Some Rough Numbers Behind Morgan Properties' $1B Target

Jonathan Morgan

WASHINGTON, DC–As we reported yesterday, the King of Prussia, Pa.-based Morgan Properties landed more class B assets to add to its growing empire: the six-property Rolling Road portfolio from Harbor Group International for $247 million.

This portfolio, like others it has acquired over the past two years or so, are Class B, infill apartments in Maryland that, with a few tweaks, can deliver additional value to Morgan Properties.

The acquisition comes on the heels of five other recent transactions closed by Morgan Properties, bringing the company’s total multifamily investment during the last year to over $800 million and 6,300 units. This year the company intends to acquire $1 billion in real estate assets, according to Jonathan Morgan, president of Morgan Properties JV Management.

The case for Class B multifamily investment is a well known one, pursued by many companies. So when we caught up with Morgan to talk about the Rolling Road purchase we tried to zero in on the “how” as we had a pretty good idea about the “why”. Following are some excerpts from our talk.

Everyone seems to wants class B apartments now, especially outside of DC’s core. How is it you have been able to grab up so many assets without overpaying?

The competitors for these assets are less institutional for one reason. There aren’t as many REITs that focus on Class B and many of the private firms that buy Class B are capital constrained. That gives us a big competitive advantage.

But there is some competition and it is driving pricing. How are you making the numbers work?

We are buying at discount to replacement cost by 55% to 60% or even 50% to 60%. Also, we maximize the rent differentials between Class A product and Class B. For one bedroom apartments there is around a $300 to $500 rent differential and it is between $500 to $700 for two-bedrooms. When you are only charging a $150 premium you are not infringing on Class A rents. There is a buffer.

 You have spoken of your operational efficiency in the past. Can you elaborate on that strategy?

Not really. It is our secret sauce. I will tell you that maximizing operational efficiency is very core to our financial strategy. We run every potential purchase through that spectrum.

 And the returns from your investments? Can you elaborate on that?

Again–no, sorry.  I will say that Class B returns are significantly higher than Class A, it could be double. A lot depends on the leverage and deal structure though.

This year you are targeting $1 billion in acquisitions. Is your criteria still the same?

Yes, although we are also looking in Northern Virginia. We have a large footprint in Maryland already but certainly will not stop acquiring assets there. Also, the market is getting frothy, so we will be more selective.