(To read more on the multifamily market, click here.)
DETROIT-The Lakewood, NJ-based Lightstone Group has acquired a 19-property multifamily portfolio from Rochester, NY-based Home Properties Inc. for approximately $250 million. All of the facilities are in the Detroit suburbs, an area of high unemployment and job loss.
"Home Properties' exit from the Michigan market is consistent with our strategy of focusing our operations in high-barrier, high-growth markets along the East Coast," says Edward J. Pettinella, president and CEO, in a statement. He adds that the divestiture will improve his company's future financial performance, "which was muted in recent years by the negative net operating income growth of these properties." The seller could not be reached by deadline.
David Lichtenstein, Lightstone's CEO, acknowledges this is a declining market, but tells GlobeSt.com, "we're an opportunistic investor. We look for places where there are problems." Of these properties, he says, "I don't even know their average age. We look at their condition, and they are B+ assets. We expect to invest in deferred maintenance and upgrades," he adds, without disclosing the amount of anticipated investment.
He says Lightstone is acquiring the portfolio at a 7.75% cap rate, "two points higher than similar properties, so the risk has been factored in. People are telling me I'm insane, but we're a turnaround buyer. Very little of what we do is vanilla-type property. While a public company's shareholders want absolute security and no perceived risk, the people who come along with us want higher return and that involves higher risk."
The properties are 90% occupied, and he says just 10% of the tenants work at auto companies, "although, we never know how many are in industries that support the auto business. We believe the market is oversold, and, while occupancy in the market has gone down by about 1% or 2%, prices are down by 20%. We believe that's an overreaction to current weakness.
"Definitely, a few of the properties are conversion candidates," he adds, "and we may sell to or partner with a converter." The majority, however, will remain rental. Beacon Management, a Lightstone affiliate, will manage the portfolio.
Four of the 19 complexes were actually acquired by Lightstone Value-Plus REIT, a Lightstone affiliate. "A REIT has its own appetite," Lichtenstein says, "so four of the properties went into that portfolio." Lightstone acquired the portfolio free and clear. According to the Home Properties' statement, Home anticipates net proceeds of $150.4 million from the transaction, after closing costs and $72.7 million in debt repayment.
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