01/20/2010

Distressed Apartments Near Block in Vegas

Five distressed senior-housing properties in Las Vegas are headed to market, and four others could be on the way.

A Starwood Capital partnership bought the nine-property portfolio in 2006 for $239 million. Last April, five of the complexes were turned over to a receiver, which is now preparing to put them up for sale. Meanwhile, the Starwood team has indicated it intends to cover cashflow shortfalls at the other four properties, but market players think it's only a matter of time before those are jettisoned as well.

The nine garden-style complexes, which encompass 2,265 units, are independent-living properties built in 2000. They are geared for residents 55 and older who don't require intensive assisted-living services.

Starwood, of Greenwich, Conn., and its partner, Orion Residential of Phoenix, financed the portfolio acquisition with $195.2 million of securitized loans from Wachovia, equal to 82% of the purchase price. They rebranded the properties, which formerly carried the name "Carefree," under the banner "Destinations."

But the duo struggled with falling rents and occupancy levels when the housing market imploded. In hard-hit Las Vegas, the values of even stable rental properties have plunged by as much as 40%. However, the Starwood/Orion complexes have been especially battered. The occupancy rates of some complexes have fallen to as low as 70%. Cashflows, in some cases, are less than 40% of the amount needed to service loans.

Last April, Integral Senior Housing of Carlsbad, Calif., was appointed receiver of five of the properties after the Starwood team told servicers it was no longer able to make loan payments. Market players said Integral is now gearing up to list the properties: Destinations at Valley View (344 units); Destinations at Pueblos (242 units); Destinations at Sandhill (180 units); Destinations at Eastern (114 units); and Destinations at Valley View Full Service (82 units).

Cashflows at the other four properties are less than the amount needed to service their loans, but the Starwood team has been making up the difference out-of-pocket.

Loans on two of those properties - Destinations at Pebble (368 units) and Destinations at Spring Valley (271 units) - were recently transferred to special servicing. According to a servicer report, the Starwood partnership has indicated that it intends to continue making payments on those loans.

The remaining two properties - Destinations at Alexander (472 units) and Destinations at Winterhaven (192 units) - were previously in special servicing, but evidently have been transferred out.

Investors think that the Starwood team is unlikely to continue covering shortfalls at the four properties long term, and will eventually throw in the towel on them as well - barring a sudden reversal in performance. The investors noted that the Starwood team had once indicated that it intended to continue making payments on the five other properties, only to end up surrendering them to the servicer.

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