It was a fitting end to the year. In the waning months of 2009, Addison, Texas-based Behringer Harvard acquired a 168-unit New Haven, Conn., apartment community; purchased the 330-unit Eclipse luxury apartments in Houston; and bought a 75-plus percent interest in two Washington, D.C., multifamily developments in the final stages of construction. The deals—all attributable to the company’s first publicly-registered, non-traded Multifamily REIT—concluded a year-long acquisition spree that saw no rival in the industry, with investments made via joint venture, as well as the direct acquisition of 10 multifamily properties in as many markets. And while more serious competitors are returning to the bidding table, the company still has vast cash reserves on hand and plans to see its purchasing volume increase across the course of 2010.

It’s a noteworthy feat, indeed. But Behringer Harvard’s portfolio strategy is not altogether special. They acquire Class A assets in high-barrier, core markets at a discount to replacement, make capital improvements where necessary, and then look forward to an exit strategy for its investors via some form of asset liquidation over the following three to seven years. What’s more, the firm’s access to capital isn’t particularly distinct. Plenty of publicly-traded REITs have amassed dry powder distress war chests to deploy into the acquisition market. Indeed, Behringer Harvard senior vice president Mark Alfieri sees a lot of regular faces (and a growing list of newer, although known, entities) at the bidding table.

Simply put, there are two reasons why Behringer Harvard has been able to lead the assault on multifamily distress, dominating the multifamily acquisition scene of the past 12 months: an absence of legacy assets on the books and practically no fear regarding further deterioration in multifamily operating fundamentals. Unhindered by portfolio issues and with a mandate to buy, the company is investing for the longer hold and consequently has no qualms grabbing assets at what they feel are fantastic prices.

“The values that we see on a price-per-pound basis are as good as we have seen in 20 years,” Alfieri says. “There’s been an enormous increase in property listings and properties available on the market as the banks stop extending loans for developers. There are also some bankruptcy situations out there that have to be resolved sooner or later with Lehman Bros. and other owners involving large multifamily portfolios. It all points to a huge increase in institutional-quality apartments coming on the market in 2010, so we think our run rate on the acquisition side is going to increase dramatically in 2010. I think we’ll buy twice as much.”

First Mover Advantage

Dominant though they may be in the current acquisition climate, Behringer Harvard executives don’t have any illusions regarding deal flow, either specific to deployment of Behringer Harvard Multifamily REIT I capital, or in the wider industry trading space thus far devoid of major activity. “If it had been 2004, 2005, 2006, nobody would have even looked at us. We would just be someone else at the table bidding,” says Behringer Harvard president and co-COO Robert Aisner. “This year, our transaction volume was among the highest, and in a market of recessionary economics, that made us the tallest midget in the circus.”

Aisner’s not lost on the self-placating nature of that statement, but coupled with the modesty of their transaction volume is a realization that Behringer Harvard was, for all intents and purposes, the first major multifamily player to substantially enter the distressed market. Approved by the U.S. Securities and Exchange Commission in 2001 to issue publicly-registered, non-listed REITs, Behringer Harvard has managed some $10 billion of assets since its inception—a good share of them not in the multifamily sector.

Buying Spree
The 10 most recent deals closed by Behringer Harvard’s Multifamily REIT I fund.
PROPERTY	CITY	MONTH (in ’09)
Verandah at Meyerland (Halstead)	Houston	June
Waterford Place	Dublin, Calif.	September
Mariposa Lofts Apartments	Atlanta	September
The Gallery at NoHo Commons	Los Angeles	September
Burrough’s Mill Apartment Homes	Cherry Hill, N.J.	September
Forty55 Lofts	Marina del Rey, Calif.	September
Grand Reserve Orange	New Haven, Conn.	November
55 Hundred	Arlington, Va.	November
The Eclipse	Houston	November
Bailey’s Crossing	Fairfax County, Va.	December

Since then, the company has issued and managed eight funds (four REITs, two limited partnerships, and two accredited funds) to invest in core and opportunity office, hospitality, and apartment assets. While Behringer Harvard opportunity funds can—and do—invest in multifamily assets, equity, and debt, the Multifamily REIT allocation is focused almost entirely on acquiring stabilized assets, although the REIT prospectus does allow Behringer Harvard to deploy the capital into different multifamily investment vehicles. Launched with a private offering in 2006, the Multifamily REIT raised an initial $127 million and was boosted by two $100 million commitments made in 2007 by Dutch pension fund PGGM. (See “Going Dutch,” opposite.) According to public filings, in September 2008, the REIT commenced its public offering and has since raised an additional $264 million in share purchases from the individual investor broker-dealer network. The REIT, open until September 10, 2010, has a total offering size of $2 billion in primary shares with an additional $475 million set aside for distribution reinvestment and already has $1 billion in multifamily assets targeted for investment.

“There was a little bit of vision and a little bit of luck in the market timing of strategically launching our multifamily platform three years ago,” says Behringer Harvard executive vice president and co-COO Robert Chapman. “But we find ourselves in a situation where there is strong investor interest in a market that has deal flow with a limited amount of players, so you are seeing a lot of transactional activity from us for those reasons.”

Key to Behringer Harvard’s agility in navigating multifamily distress has been its unencumbered asset base. The Multifamily REIT was envisioned as an opportunity to amass a brand-new, Class A multifamily apartment portfolio. Ten core assets were purchased from April 2006 to December 2007 via funds from the private offering and capital committed by PGGM, including luxury multifamily communities in Las Vegas, Denver, Dallas, Houston, Atlanta, Washington, D.C., and Ft. Lauderdale, Fla. Other than discretionary cap ex improvements, the REIT has no legacy issues: Cash can be deployed at will into the acquisition market. “Through most of 2009, everyone else out there—even the publicly traded REITs—had problems,” Aisner says. “The ongoing challenge for most multifamily firms right now is figuring out how to allocate capital to solve old problems. We don’t have any old problems. We are a brand-new, shiny car driving down the street, and the muffler works great, and that has made us different.”

Not that the firm is new to the multifamily space. Aisner, Chapman, and Alfieri are Chicago-based AMLI Residential veterans. Aisner served as executive vice president of AMLI Residential Properties Trust, president of AMLI Management Co., and vice president of AMLI Residential Construction; Chapman served as AMLI Residential’s executive vice president and CFO; and Alfieri as a senior vice president directing investment activities for AMLI’s Southwest region, where he completed more than $1.4 billion in multifamily transactions during his seven-year tenure. “We all worked together at AMLI, so literally for the last 14 years we’ve been together one way or another,” says Aisner, who helped form Behringer Harvard from legacy firms Behringer Partners and Harvard Property Trust. “We know most of the people in the business, and we’re not an unknown quantity ourselves. But that’s not entirely unusual. Multifamily is a relatively small business, and it’s not hard to go to a meeting where everyone knows everyone else.”

Deal Closers

Still, Behringer Harvard’s reputation for execution in the multifamily deal space is beginning to precede sit-downs at the bid table, augmenting a quick-close, all-cash transaction strategy that all but the most well-powdered and liquid competitors are finding hard to beat. “In looking at them in the competitive landscape, they have certainly put together a very solid team of high-caliber individuals,” says Steve Lamberti, COO of Dallas-based The Milestone Group, which does not currently have any business relationship with Behringer Harvard. “What they have been able to do over the past 24 months is execute at a very high level. They have been focused, have had a consistent acquisition strategy, and I admire the level of quality in that execution. If you are going to spend the money and spend the time, you might as well do it right.”

Alfieri says acquisition opportunities are coming to Behringer Harvard split evenly between brokered deals and off-market offerings. But regardless of how deals are being marketed, sellers want certainty of execution, which means accelerated due diligence and typically all-cash and/or debt assumption transactions. “That’s what is winning deals right now—the ability to get in quickly, execute due diligence quickly, and get closed right away with cash and not wait on financing,” Alfieri says. “If you’re going to finance, then finance them after the fact. On the due diligence side, there’s been an opportunity for extensive market monitoring for awhile. Most of the deals we are buying today we have been tracking for a year or more—it is all distress that is finally maturing.”

That concept of mature distress isn’t a feint. Behringer Harvard has underwritten near-term rent and occupancy depreciation into its acquisition strategy, and is therefore trumping players still staring at the recession and balking on the fear of additional fundamentals deterioration. The firm simply isn’t waiting for bottom and instead is happy to jump in at a time when prices coupled with interest rates offer a compelling return to investors.

“They are ahead of the curve,” says Washington, D.C.-based National Multi Housing Council president Doug Bibby. “There are a lot of investors waiting until that absolute perfect time when every seller is distressed and the bid/ask spread is down to zero. Forget it. If you’ve got capital and can get the kind of returns your investors expect, then this is a great time to buy, rather than try to time the market.”

Indeed, Alfieri says that rent depreciation is already reflected in current pricing, and without exception, Behringer Harvard is looking for distressed sellers—not distressed assets. Those sellers are typically players in the institutional space looking for liquidity in liquid markets, and acquisitions are typically commanding cap rates ranging between 5.5 percent and 6.5 percent, with the occasional deal coming in at a 7 percent cap. “But interest rates are lower, so the positive spread between debt and cap rate is much greater than it has been in decades,” Alfieri says. “We just closed a loan at 4.72 percent fixed. When you are applying a 7 percent cap to the investment with that kind of debt, the positive leverage is very attractive.”

Nearly all long-term financing on Behringer Harvard Multifamily REIT assets are agency-led, and Alfieri notes the inability of insurance firms and other debt capital sources to stay competitive with the long-term, fixed-rate, interest-only products available via Fannie Mae and Freddie Mac. In addition to post-acquisition financing and debt assumption, bylaws of the Multifamily REIT also allow the firm to deploy capital as an equity investor in a recapitalization play; as a mezzanine lender; or even as an equity JV player in new development projects.

“We have done five joint venture developments with them,” says Ken Valach, executive managing director for Dallas-based Trammell Crow Residential. “I think we were one of the first calls when they started the multifamily program. They went through specific markets they wanted to target, and we identified opportunities in Houston, Denver, and Las Vegas. They are decisive, and that has been a great asset to work through the tough development climate. From investments to construction to asset management, they move fast and with certainty.”

Forward Looking

Regardless of deal structure or rate, Behringer Harvard’s ability to close as an all-cash buyer is bringing repeat business to the table, particularly among institutional sellers looking for certainty in the disposition space. That business could become more valuable in 2010 as additional buyers return to the transaction arena.

“We were out in front, but there are a lot of investors in the queue now,” Alfieri says. “There are a couple of public REITs and also more institutional investors now bidding at the same level as Behringer Harvard, and that wasn’t the case even 60 days ago. The market has already changed pretty dramatically from that standpoint.” In addition to competitive pressure from publicly-traded companies and institutions, Behringer Harvard is also competing with owners such as Santa Ana, Calif.-based Grubb and Ellis and New York-based Bluerock, both of whom are raising capital publicly for multifamily funds in the non-listed REIT space.

Despite that increased competition, cap rates do not seem to be compressing, likely due to the expectation of disposition volume over the next 24 months. In short, there’s likely to be more than enough property to go around, and Behringer Harvard is bullish on the firm’s opportunity to fully deploy its Multifamily REIT capital into the Class A apartment space.

“There are additional bidders that are focused on the same core product we are,” Alfieri says. “But we’ve won more than we’ve lost. Our 2009 reputation is the way we have closed and repeat business with institutional sellers. With the amount of product coming online this year, and the excess capital we have to invest, there’s plenty of opportunity continuing to come our way.” Looks like 2010 just might be another banner year for the firm.

 

Going Dutch

Behringer Harvard is on the leading edge of a growing trend to partner with foreign investors and seek co-investment equity.

Of the $400 million that has been available as part of Behringer Harvard’s Multifamily REIT I, about half has come via co-investment commitments from the Dutch pension fund PGGM, currently the second-largest pension fund in the Netherlands and 17th largest in the world, according to the 2009 Pension & Investments/Watson Wyatt World 300 ranking of global funds. And Behringer Harvard dealmakers aren’t letting the money sit idle. “A significant portion of our capital investment is coming from institutional co-investment,” says company senior vice president Mark Alfieri. “To date our institutional investors have co-invested in about 70 percent of our portfolio assets on the multifamily side.”

Supplementing the REIT’s common share proceeds with institutional co-investment capital has figured large into Behringer Harvard’s current acquisition spree, including the recent 75-plus percent majority interest purchase of Bailey’s Crossing and 55 Hundred, two Washington, D.C., luxury apartment communities in the final stages of development.

“Our relationship with PGGM is an example of our broader view of how to bring capital into the space,” says Behringer Harvard president and COO Bob Aisner. Industry pundits agree: “Behringer Harvard is among the few in the multifamily space that have substantial assets and capital relationships outside the United States,” says Washington, D.C.-based National Multi Housing Council president Doug Bibby, who also points to Seattle-based Pinnacle, an American Management Services Co., and Englewood, Colo.-based Archstone as firms with foreign investment capabilities. “They are all on the leading edge of what will be a phenomenon in our business—an understanding of the worldwide capital markets, how to attract capital to this country, and how to invest outside the States.”

To that end, Behringer Harvard also maintains a permanent office in Hamburg, Germany and has been successful in attracting individual investor interest from Europe to its real estate funds in addition to leveraging international pension equity.

“The office there is charged not only with managing some of the assets we have in Europe but also with raising capital, some of which could find its way here as a direct investment or as a co-investment in our multifamily platform or one of our other platoforms,” says Behringer Harvard executive vice president and COO Robert Chapman. “Our capital-raising platform is more global and diverse than just the retail individual investor in the U.S., and we think there are a lot of synergies that can be created by marrying capital sources over time.”