In 2006, Babcock & Brown Real Estate Investments, a unit of Babcock & Brown Ltd., Australia's second-largest investment bank, spent $316 million to take Charlotte-based BNP Residential Properties private. Babock added the BNP’s 8,180 units to its existing portfolio, giving it 28,000 units nationally. Then, in 2009, Babcock and Brown went bankrupt.
That put a great deal of pressure on former BNP chairman Philip Payne. “It’s tough when your parent is going through a bankruptcy filing,” Payne says. “It makes capital virtually impossible to attract. It’s hard to get people to work with you, whether it's lenders or equity partners or anyone else when they’re concerned about the viability of your parent.”
But Payne feels “free” after an August announcement that his group, the former management core of BNP, was splitting from Babcock & Brown and reorganizing as Gingko Residential. Under the agreement, Payne’s seasoned management team would own Gingko, which would manage Babcock’s 28,500 units. But Babcock, which is now a separate entity, will retain ownership of those units. Gingko does manage for a couple of other owners and will continue that program.
“We were part of Babcock,” Payne says. “We were their employees. Everything we did was for their growth and development. Now they’re our largest client.”
This shift in its operations opens up opportunities for the new company. “We’re free to go do whatever we want in terms of acquisition, rehab, finding new capital sources, and working with them,” Payne says. “We’re wide open now. We don’t have restrictions.”
Gingko’s focus will be much like BNP’s: Provide high-quality apartment homes to the middle market. The company is looking for acquisition and third-party management opportunities to grow its portfolio, as Payne predicts the company can buy the apartments and do the rehab substantially ahead of replacement costs.
It will also consider expanding to markets contiguous to its core in the Southeast. “For the 20 past years, we did middle-market housing,” Payne says. “We’re going to continue the same kinds of things we’ve done for 20 years—buying existing properties, doing some fix-ups, and trying to produce very high-quality, reasonably priced workforce housing.”
Gingko will focus on responsible property investing, which emphasizes improving the energy efficiency of middle-market rental housing in a way that improves operating returns and economic value. It’s targeting distressed properties in need of significant rehab, many of which could be found with banks or special servicers. In the past, the company focused on properties that required a few thousand to $15,000 per door in rehab costs. Now, it’s ratcheting that up to $20,000 or $30,000 per door in rehab costs.
“Part of that rehab will be an effort to materially reduce the energy and water consumption at the property,” Payne says. “It’s all driven by our desire to maximize the value of the profit and the returns.”
Of course, to buy those projects, Gingko needs capital. Right now, it has no need for a “billion-dollar capital source,” as Payne puts it, but he thinks his management team's 20 years of experience (and the 14.5 percent return it provided in that timeframe) should be a strong selling point. “Our primary goal is to raise money, buy properties, and get back to what we have always done,” Payne says.