The Real Deal New York

Financial woes plague multi-family portfolios

January 07, 2009 02:26PM
By Adam Pincus

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Nine high-profile New York City apartment portfolios comprised of 188 buildings, with mostly rent-stabilized tenants, do not generate enough revenue to cover their monthly loan payments, according to recent mortgage research reports.  

The owners of the nine portfolios, representing 19,457 rental apartments in Manhattan and Queens, cannot cover mortgage payments with net income, according to December reports from commercial mortgage research firm Trepp. Since the owners, which include powerhouse real estate investment firms such as Tishman Speyer Properties and Apollo Real Estate Advisors, cannot make mortgage payments with revenues, they have dipped into interest reserves, the data showed.

Manus Clancy, a senior managing director at Trepp, said multi-family owners who paid top dollar for housing portfolios in 2006 and 2007 are being squeezed because they are not able to generate sufficient revenues.

“Anybody who was dependent on an execution strategy that involved taking rent-stabilized apartments, flipping them, converting them and getting a premium for a market level price is going to face challenges until the New York economy starts firming up,” he said.

Although the Trepp reports are from December, the information provided is not consistent across the portfolios and most of the financial information is from the second or third quarters.

Loans from the nine portfolios were packaged into nine separate commercial mortgage-backed securities and then resold to bondholders, who now own the debt.

Most of the owners declined to comment, but in filings said they expect the value of the properties to rise over time.

Housing advocates believe property owners are running into trouble because they overpaid to begin with.

Irene Baldwin, executive director of Association for Neighborhood and Housing Development, said these owners have been unable to raise rents because many tenants are protected by rent stabilization laws.

“Now you have a financial problem because the owners can’t reach their income projections,” she said.

The largest portfolio is Stuyvesant Town and Peter Cooper Village, which Tishman Speyer bought for a record $5.4 billion in 2006. By September 2008, the company had spent $224.4 million of a $400 million interest reserve fund, the Trepp report on their loan said.

A partnership between Manhattan-based real estate investors Apollo Real Estate Advisors and Vantage Properties is the owner of four of the nine portfolios.

Two of the portfolios the partnership bought were recently added to servicer watchlists because of weak financial performance, according to the Trepp reports. Servicers are financial firms that manage the mortgage-backed securities.

Apollo and Vantage bought a portfolio, comprised of eight buildings containing 455 units, in Upper Manhattan in early 2007. In April that year, they borrowed $70 million against the properties, according to data compiled by housing advocacy organization Association of Neighborhood and Housing Development, which has been tracking purchases of multi-family properties in New York City in recent years.

That portfolio, which Trepp’s Clancy said at first appeared to be a strong loan when it was made, was added to the servicer watchlist in October. The loan was added in part because of the weak levels of an important measure of loan performance called the debt service coverage ratio, which is the ratio between the monthly net income and the monthly loan payments.

Although the ratio has improved over the past year from .38 in 2007 to .46 in July — meaning net income now covers 46 percent of the mortgage payment — it remains far below the anticipated ratio of 1.36 from the original loan documents.

“It seemed to be performing at the time it was securitized,” Clancy said. “And the big question is — Why is this so underperforming in this market? That is really what jumped out at me in that particular one.”

Vantage President and CEO Neil Rubler, speaking also on behalf of Apollo, said in a statement the buildings were purchased as long-term investments.

“Vantage and our investment partners are committed to our New York City residential properties and have the resources to service our financial obligations and to preserve and protect our portfolio,” he said.

The partnership’s Queens multi-family portfolio, purchased in 2006, is made up of 31 buildings in Queens with 2,124 apartments, and was added to the loan servicer’s watchlist in November. The borrowers, who according to SEC documents set aside $7 million in 2007 as a reserve fund to make loan payments, had only $1.299 million remaining in the account as of October, the Trepp report said.

A small, four-building portfolio in Upper Manhattan, purchased by Apollo and Vantage in 2007, generated so little income this year that its debt service coverage ratio was just .14 as of September, Trepp’s report said. That means net income covered only 14 percent of the loan payment, in contrast to the anticipated ratio of 1.83.

In East Harlem, a 36-building portfolio bought by the Pinnacle Group saw its debt service coverage ratio on its $204 million loan fall to .35 at the end of September, a 12.5 percent decline from year end 2007. Pinnacle Group did not provide comment.

At the Riverton Houses, a seven-building portfolio with 1,228 units in Harlem that was purchased in 2006 by Stellar Management and the Rockport Group, has a $225 million loan. The debt service coverage ratio on that loan is .32, the data shows, an improvement from .31 in 2007, but still short of its goal of 1.75. A spokeswoman for Stellar declined to comment.

The other two portfolios are in East Harlem and on the Upper East Side.

Dawnay Day, the owner of 37 apartment buildings with 1,142 units in East Harlem, showed a debt service coverage ratio of .89 in September  2008, a decline from 1.03 at the same point a year earlier, the loan’s report showed.

On the Upper East Side, the Meyberry House, a 145-unit building at 220 East 63rd Street was purchased in 2006 by Atlas Capital Group. It has seen its debt service coverage ratio fall from .68 in December 2007 to .40 in October 2008, according to the loan’s report.

This is the first in a two-part Web series on troubled multi-family portfolios.

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