MBS Apartment Titan
Struggles Against Defaults

Massive Texas apartment-complex owner and operator MBS Cos. is in danger of defaulting on nearly $400 million in loans and has sought bankruptcy-law protection for many of its properties to stave off foreclosure.

MBS, a privately held company based in Metairie, La., is delinquent in payments by more than 60 days on those loans, according to data and analytics provider Trepp LLC. Another $17.3 million in loans to MBS are in foreclosure.

The problems facing MBS are unusual in the current housing carnage because MBS owns and operates rental apartments, a real-estate class that until now has been relatively unscathed. The company's difficulty in keeping up with debt payments appears to result from unique circumstances facing MBS rather than a broader market downturn.

Those circumstances include the fallout from Hurricane Katrina, which initially was a boom for MBS because the company housed many of the refugees. More recently, though, many of them have moved out and the Federal Emergency Management Agency has stopped making payments for people who have vacated.

Nevertheless, much of MBS's debt has been repackaged and sold as commercial-mortgage-backed securities to a wide range of institutional buyers. Many of those buyers have been clobbered by the subprime-mortgage downturn in the single-family-home market, and this will add to their woes.

In context, the entire U.S. market for commercial-mortgage-backed securities collateralized by rental apartments was $100 billion last month, according to J.P. Morgan Securities. Of that, $811.3 million in loans -- or 0.8% of the total -- were more than 60 days delinquent, and $338.3 million were in default or the assets claimed by lenders, according to J.P. Morgan. Meantime, the default rate of subprime loans is in the 15% range.

"It's not a good thing for the market, but I don't think that it's a signal that the market is changing dramatically," said Susan Merrick, a managing director at debt-rating firm Fitch.

MBS has kept payments current on 17 additional loans with a balance of $316.8 million, according to Trepp. MBS's default troubles were reported by the Web site costar.com.

MBS, founded in 1986 by chairman and chief executive Michael B. Smuck, owns and operates 59 apartment complexes spanning 15,300 units, all in Texas. As lenders initiated foreclosure proceedings on MBS properties in recent months, the company filed for bankruptcy protection in New Orleans for some properties in November and earlier this month and signaled that more could file soon.

All of the factors that landed MBS in its solvency crisis remain unclear. Officials at the Texas Apartment Association and its chapter in Houston note that MBS apartment complexes received numerous evacuees of hurricanes Katrina and Rita in late 2005, but not proportionately more than other apartment operators. At the height of the relocation effort, FEMA paid rent for roughly 45,000 families relocated to Texas apartments. That number since has dwindled to 11,700.

Yet apartment-association officials say that, even prior to late 2005, some MBS complexes suffered from poor maintenance. The situation worsened after the storms. "It went beyond maintenance issues to utilities being cut off," said Suan Tinsley, president of the Houston Apartment Association.

Mr. Smuck and MBS's bankruptcy attorney didn't return messages seeking comment.

Complaints have come in from residents and neighbors of MBS properties in Houston, Dallas, Fort Worth, San Antonio and Austin. In the state capital, many of those complaining were state legislators living in MBS units during the legislative session. "The level of complaints we received about MBS properties significantly escalated in the past 18 months," said George B. Allen, executive vice president of the Texas Apartment Association.

In bankruptcy records, MBS's attorneys say only that MBS's properties "have experienced financial difficulties and have been unable to satisfy their debt obligations because of various reasons."

MBS is actively forfeiting and selling properties. Its lawyers indicated in a bankruptcy-court hearing this month that four MBS apartment complexes may soon be sold in separate deals for a cumulative $75 million. Twenty-four MBS properties are now operated by Greystar Real Estate Partners on behalf of MBS's lenders and receivers and the bankruptcy court.

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