Time is money, as the saying goes, but in some cases, biding your time is the richest strategy of all.

 Throughout the downturn, the common practice of “extend and pretend,” where lenders hoped to delay the inevitable demise of troubled assets, was widely derided by distress hunters. After all, critics said, lenders were just kicking the can down the road, building a weak dam of false hope to hold back a flood of distress.

But even the staunchest critics would have to agree that extend and pretend actually worked. The swift rebound in values and continually improving capital markets gave lenders and troubled owners a way out this year, probably sooner than they could have hoped.

As a result, the 2011 Deals of the Year, a who's who of large, distressed portfolios, signaled the endgame of extend and pretend.

At the starting line are overleveraged owners that bought at the height of the upturn and have since bought nothing but time. And waiting at the finish line is a bevy of hungry private investors, lured by the prospect of above-average returns on complicated capital restructuring deals.

“Extend and pretend allowed this to drag out, and now we're starting to see a steady flow of distressed portfolios come to market,” says Dan Fasulo, managing director of New York–based Real Capital Analytics. “There's a window of opportunity now. And I think that will increase moving forward."

The Biggest Winner

Buyer: Pantzer Properties / Dune Capital Management

Seller: RREEF

Price tag: $460 million

Size: 8 properties, 2,580 units

The year's largest deal—a $460 million buy of an eight-property, 2,580-unit portfolio outside Washington, D.C.—also happens to be the largest deal since 2008, underscoring both the renewed health of the transaction market and the continued investor interest in D.C.

In March, New York–based firms Pantzer Properties and Dune Capital Management teamed up in a 50/50 joint venture to acquire the assets, located in Virginia and Maryland, from RREEF, the real estate investment arm of Deutsche Bank. The portfolio was originally assembled by the former Town & Country REIT before being sold to a partnership led by Morgan Stanley and, subsequently, RREEF in 2006. But five years later, the deal became unmanageable for RREEF, which couldn't devote additional capital to the portfolio.

RREEF put the portfolio on the block after some CMBS loans on it were sent to special servicers in mid-2010. Those CMBS loans, scheduled to mature in December 2011, presented the buyers with a complex debt-modification deal that served as a high barrier to entry for other bidders. The $460 million price tag included the assumption of $410 million in debt, which the buyers immediately reduced to $390 million. The deal had a blended cap rate of 6.6 percent, and Dune estimates that the price paid was 30 percent below what the portfolio would've commanded at the peak in 2008.

The Motivated Seller

Buyer: Vantage Properties / Angelo, Gordon & Co.

Seller: AIG / Morgan Properties

Price tag: $241.5 million

Size: 6 properties, 2,200 units

When New York–based Kushner Cos. left the apartment market in September 2007, the firm sold its portfolio of nearly 16,784 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. The portfolio, located throughout the Northeast, sold for more than $113,000 a door.

Not surprisingly, that AIG/Morgan portfolio has now hit the market. In July, a JV of Long Island City, N.Y.–based Vantage Properties and New York–based Angelo, Gordon & Co. spent $241.5 million on a sixproperty, 2,200-unit former AIG/Morgan portfolio located in New Jersey. The sale, at $110,500 a door, included the assumption of $150 million worth of debt.

Talk about a motivated seller—AIG has sold more than $50 billion in assets over the past few years as it struggles to pay off the U.S. government for its $182 billion bailout. In fact, the Treasury Department owns about 75 percent of the insurance giant.

On the flip side, both buyers have experience turning a profit in Jersey. In July 2009, they purchased the 776-unit Fox Run Apartments in Plainsboro from Denver-based Aimco for $70.5 million; 17 months later, they sold it to Arlington, Va.–based AvalonBay Communities for $86.5 million. That deal was Vantage's first venture outside of New York City, where it owns 10,000 units. The new portfolio deal also signals the launch of Vantage subsidiary Candlebrook, which focuses on suburban markets.

The Risk Takers

Buyer: Harbor Group International

Sellers: Various, including Great Atlantic Management and Sawyer Realty Holdings

Price tag: $355.9 million across two transactions

Size: 14 properties, 4,492 units

For many investors, the opportunity today is in taking on hairier deals that would scare away more risk-averse buyers. Norfolk, Va.–based Harbor Group International is one such investor.

In March, the firm purchased an eight-property, 2,508-unit portfolio for $165.9 million from Great Atlantic Management, also based in Norfolk, at a cap rate of 8.1 percent. The properties were encumbered with 11 loans, none of which was anywhere near market terms, with everything from lock-out of the loans to hyper-amortization structures. Harbor plans to invest an additional $11 million in renovating the properties, which range from 26 to 46 years old.

Just a few months later, in July, Harbor struck a similar deal, acquiring a six-property portfolio in Baltimore from College Park, Md.–based Sawyer Realty Holdings for $190 million. The 1,984-unit portfolio also had existing, high-leverage debt—coming due in about 15 months—that had to be assumed. Harbor plans to pump about $7.75 million into renovations on the assets.

Meanwhile, Great Atlantic, which has been selling off a number of assets this year—it's already disposed of 21 of its 38 communities—is off ering even more opportunities for Harbor: In September, Harbor took over Great Atlantic's 3,880- unit property management business, as well.

Shifting away from cash yields to a longer horizon, these heavily structured transactions allow Harbor Group to achieve a payoff that's anywhere from 200 basis points (bps) to 500 bps of above-market IRRs down the road.

A Titan's Fall

Buyers: Various, including AREA Property Partners and Veritas Investments

Seller: The Lembi family

Price tag: $213.8 million across four transactions

Size: 38 properties in all

In the run-up to the credit crisis, San Francisco's Lembi family was one of the industry's most active buyers, spending more than $1.2 billion on Bay Area apartments between 2003 and 2007. In 2007, the Lembis purchased 75 percent of all the apartments that changed hands in the city.

At its zenith, the company owned more than 300 apartment buildings in San Francisco. To finance its appetite, Lembi would often tap cross-collateralized CMBS debt that would be leveraged up to 95 percent of the purchase price. As those aggressive loans started coming due in 2008 and 2009, the portfolio was too far under water. As a result, New York–based conduit lender UBS took back 51 properties in 2009.

In the spring and summer of this year, the bulk dispositions continued in earnest, with at least 38 former Lembi buildings sold in four separate portfolio deals: the $55 million default note purchase by locally based investor Russ Flynn on two Nob Hill buildings that Flynn originally tried to buy in 2005 (he was outbid by Lembi, who paid $60 million at the time); a 20-asset, 422-unit portfolio buy by New York–based AREA Property Partners from special servicer LNR for $59.8 million; a JV between Belmont, Calif.–based firms Woodmont Cos. and Pacific Valley Investors that paid $44 million for an eight-property portfolio, which closed days before it was to be sold at auction; and the $55 million purchase of eight heavily encumbered former Lembi assets by San Francisco–based Veritas Investments from UBS.

The Comeback Kid

Buyer: Kushner Cos.

Seller: Prudential Mortgage Capital Corp.

Price tag: $72 million

Size: 12 properties, 4,681 units

In early June, a JV led by New York–based Kushner Cos. bought 4,681 units throughout Ohio, Indiana, and Pennsylvania from Newark, N.J.–based Prudential Mortgage Capital Corp., which was foreclosing on the portfolio. The deal marked Kushner's re-entry into the apartment market after cashing out in 2007.

Kushner's JV, which includes New York– based private equity firm Square Mile Capital and Cleveland-based Apollo Property Management, paid $72 million for the 12-property portfolio, about half the face value of the mortgages, at a high–7 percent cap rate.

Kushner plans to pump about $10 million into upgrading the properties, particularly since many suff ered from poor management under then-owner Cuyahoga Falls, Ohio– based investment group Karam Managed Properties. The average occupancy level of the properties was less than 75 percent.

At one of the assets, the 1,056-unit Leland Point Apartments in Pittsburgh, residents were often left without heat and power. The maintenance was so deferred that in June the district attorney charged Karam with making a public nuisance of Leland Point. Prudential provided $31 million in funding for Leland Point in 2007—Kushner paid about $10 million for the asset in June. Kushner also paid a $700,000 lien against the property and addressed delinquent fees.

In all, Kushner had to settle 209 liens in a week to close the deal and inject a cash infusion to pay down some of the debt.

The New Contender

Buyer: Ascension Commercial Real Estate

Seller: CDPB Residential

Price tag: $100 million

Size: 15 properties, 4,568 units

Houston-based Ascension Commercial Real Estate more than doubled its assets in July when it acquired a portfolio of 15 distressed Texas communities with 4,568 units for about $100 million.

The properties were sold by Dallas-based private investment company CDPB Residential, which had owned them since 2007 and had fallen on hard times. CDPB couldn't find the capital to maintain the assets during the credit crisis, and that problem was only compounded when Hurricane Ike hit Texas in September 2008, damaging many of the properties.

The previous owners managed as long as they could, maximizing occupancy by stripping out items from damaged units to keep the healthy units operational. The portfolio of Class B and C assets, all more than 30 years old, had been on the market for a year, and, given the complexity of the deal, it's no wonder why.

Ascension's capital stack included two equity partners, three lenders, and a separate investor that purchased one of the communities when the deal closed. To make the numbers on the remaining 14 assets work, Ascension had to divide the deal into two separate groups. One large national bank funded seven of the assets; a New York–based investor lent on six; and the remaining asset was an all-cash buy. Ascension will pump $24 million, or $5,700 per unit, in rehab capital into the portfolio.

REITs Take the Leap

WHILE PRIVATE BUYERS acquiring distressed portfolios took the spotlight this year, REITs (and former REITs) were busy with their own portfolio transactions. Here are some highlights from 2011.

1. Houston-based Camden Property Trust and Austinbased institutional investor Teacher Retirement System of Texas bought an 11-property portfolio for $321 million in June from Houston-based Verde Realty Group . The portfolio of about 3,700 units is located in Houston, Dallas, Austin, and San Antonio. The cap rate on the deal was in the 6 percent range, and Camden estimates it paid between 5 percent and 10 percent below replacement costs. Verde, which failed to go public last year, sold off its apartment assets to take advantage of today's high pricing.

2. Last year, Arlington, Va.– based AvalonBay Communities was looking to add more Class B properties to its portfolio and expand in Southern California. Meanwhile, Denver-based UDR sought to grow in Boston and San Francisco. So, the two companies eyed each other's portfolios and began a swap valued at $500 million. In the end, UDR received one 227-unit building in San Francisco and two assets totaling 833 units in Massachusetts. Meanwhile, AvalonBay received six communities totaling 1,419 units in Southern California. The deal was a rare win/ win showcasing a creative way of balancing portfolios and proved that the 1031 exchange market isn't dead after all.

3. The fate of Englewood, Colo.–based Archstone may be in limbo, but its dealmaking prowess is still intact. Earlier this year, the former REIT struck a $216 million deal with foreign investors Allianz, headquartered in Munich, Germany, and the Canada Pension Plan Investment Board (CPPIB), based in Toronto, for the sale of the 426-unit North Point in Cambridge, Mass., and the 392- unit Woodland Park in Herndon, Va. The deal illustrates the growing appetite among foreign investors for multifamily deals in the United States.