Kushner Cos. has already bought more than 4,600 apartment units this year. And by the end of the year, thousands more units should be in its portfolio.
In 2007, Kushner Cos. cashed out its multifamily portfolio at the height of the market, selling nearly 17,000 units for $1.9 billion to a joint venture of New York–based AIG Global Real Estate Investment Corp. and King of Prussia, Pa.–based Morgan Properties.
Kushner made a big splash when it re-entered the multifamily space in June, buying 4,681 units from Newark, N.J.–based Prudential, which was foreclosing on the portfolio. Kushner’s joint venture, which includes New York–based private equity firm Square Mile Capital and Cleveland-based Apollo Property Management, paid just $72 million for the 12-property portfolio.
The properties are all located in secondary Midwest markets such as Pittsburgh, Cincinnati, and Toledo, Ohio. Kushner’s instantly large presence in these markets has paved the way for similar portfolio deals currently in the works, which are expected to close by the end of the year. After these pending portfolio deals close, the company estimates it will have about 6,300 units in and around those markets.
“Our goal is to keep buying and incrementally growing—they’re good markets where you can get yield,” says Jared Kushner, principal of New York–based Kushner Cos. “We’re seeing a lot of deal flow now, and we’ve got a lot of institutional partners that really want to be in the multifamily space but are having trouble finding opportunities.”
The Prudential Portfolio
When it comes to distress plays, discounts don’t get much bigger than the one Kushner realized earlier this year. The $72 million price tag on the Prudential portfolio was about half the face value of the mortgages.
The deal had a cap rate in the high–7 percent range, and many of the properties suffered from poor management—the average occupancy level was less than 75 percent. In fact, Kushner had to settle 209 liens in a week to get the deal closed. The company plans to pump about $10 million into upgrading the properties.
“All the properties were operating very poorly, based on the fact that they had been going through a foreclosure process for two years,” says Kushner. “But the properties were solid. The previous owners had spent a lot on cap-ex but ran out of money when they started turning units.”
Kushner estimates the all-in capitalization on the deal—which he calls one of the most difficult the company has ever done—will be close to $85 million to $90 million. But he also estimates that the NOI on the portfolio could reach $14 million next year.
The portfolio had been assembled in 2006 and 2007 by Cuyahoga Falls, Ohio–based investment group Karam Managed Properties and capitalized with about $172 million of debt and equity.
One of the assets, the 1,056-unit Leland Point Apartments in Pittsburgh, provides a glimpse into the portfolio’s level of distress. Toward the end, some residents were left without heat and power because Karam couldn’t pay the utility bills. The maintenance was so deferred that the district attorney filed criminal complaints in June, charging Karam with making a public nuisance out of Leland Point.
Prudential had provided $31 million in funding for the Leland Point acquisition in 2007—and Kushner paid about $10 million for the asset. Kushner then paid a $700,000 lien against the property and worked out a payment plan for delinquent sewage fees.
When Kushner took over, it reduced the occupancy from 65 percent to 50 percent, purging the rent roll of bad tenants. The company plans to upgrade about half of the asset’s units while building a new clubhouse and state-of-the-art fitness center. All told, it’s investing about $15,000 per unit on Leland Point.
“Leland is a monster—a very hard project to turn around, and I think very few people can do it,” says Kushner. “We’re essentially leasing units now as quickly as we can give them.”
But the Prudential deal, while large, may be just the tip of the iceberg. The company continues to grow bullish on multifamily and sees more opportunities in distress plays coming over the next year or two as “extend and pretend” starts coming to an end.
“It’s proven over the last few years to be the most-resilient asset class, and at the end of the day, it’s a very stable asset class,” says Kushner. “A lot of investors, including us, believe we’re going to hit a period of serious inflation over the next five to seven years. So if you fix your debt and buy multifamily, you’ll have the best hedge against inflation and clip a nice coupon in the interim.”