08/11/2010

Angelo Gordon Flips Loan, Nets Hefty Profit

An Angelo, Gordon & Co. partnership earned a 50% nominal return by flipping a mortgage on a suburban Washington apartment complex just one month after acquiring it from Wells Fargo.

While the maneuver was a coup for the Angelo Gordon team, it also underscored the quandary that lenders face in deciding whether and when to liquidate distressed assets.

The loan of about $32 million is backed by Regency Pointe, a 599-unit complex in District Heights, Md., that suffers from low occupancy and physical problems, including damage from a fire. Angelo Gordon, a New York fund operator, teamed up with Donaldson Group of Rockville, Md., to buy the senior loan from Wells at the end of June for about $20 million, or $33,000/unit, via an offering handled by Wells subsidiary Eastdil Secured.

The duo planned to foreclose, conduct a $15 million renovation and hold the property for 3-5 years. A foreclosure auction was held at the end of July, when the Angelo Gordon team expected to assume control of the complex. But bids came in well above the price the duo paid for the loan, prompting it to take a quick profit. Tristar Management, a regional apartment operator in Baltimore, bought the property for just $30.1 million, or $50,000/unit.

The turn of events reflects the uncertain waters that lenders can find themselves in when working out troubled loans. If they delay liquidations in the hope that prices will rebound, they run the risk that the opposite will happen, leading to bigger losses. On the other hand, if they move to sell quickly, they could end up selling too low. That seems to have happened to Wells.

The episode also suggests that the demand for Washington-area apartments, until now largely centering on core properties, may be extending into value-added opportunities. The Angelo Gordon team's ambitious - and costly - improvement plan for Regency Pointe would have been unthinkable just a few months ago, when property values were in flux. But the clear demand for rental housing in the Washington area these days makes value-added plays more realistic.

Wells assumed the loan via its takeover of Wachovia at yearend 2008. Wachovia had originated the loan for Miles Properties, which acquired the complex in September 2006 for $33.3 million, or $56,000/unit.

The Class-C property, at 3201 Walters Lane, has a high vacancy rate and negative net operating income. At least 60 units are unrentable because of fire damage. Miles defaulted earlier this year. The Atlanta company, which controlled 37 apartment properties with 9,200 units, filed for bankruptcy in January.

Angelo Gordon and Donaldson, a value-added specialist, planned to upgrade the complex to Class-B status. The partnership was in talks with lenders to finance the acquisition and renovation.

The foreclosure auction was expected to be a formality. As the holder of the $32 million senior mortgage, the Angelo Gordon team could have "bid" for the property for up to that amount without putting up any additional cash. But it was surprised when Tristar bid close to $31 million. Faced with the choice of taking a quick $10 million profit or trying to build up more value over time via the renovation, the partnership decided that the price was too attractive to pass up.

Area apartment pros expect Tristar to undertake a rehabilitation that would be similar, if more modest, than the one planned by the Angelo Gordon team.

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