Camden has cashed its chips—all of them—in Las Vegas and, in the process, made Bascom the largest landlord in Sin City.
The Houston-based firm raked in $630 million in selling a 15-community portfolio of more than 4,900 units to a joint venture between Irvine, Calif.–based Bascom Group and private equity firm Oaktree Capital Management.
The mega-deal—which also included a retail center and more than 19.5 acres of undeveloped land—had a blended cap rate of between 5.6% and 5.7%, according to Camden.
The firm had long wrestled with the portfolio’s future—a legacy from its merger with Oasis Residential in 1998—but hadn’t put it up for sale, given its consistent cash flow. But the average property vintage was 23 years—twice that of the rest of its assets—and the communities were achieving monthly rents $500 less per unit per month than the rest of its portfolio.
“We’d been contemplating what to do—we felt we had gotten to a point where we couldn’t rebuild the Vegas portfolio to the standards we like to maintain; there’s not enough new construction to acquire there,” says Keith Oden, Camden's president and trust manager. “We received some unsolicited offers—in fact, there was a tremendous amount of interest—and we picked the group that had the least execution risk.”
Camden has been on a selling spree over the past few years, believing that valuations are peaking in this cycle—in fact, the REIT hasn’t bought anything in more than a year and a half, an unprecedented dry spell.
“I can’t think of another 18-month period where we didn’t buy anything,” says Oden. “We just think the cap rates this stuff is trading at … for us, it makes a lot more sense to be a net seller. But we’re growing because we have a sizable development pipeline, and that’s working out well for us.”
Still, Oden believes there’s some runway left for more cap-rate compression this year as capital seeks a safe haven in a yield-starved world.
“Just when you think it can’t get any lower, the buyers come,” he says. “As long as the amount of capital that wants multifamily is abundant, and interest rates continue to be where they are, it’s perilous to say we’ve hit a floor in cap rate. Every time I make that prediction, buyers have been willing to take on more risk.”
Viva Volatile Vegas?
While fundamentals in Las Vegas are steady, the market is still trying to dig itself out of the hole caused by the Great Recession. Of Camden’s 15 markets, Vegas is the only one that still hadn't reached its rent peaks of 2008, Oden says.
“Most of our other markets climbed 20% to 30% over that period, but Vegas is still 9% off from the last peak,” he adds. “But in the short run, Vegas rents will probably be up 6% this year and would’ve been one of our better markets.”
Market research firms agree with that near-term optimism—and believe Bascom may have done pretty well for itself in the long run.
“We actually think the outlook for Vegas is pretty good,” says Ryan Severino, senior economist at market research firm Reis. “Vacancy is set to rise over the next four to five years, but only marginally.”
The metro area, once considered a poster child for distress, is on the right trajectory, Severino says. The Class A vacancy rate currently sits at 5.1%, down from 5.4% in the fourth quarter of 2015—and well below the 11% seen in 2009. Class A rents grew 3.5% last year, up from 2.9% in 2014.
Class B/C properties are faring even better, with a current vacancy rate of just 3.4%, an 80 basis-point drop from the fourth quarter of 2015. And while rents grew a more modest 2.9% last year, that’s up from 2.5% the year before.
“The big difference between this cycle and last cycle is that there isn't much new development in the pipeline relative to what happened last decade,” Severino says. “On the fundamentals side, Bascom might do well on this deal, or at least better than some might expect.”
Reis expects demand to maintain its lead over new supply in 2016 as the vacancy rate slips to about 4.5% while rent growth stays strong.
For Camden, the disposition was a bittersweet proposition, but one it just couldn't pass up.
“The decision to exit Las Vegas was a balance between losing the market with above-average NOI growth in the near term versus the long-term challenges Las Vegas faces,” said Ric Campo, chairman and CEO, during a first-quarter conference call.
In explaining the deal, Campo cited a Whitman Associates study that ranks Vegas toward the bottom of its rent growth projections over the next five years.
“We believe that we were paid well and in advance for the loss of the near-term net operating income growth,” he said. The Vegas portfolio produced an annual unlevered return of 10.7% over an 18-year period, Campo said.
CBRE Capital Markets represented Camden in the deal, while it secured a $470.7 million acquisition loan for the Bascom/Oaktree joint venture.
Mark Jacobs, managing director at Oaktree*, says that the assets, most of which were built in the early 1990s, will undergo a value-add renovation program.
“We believe the Las Vegas market is still in the early stages of its recovery,” he says, adding that the area is “ … poised to benefit from meaningful rent gains with population and job growth outpacing the national averages.”
Bascom refused to comment on the deal.
* Editor's note: Oaktree Capital Management is an equity investor in Hanley Wood, parent company of Multifamily Executive.