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Investors in Alchemy

Old Lyme fund buys Bushnell on the Park rental units at ‘significant’ discount

Greg Bordonaro

June 27, 2011

To some real estate investors, the current rock bottom market is a nightmare. To others, like Matthew Sharp and David Kelsey, it presents an opportunity. Maybe even a once in a lifetime opportunity.

So far, things seem to be working out.

Less than a year and half later, their company — Hamilton Point Investments — has raised over $30 million from individual and institutional investors and amassed a $76 million portfolio consisting of 11 Class A and B apartment buildings with nearly 2,000 units and 48,000 square feet of commercial space.

And the firm just closed a deal to acquire the 129 rental units at the Bushnell on the Park in Hartford, making Hamilton Point one of downtown’s newest landlords. The company also owns two more Connecticut properties, as well as real estate in several other states including Indiana, North Carolina, Ohio and Arkansas.

Now with more than 50 employees, Hamilton Point is getting ready to raise another $90 million, with the goal of more than doubling their portfolio by the end of 2012.

“We see this as a once in a career buying window that will continue for at least the next 12 months,” said the 44-year-old Sharp.

Sharp and Kelsey are business partners with similar pedigrees and backgrounds. Both graduated from Ivy League schools; worked in New York City at investment banks where they focused on commercial real estate; and owned or rented vacation homes in Old Lyme, which is where they originally met only a few years ago.

Now both real estate entrepreneurs have taken permanent residence in or near that small coastline community, and it’s also where their firm has its corporate headquarters in a modest space at the Eastport North Office Park.

Sharp has held commercial real estate roles at various companies, including Standard & Poor’s and ABN AMRO Bank, N.V. In 2005, he put out his own shingle and founded Milton Point Investments LLC, a company similar to Hamilton Point Investments that invested in defaulted commercial mortgage notes and distressed real estate in the Midwest.

Kelsey, 43, had worked at Bear, Stearns & Co. as an investment banker, where he assisted public and private real estate clients in securities placement, capital structuring, and mergers and acquisitions. He was also a managing principal at New York-based Trinity Hotel Investors LLC, before he founded Hamilton Point Investments with Sharp.

Another key similarity between the two: both sat out the buying frenzy of 2006 through 2008, having purchased no assets during those peak market years. It was in 2009 that the men met for the first time through a mutual friend and realized they were trying to build similar businesses. They partnered to establish Hamilton Point Investments, hoping to leverage their expertise and institutional contacts to make headway in an unseemly market.

“Pricing was so extraordinary during that time period (2006-08), it was very frustrating,” Sharp said. “But we kept our finger on the pulse of the market and continued to strengthen our historical relationships because we knew there was trouble coming down the pike. We came together in 2009 when deals began to come to the table as owners were defaulting and prices were coming down.”

Hamilton Point’s business model is relatively simple: they find and acquire financially distressed class A and B multifamily apartment properties from special servicers and banks.

Typically, they search out garden-style apartments in the suburbs that are well-occupied, located in growth submarkets that are often overlooked by institutional and national investors, and require some maintenance but not a complete overhaul.

Deal sizes range from $5 million to $20 million on an individual property and up to $34 million for a portfolio. And of course, they are looking for a significant purchase discount. The company raised about $32 million from individual and institutional investors for its first fund, which began investing in 2010. It has acquired 11 apartment properties so far totaling 1,927 units, mostly in the north and southeast and Midwest. They have an additional property under contract.

Sharp said on average they have paid 26 percent less than the defaulted mortgage balance and about 40 percent less than the peak market value of each property.

The investment strategy for the first portfolio is to hold properties for up to three years and then sell them off, Sharp said. They are also gearing up to raise another $90 million from high net worth and institutional investors over the next year and half for three more funds.

The goal is to have $300 million in assets by the end of 2012. “The growth here has been as much or more than we hoped for,” Sharp said. The portfolio added the 129 rental units within the Bushnell on the Park property, after the downtown Hartford landmark sank into foreclosure in 2009. The former owners, Bushnell Regency, stopped making payments on a $12.7 million mortgage.

Kelsey said they purchased the note on the property in October with cash at a “significant discount,” but did not close the deal until about three weeks ago. The property also contains about 51 condominiums and at the end of the month HPI’s subsidiary unit — Hamilton Point Property Management — will take over control of the condo association.

Kelsey said they were attracted to the property because it met all of their investing criteria. He said there is also little high-end rental competition in the market with no new supply coming online anytime soon.

“It’s a spectacular property that is tired, but doesn’t need massive renovation,” Kelsey said.

He added that they will be making an investment to give the property a much needed facelift including resurfacing the entrance patio, rehabbing drainage and landscaping, and cleaning the façade of the property. Kelsey said the apartment units remain in great shape, although he feels the rents are too low.

The property also includes 28,000 square feet of office space that is 60 percent occupied. Kelsey said they have already cleaned out the empty space, which was being used as a storage unit. He hopes to add more small business tenants to the mix of doctors, lawyers, architects and engineers who occupy space there.

HPI also owns The Wilcox property in Middletown and The Crocker House building in New London, each of which has 82 units.