Translation: Building property management expertise—including establishing industry-leading technologies and efficiencies to alleviate on-site staff of customer service-consuming admin duties—is job No. 1 in effectuating real estate returns for investors. “If we are going to compete in the institutional capital arena, we need institutional operations,” Vilim explains. “And the sideline over the past several years has been to build that as we continue to find opportunistic acquisitions on the real estate side.”
Acquisitions of Note
Finding opportunistic acquisitions in a recession-constricted deal arena hasn’t exactly been easy, however. After laying down virtually the entirety of Waterton’s $460 million Fund 9 on the acquisition of Chicago’s 2,346-unit Presidential Towers in 2007 (see “Executive Decisions” at right), value-add deal flow for Waterton, and indeed for the multifamily real estate sector as a whole, ground to a halt. Waterton Fund 10, the firm’s fourth consecutive joint venture (JV) fund with CalSTRS, was fully committed in 2008 but saw zero capital deployment in 2009. As markets loosened slightly in 2010, Waterton has been able to place $200 million in acquisitions but has not deployed any equity into value-add real estate opportunities per se.
Waterton Residential
Headquarters: Chicago
Year Founded: 1995
No. of Employees: 440
No. of Units Owned/Managed: 14,000
Estimated 2010 Revenue: $175 million
Market Coverage: National
“Instead of a flurry of asset liquidations like the RTC days, there has been a flurry of workouts, and that is where Waterton is stepping in,” Schwartz says. “We have done $200 million in acquisition deployment across seven properties this year, and all seven are debt acquisitions. When we buy the debt, it is a vehicle for us to force ourselves into the workout solution.” It’s also a vehicle for acquiring underlying real estate assets, although Waterton underwrites both loan-to-own and yield-to-maturity possibilities into all of its note purchases and prices the acquisitions to, as Vilim says, “the point of investor indifference.”
Examples of Waterton’s note purchases include the September acquisition of $109.5 million in debt secured by four assets in North Carolina and California: the 274-unit Exchange at Brier Creek in Raleigh, N.C.; the 139-unit Skyline Terrace Apartments in Burlingame, N.C.; the 628-unit Waterstone Corona Point Apartments in Corona, Calif.; and the 296-unit Copper Canyon Apartments in Riverside, Calif. “If the right deal comes along that has a clear value-add execution to it, we are more than happy to do that. Obviously that is our expertise,” says Waterton vice president of acquisitions Max Peek. “The route of purchasing the notes with either the intention of taking title or being satisfied with the yield-to-maturity play has suited us well, though, and we have pretty attractive capital for it.”
According to Peek, Waterton has an additional $120 million pipeline of acquisitions under contract that has yet to be finalized, the majority of which are debt purchases versus traditional fee-simple transactions, and would be happy to deploy up to $300 million into apartment-secured debt. Helping the firm to underwrite all-cash debt deals that often require a 10-day, no asset access due diligence period have been two pools of Freddie Mac “B” notes purchased by Waterton in June 2009. The subordinate debt certificates have an aggregate balance of $2.29 billion and are secured by 130 properties with 34,382 units, providing Waterton with a P&L glimpse into a portfolio twice its size. “We have their financial statements and rent rolls, and we’ve gone through their appraisals, so it has given us double our ownership market insight,” Vilim says. “For less money than we spend on a single property, we control 35,000 units from a financial info standpoint. The ability to gain that info by buying into a debt pool is significant. It gives you underwriting insight that you could not have unless you went out and bought 35,000 apartments.”
