Keystone Launches to Build Apartment Portfolio

[IMGCAP(2)]Gardner is a former managing director in Southern California for Palo Alto-based Pacific Property Co. Heimler is president of Cirrus Asset Management Inc., Keystone's affiliated property management firm, which he formed after co-founding property management firm Stratus Real Estate Inc. and later selling it to British investors. On board as CFO of Keystone is Carrie Roth , who is also CFO of Cirrus and formerly was CFO with E&S Ring Management Corp.

Gardner tells GlobeSt.com that Keystone is looking for multifamily properties of 40 units or larger and is already "fairly close on a couple of opportunities." The new investment firm is looking at stabilized and distressed properties as well as REO and debt, and in general is modeling its deals on the basis of 60% to 65% debt. Its equity investors include both institutional money and high-net-worth individuals.

Keystone's long-range plan is "to build a stable portfolio of cash-flowing assets in quality locations for longer-term ownership," Gardner says. However, he notes, "For deals that have a little more of a near-term opportunity, we would potentially cycle those through and harvest some profits."

One of the greatest strengths of Keystone is Heimler's operational expertise, Gardner says. He points out that at the time Heimler sold Stratus, it was one of the largest third-party management firms in the US, managing in excess of 20,000 units for private and institutional clients. In addition, Heimler is on the approved receiver list in five Southern California counties.

Heimler observes that the investment landscape emerging from the economic and real estate downturn "is superior to what has been available since the early part of the decade." He says that the new landscape presents investors with "the opportunity to assemble a quality portfolio at attractive economics."

Gardner lists some of the prospective deals that Keystone is looking at right now: One is the acquisition of a note that it could potentially hold or foreclose on, depending on what strategy would work best. Others include stabilized assets that look appealing from a cash-flow perspective for long-term ownership. In another case, an equity partner who is not local to Southern California and whose sponsor "has basically abandoned the property" is looking for some local expertise to come in and oversee the project and participate with a recapitalization basis, Gardner says.

One reason that operational expertise will be so important in this cycle, Gardner points out, is that operations will be of paramount importance in building value. "Steve and I think that, in the current environment, we are not likely to see the kind of cap rate compression that we saw in the previous cycle," he says.

Keystone is focusing on Southern California and Hawaii because it sees barriers to adding new supply―such as limited land and the difficulty of obtaining entitlements―that bode well for those markets in the long term. "It's a little bit challenging to make that claim or envision that right now, but at some point when job growth returns, we like the longer-term fundamentals in these locations," Gardner says.