As the capital markets continue to improve, an increasing number of portfolio sales are closing throughout the multifamily industry.
In many ways, the trend signals the end of the “extend and pretend” period that dominated lender behavior since the recession began. Extensions can only last so long, after all. And as fundamentals continue to climb—and financing becomes more readily available—more lenders and owners are cutting bait, happy to have waited out the downturn in order to sell into the upturn.
“The recent flurry of portfolio transactions really shows how deep the capital markets are at this early point in the cycle,” says Dan Fasulo, managing director at New York-based market-research firm Real Capital Analytics. “And the ease of how these early portfolio deals were digested should give portfolio sellers further confidence to bring more product to the market.”
Consider the recent flurry of deals. In early June, Kushner Cos. purchased 4,681 units throughout Ohio, Indiana, and Western Pennsylvania from Prudential Mortgage Capital Corp., which was foreclosing on the portfolio. The deal marked Kushner’s re-entrance into the apartment market after selling its entire portfolio for $1.9 billion in 2007, at the height of the upturn, to a joint venture of AIG and Morgan Properties. Not surprisingly, that AIG/Morgan portfolio is also hitting the auction block in drips and drops. In July, Vantage Properties spent $241.5 million on a six-property, 2,200-unit portfolio located in New Jersey formerly owned by AIG and Morgan.
Distressed sales are making up about a quarter of all multifamily transactions this year, according to Real Capital Analytics. But it’s not as though deep discounts are being seen on portfolio buys. One reason that portfolios are attractive to large investors is the efficiency of deploying large amounts of capital all at once. At the height of the last boom market, there was a tremendous portfolio premium—buyers were willing to pay more for that efficiency. “And I think buyers are willing to pay a slight premium now,” Fasulo says. “They’re not getting much of a discount for a portfolio deal anymore.”
Ample evidence of that can be found in one massive portfolio currently on the block. Anglo Irish Bank Corp., which was seized by the Irish government, is selling a portfolio of about 250 so-called “troubled” commercial real estate loans with a combined face value of about $9.5 billion. So far, the bidding is intense—institutions such as Blackstone, Starwood, and BlackRock have driven the price tag up to around $10 billion. So Anglo Irish will probably see a 100 percent recovery rate.
The success of the auction is expected to encourage other lenders and servicers to jump off the sidelines with larger offerings, yet another sign of how much the capital markets have improved. It's a far cry from the days when the FDIC sold $4.5 billion in real estate assets from Corus Bank in late 2009, and had to provide more than $1.3 billion in debt financing for the buyers, a consortium led by Starwood.
Not all of the recent portfolio sales are distressed situations, however. At the end of June, Camden Property Trust bought an eight-community portfolio in Texas for $261 million from Verde Apartment Communities and has another three Verde assets from the same portfolio under contract. In total, the 11 communities will cost about $321 million for 3,700 units—essentially the majority of Verde’s multifamily assets.
The communities are mostly located in Camden’s core Texas markets, though two of the complexes are in San Antonio, a new market for the REIT. The blended cap rate on the portfolio—which is mostly newer stuff, with an average age of just three years—was in the 6 percent range. The company estimates that it paid slightly beneath replacement cost, in the 5 percent to 10 percent range.
“A lot of portfolios that have come out have been a little lesser quality, and it’s only been recently that some higher-quality portfolios are coming out,” says Dennis Steen, CFO of Houston-based Camden. “I think, based on where values are now, people are making a determination of whether they want to exit the market, and some are.”