Starwood buys 9,500 US apartments for $446m

Greenwich, Connecticut-based Starwood Capital Group, in partnership with New York-based real estate investment firm Gaia Real Estate, has bought a massive multifamily portfolio encompassing more than 9,500 units spanning five states in the US for $446 million. Starwood and Gaia purchased the properties via a bankruptcy auction, in a transaction that was approved by the US Bankruptcy Court on May 8 and closed last Friday. The deal was executed on behalf of Starwood Distressed Opportunity Fund IX, which held a first close of $1.2 billion last December.  

The joint venture has agreed to invest $22.5 million of new equity to acquire and recapitalise the portfolio’s owner, PJ Finance Company, and will finance the balance of the deal with an eight-year, $423 million bank loan. The portfolio consists of 34 properties located in major metropolitan areas in the Sunbelt region of the southern US. Twenty of the properties are located in Texas, while the remaining 12 are in Arizona, Georgia, Florida and Tennessee.

“We are excited to partner with Gaia to unlock all the substantial upside potential in these attractive assets,” said Chris Graham, managing director of Starwood Capital Group, in a statement today. “We believe the structure of this investment is quite unique and allows us to maximize the value of the portfolio with very little downside risk.”

PJ Finance originally acquired the assets in 2001 and refinanced the portfolio with more than $540 million of securitised debt financing in 2006, based on a valuation of $580 million. But the Chicago-based apartment owner sought Chapter 11 bankruptcy protection in March 2011, citing apartment rents that were insufficient to cover both the heavy debt service and daily operations of the portfolio. 

The company re-emerged from bankruptcy last Friday, with the debt on the portfolio restructured into three tiers: a first tier of $423 million, a second tier of $52 million and a third tier of $28 million. Only the interest will be paid on the senior debt during the term of the loan, while no interest will be due on the B and C debt pieces.

Starwood and Gaia expect to earn a 16 percent preferred return on their new equity investment in the portfolio, and all principal and interest will be senior to the loan’s principal. The capital will go toward deferred maintenance, capital improvements and renovations of the apartments. The joint venture also plans to implement a $45 million capital improvement plan over the next eight years.

Starwood's last major multifamily investment occurred last year, when it acquired 1,626 apartment units in Virginia and Maryland in partnership with Bainbridge Companies and a large institutional investor.