Transwestern Executives Roundtable: Dealing with the Crisis

Transwestern Institutional Multifamily Group recently sponsored a multifamily executives roundtable that took place during Transwestern’s annual market forecast and awards conference. Transwestern’s Scott Melnick and Al Cissel co-moderated the discussion, held in October at The Ritz-Carlton Hotel in Washington, D.C., with Keat Foong, MHN’s executive editor. While the participants expressed uncertainty about the fast-changing economic scene, they also discussed business opportunities presented by the financial turmoil. Click Here to Read More About Participants of Transwestern’s RoundtableScott Melnick: You will hear that there is no investment sales activity, but—and one of the reasons we put out our brochure [Washington, D.C Metro Area Multifamily Market Update, August 2008]—is that the data as of August shows that 2008 investment sales activity for the trailing 12 months was exceeding the previous year of 2007.  We’re all fortunate that we’re in Washington where there’s activity, and our brochure was printed at the end of August, though the world has changed in the last 30 days and was changed the 30 days before that. One question we wanted to start off with is who is actively buying in Washington, D.C. and looking for properties now? There are some groups that have just stopped buying anywhere. In this room, it’s pretty much a microcosm of different types of buyers.Timothy Bright: We have clients who have money for a select core of opportunities. We are raising mezzanine debt fund, and the value fund is also replacing some resident debt. Underwriting is more conservative. It’s focused on trailing numbers, and assumptions from our research group fluctuate as does everything else today. [Core] buyers are focused on yield. If you’re looking at development opportunity, it’s really about the location and the managing partner.Al Cissel:  Tim, how does your underwriting look today compared to even 30 days ago or 60 days ago?   Bright:  It’s more conservative. It’s focused on trailing numbers, and assumptions from our research group fluctuate as does everything else today.  Core buyers are focused on yield. If you’re looking at development opportunity, yield is important, but it’s really about the location and the managing partner.  I think the biggest thing we see today is relationships and who your partner is. Keat Foong: To what extent have pension funds changed their appetite for apartments? Bright:  It depends a great deal by the client.  We see opportunities to fill in portfolios for client who maybe in the last few years were not able to purchase the core assets that they are most desirous of. So there are opportunities in some of the best locations to buy properties that were being converted to condominiums, or that were under new development and are now available as apartment buildings. Cissel:  Alec, you said you were buying. Can you address your underwriting?  Are you buying 1031 generated requirement generated from sales? Alec Brackenridge: No. You have 1031 requirements that require match-up and sometimes we can accommodate that in other ways, but we have $700 million in cash sitting in the bank and a $1.4 billion line of credit. We have $500 million in product out of market. To the extent that you’re selling and to the extent the opportunities make sense to us, we’ll be a big buyer. Our company is built on opportunity and buying what other people aren’t. As to underwriting, you just have to give us a chance to fall in love, and we’ll come up with our reasons. But clearly, land is much more than an issue than it was, whether it’s a land lease, a busted condo deal or structural issue, anything that we may have overlooked two years ago and discharged at the closing is more of an issue. Having said all that, we will be buying a lot of apartments. We’ll be moving out of what we consider secondary tertiary markets to focus more on markets like D.C., Boston, New York, LA, Seattle, San Francisco and look to do that through presales, through buying busted condo deals if that’s what it takes or operating partnership units in our reach.  So we have a lot of flexibility. Melnick: Who else is buying right now? Like you said, rumors of your demise were greatly exaggerated and the fact is, Archstone is out there buying in selective scenarios. Todd Grasinger: We’ve had a couple of 1031 exchange hands we were buying. It’s not on the scale that we had in the past, but we’re still active buyers. I would say that it’s much more conservative, and anything with any hair on it just won’t fly these days.Cissel: Lacy, what do you find?Lacy Rice: A lot of work and not a lot of action. We make a point to look at a big deal across each of the product sectors in this market and we bid on a lot of them. We’re having more success working with operators to help restructure by providing capital in their field of expertise. Particularly on the mezz side compared to the equity side, there is generally a big spread that’s derivative of fundamental disconnects on where the cap rates are at or going. We find clearly lenders being less willing to provide significant amounts of debt. There is a gap in capital stacks and the situations we tend to run into the most are construction projects that got in the way of any additional capital. Projects that are not yet stabilized are construction loans and the capital is needed. The rehab business is very difficult now, obviously.  I’ve seen a lot of growing opportunities there and the cap rates will settle out in that market. It seems like good sense to buy.  Cissel: Are you seeing some opportunities already from mezzanine pieces in capital stacks where somebody might be highly levered in debts coming due either now or a year to two years from now? Rice: Yes. There has been a fundamental shift in the market and senior loans now top out at 65 or 70 percent. That’s across the board, whether it’s a refinancing or on the land side. Melnick: Scott [Ross], your activity? Scott Ross: We’ve been trying to buy. Actually, a number of people at this roundtable are people we’ve been working with. What has happened is so significant and so dramatic. We’ve gone from a normal view of rent growth and improvements creating further capability to a place where, pretty much in an instant, we went to looking backwards. We went to looking at three months of income and now we’re all of a sudden at 12 months worth of income and in fact, tomorrow’s expenses.  We’re in the middle of refinancing, financing and acquisitions, and we find lenders’ underwriting and coverage have changed. The dynamics that have occurred in the last 30 days, which may be different tomorrow, are really unsettling. What you’ve underwritten and your underwriting theories very rapidly change.Cissel: And are investors the ones who are looking 12 months back?Ross: It’s debt and equity.Melnick: That’s much like what Bob [Ryan] does. Freddie Mac and Fannie Mae are generally always looking at the past 90 days. When we were selling in the old days of three months ago, we were looking at stabilized numbers for the first year and three years down the road. And clearly, as Scott [Melnick] just mentioned, it seems as though capital sources are now looking at the actual in-place numbers. From your end, do you see more players willing to take the lower loan to value-type scenarios?Robert Ryan: Some of them are.  Some are squealing like there is a cobra in the basement.  But one comment that I did want to make to people looking to buy in the District is that in the last 30 or 45 days, we’ve had an unusual number of our clients that have been sleeping for a year or two and didn’t want to buy call us up. I’d say that 60 or 70 percent of them own this much in the District right now. Melnick: You’re talking about downtown D.C.? Ryan: Take the White House and spin around 20 miles. With cap rates [rising], big families, even some big funds, are saying “We’re really interested in a couple thousand units in the District.” They’ve woken up family members or board members and said, “Let’s get in here. The jo
bs are great, everything about it. Why haven’t we been doing it? Why have we just stayed in Philadelphia or why have we stayed in New York City or White Plains or Long Island?” That is good for you guys. That being said, Fannie Mae and Freddie Mac are in business but it’s a village of credit unions on every decision, lots of people, lots of eyes, slower process. They are Coke and Pepsi and they’re both lending, they’re both a little tighter. They’re not drastically tighter, but when you’ve had your numbers and end up in the middle of a major acquisition, they’re coming with a major change to you. That’s where a lot of things end—and the acquisition activity is slow and the refinance business is slower than we’d like right now.   Melnick: John, also, you can walk through being a seller or a buyer, but also a recent phenomenon is you as a seller have deals where there is financing in place too.   John Majeski: On the acquisition side, as a company we are a selective buyer, similar to Alec’s platform.   We are focusing on what we consider the top 20 markets in the country, D.C. being one of them. We’re also looking at our capital allocation and making sure we keep a diversified portfolio.  In D.C., for instance, we are probably over allocated right now, so we’re much more selective. On the sale side, we’ve had many people look at our deals—one where they’ve lost their equity partner and two on the debt side. And we have quite a few properties that have favorable existing debt that buyers are looking to assume, and we are also offering seller financing in some cases to make the deal work. Melnick: We’ve seem more of that.  Bill, your company operates all over the country, but how is this market, in the Maryland, Virginia, and D.C. area? Bill Revers: Echoing with what Lacy [Rice] said it’s just not what it was a short time ago. You can’t finance anywhere as well as you used to be able to. It’s not had so much of an impact in Washington, D.C., but other markets have gone way down. If we are in a recession and jobs are being lost, people aren’t going to care about fancy cabinets, countertops, and maybe they’d rather have that $150 in their pocket.  So, we’re at a point where with apartment rehab and value add distress is what you’re going to have to put on most of your flyers going forward in order to get the same velocity behind these deals because it’s really difficult to get them again. Melnick: But that doesn’t mean buying stabilized deals. You still need some sort of fit for the transaction.  Revers: Well, at some level. I think at this moment we’re not really willing to go under debt like we used to, say, two years at 5.5 percent caps. The going in yield has to be much closer to where the debt is.  But the story we’re looking for now is not so much putting in 15 doors, it’s more adding value to the management. And maybe there’s below market debt and we’ll invest a couple of thousand a year and try to get $50 instead of $250. So, it’s a very different picture from even 20 or 30 days ago. It’ll probably change again tomorrow, but that’s where it is today.    Melnick:  It’s true.  Everybody wanted value add.  I had a property that was built in 2002 that could be labeled as value add because you could do something to the kitchen. Richard, that’s what your firm has been successful here, in repositioning some cases of properties. Richard Schechter: Right now, we’re having some luck selling some brand new properties that we just built. Brand new core assets are still up pretty good, and some of those buyers are not using any debt. We’re not looking at traditional value add opportunities anymore. We’re looking at high distressed situations and we’re looking at substantial rehab or more development deals like the deal that we bought from Equity. Brackenridge: That was one of our rehabs. We had rehabbed that property. Schechter: We may still take on, or at least have some capital to take on, projects in which you can do a tremendous amount of work, but we do not have any capital right now to buy modest value adds. I agree with Bill [Revers] that in some of the markets, we’re picking up the fix-up differential, but in other markets we’re not or we are not anymore. [Buyers] have become very price conscious and I think it’s become a much more difficult process. We have taken a whole group of properties that we were going to sell this year and just financed them long-term and forget about them. Fortunately, we have some offshore capital, and if we didn’t, we’d be in a pretty tough spot right now. We’re certainly not rolling.  We’re actually partners with Tim [Bright] in a deal in Florida and we hope that we’ll get to build it someday, but we’re certainly not going to build it anytime soon. Melnick: But even here in D.C., you’re looking at development opportunities. Schechter: Because I do have an offshore partner, I am looking at some development opportunities.  As you know, we definitely plan to start building on that one development site, but that’s not until next July or August at the earliest.  Because it’s a high-rise, it’ll be two years out before we have any units. But we are very, very selectively looking for opportunities. Greg Lamb: We are absolutely looking for opportunities. I have a story like all of you. We bought a fairly large asset that had a redevelopment story, and gave it to First Mariner earlier this year, a project in a city that embraced change and that is adjacent to a HUD. We’re doing a modest rehab, adding some washers and dryers and trying to get some improvements. The story on that project, like most of the ones that we look at, is that we’re trying to upgrade management. We’re all trying to put professional management in place, and that’s more of a story today than putting in cabinets. I think you’re right. I think the people are struggling to pay more money for a china cabinet and they would much prefer to have an older cabinet. On new development deals, I think once the glut of condo finishes goes away, we’re all going to be focused on trying to be more efficient with our dollars. Finishes of condos are starting to drop back down. I think we would all like to build to the normal standard, focusing more on our amenities.  On the sales side, we’re a seller, but we’re not the mandatory seller. We want to sit back. What we’ve found is the obvious statement that the days of selling a project at first CO are over, and unfortunately, we underwrote to hold these assets through stabilization. And that’s the time when there should be a real sale, right? So, we’re looking at both, but being much more cautious then we were 90 days ago. displayGallery(106761);