Multifamily Investor With Nearly $8B Under Management Exploring Sale Of The Company

The Carroll Organization, with a nearly 100-property portfolio worth roughly $7.4B, could be sold in its entirety this year, CEO Patrick Carroll told Bisnow in an interview Thursday. 

Carroll, who founded the company in 2004 and has since grown it to employ 800 people and manage nearly 30,000 units, has tapped investment bank UBS Group AG to explore a partial or full sale of the company, with a hopeful closing date as soon as this summer. Real Estate Alert was first to report that Carroll was exploring strategic alternatives. Carroll confirmed the process, which he said was in the early stages.

Prospective buyers are more likely to be institutional owners, pension or sovereign wealth funds that want to acquire an operating platform, rather than a multifamily operator looking to merge with a competitor and have deeper pockets to take advantage of what he sees as a coming wave of multifamily distress. 

“You want to be in a position of strength and ready to go when the market rebounds,” he said. “Personally I've been thinking, ‘OK, how do we bulk up? How do we get ready for this next wave of buying opportunities?’”

Carroll said the firm doesn’t have any loans maturing this year and isn’t in the market for refinancing — although he said the firm’s floating-rate debt loans are “an issue for us.” But rather than being driven by a need for cash, Carroll said his real target is scale.

Investors are increasingly gravitating to larger multifamily companies instead of local and regional players after the fallout from the latest banking crisis. When interest rates were near zero, real estate companies of any size could make money on apartment deals, Carroll said. 

“Smaller players that don’t have great access to capital, I think they’re going to go away. So it was really just a strategic decision based off where I think the world’s going,” he said. “What I’m trying to do is either scale up, or potentially merge [with a] partner or sell to a larger group.”

The banking industry has largely been frozen since the failures of both Silicon Valley Bank and especially Signature Bank last month, since it was a major lender to New York commercial real estate. Since then, experts have expressed concern that a correction on commercial real estate values — which are down 15%, according to Green Street — could add stress to the banking system, especially for smaller banks, which have been the lifeblood of commercial real estate finance in recent years.

That commercial real estate exposure has been complicated since the Federal Reserve began aggressively hiking interest rates last year. The net effect has been to push capitalization rates up and drive commercial real estate valuations down, especially in the office sector, which was already feeling the effects from the hybrid and work-from-home movement. 

Carroll said he has been contemplating a sale of the company since 2012, the current dynamic presents an opportunity for the firm to quickly scale up through a potential sale. That's particularly true as asset-level deal activity has slowed.

"You've got a lot of people in this industry sitting on a lot of capital and looking for things to do," Carroll said. "When there's not a lot of activity on the traditional property, acquisition side, looking at platforms, looking at other companies, potential roll-ups, etc., to me makes a lot of sense."

Carroll also told Bisnow that he expects to see a wave of distress ripple through the multifamily industry, especially as loans made during the peak of the market mature. Owners will either have to pay down their debt in order to refinance or give the assets back to the lenders. In both cases, that presents opportunities for larger investment firms to further bulk up on apartments. 

“A lot of people, especially these guys that got into the industry the last couple of years, they really have nothing to lose,” he said. "So I think they’re not going to be injecting new equity into those properties, they’ll just walk away."

The firm recently closed a $343M capital raise for its seventh and largest investment fund, called Carroll Multifamily Venture VII, which has a total of $5.5B in buying power, according to its annual report. Since its formation, the fund has deployed $131M of equity into 14 properties in Georgia, Florida, North Carolina, Texas and Arizona, according to the report. Overall, Carroll bought and sold $3.4B in 2022.

Apartment trades cratered in the first quarter — falling to $14B, a 74% drop in transactions compared to the first quarter of 2022, according to CoStar. When investors are ready to shop for properties again once the market settles down, Carroll said he expects those investors to place their capital with larger companies with more robust platforms.

“I think all the smart people are holding on, being patient, seeing where the market settles out, and so it’s gonna be good for us to be sitting on a lot of dry powder,” he said. “I think that’s where the opportunities are. I don’t know if they’re going to happen this year or next year. We’re a profitable business with recurring cash flow, and so we don’t have to live off transaction fees or anything like that. So we’re lucky in that sense to have the ability to be patient.”

Carroll said he’s open to a variety of possible scenarios with a sale, including the possible absorption of the entire firm into another company, with or without his involvement. The company operates a number of divisions other than investment and ownership: property management and its third-party property marketing branch, called Carroll Nocturnal.

"The company’s my baby, so I would love to continue to be involved in whatever fashion makes sense," Carroll said. "I want the best outcome. I want to look out in 10 years and see the company thriving. So whatever capacity I can be in to do that, that’s what I want to do."