Stack and Attack: Behringer Harvard Deploys Multifamily REIT Capital

  It was a fitting end to the year. In the waning months of 2009, Addison, Texas-based Behringer Harvard acquired a 168-unit New Haven, Conn., apartment community; purchased the 330-unit Eclipse luxury apartments in Houston; and bought a 75-plus percent interest in two Washington, D.C., multifamily developments in the final stages of construction. The deals—all attributable to the company’s first publicly-registered, non-traded Multifamily REIT—concluded a year-long acquisition spree that saw no rival in the industry, with investments made via joint venture, as well as the direct acquisition of 10 multifamily properties in as many markets. And while more serious competitors are returning to the bidding table, the company still has vast cash reserves on hand and plans to see its purchasing volume increase across the course of 2010.

It’s a noteworthy feat, indeed. But Behringer Harvard’s portfolio strategy is not altogether special. They acquire Class A assets in high-barrier, core markets at a discount to replacement, make capital improvements where necessary, and then look forward to an exit strategy for its investors via some form of asset liquidation over the following three to seven years. What’s more, the firm’s access to capital isn’t particularly distinct. Plenty of publicly-traded REITs have amassed dry powder distress war chests to deploy into the acquisition market. Indeed, Behringer Harvard senior vice president Mark Alfieri sees a lot of regular faces (and a growing list of newer, although known, entities) at the bidding table.

Founded: 2001
No. of Employees: 428
Multifamily REIT I offering: $2 billion
Current Capital Raised: $400 million (for Multifamily REIT I)
Units Under Management: 4,937
Market Coverage: National, focused on high-barrier-to-entry growth markets in major metros

Simply put, there are two reasons why Behringer Harvard has been able to lead the assault on multifamily distress, dominating the multifamily acquisition scene of the past 12 months: an absence of legacy assets on the books and practically no fear regarding further deterioration in multifamily operating fundamentals. Unhindered by portfolio issues and with a mandate to buy, the company is investing for the longer hold and consequently has no qualms grabbing assets at what they feel are fantastic prices.

“The values that we see on a price-per-pound basis are as good as we have seen in 20 years,” Alfieri says. “There’s been an enormous increase in property listings and properties available on the market as the banks stop extending loans for developers. There are also some bankruptcy situations out there that have to be resolved sooner or later with Lehman Bros. and other owners involving large multifamily portfolios. It all points to a huge increase in institutional-quality apartments coming on the market in 2010, so we think our run rate on the acquisition side is going to increase dramatically in 2010. I think we’ll buy twice as much.”

First Mover Advantage

Dominant though they may be in the current acquisition climate, Behringer Harvard executives don’t have any illusions regarding deal flow, either specific to deployment of Behringer Harvard Multifamily REIT I capital, or in the wider industry trading space thus far devoid of major activity. “If it had been 2004, 2005, 2006, nobody would have even looked at us. We would just be someone else at the table bidding,” says Behringer Harvard president and co-COO Robert Aisner. “This year, our transaction volume was among the highest, and in a market of recessionary economics, that made us the tallest midget in the circus.”

Aisner’s not lost on the self-placating nature of that statement, but coupled with the modesty of their transaction volume is a realization that Behringer Harvard was, for all intents and purposes, the first major multifamily player to substantially enter the distressed market. Approved by the U.S. Securities and Exchange Commission in 2001 to issue publicly-registered, non-listed REITs, Behringer Harvard has managed some $10 billion of assets since its inception—a good share of them not in the multifamily sector.

Since then, the company has issued and managed eight funds (four REITs, two limited partnerships, and two accredited funds) to invest in core and opportunity office, hospitality, and apartment assets. While Behringer Harvard opportunity funds can—and do—invest in multifamily assets, equity, and debt, the Multifamily REIT allocation is focused almost entirely on acquiring stabilized assets, although the REIT prospectus does allow Behringer Harvard to deploy the capital into different multifamily investment vehicles. Launched with a private offering in 2006, the Multifamily REIT raised an initial $127 million and was boosted by two $100 million commitments made in 2007 by Dutch pension fund PGGM. (See “Going Dutch,” opposite.) According to public filings, in September 2008, the REIT commenced its public offering and has since raised an additional $264 million in share purchases from the individual investor broker-dealer network. The REIT, open until September 10, 2010, has a total offering size of $2 billion in primary shares with an additional $475 million set aside for distribution reinvestment and already has $1 billion in multifamily assets targeted for investment.

“There was a little bit of vision and a little bit of luck in the market timing of strategically launching our multifamily platform three years ago,” says Behringer Harvard executive vice president and co-COO Robert Chapman. “But we find ourselves in a situation where there is strong investor interest in a market that has deal flow with a limited amount of players, so you are seeing a lot of transactional activity from us for those reasons.”

Key to Behringer Harvard’s agility in navigating multifamily distress has been its unencumbered asset base. The Multifamily REIT was envisioned as an opportunity to amass a brand-new, Class A multifamily apartment portfolio. Ten core assets were purchased from April 2006 to December 2007 via funds from the private offering and capital committed by PGGM, including luxury multifamily communities in Las Vegas, Denver, Dallas, Houston, Atlanta, Washington, D.C., and Ft. Lauderdale, Fla. Other than discretionary cap ex improvements, the REIT has no legacy issues: Cash can be deployed at will into the acquisition market. “Through most of 2009, everyone else out there—even the publicly traded REITs—had problems,” Aisner says. “The ongoing challenge for most multifamily firms right now is figuring out how to allocate capital to solve old problems. We don’t have any old problems. We are a brand-new, shiny car driving down the street, and the muffler works great, and that has made us different.”