Waterford Builds a Workforce Housing Brand

MUNI BONDS, CSCDA FUEL $2B YEAR OF ACQUISITIONS

After a whirlwind 2021 that included participation in over $2 billion dollars’ worth of high-end apartment acquisitions in the state, Newport Beach’s Waterford Property Co. isn’t expecting a similar rate of growth in its multifamily portfolio in 2022.

That’s OK, company officials tell the Business Journal. Last year’s push into workforce housing—a sector that aims to provide affordable rental homes for healthcare workers, military members, first responders, teachers, and other service professionals and their families—has set the upstart real estate investor and developer up for the long haul.

Last year’s slate of acquisitions for what it calls “essential housing” provides Waterford with long-term operating fees, and a steady, stable cash flow, officials say.

It has also “helped us build our assets under management, so that we can be a more established business,” said Waterford co-founder John Drachman.

Waterford, created in 2019 via the combination of Drachman’s Stillwater Investment Group with Sean Rawson’s Waterford Group, has seen its size grow from five to a dozen employees as a result of a recent partnership with the California Statewide Community Development Authority, or CSCDA. More hires are on the docket, Drachman said.

The firm now counts nearly 4,500 apartment units under management, including 15 properties in Orange County, Los Angeles, and San Diego that fall under its essential housing and market-rate housing programs.

It’s also an active investor in value-add retail properties, and has been an office investor as well, though that business line is slower as a result of the pandemic, Drachman said.

Record Maker

Waterford and CSCDA, a joint powers authority, state that they acquired more multifamily properties by asset value in 2021 than any other buyer in a single calendar year in the history of California, citing CoStar Group Inc. records.

Deals last year included close to $600 million of local acquisitions, in Anaheim’s Platinum Triangle and the city of Orange, for recently-built complexes that traded hands from anywhere from $400,000 a unit to nearly $570,000 a unit.

Recent rental additions include the $160 million buy of the 400-unit Paramount, formerly known as The Jefferson Platinum Triangle; a $127 million buy of the 256-unit 1818 Platinum Triangle; and the $149 million buy of Orange’s 262-unit Cameo complex.

The Structure

Under the partnerships’ business model, tax-free municipal bonds are issued by the CSCDA to finance the acquisition of the apartments in a participating city. “It’s an innovative program,” which only recently stated being put to use in the state, Drachman said. Others in the sector include Larkspur’s Catalyst Housing Group.

The new owners cut the rents—often dramatically—for tenants meeting certain income requirements, and limit annual rent increases to 4% or so, in exchange for not paying property taxes. That removes close to a third of the expenses for the owners, Drachman said.

Cities have the ability to force a sale of property anywhere from 15 years to the end of the bond’s life at 30 years, and receive the proceeds.

Waterford and its asset management team act as project administrator for each deal, and as part of the fee structure gets a subordinated bond tied to the property. “Our goal is to run (the properties) efficiently,” Drachman said. “We’re not going to aggressively push rents; we’re not 100% profit oriented.”

The average savings off market rate rents in Waterford’s OC essential housing portfolio, which tops 1,400 units, are averaging about 25%, it says.

Comparable 4 and 5-star apartment properties in OC, by comparison, saw annual rent growth of 22% last year, according to industry data.

Eliminating Lumps

Waterford’s work with the CSCDA is a decidedly different business model than one used by a most real estate developers, which relies on acquisition fees, asset management fees and profitable property sales to fuel growth.

From an income standpoint, those assets sales “are really lumpy,” said Drachman, whose most prominent non-rental transaction in OC of late was the $73.5 million sale in 2020 of the former Qlogic campus in Aliso Viejo. It and other investors paid $36 million for the three-building campus in 2016. San Clemente’s Glaukos Corp. is set to move into the complex soon.

Getting a more consistent income stream is expected to help Waterford establish other lines of business. The firm is looking to get into more ground-up apartment development, also for middle-income renters.

The company is on the lookout for other deals with the CSCDA. The Royce, a 520-unit complex built in 2018 at Irvine’s Park Place complex, is one site the company has been in discussion with city officials of late. The deal has yet to be finalized.

Drachman said the near-term outlook for other municipal bond-financed projects is murky, given the bond market’s volatility of late, due in large part to the war in Ukraine.

“We probably won’t be as active this year,” he said. “But we’re building other business lines.”