It was only six months ago that 29th Street Capital touted Jeff Day’s skills with distressed debt and collateralized loan obligations as a key reason for hiring him away from Newmark, where he had risen to head of multifamily capital markets.
Little wonder given the challenges the Chicago-based multifamily investment firm now faces, as its strategy of buying vintage fixer-upper properties nationwide faces the hurdle of higher interest rates. Indeed, Day was hired as 29th Street’s Chief Investment Officer in January, but the company’s website now lists him as CEO.
The firm in recent months has paused or been delayed in its renovation work on some of its properties, according to loan servicer reports collated by credit ratings agency Morningstar Credit. The landlord owns apartments in 23 markets, a portfolio of complexes that are typically larger than 100 units and originally built between 20 and 40 years ago, though it owns some newer properties, as well. The paused projects mean the landlord is behind schedule in executing its business plan of buying properties, improving them with upgrades and raising rents.
The work stoppages appear to come in tandem with the firm facing headwinds on at least $258 million in floating rate debt. Lenders have flagged nine of the firm’s properties as the cost to service debts have risen along with interest rates as the Federal Reserve continues its battle with inflation.
Loan servicers, including Newmark and Berkadia, are working on behalf of lenders, such as Ready Capital and Bridge Investment Group, to oversee debts owed by 29th Street on the nine properties. All nine of the complexes appear to have been hit hard by surging borrowing costs on floating rate loans taken out between 2020 and 2022, according to loan data from ratings agency Morningstar Credit.
Morningstar Credit recently indicated that 29th Street is pouring cash to offset shortfalls on debt obligations at a roster of properties from the West Coast to the Deep South, including:
- Lincoln Medical Center Apartments, $18.3M; 224 units; Houston
- Waterside at RiverPark Place, $18.6M; 107 units; Louisville, Kentucky
- 79 Metcalf Apartments, $33.5M; 280 units; Overland Park, Kansas
- Spalding Bridge, $29.7M; 192 units; Atlanta
- The Highbank, $37.6M; 284 units; Houston
- Southglenn Place, $18.6M; 107 units; Centennial, Colorado
- Avana Sterling Ridge, $37.2M; 254 units; The Woodlands, Texas
- The Lake House At Martin's Landing, $47M; 300 units; Roswell, Georgia
- The Davenport Apartment Homes, $17.8M; 126 units; Sacramento, California
Loan servicers tied to 29th Street’s deals either declined to comment or didn’t return requests for comment.
Robb Bollhoffer, a managing partner for 29th Street for the past decade, said in December that the firm had “dealt with most” of its rate caps, which are financial mechanisms that limit the impact of interest rate hikes on floating rate loans, at a cost to the borrower.
“Just slow here,” Bollhoffer said at the time. He refuted that more than $200 million in floating rate loans for 29th Street-owned apartment complexes had been watchlisted by lenders in the last year and were facing upcoming maturity dates.
“We have extended all loans that are approaching maturity,” 29th Street founder Stan Beraznik said in a Dec. 27 email.
29th Street is nonetheless one of several multifamily players to have drawn concerns from lenders since raising money from investors and taking on floating rate debt to buy real estate in the years after the coronavirus pandemic upended the economy.
The firm and its leaders have not returned subsequent requests for comment as additional loan data detailed further deterioration of revenue streams at the properties.
29th Street Capital was founded by Beraznik in 2009. He made its first real estate investment at an auction held on the steps of a San Francisco courthouse, the property being a home on the firm’s namesake street.
By 2018, it had bought 10,000 apartment units, and two years later it had doubled that to 20,000, according to the firm’s website. Its portfolio consisted of more than 15,000 units as of earlier this year, according to a news release. Last year, the firm bought 18 properties with more than 5,000 units, the release said.
The landlord was not prepared for interest rates to rise as suddenly as they did when it was borrowing the money for the deals, loan data indicates. All of them posted debt service coverage ratios, or DSCRs — a measure of a property’s revenue stream compared to the cost of its operations and debt — well below the breakeven point of 1.0. That generally means the borrower is having to put additional cash into the deals to satisfy its debt obligations. Lenders normally watchlist loans in such situations, meaning they’re subjected to extra scrutiny until the borrowers can improve a property’s performance.
At 29th Street’s 79 Metcalf property in Kansas, the DSCR fell as low as 0.26 for 2023. Its loan matured in May, and is under review by the lender for a potential maturity extension, loan data shows.
“The property was at [the] tail end of [a] major renovation phase and occupancy was steadily increasing as units come online,” a loan servicer, Berkadia, wrote in a report last month. The 29th Street affiliate that borrowed against the property expected to generate more cash flow starting in the first quarter of this year, but it’s unclear if the property’s performance has turned around.
The loans owed by 29th Street tracked by The Real Deal make up only a portion of the firm’s vast multifamily portfolio — most of its other properties are tied to debts that haven’t been securitized or rated by Morningstar, meaning there’s fewer public details of their performance. The credit ratings agency’s data on the watchlisted debts is derived from reports on collateralized loan obligations, or CLOs — pools of loans against multiple commercial properties that were packaged together and sold off in pieces by their original lenders — as well as commercial mortgage-backed security loans owned by Freddie Mac.
However, 29th Street’s watchlisted deals show the brutal impact rising interest rates can have on borrowers carrying adjustable rate debt.
At the Lake House at Martin’s Landing property north of Atlanta, the cost of debt service is currently more than triple the amount underwritten by the dealmakers when the loan was originated. That has pushed the property’s rate cap escrow — money set aside in case the borrower needs to purchase a new instrument to limit exposure to interest rate hikes — to more than $200,000 per month, compared to just $990 per month at the deal’s inception, according to loan servicer commentary.
The landlord’s plans to deal with the concerns flagged by lenders aren’t yet clear. It’s unknown whether 29th Street’s properties can meet whatever capital requirements lenders might set to extend their maturity dates, several of which are set for later this year while a handful aren’t due until as late as 2030.
At least one lender has started to make some moves on a 29th Street deal.
In February, the manager of a CLO originated by an affiliate of Bridge moved a $35 million loan to 29th Street for a 192-unit apartment complex, at 131-171 South Burlington Avenue in Los Angeles, out of the pooled debt after it had struggled with delinquent debt payments since 2022, loan data shows. The move allows the lender to shield other investors in the CLO from being harmed by the delinquency by replacing the troubled loan in the pool with a performing one, while the original lender keeps the bad debt on its own books.
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