PROPERTY: Private Equity Firm Gets in Good Markets for Less
San Diego Business Journal
By Lou Hirsh
Interwest Capital Corp. looked far and wide and among young and old for commercial property investment opportunities during what turned out to be a busy 2013 for the La Jolla-based company.
It finished the year by closing on the first portion of what would be a $150 million investment in a Las Vegas portfolio of eight senior housing communities. That came not long after it made a deal to acquire a 904-bed student housing complex in College Station, Texas, serving Texas A&M University, for an undisclosed price. (The complex has been appraised by Texas Brazos County at $33.8 million.)
The transactions were calculated bets on two growing demographic segments. More importantly, Interwest Chairman and CEO Alex Roudi said , is that both deals fit the company’s longtime core strategy of seeking “value-add” transactions, in which it acquires the debt on properties whose prior owners encountered problems paying off loans, leading to delinquency and foreclosures.
By dealing with lenders and special servicers, Interwest and its investment partners are able to acquire assets at a cost much lower than developing or acquiring the same type of property at current market prices. The low buy-in cost also enables the private equity firm to invest in renovating and repositioning those properties.
“We like these complicated situations, where we can find value in places where other people might not know where to look,” said Roudi, who founded the company in 2003.
Its nationwide portfolio stands at around $850 million, with holdings across all commercial property sectors. Over the past two years, its largest investments have involved apartments and hotels in the western United States.
Interwest recent completed a multimillion-dollar renovation of the historic Crowne Plaza San Marcos Golf Resort hotel in Chandler, Ariz., which it bought in early 2013 for $11 million. During 2012 and 2013, it invested in similar overhauls of historic hotels that it acquired in San Francisco, New Orleansand Birmingham, Ala., all under distress-related conditions.
The company is anticipating another three years in which the national apartment market will continue to see rising consumer demand, with rents also increasing amid tight supply, Roudi said. Senior and college student housing have recently shown themselves to be among the more stable sectors within the apartment category.
He said part of the reason behind its purchase of the Las Vegas Destinations Living portfolio more than 2,100 age-restricted apartments, acquired in partnership with New York-based Angelo Gordon & Co. is that residents 55 and over generally stay long-term in one place during their retirement years, until they need a higher level of medical care.
The acquisition of the 904-bed Woodlands of College Station marked Interwest’s fifth buy in Texas, and Roudi said the company is planning to convert two of its earlier apartment acquisitions, in the Dallas and Houston markets, into college student-oriented housing. Universities like Texas A&M are seeing burgeoning enrollment amid academic program expansions, he said, and campus-adjacent student apartment vacancies tend to get filled quickly.
Tougher to Find Bargains
While Interwest’s annual investments have consistently ranged from $150 million to $180 million over the past few years, Roudi acknowledged that it has become increasingly challenging to find properties that meet its value-add, distress-focused buying criteria at a time when the overall economy is steadily improving.
That’s especially true in relatively healthy markets like San Diego County, where Interwest has two properties the mixed-use Viridian Lofts in downtown San Diego and the Monarch at Scripps Ranch apartment community.
According to real estate data provider Trepp LLC, 3.08 percent of commercial property loan balances in San Diego County were at least 30 days delinquent as of January, down from 3.55 percent a year ago.
That was much lower than the national rate of 7.25 percent, which is down from 9.57 percent a year ago.
Roudi said his company over the next few years will be scouting locally and nationally for bargains on properties whose owners took out loans just before a real estate bubble burst as the recession hit. Many of those loans will soon be reaching their 10-year maturities, and some of those owners could face issues in refinancing their debt or otherwise be motivated to sell.
“Everything is cyclical, but there are always opportunities out there,” Roudi said.