PH Realty Takes Massive Rent-Stabilized Portfolio at 60% Discount

While New York City landlords flee the storm ravaging rent-stabilized housing, PH Realty is heading right into the eye.

Though PH head Peter Hungerford wouldn’t put it that way.

The value-add firm, in partnership with Alma Realty, Rockledge CRE and an unnamed pension fund, according to sources familiar with the deal, closed on the second half of a $180 million portfolio comprising 1,300 units last week. The seller was veteran multifamily investor Sentinel Real Estate.

The portfolio, concentrated in Ditmas Park, Washington Heights and Brighton Beach, is 85 percent rent-stabilized, Hungerford said, meaning revenues are effectively capped on those units.

PH and partners scored the buildings at an approximate 40 percent discount to what Sentinel paid between 2013 and 2019, property records show. The sale marks Sentinel’s exit from the rent-stabilized market.

Executives at Sentinel, Rockledge and Alma did not return requests for comment.

Even considering the discount, the deal is a contrarian bet. Landlords by and large are scrambling to offload their rent-stabilized stock, particularly the majority regulated product that PH and company picked up.

Rents in those units only rise if the rent guidelines board okays a hike — an annual decision that typically leaves landlords head in hands. The bumps reliably lag inflation. Landlords can also notch an increase if they sink money into building or unit renovations. But few pursue that route, as the return on investment typically doesn’t pencil out.

Meanwhile, expenses, including maintenance, utilities and property taxes and insurance in particular, keep rising.

Those who are buying buildings are doing so piecemeal at a low basis so that other assets in their portfolios can supplement the low rents until Albany, some day, changes the laws in landlords’ favor.

But PH Realty isn’t waiting on Albany, Hungerford said. Rather, he’s hoping moves on the city level will ultimately ease the pressures of rising expenses.

In the meantime, the investor plans to renovate apartments to boost occupancy and produce modest returns.

“The play isn’t really about increasing revenue, as much as operating the properties as a responsible local landlord,” Hungerford said.

The portfolio, which includes 24 apartment buildings, is 90 percent occupied — ”In New York, that’s crazy to me,” Hungerford said. The empty units are a chance to refurbish, plug vacancies and boost revenue, a bit.

The vacancies are split between market-rate and rent-stabilized, meaning renovations of some will boost cash flow more than others.

The new owners took out two bridge loans totaling $120 million at a rate of about 7 percent to finance the play. Hungerford said the team plans to refinance with agency debt when renovations are wrapped and interest rates are, ideally, lower.

That’s all well and good but it doesn’t fix the mismatch between flatlined revenue and ever-growing expenses. Lender Bridge Invest’s Alex Horn said the loans were underwritten for expenses to rise 1.5 times faster than rents.

Hungerford identified two line items he hoped might fix that discrepancy: property taxes and insurance, which are coincidentally the biggest headaches for rent-stabilized owners.

Property taxes take the biggest bite out of revenue, and recent attempts by industry-backed groups to lobby for tweaks to tax assessment process for rental buildings TK.

Insurance, meanwhile, is rising at the fastest rate, and Hungerford expects premiums to get so out of whack that the federal government will step in. There’s certainly precedent for that. Take California where carriers quit writing new policies for property owners and the state picked up the slack.

The NYAA spokesperson said there was no movement on the issue right now.

Hungerford also floated that a revamped rent guidelines board could help on the revenue side. Tenants, landlords and most recently board members have called for reform for years. Any legal changes would need to be approved by the state, but the RGB itself could decide to tie its increases to inflation, for example, which would be a help for owners.

Running a portfolio without those interventions, rent-stabilized owners say is without a doubt, a losing game. One landlord who has lost properties to foreclosure and is trying to unwind itself from the rest said the terminal value of buildings is $0 so long as expenses keep rising and rents cannot.

Expecting regulatory change, meanwhile, is not necessarily a bad bet, the NYAA spokesperson said, but a risky one.

Hungerford, for one, hasn’t been deterred by risk.

“Sentiment may be negative toward buildings like these,” Hungerford said. “But I think at some point, in some way, that it is going to change.”

CORRECTION: This article previously stated PH Realty and partners acquired the Sentinel portfolio at a 60 percent discount. The discount was 40 percent.