On the Hunt

Mike Ratliff, Senior Associate Editor

The ability for a real estate company to evolve with changing business conditions is a trait that sets the stage for tremendous growth. When it comes to adaptability, there is perhaps no greater example in our industry than Hunt. Founded in 1947 as Hunt Sales Co., the first iteration of the four-generation family company was a retail lumber, hardware and building store in the El Paso’s Lower Valley. Fast forward to 1985 and Hunt was one of the premier design-build contractors for the U.S. Armed Forces.

Today, the fully integrated real estate firm manages over 144,000 units and has over $16 billion in assets under management. As the demand for new military housing construction tapers, Hunt has turned its attention to affordable housing, where it is active as an investor, builder and LIHTC syndicator.
Dedicated to affordable housing
Hunt first got its feet wet in affordable housing back in the 1970s as a contractor for Section 8 properties. From the mid-1990s through the early 2000s the company developed 21 tax credit properties before slowing down the pace and focusing more on military housing. In the fall of 2010 the company formally decided to enter the LIHTC syndication and investment business with the founding of its affordable division, Hunt Capital Partners. The unit began syndicating properties in the spring of 2011.

“Since then we have raised over $400 million in equity from investors,” says Jeffrey Weiss, senior vice president of affordable housing at Hunt. “For a relatively new company we are very happy with the success we have had.”

Hunt’s affordable group has also closed two significant deals since its inception. The first was the $102.4 million acquisition of Capmark Financial Group’s affordable housing portfolio. Hunt picked up the 474-property, 75,000-unit portfolio in Capmark’s bankruptcy auction during the summer of 2011. The move increased their affordable holdings to 500 properties with just under 80,000 units. Texas has a habit of doing things big, and Hunt is no exception.
“When you look at the affordable housing industry, there are only so many large syndicators and large portfolios available,” Weiss says. “Generally we are not interested in buying a limited partnership interest. We want to acquire the general partner interest at the fund level. Our avenue is approaching one of the large syndicators.”

In April 2013, the company acquired a 41 percent interest in Centerline Holding Co. Hunt had been interested in acquiring complete ownership in Centerline, which manages a portfolio of over 140,000 affordable units. A definitive merger agreement between Hunt and Centerline was approved by Centerline shareholders in June. The merger, which was initially expected to close in the third quarter of 2013, will effectively double Hunt’s multifamily portfolio—making the company the largest owner of apartments in the U.S. if completed.

Weiss attributes part of Hunt’s success with affordable housing to the success of the LIHTC program, which he refers to as one of the most successful private-public partnerships in existence. While LIHTC has matured and enjoys both bipartisan support and a number of high-quality developers and investors, Weiss cautions that sector participants should not become complacent and should continue to advertise the success of the program. After all, the nine percent tax credit allocation rate is only temporary, and with the current federal budget deficit there is always the risk of the program being done away with altogether. Another piece of advice Weiss offers is to remember that LIHTC can only be as successful as the properties themselves.

“Some of the corporate entities are focused on the tax benefits of an investment. We still have to make sure that the asset is built appropriately, and that the market can support it. There are some markets where you can build affordable housing, and it will lease up, no problem. But just because it is affordable housing doesn’t guarantee success. If you build out in the middle of nowhere it is not going to be a successful property.”

Unless, that is, the middle of nowhere happens to be a chain of supply-constrained islands in the middle of the Pacific. Hunt’s affordable group has closed four deals in Hawaii, has three scheduled by year end and is working on the letter of intent for a seventh. Hunt’s construction group is the contractor on five of the projects, which are a combination of new construction and rehabs ranging in size from 28 to 150 units.

Hawaii—fundamentally strong, though often overlooked
“Hawaii is a very interesting market. Most investors are focused on the east and west coasts for CRA deals. Right off the bat a lot of people question the need for affordable housing on the islands,” Weiss says. “However, Hawaii is one of the most expensive places to live in the country. High AMI, a limited number of units—especially affordable units—makes it a market where the demand for affordable housing far exceeds the supply.”

Fortunately for Weiss and the affordable group, Hunt is very familiar with the Aloha State. In 2003 the company entered a large public-private partnership with the Navy on O’ahu called the Ford Island Master Development Agreement. The Navy had extra land after closing a set of bases they were trying to dispose of, yet at the same time found itself cash poor to get a series of new buildings and infrastructure built. Hunt essentially received five different property parcels—including a large amount of former Navy housing areas—in exchange for infrastructure improvements on Ford Island, which sits in the middle of Pearl Harbor.

The largest asset that Hunt received from the Navy on O’ahu was 1,461 units of Navy housing nestled along Pearl Harbor’s inlet known as Waterfront at Pu’uloa. The asset was only 20 percent occupied at acquisition in 2003. Hunt invested more than $100 million into the community, achieved 94 percent occupancy, and sold it to Carmel Partners in 2012 for $311 million. It was the largest single multifamily sale of the year by value.

“Waterfront at Pu’uloa had gone from being an incredibly dilapidated former Navy housing area to a thriving market-rate rental community,” says Steve Colon, president of the Hawaii division of Hunt’s development group.

The successful repositioning and sale allows Hunt to now focus on a major master-planned redevelopment of a former Navy air station known as Barber’s Point. The 540-acre property is located about 5 miles west of Pearl Harbor on O’ahu’s southwestern point. It currently features roughly half a million square feet of assorted asset classes ranging from multi-housing, former officer homes, retail and industrial. The redevelopment, now branded Kalaeloa, will include 4,000 homes (a large portion of which will be rentals) and 3 million square feet of commercial and industrial space to be built over the next 20 years. The first project, a utility-scale 5-megawatt solar field, will be up and running this fall. The next task will be the redevelopment of a former Navy bachelor officer quarters (BOQ) into a 100-unit workforce housing project with ground scheduled to break in December.

Though the market in Hawaii makes unit absorption easy, the development process carries certain facets that are not usually encountered back on the mainland. Getting shovels in the ground is an especially political process, and transparent plans, community participation and buy-in from citizen oversight groups are all necessary checkmarks.

“Tourism plays such an important role over here, and that is the case because of how beautiful the environment is,” Colon says. “The State has to be very careful about development activities because of the potential impact it has on the number one industry. There are also cultural and archeological concerns. Ancient Hawaiians used to live near the beach and there tend to be burial areas where you end up finding bones. We have to do extensive studies to make sure that any development we are going to do is not going to be in one of these areas.”

Other development projects on the Island include Imi Ikena, which as with the BOQ, is being built by Hunt’s in-house construction group. The four-story, 28-unit affordable housing asset on Maui is scheduled to see completion this fall. As with the other islands, the demand for quality affordable housing in Maui is strong.

“There is a real need for affordable housing on the Island,” says Bud Waters, executive vice president of Hunt’s construction services division. “The Maui City Council believes there is a need for 40,000 units, but there is not enough capital to finance all those projects, so they are going out to different developers to encourage them to get projects started.”
The construction group has roughly 350 units of renovation work and 130 units of new construction slated for 2014. Waters expects the affordable construction work to continue to pick up in Hawaii, and cites part of his group’s success to its symbiotic relationship with the affordable group.

“It is a hand-in-hand relationship. They send us jobs to construct, and we send them jobs to finance. It really works very well.”

True to their Texas roots
Back on the mainland, Hunt also has a sizeable development pipeline of market-rate apartments. Right now—due to market conditions rather than local favoritism—a majority of that development activity is happening in Texas.
“Hunt has a true national footprint, and we track conditions all over the country. It just so happens that in this last recession, Texas didn’t do the deep dive that some of the other markets did, and the energy sector recovered well ahead of other markets in the country,” says Gary Sapp, Southwest regional president of Hunt’s development division. “What we are following in Texas are new high-paying jobs. In particular, the three big markets are Houston, Dallas and Austin.”

In May the company sold its interest in Ablon at Frisco Bridge, a 252-unit wrap project co-developed with PegasusAblon in the fast-growing Dallas suburb of Frisco.

“It was actually a presale before we even stabilized the lease-up, which is a reflection of the appetite in the investment capital market for new Class A product, and in particular, Class A Texas product,” Sapp says.
Hunt currently has two Texas projects under construction and a third teed up for development.  In January, Hunt and StreetLights Residential broke ground on the 19-story, 300-unit tower known as The Catherine on the southside of Lady Bird Lake in Austin’s entertainment district. The luxury product is targeting young, typically single, tech employees with units averaging 700 square feet in size. The tower is currently over 30 percent complete.
In a similar structured deal, Hunt is serving as an equity partner and general contractor in Alamo Manhattan’s 263-unit luxury building in Dallas’ Victory Park neighborhood which is about a block away from American Airlines Center where the Dallas Mavericks play. Its leasing office will open in November. As demonstrated by the Ablon at Frisco, Sapp says that Hunt is open to short-term hold periods.

“We are willing to be a merchant developer with the idea that we would complete construction, stabilize the lease-up, and spend some period of time—usually through the first lease rollover to optimize the rent—and then monetize the asset to a real estate investor.”

While none of the projects are planned to be portfolio assets, Hunt still has to make sure that each property meets the quality and economic metrics necessary to remain happy as an investor laying down term debt and holding the asset. In roughly two months, Hunt plans to break ground on a 21-story project in Houston’s Museum District. The “uber-luxury” asset will feature a fine dining restaurant and urban grocer on the ground floor, as well as six stories of structured parking topped with an amenity space highlighted by a negative-edged swimming pool. Penthouses on the top two floors will approach 4,000 square feet in size. Sapp jokingly refers to those types of apartments as the OPEC units due to their caliber and tendency to secure leases from high income earners looking for temporary Houston residences.

The recent projects Hunt has focused on are, to an extent, jobs that had been identified as the next best sites in 2007. The financial crisis put a freeze on construction lending, and shovels never hit dirt. These premium lifestyle sites are now set to deliver premium residential experiences in some of the strongest job markets in the country. While having the support of an industry-leading investor, asset manager and builder certainly doesn’t hurt, the success of these Texas developments is partly due to the autonomy Hunt offers each of its divisions.
“Our oversight process is mainly line of sight, though a broad direction and objectives are transmitted by management to the various business units,” Sapp says. “Management does get out of the way and waits for the boots on the ground to identify development or construction programs that fall within that scope. As a private company we have the luxury to be flexible and counter cyclical when that seems to be the right thing to do without worrying about Wall Street third quarter profit issues.”

To comment, e-mail Mike Ratliff at [email protected]