Related Capital Co. is on a roll. Just one year after posting a phenomenal 53% increase in its portfolio of apartment properties, the New York-based financial services firm has bulked up again by increasing its holdings nearly 12%.

Related Capital and its affiliate companies held an ownership interest in 275,831 units at the beginning of 2003, according to the National Multi Housing Council's (NMHC) annual ranking of the largest apartment owners. The increase by 28,913 units also propelled Related Capital from its No. 2 ranking in 2002 to the top spot on the NMHC's 2003 list, originally published in the May 2003 issue of NREI. Approximately 70% of the units in which Related Capital and its affiliates have an ownership interest are affordable units.

That impressive growth is due to a culmination of efforts that began in 1997 with the launch of a new five-year business plan. “At that point, we were the largest tax credit syndicator in affordable housing, but we were not truly on the map with our mortgage product services,” says Marc Schnitzer, Related Capital's managing director.

Putting the Pieces in Place

Founded in 1972, Related Capital is a full-service real estate financial services firm providing equity financing to mid-market multifamily developers with an emphasis on affordable housing. The firm recognized that it needed to continue to grow its equity business, Schnitzer says. “At the same time, we needed to come up with mortgage products that could not only [serve] our multifamily developers, but also would enhance and grow our equity system in a synergistic way,” he adds.

The first step in that process was to launch CharterMac in 1997 to provide tax-exempt financing to multifamily developers. Since that time, the publicly traded CharterMac (AMEX:CHC) has grown to a market capitalization of $875 million, and has exceeded $1.2 billion in new financing. In May, CharterMac stock hit a 52-week high of $19.63 per share.

“CharterMac is an excellent investment for the tax-sensitive investor,” says Jay Leupp, a managing director at RBC Capital Markets in San Francisco. The stock produces a 6.85% tax-free yield, as well as an additional 5% to 7% year-over-year return, he notes.

Related Capital launched AMAC in 1999, a mortgage REIT that provides mezzanine and bridge financing. The REIT has a market cap of $133.5 million, and in June the stock price hit a new 52-week high of $16.65. The third step was to acquire a mortgage banking company that could offer FannieMae, FreddieMac and Federal Housing Authority financing. Related Capital realized that goal with the acquisition of New York-based PW Funding at the end of 2001.

“The reason you are seeing such rapid growth over these last couple of years is that all these steps have paid off,” Schnitzer says. “The whole is greater than the sum of the parts, so we are benefiting from a lot of synergy.”

Weakening Fundamentals

That synergy has been key to bolstering growth in the midst of a flagging apartment industry. The multifamily sector has been hard hit by the economy, as well as a surge in single-family home buying thanks to record-low interest rates. Apartment vacancy rates continued to rise in the first quarter of 2003. Vacancies for rental apartments reached 10.8% — the highest in almost 10 years, reports NMHC.

“The impact of depressed economic activity in certain regions is definitely having an impact on our business, although that impact is less pronounced on the affordable housing side, which tends to dominate what we do,” Schnitzer says.

To combat the slumping market conditions, Related Capital is gravitating toward markets where the fundamentals are stronger, such as California. And it's being more selective in the deals it finances. One major investment is a $102 million mixed-use affordable housing complex near Fisherman's Wharf in San Francisco. Related Capital has provided $48 million in equity financing for the development of North Beach Place — one of the largest such developments in the history of affordable housing.

“They competed very aggressively on price,” says Peter Nichol, a project manager at San Francisco-based BRIDGE Housing Corp., the lead development partner on the North Beach project. Related Capital outbid its competitors by paying a combined 86.3 cents on the dollar for both the state and federal tax credits. Related Capital's track record was also a deciding factor due to the complex nature of the project. “We needed somebody who was sophisticated, because North Beach involved a mixed-finance package with its use of public housing finance dollars,” Nichol adds.

It is deals such as North Beach Place that have given Related Capital an optimistic outlook for 2003. In 2002, Related Capital and its affiliates completed $2.1 billion in equity and debt financing. This year, the firm expects to place between $2.3 billion and $2.4 billion in total financing.