Gaia, Starwood parlay Lehman bankruptcy into multifamily bonanza

Gaia Real Estate and Starwood Capital just exited their Sun Belt portfolio for more than 15 times what they spent on it. The portfolio had 32 properties with a total of 9,500 units, and almost 60 percent of those are in Texas.

Bringing in Miami-based Starwood as a partner in the joint venture, New York’s Gaia bought the distressed apartment complexes in bankruptcy court in 2012. The portfolio’s availability was connected to the 2008 collapse of Lehman Brothers, which had provided mezzanine financing to previous owner PJ Finance, according to Gaia CEO and cofounder Danny Fishman. The portfolio eventually landed in bankruptcy court in 2011, and Gaia spent a year competing with other companies for the distressed properties.

The partnership paid $22.5 million to buy and recapitalize $503 million in debt on the group of properties, according to a 2012 press release. An additional $14 million was reinvested into the portfolio when it was still in Chapter 11 bankruptcy. That immediately brought 1,000 vacant units back for rental and increased occupancy to 90 percent. The companies also agreed to implement a $45 million capital improvement plan over the following eight years.

The complexes were in “horrible condition,” Fishman said in a phone interview Friday. “There were 32 properties all over the Sun Belt, and in every place there was an issue. There were tons of [code] violations. In some places 20 percent of the units were down. Ten percent of the units were totally destroyed.“

More than half of the portfolio was in Dallas (45 percent), Houston (8 percent) and Corpus Christi, Texas (6 percent). It also included properties in Phoenix (19 percent), Atlanta (8 percent), Fort Lauderdale (7 percent), Nashville (5 percent) and Orlando (3 percent).

The first two years after Gaia and Starwood acquired the portfolio were spent rehabbing the properties and increasing occupancy. Over the following decade, the companies distributed cash flow and paid off debt on the portfolio, then exited with what Fishman called “a huge return.”

Gaia and Starwood attributed the success of the deal to “an early adopter mentality” toward “the Sunbelt investment strategy,” according to a press release. In addition, Fishman said, turning around distressed properties or those in “special situations” is “Gaia’s forte. We’re also operators so we’re not just sitting in towers. We know the real estate.”

Fishman said the companies exited the portfolio after 10 years because “it was the end of the cycle for the funds.” He also hinted that it might be the end of another cycle. The Sun Belt investment “started with the recession, when Lehman Brothers declared bankruptcy,” he said, “and ends up today, before the next cycle down — maybe the peak before the second cycle down.”