selling them off.
And even if the current real estate market might be looking a bit shaky, there's always a desire to buy and sell, McKenna believes. Putting quality properties on the block brings out interested parties, whether they are institutional investors or local operators looking to expand. Even if dozens of offers don't roll in, "you only need one," to make a sale, he says.
Last year saw some notable deals. In September 2007, Kushner Cos. of Florham Park, N.J., sold 86 multifamily communities -- primarily in New Jersey and the Philadelphia area -- to Morgan Properties of King of Prussia, Pa., and AIG Global Real Estate Investment Corp. for nearly $2 billion. Though Kushner Cos. declined to comment for this story, reports suggest they were seeking to shift the company's focus from multifamily properties to office and commercial assets.
Meanwhile, Phoenix was home to Arizona's largest multifamily deal ever when Bascom Arizona Ventures, a unit of Bascom Holdings in Irvine, Calif., sold 12 properties with nearly 5,200 units to the Bethany Group of Irvine, Calif., for $428 million. Bascom began purchasing the properties in late 2002 under the company's strategy of buying "fixer-uppers," upgrading them, and selling them off, says Jerry Finney, manager of Bascom Arizona Ventures, which owned the buildings in separate partnerships with KeyBank Real Estate Capital and Rockwood Capital.
Bascom was open to the possibility of selling each property to individual buyers, or selling part of the group to one buyer. While the company might have gotten a higher price selling the pieces individually, it ultimately settled on the Bethany Group because "it had such a good track record of closing," Finney says. "We decided to roll with a sure thing rather than a bunch of individuals."
Being left with only pieces of the portfolio is always an issue in situations such as this when a company wants to exit a particular geographic region, Warshof says. If a company marketed 4,000 units, then managed to sell only 3,500 "you shoot yourself in the foot," while operating efficiencies decline.
That's why Home Properties sold 18 properties with more than 4,500 units in upstate New York to a joint venture among Dawn Homes Management and Tri-City Rentals of Albany, N.Y., and Morgan Management of Rochester, N.Y. The deal closed in December 2006 and raked in $171 million. In June 2006, the company sold 19 properties with more than 5,000 units in the Detroit area to Lightstone Group of Lakewood, N.J.
Selling everything to one player is a tack Merrill Gardens also took when it sold its 23 properties to Chartwell Seniors Housing REIT of Mississauga, Ontario, Canada, for $346 million. While Merrill Gardens wanted to retrench and focus its efforts on the West Coast, and use the proceeds from the sale to fund expansion in Washington, California, and Nevada, Chartwell was looking for properties in one geographic region. "We're always very concerned about spreading ourselves too thin," says Tony McLean, Chartwell's senior vice president for research and development.
Despite some slowdown in commercial real estate sales in the current market, Chartwell continues to look for opportunities to expand. They are targeting the United States because, in Canada, they can't own more than 35 percent of the senior housing in any market, so the company is running out of room to expand.
While Chartwell hasn't been active in the past six months, McLean still sees lots of possibilities. "The costs of [loan] funds have gone up a bit, but they are still at historic lows."
Others aren't quite as optimistic. More than anything, would-be buyers are waiting on the sidelines. "Everything is just stuck," Finney says.
Bascom plans to begin marketing about a dozen multifamily properties in the Tucson, Ariz., area during the first half of this year. Just two years out from its Phoenix deal, this portfolio will require buying and renovating the units. The firm's Tucson partner "wants in and out quickly," Finney says. But the debt markets are "very, very different" than they were just a few months ago, he adds.
The loan amounts that were available a few months ago aren't to be found today. Before, buyers could get loans for 80 percent or more of the property's value, but at a recent meeting with Deutsche Bank, which works with Fannie Mae, Finney says they were told loans of about 70 percent to 75 percent of the value are available. "People are just going to have to put in more dough now."
One of those waiting to see how the market shakes out is Robert Sheridan, founder of Robert Sheridan & Partners in Chicago, whose specialty is taking over and turning around distressed condominium conversions. "People want to sell now; I'm not sure I want to buy yet," he says, citing the possibility that prices may fall further.
These sellers often are unrealistic about price. "There's a huge difference between bid and ask," Sheridan says. But he thinks prices will begin to reach equilibrium in late 2008.
Others are already jumping back into the market. Laramar Group of Chicago sold off its Florida portfolio between 2003 and 2006, disposing of 11 properties comprised of 4,000 units. The company was drawn by exceedingly low cap rates and generous offers from condominium converters. "We caught the wave and we sold into that," says Laramar president Jeff Elowe.
But like a siren's song, Laramar was pulled back into the now-overbuilt Florida market, where the company is buying up troubled properties such as Bay Park in Clearwater, which was weeks from foreclosure. The firm is particularly targeting condo converters who are overleveraged, so their properties are available at 40 cents to 70 cents on the dollar, says Elowe, who is attracted to Florida because it continues to draw new residents, while the international influence -- particularly in areas such as South Florida -- adds liquidity.
"We look for special situations that are distressed, like unique locations on the water or infill," Elowe says. Typically, Laramar buys assets and holds them for four to seven years, waiting for a better time to sell.
This deal is no different. "It's always good to stick to what you know, especially when things are changing," Elowe adds.
Strategies for Sales Success
The following tips from portfolio selling experts Bill Pettit, president of Merrill Gardens, and John Smith, senior vice president and chief investment officer of Home Properties, should help you prepare for your next big sell-off.
1. Be objective. Have a solid understanding of your products, how it fits the market's current buying trends, and what a reasonable value range might be for the assets. "We spent six [months] to nine months carefully tracking the sales within our sector," Pettit says. "We looked at each one, compared them to our own assets, and confirmed how the seller's advisers positioned the assets."
2. Know your limits. "We entered into conversations with the final selection of potential buyers with a very clear picture of where the lines were drawn between a sale that had strategic value to us and valuations that we would pass on in favor of holding the assets," Pettit explains.
3. Go with safe sources. Use a nationally recognized brokerage firm, recommends Smith. Doing so will allow the broker to market to a broader network.
4. Prepare ahead. Smith suggests having due diligence material prepared in advance to help ease the dealmaking process. At Merrill Gardens, preparation and a clear focus on confidentiality helped the firm close deals or walk away with minimal fallout. "We don't participate in auctions, so we indicated a willingness to work with the most attractive offer to attempt to negotiate a transaction," Pettit says.
5. Communicate openly. Merrill Gardens closed its recent transaction within 120 days of the initial deal discussions. Pettit believes this was only possible because both parties trusted the process and communicated directly and openly throughout the process, rather than filtering information through advisers. Smith believes such open communication should extend internally to employees, as well. Encourage the buyer to keep existing employees on board, and offer incentives for them to stay with the property once it changes hands, Smith adds.