S2 Capital CMBS Loans Flagged For Special Servicing

A wave of distress has hit the shelter S2 Capital built to protect its properties from high interest rates.

Over $250 million in CMBS loans tied to three S2-owned properties was transferred to special servicing, Morningstar Credit reported. Each property failed to maintain net cashflow at the level for which the loans were underwritten.

As rising interest rates toppled Scott Everett’s syndicator peers, his Dallas-based firm found a creative way to wait out the rate hikes and rolled its multifamily portfolio into a real estate investment trust. It’s been two years since the creation of the REIT and rates are still stubbornly high.

The underperforming CMBS debt includes the $92.2 million loan tied to The Kace, a 720-unit complex at 2301 Avenue H East in the Dallas suburb of Grand Prairie; the $84 million loan tied to The Weston Medical Center Apartments, a 793-unit property at 7510 Brompton Road in Houston; and The Jerome, a 408-unit complex at 6451 West Bell Road in Glendale, Arizona.

It’s been a rocky stretch for the Dallas-based multifamily firm, which was also hit with a $78 million foreclosure this month for The Republic Apartments in Garland. Everett told The Real Deal in an email that the property is under contract to sell in the next 30 days.

The distress comes a few months after S2 issued a capital call, asking for $70 million in preferred equity. Without the funds, the firm said it would have to sell off properties.

S2 ended up raising $30 million, which will provide a “short runway to complete an orderly wind down of the REIT,” according to Trinity Investors, the feeder fund that helped launch the REIT. Trinity isn’t expecting to get anything out of the trust, and warned: “equity investors should expect a full loss of capital.”

The REIT owns over 9,000 units in North Texas, Houston and Phoenix.