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A Private Equity Firm Has Sold 14,000 East Coast Apartments For Over $3B This Year

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A Dallas-based private equity firm has sold $3B worth of suburban multifamily properties along the East Coast this year, unloading thousands of apartments and creating opportunities for hungry buyers. 

The East Meadow apartments in Fairfax, which Lone Star sold for $43.8M in March
The East Meadow apartments in Fairfax, which Lone Star sold for $43.8M in March

Lone Star Funds has sold a series of multifamily portfolios in Virginia, Pennsylvania, New York and Massachusetts totaling 14,606 apartments, all since January, according to Real Capital Analytics data.

In the Mid-Atlantic states of Virginia and Pennsylvania, the firm has sold 11,156 apartments for $2.2B in February and March alone, RCA data shows. 

"These are huge acquisitions being made in our submarkets," said Transwestern Executive Vice President Dean Sigmon, who leads the firm's Mid-Atlantic Multifamily Group. 

The Mid-Atlantic sell-off is highlighted by two major portfolio transactions. Lone Star sold 10 properties totaling 4,130 units to Morgan Properties for $890M, in a deal announced March 14. Lone Star has also sold a 6,000-unit portfolio to Kushner Cos. in a $1.1B deal. Lone Star declined to comment. 

Lone Star has sold eight New York properties totaling 1,728 units for $516.5M since January, according to RCA. The majority of those sales came as part of a Long Island portfolio it sold to Fairfield Properties for $472.5M. It has also sold six Massachusetts properties totaling 1,722 units for $379.9M, according to the RCA data. 

The sales largely consist of properties Lone Star scooped up with its 2015 acquisition of Home Properties for $7.6B. None of the apartments are located in downtown areas; the majority are garden-style suburban communities. 

Lone Star, founded in 1995, has 15 offices around the world, including three U.S. offices in Dallas, Miami and New York. The firm has raised 18 private equity funds with combined capital commitments of roughly $80B. The latest real estate fund the firm launched in December is targeting $3B of equity, roughly half the size of its previous fund, a sign it is slowing its acquisition pace. 

The firm was a net buyer from 2012 to 2015, its peak year of acquisitions, but then shifted to become a net seller in 2016, according to the RCA data, and it has continued to focus on dispositions over the last three years.

The Home Properties of Devon apartments, a suburban Philadelphia community Morgan Properties acquired from Lone Star
The Home Properties of Devon apartments, a suburban Philadelphia community Morgan Properties acquired from Lone Star

Sigmon, who previously worked on deals with Home Properties before Lone Star acquired it, said the properties are all quality, suburban multifamily assets. He said Lone Star has always indicated it planned to sell the apartments, but right now is a smart time to take advantage of the market. 

"It's a great time to be a seller," Sigmon said. "There's not enough product to meet demand. It just continues to be unbelievable the responses brokers are getting and where the pricing is going. It continues to go higher." 

The demand in the market come from large institutional players like Morgan Properties. The Pennsylvania-based investment firm has acquired over 30,000 units for more than $5B combined since 2012. It has focused on massive portfolio acquisitions like the Lone Star deal and its $509M acquisition of Northern Virginia's 2,644-unit Mark Center portfolio in 2017. 

"We typically target large, one-off portfolio acquisitions," Morgan Properties President Jonathan Morgan said. "We're finding there's less competition there, it's more institutional, and the local and regional competitors are capital constrained. It gives us an edge." 

Morgan has been scooping up thousands of suburban, Class-B apartments in the Mid-Atlantic. Morgan said he thinks that sector of the market is well-positioned for the future and he plans to hold the properties long-term. 

"We realize it's getting late innings in the cycle, but we're bullish on the fundamentals of multifamily and feel we're in the right space in Class-B," Morgan said. "We have the benefit of duration being a long-term holder."

The only difficulty, Morgan said, has been finding sellers willing to part ways with large multifamily portfolios. He said more product has been coming to market around Maryland and Virginia, but the offerings in the Pennsylvania and New Jersey area have traditionally been sparse. 

"In suburban Philly, there haven't been a whole lot of transactions, the owners are families that are long-term holders," Morgan said. "We're talking about a more institutional market in Maryland with funds that come to an end creating opportunities to dispose of large portfolios. That doesn't really happen in Pennsylvania and New Jersey." 

The Lone Star portfolio, a rare example of a large stock of Pennsylvania apartments hitting the market, presented a prime opportunity for Morgan Properties. More than half of the 4,130 units in the portfolio it acquired are based in Pennsylvania, making it the largest multifamily owner in the state. 

CBRE's 12-broker Mid-Atlantic multifamily investment sales team, led by Bill Roohan and Mike Muldowney, is representing Lone Star in its dispositions. 

The majority of the former Home Properties portfolio Lone Star is offloading appears to be sold or under contract, Sigmon said, but that does not mean the large-scale multifamily transactions in the Mid-Atlantic will end. CBRE's team is also marketing a seven-property portfolio in Maryland and Virginia on behalf of Pantzer Properties. Sigmon said he expects more large portfolios offered for sale as pricing continues to rise.

"I think you'll continue to see a few more portfolios come to market," Sigmon said.