The September closing of the acquisition of 16,784 apartments in 86 market-rate communities by a joint venture of Morgan Properties and AIG Global Real Estate from Kushner Companies for $1.9 billion was somewhat anticlimactic, compared to the race to get the deal under contract last summer, when the JV submitted a preemptive bid for the coveted assets. The portfolio includes properties in New Jersey, Pennsylvania, Delaware and New York, with 75 percent of the units in New Jersey, a market where Morgan previously owned only three apartment communities and wanted to expand its footprint.
The deal that more than doubles the size of Morgan Properties’ multifamily portfolio catapulted the 22-year-old multifamily owner and manager, based in King of Prussia, Penn., to number one on the list of New Jersey apartment owners, taking that position over from Kushner. And the purchase vaults Morgan into the top 50 apartment owners in the country.
The portfolio includes 5,228 units in 25 communities in southern New Jersey and Philadelphia and 2,473 units in 23 communities in northern New Jersey. The balance of the portfolio includes 14 communities in central New Jersey, nine communities on the Jersey shore, seven communities in both Pennsylvania and Delaware and one in New York.
Morgan assumed $480 million of existing debt on the properties and Fannie Mae provided a $1 billion loan through Wachovia, which also contributed a $125 million mezzanine loan. The JV partners provided the remaining financing, 20 percent of the purchase price, or $295 million, in equity.
The sale to the Morgan/AIG partnership, along with the sale in a separate deal of 844 units in Maryland and southern New Jersey to investment clients of the Kislak Company for $42 million, takes Kushner out of the apartment business, except for passive involvement in a few local deals.
“Kushner is not operating any apartments. Charlie and his family are participants in many other multifamily buildings. Charlie’s interests in other multifamily are as a limited partner owner or a member in a limited liability company,” said Alan Hammer, senior portfolio advisor for Westminster Management, which formerly oversaw the day-to- day operations of Kushner’s apartments. Kushner’s management division continues to oversee operations of the company’s commercial portfolio that consists of 6.5 million square feet of office, industrial, hotel and retail property.
Hammer said Kushner decided to sell the multifamily segment of his company because he saw a chance to make a good profit on the assets while reducing the company’s holdings to a more easily managed collection of commercial properties. “The amount of money that people were paying for the product caught his attention. He also wanted to spend more time in New York City and, he’s said, he wanted to simplify his life. Managing these 18,000 apartments is not simple or easy, compared to a handful of office buildings in New York City,” said Hammer, adding that Kushner has moved his office from the address on 64th Street, where he has conducted business for many years, to the building at 666 5th Avenue that represents his first foray into the Manhattan office market. Kushner bought the building from Tishman Speyer last January for $1.8 billion, almost as much as Morgan paid for his entire apartment collection.
But the slow dismantling of Kushner’s apartment empire really began when Hammer took over as acting chairman in August 2004, when Kushner resigned from his position as chairman following his guilty plea to federal charges of tax fraud, retaliation against a federal witness and illegal contributions to a number of political campaigns for which he was sentenced to two years in federal prison.
A few months after he took over the reins of the company, Hammer closed the doors of the nine-month-old Westminster Moving company that offered special rates to residents of Kushner’s apartments, especially if the move was from one Kushner-owned community to another. In addition, he shut down a Kushner-affiliated title company and laid off around a dozen employees at the company’s headquarters in Florham Park, N.J.
A couple of years later, in the middle of 2006, the Kushner family put a portfolio 17,500 apartments in 90 communities on the market, hoping to reap around $2 billion from the sale. “There was some interest in it and there was some conversation, but nobody ever really stepped up,” Hammer said last month, explaining that, when Charles Kushner returned to take over the chairmanship again, he took it off the market completely.
The deal was repackaged this year and Kushner brought aboard CB Richard Ellis to help market the offering and announced that the deadline for bids was June 25.
Morgan Properties’ COO Ron Monson, who joined the company two years ago, said the Morgan team got wind of the opportunity in late May. The management team got together with AIG Global, an equity partner in half a dozen previous deals, and they agreed to take a serious look at the properties with an eye toward bidding on the entire portfolio, which President and CEO Mitch Morgan saw as “a natural fit with our current portfolio. The locations are complimentary to ours and the property types are similar,” he said.
After a whirlwind tour of the Kushner communities by Morgan Properties and AIG, in what amounted to pre-contract due diligence, the company decided to make an offer Kushner couldn’t refuse. “We submitted a strong offer on June 22 and pre-empted opening of the bids on Monday the 25th,” said Monson. David Koffler, senior vice president of asset management for Morgan Properties, and Rimas Petrulis led the team that spend much of that weekend working through details of the portfolio and the bid and, by Sunday night the contracts were signed.
The purchase agreement the two companies signed contained an unusual requirement that the buyer hire all of the on-site employees. “That’s an interesting part of this. It took Charlie 25 years to assemble this multifamily business, he had relationships with many of the site people and the property managers, so when we drew the contract of sale, we required the buyers to take all the site people and our property managers, but not our accounting department,” explained Hammer.
“They said they would take the site people, but they didn’t want to be obligated to take the property managers. By the time we closed the deal, they took all of the site people and almost the entire bookkeeping department, all on a voluntary basis, and I think every property manager but three. And that was strictly voluntary. Nobody made them do it. They interviewed each of the people and they just absorbed everybody,” Hammer said.
“We didn’t balk for a second,” said Monson of the agreement to hire all of Westminster Management’s onsite staff, a requirement he’d never seen before in a property sale, but nonetheless found far from burdensome. “Part of that talks to Charlie Kushner’s desire to take care of his employees. That was important to him, too,” said the COO, who spent nine years at AIMCO, where he was the division vice president for the huge apartment REIT’s Midwest division prior to joining Morgan Properties.
And he has worked hard to make sure the new Westminster employees feel secure in their new positions. “By August, we had made every individual at the site level a job offer and virtually everyone at the corporate level as well. Within three days, 98 percent or 346 employees signed offer letters, said Monson, adding that Morgan Properties conducted one-on-one sessions and group meetings with the employees to tell them the Morgan story and answer any questions they might have, trying to present the transaction as more of a merger of two companies than a buy-out.
Morgan has leased new office space adjacent to their former home office in Florham Park to make it easier for the corporate-level employees to make the transition and, beginning the day after the agreement was signed in June, the Morgan Properties team visited every single community and met every employee in Westminster’s New Jersey office “to put a face and a name and a personality to the Morgan name,” he said.
It will take about a year to put Morgan’s name on all the newly acquired properties, but the company has permission to use the Westminster name until next fall, when the re-flagging process is expected to be complete.
“The process is underway. We would call it a soft relaunch,” said Monson, who has no problem with using the Westminster name for a while. “It enjoys a good reputation in the marketplace, so we’re in no hurry to get rid of it. We’re co-branding the properties for a short period celebrating the merger and will be replacing Westminster with Morgan in a very methodical way,” he said.
And, along with changing the signage, Morgan plans to spend $120 million on renovations at the properties, addressing deferred maintenance in areas like roofs, siding, asphalt, common area hallways and windows. A large portion of the upgrade budget will go towards renovation of kitchens and baths and the installation of washer and dryer units in all the apartments.
The deal has brought with it a few changes in Morgan Properties’ executive structure. The company’s longtime Regional Vice President Karen McAlonen will continue to oversee Morgan’s current portfolio, while absorbing the seven communities in Central Pennsylvania into her organization. Former Westminster Regional Director Mel Scheinerman, has joined Morgan as a regional vice president and will oversee operations of the balance of the 86 properties.