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Friday, Dec 9, 2022

Deal Signal of Irvine Co. Shopping Spree?

A new billion-dollar funding deal involving a portion of Irvine Company’s apartment portfolio raises the prospect that Orange County’s dominant real estate company could soon be on the lookout for acquisitions.

The multifamily division of Freddie Mac, the government-backed mortgage company, announced this month that it priced a new offering of multifamily mortgage-backed securities backed by 19 rental properties owned by the Newport Beach-based company.

The apartment complexes are based largely in Orange County, 15 of them in Irvine, one in Tustin, and the other three in San Diego and Redwood City.

The mortgage balance for the properties is about $1.16 billion, and the Freddie Mac offering totals about $1.04 billion of that, according to documents tied to the securities.

The rental properties, which were built between 1975 and 2002 and hold 5,242 apartments altogether, have roughly $220,000 of debt per unit attached to them following the financing deal.

They have a combined appraised value of nearly $1.9 billion, or roughly $360,000 per unit, according to Freddie Mac’s data. The financing deal represents about a 63% loan-to-value ratio.

None of the locally based complexes is believed to have had significant, if any, debt tied to them before the transaction, according to sources familiar with Irvine Co.’s apartment operations.

The privately held company is the largest apartment owner in California, with an in-state portfolio of close to 57,000 units.

War Chest?

Irvine Co. is no stranger to having its office and apartment properties wrapped up in commercial mortgage-backed securities. Several billion dollars’ worth of debt tied to its properties was packaged in such deals in recent years.

The individual deals in some cases, as in the new Freddie Mac transaction, have involved only Irvine Co. properties, while in other transactions the company’s properties have been packaged with non-Irvine Co. buildings into new securities.

Irvine Co. has paid interest rates as low as 3.2% for some of its other large loans tied to CMBS deals in the past few years. The 10-year loan tied to the 19 apartment complexes carries a 4.3% interest rate.

Prior CMBS deals have preceded notable acquisitions by Irvine Co., whose investment portfolio totals 115 million square feet, including 47.5 million square feet of office space and 8.8 million square feet of retail space, in addition to its apartment and resort portfolio.

The company in 2013 raised about $875 million after finalizing a commercial mortgage loan package tied to 4.8 million square feet of office space it owns in Orange and Los Angeles counties.

None of those offices had debt tied to them prior to the financing deal; market watchers suggested at the time that Irvine Co. was preparing a “war chest” to fund an acquisition push.

Irvine Co. within a year had struck a deal to buy the 60-story 300 N. LaSalle building in Chicago, Ill., for $850 million, one of the largest purchases in its history.

Company officials declined to comment on the latest financing deal. The company isn’t known to be planning any significant acquisitions outside of a 319,000-square-foot office campus in the Silicon Valley city of Sunnyvale that it’s rumored to be buying to make way for an apartment complex.

Full Occupancy

The underlying mortgage loans for the apartment complexes were originated by CBRE Capital Markets Inc., PNC Bank and Wells Fargo Bank in individual deals that closed in late February.

The largest individual mortgage was a $124.4 million loan tied to Brittany at Oak Creek, a 529-unit complex near the intersection of Jeffrey Road and the San Diego (I- 405) Freeway in Irvine. Average monthly rents there are close to $2,000 per unit.

The largest complex by unit count involved in the deal is the 604-unit Northwood Place Apartment Homes complex near Jeffrey Road and the Santa Ana (I-5) Freeway in Irvine. It now has about $116 million in debt tied to it. Monthly rents there average about $1,650 per unit.

The 19-property portfolio is largely full. The lowest occupancy rate of any complex involved in the deal is 93.7%.

Four complexes were renovated in the past year, and the company plans to renovate an additional 275 units in the portfolio over the next two years, according to Freddie Mac’s data.

Freddie Mac’s multifamily division issued more than $35 billion in structured multifamily securities—a type of CMBS loan it calls K-Deals—last year and said it should surpass that this year.

The Irvine Co. deal was one of eight K-Deals topping $1 billion that are slated to close in the second quarter, according to the McLean, Va.-based agency’s calendar.

K-Deals “are part of the company’s business strategy to transfer a portion of the risk of losses away from taxpayers and to private investors who purchase the unguaranteed subordinate bonds,” the agency said in a statement.

It said K Certificates “typically feature a wide range of investor options with stable cash flows and structured credit enhancement.”

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Mark Mueller
Mark Mueller
Mark is the Editor-in-Chief of the Orange County Business Journal, one of the premier regional business newspapers in the country. He’s the fifth person to hold the editor’s position in the paper’s long history. He oversees a staff of about 15 people. The OCBJ is considered a must-read for area business executives. The print edition of the paper is the primary source of local news for most of the Business Journal’s subscribers, which includes most of OC’s major corporate and community players. Mark’s been with the paper since 2005, and long served as the real estate reporter for the paper, breaking hundreds of commercial and residential real estate stories. He took on the editor’s position in 2018.

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