How Brookfield prices one-time poster child of “predatory equity” at $1.5B

3333 Broadway in Harlem (Credit: Google)

NOI up 70pct since 2008, tenants churn, rents rise, no public pushback from NYC

By Adam Pincus

In 2007, under the nascent concept of “predatory equity,” tenants and housing organizers protested outside of 3333 Broadway, a massive, 1,193-unit apartment complex at the corner of West 133 Street in Harlem.

Advocates could not understand how Urban American Management —backed by private equity and city pension dollars — could pay $938 million for a 3,962-unit portfolio that included 3333 Broadway, which sold just two years earlier for only $295 million. Fueled by that pricing spread, the so-called Putnam portfolio became a poster child for private equity excesses.

But it turns out Urban American probably could have paid more. After all, the net operating income jumped by nearly 70 percent since they bought it.

It rose from less than $32 million in 2008 to approximately $54 million in 2017, a review of offering memoranda and city assessment records reveals.

That bottom line figure has been on an upward trajectory, city and offering data show, and of course NOI combined with a cap rate is the driver of a sale price.

PincusCo Media estimate of Putnam portfolio NOI using various sources

Now, the current controlling owner, Brookfield Asset Management, has put the portfolio on the market with an asking price of $1.5 billion. The marketing is being handled by a Cushman & Wakefield team including Doug Harmon and Adam Spies.

Brookfield and Urban American declined to comment.

The Putnam portfolio includes several collections of buildings. The largest is the 1,193-unit 3333 Broadway, followed by the 1,003-unit Roosevelt Landings at 510-580 Main Street on Roosevelt Island. There is River Crossing, a 761-unit complex at 1940-1966 First Avenue and 420 East 102nd Street and the 600-unit Heritage at 1295 Fifth Avenue, 1309 Fifth Avenue and 1660 Madison Avenue. Finally there is the Miles and the Parker at 1890 Lexington Avenue and 1990 Lexington Avenue, which have 405 units combined.

So from an investor point of view, the outcome has been good, especially taking into consideration the economic downturn which started in 2008. Many peer acquisitions tanked following the Lehman Brothers collapse. Tishman Speyer famously lost Stuyvesant Town, Stellar Management lost Riverton Houses. The Bronx Ocelot portfolio crumbled and an experienced owner lost control of the “birthplace of hip hop” at 1520 Sedgwick Avenue, also in the Bronx.

Like the rest of the city, the Putnam portfolio struggled for a few years. But the deal got a boost in 2014 when Brookfield Asset Management, the global real estate investment conglomerate, partnered with Urban American and bought a controlling stake in the complex for $1.043 billion. The partners paid off an $800 million Fannie Mae loan, and reduced the debt load to $737.8 million, taking the new loan from New York Community Bank.

But three years later, in 2017, they refinanced five of the six groups of properties (it excluded the Roosevelt Island parcels) with a new seven-year, $714 million loan originated by Wells Fargo and securitized by Freddie Mac. On those properties, the venture pays interest only through July 2020, after that, principal payments kick in.

At the time of that loan, the five groups of properties were valued at $1.25 billion. Had the Roosevelt Island holdings been part of that appraisal, the entire portfolio would have a value of about $1.6 billion, according to an estimate by PincusCo.

And the tenants?

In 2007, the complex was 90 percent federally subsidized or rent regulated —  82 percent of units had Section 8 “sticky” vouchers that traveled with the tenant and 8 percent had restricted rents under a “landlord assistance program”. The number of Section 8 tenants had declined to about 40 percent, as of 2014. It’s unclear how many Section 8 tenants remain.

Riding a steady increase in rents, the portfolio revenues grew from approximately $85 million in 2011 to $127 million in 2017, an analysis of city assessment data show. That gross income figure hides the impact on tenants, however.

Put more bluntly, rents are up sharply since Urban American bought the portfolio. For example at 3333 Broadway, rents rose from an average of about $1,500 per month in 2007 to about $2,239 per month at the end of 2016, an increase of nearly 50 percent in 9 years.

The city, which aggressively intervened in Stuyvesant Town, Riverton and other situations, has not intervened in a public way at this project.

And the city is in a powerful position. The Department of Housing Preservation and Development is the administrator of the rent levels that the Section 8 tenants can be charged for all the properties excluding the Roosevelt Island buildings, which are administered by the state’s Department of Homes and Community Renewal. The market rents can be renegotiated every year based on a new market study, according to a marketing memorandum and insiders. HPD did not immediately respond to a request for comment.

Clarification: The article was updated to clarify that the state’s Department of Homes and Community Renewal administers the Section 8 rents for Roosevelt Island properties.