S2 Capital Takes Action on Multifamily Woes With $1.2B Refi and Modification Package

Elevated multifamily supply and likely higher interest rates have been putting pressure on S2 Capital's properties. Now, S2 Capital is taking action by announcing that it has completed refinancing and loan modifications across 26 multifamily properties and a total of 8,223 units.

These assets represent a balance of $1.2 billion, with 12 of the communities subject to foreclosure proceedings, according to S2. Altogether, the move resolves current defaults, near-term maturities and revises pricing.

S2 listed one example in its release, which was a troubled 531-unit property in North Dallas. Modifying this asset waives existing defaults, ends a pending foreclosure posting and extends the maturity date to July 2031. Also, litigation will be dismissed.

Past Trouble In Sun Belt

The Dallas-based firm did not reveal the specifications around the rest of the communities impacted in the news today — but it has reportedly had some more problems with other properties in the Sun Belt.

Multifamily Dive reported in May, citing sharings from Morningstar, that S2 lost three properties with CMBS floating rates to special servicing.

Also, other properties have been transferred to special servicing, including 720-unit The Kace in Grand Prairie, Texas; 524-unit Hyde Park at Valley Ranch in Irvington, Texas; 360-unit The Landing at East Mil in Orlando; 377-unit The Sophia Apartments in Dallas; 220-unit Winslow Apartment Homes in Charlotte; 272-unit The Felix in Arlington, Texas; 168-unit The Quinn at Ravenglass and 176-unit The Tatum in Charlotte.

Multifamily Dive reported that surging costs in the past few years, particularly in Texas, have put pressure on local multifamily landlords.

Hoping Easing Multifamily Supply Will Offset Rising Costs and Rates

Scott Everett, CEO of S2 Capital, said that the loan and refinancing resolutions on the $1.2 billion package took six months to settle. He also listed the elevated multifamily supply as a big headwind in the sector — but is optimistic that the worst is behind it.

"In our view, the pressure on multifamily in this cycle has come mainly from a historically high level of new supply, not from weaker renter demand, and we are seeing new deliveries in our markets begin to decline," Everett said in a statement.

"We believe these modifications give the assets a capital structure better suited to the timeline we anticipate for recovery."

However, it is worth noting that borrowing costs have been surging in the last couple of months, with the 10-year Treasury rising from 4.63 percent in late August to as high as 5.3 percent in recent days.

Will the anticipation of multifamily supply easing be enough to offset the pain for S2 and some of its troubled assets? The Dallas-based firm said its focus now is to execute on occupancy, discipline in the market and resident experience.