Adding Value

Norman Radow

By Keat Foong, Executive Editor 

The real estate turnaround business is no longer an easy proposition, observes Norman Radow, founder and CEO of The Radco Companies. “It takes a lot more skill and shoe leather to find those opportunities today.”

Yet, Radco remains very much active in acquiring undervalued properties and raising their value. The reason: Radco, being an expert in the field, has the experience to get the job done—and the opportunistic business still provides good returns. “We are not any less focused on value-add today,” says Radow. “Value-add is still a very important component of everything we do.”

Indeed, all the deals the company has purchased have a value-add component. Radco is today a turnaround specialist that focuses on opportunistic investments. With a holding period of three to five years, the company currently owns a portfolio of about 7,600 apartments located in markets including Atlanta, South Carolina, the western suburbs of Chicago, Indianapolis, Tulsa, Okla. and Denver. It is also entering Clearwater, Fla., Houston, San Antonio, Texas, and Oklahoma City, Okla. In the past three years, Radco has closed on 29 properties and sold three, says Radow. An additional 11 are currently under contract.

Radco has a three-pronged strategy in approaching its projects: the company picks up assets that have a “mark-to-market” opportunity; it implements a value-add execution; and it invests in properties that are located in markets that are on the upswing. “There could be lots of reasons for properties being undervalued,” including undermanagement, undercapitalization, distressed seller, Radow says. “We try to find the reasons, fix them, and increase the rents via a better execution.”

In targeting value-add opportunities, Radco is drawing on its experience and engaging in what has been its specialty for the past 18 years. Before founding Radco in 1994, Radow, an attorney by training, had been a real estate litigation, workout and transactional lawyer who worked on complex workout and successor developer issues. After its founding, Radco initially specialized in acquiring distressed, underperforming or other challenging deals, including multifamily, mixed-use, condominiums and highly amenitized for-sale housing developments.

One of Radow’s first projects involved acquiring and redeveloping a distressed 53-story hotel, office and condominium tower in Atlanta. The project later became the Four Seasons Hotel. The multifamily real estate turnaround business today is still very lucrative, if the developer finds the real estate opportunities, says Radow. In many markets or submarkets, Radow suggests, there remains scope for developers to create apartments that are more affordable than new Class A construction—and are still priced considerably higher than existing legacy apartments. In these markets, new-construction apartments can charge rents of $2 per square foot, whereas Class B unrenovated properties—with modern features and high ceilings—are still bringing rents of only $0.85.

“$2.00 versus 85 cents is [a large difference]. Many tenants are priced out of new construction and are looking for value. If they can obtain the finishes and lifestyle [of the new properties] and still get 30 to 40 percent less in rent, they will flock to the apartment property.”

Which markets are these? Radco likes to operate in markets that are in the process of experiencing improving fundamentals. Four of Radco’s markets—Denver, Atlanta, Houston, and Greenville, S.C.—are located in Axiometric’s Top 10 markets, Radow points out. “These markets exhibit rent growths of 5 to 10 percent,” he says. While the company marks to market the projects, these improving markets are simultaneously further enhancing the property’s value, he points out.

Given the maturity of the apartment business cycle, and the sheer volume of demand for multifamily real estate, Radco has entered new markets to find value-add opportunities. The company started targeting Texas, Oklahoma and Colorado last year and began entering those markets in earnest in 2014. It now has 10 properties owned or under contract in those locations, says Radow.

“We love Oklahoma. It has the same story as Texas: low taxes, low unemployment, and an energy galore,” says Radow. “There is no direct flight from New York to Tulsa, so Wall Street has not started buying in Oklahoma yet. We can purchase at 7 or 9 caps before anyone hears about [these opportunities].” Californians, adds Radow, are also migrating to Oklahoma.

For now, Radco has exited the Northeast for the most part, but remains in Atlanta. “We will always be in Atlanta,” says Radow. As far as the Northeastern states, they are marked by “high taxes, low employment growth, and lots of regulations,” says Radow. “It is difficult to obtain permits [in those states]. We avoid them today. We used to do more in the Northeast, especially in condominium turnarounds.”

In pursuing its turnaround executions, Radco has learned from its many years in the line of business. For opportunistic players, it is difficult to “mess up” in the beginning of the business cycle, but it may become more of a challenge to succeed later in the cycle when market conditions and the competition stiffen. In this respect, an advantage Radco may exercise over the competition is the experience it has gleaned from being in this particular specialty for many years—it is therefore less likely to trip when the going gets tough. For example, the company has experience working with vintage properties. “[We] know what to expect,” Radow says. He equates a developer that buys an older property to renovate to an archaeologist. “You know what is behind the walls. What is behind the walls in a 1990s property is different from what is behind the walls in a 1980s property versus what is behind the walls in a 1970s deal.”

One of the keys to Radco’s success in the business is also to know the right amount of upgrades to implement in projects. Developers “are not building the Taj Mahal,” but they nevertheless need to demand a “quality and fine finish,” says Radow. On the other hand, developers also need to have the skill to make sure they do not “over-improve.” There are some things the market will not pay for,” says Radow. “Our philosophy is to make the asset the best it can be, but still be what it is. It is difficult to make a Class C property into a Class A-minus, as the bones are not there. It lacks modern features that we cannot fix.”

Moving forward, Radow expects to expand the company’s portfolio to incorporate over 10,000 units by the end of the year. Radow says Radco has raised about $150 million over the past three years from among the company’s roster of about 100 private investors, and it expects to raise up to $200 million or more by the end of the year. “There is not any deal we have that is not making money,” adds Radow.

Finding deals today is key, and in sourcing transactions, Radco’s time spent in the marketplace also plays a big part in its success. “We get a lot of deals off market because of our reputation and ability to close.” The company, which employs about 47 employees above the property level, has eight professionals dedicated to finding opportunities, says Radow. Three professionals are going “door to door” seeking assets, says Radow. Surprisingly, Radco is still buying significant amounts of assets from lenders, though admittedly there are fewer of those opportunities today. Four of the 11 transactions Radco has under contract currently are foreclosures sourced from lenders, says Radow. He estimates that 30 to 40 percent of the company’s deals still originate from lenders. “There are less and less of such opportunities, but they are still there,” he says.

Another of the lessons Radow has learned from the company’s years performing workouts or turnarounds for multifamily housing is that developers should remain flexible in their approach to the business. “I found one common denominator” in the problem properties, says Radow. “Developers did not change their business plans. I learned that lesson. You have to be careful to let the market help you determine what is best for it.” The developer should, for example, play with different upgrades, and observe the market responses.

Success in the development field is “about detail and about caring,” says Radow. Very often, “we see developers add fine finishes, but they do not fix the fundamental problems. The units look pretty, but problems will surface very quickly.”

For the future, Radow sees that the value-add game still has legs, and he wants to continue growing into 2015, as long as the market allows. “We think at some point, more institutional investors will come in. We see that every day,” he adds. “We do not know for how long, but we’ll participate in the market as long as possible.” Besides being lucrative still, he says, acquiring and turning around apartments “is such a great, fun, rewarding business.”

History

The Radco Companies was founded in 1994 as a holding company for a distressed 53-story hotel, office and condominium tower in Atlanta that Norman Radow had acquired. After its turnaround, the hotel became the Four Seasons Hotel.

Radco (which is based on Radow’s name) went on to acquire distressed, underperforming and other challenging deals, including multifamily, mixed-use, condominiums and highly amenitized for-sale housing developments. These deals utilized the skills of Radow, an attorney by training, who had been a real estate litigation, workout and transactional lawyer who had specialized in complex workout and successor developer issues.

In 2000, Radco began to accept third-party workout service opportunities. “Lehman [Brothers] called me and asked me to help with underperforming condo conversion in Atlanta,” says Radow. Subsequently, “Lehman started calling us in other cities—Boston, Chicago, LA. That made us into a national company from a mom-and-pop shop in Atlanta.”

The Radco Companies At a Glance

Headquarters: Atlanta

No. of Employees: 47
(not including property level)

Portfolio: 7,600 units (approx.)

Apartment Locations: Atlanta; Chicago; Indianapolis; Tulsa, Okla., Oklahoma City; Denver; Clearwater, Fla.; Houston, and
San Antonio.