Westgate Phase 1-Pasadena Misses Mezzanine DSCR for FY’24

Relevant Documents:
Notice to Bondholders
Quarter Financials
Issuer Page:
Series 2021A-1, 2021A-2, 2021B

Westgate Phase 1 Apartments failed to meet its mezzanine debt service coverage ratio, or DSCR, requirement, according to an EMMA filing dated Dec. 19, 2024. The notice to bondholders relates to an aggregate $356.7 million in senior Series 2021A-1, senior Series 2012A-2 and mezzanine Series 2021B bonds issued by the California Statewide Community Development Authority, or CSCDA.

The Pasadena-based workforce housing project calculated a senior DSCR of 1.33x and a mezzanine DSCR of 1x for the fiscal year ended June 30, 2024. While Westgate ended the fiscal year below its mezzanine requirement of 1.1x, the project met its senior DSCR requirement of 1.2x. An event of default would occur if the net DSCR is below 1x, according to the notice.

This will be the fifth project that failed to meet at least one of its FY 2024 debt service coverage requirements, after Twin Creeks was required to retain a consultant on Oct. 30. Last year alone, three California workforce housing projects defaulted on their DSCR covenants, starting with Serenity at Larkspur, then Mira Vista Hills and Annadel Apartments.

Westgate is unique in that it is one of the few distressed California workforce housing projects to date under Octus coverage to include significant mezzanine debt and risk defaulting on its mezzanine debt.

Westgate’s $70.2 million 4% mezzanine lien Series 2021B bonds due June 2057 last traded on Dec. 30 with $500,000 in volume at a steep discount of 24 to yield 16.936%, according to secondary trading data on EMMA. The bonds were issued at a price of 91.179 to yield 4.5%.

The housing project had an interest payment of $5.75 million due Dec. 1, 2024. The project previously had to tap into its coverage reserve fund to pay the past three interest payments, including its Dec. 1, 2023, payment, according to an EMMA notice on Feb. 15, 2024. Westgate has yet to disclose if the project needed to pull from its funds to make its latest payment.

The next distressed project to pay its semiannual interest payment is Twin Creeks on Feb. 1, 2025.

Westgate previously failed to meet its senior DSCR requirement for FY 2023, requiring the system to retain Century Urban LLC. The consultant’s recommendations “either align with actions we are already undertaking, are not legally feasible under current regulations and agreements, or would provide only an immaterial financial benefit to the project’s operations,” project administrator Waterford said in the Dec. 19 EMMA notice.

Some consultant recommendations include an operating expense reduction program targeting 2.5% to 5%, an increase to the marketing budget – which Waterford claimed to have already “more than doubled” since FY 2022, introducing a 150% annual median income tier to enhance occupancy and even pivoting to self-guided tours. Many are similar to prior recommendations to Annadel Apartments and Serenity at Larkspur, which had engaged Century Urban in the past two years.

“My take is that the consultant believes, and the project administrator agrees, that a lot of the challenges, such as bad debt due to COVID and inflationary expense pressures, are ‘macro’ trends outside of their control,” said a market source. “[Century Urban] was vague on details as to how [to reduce operating expenses] other than possibly deferring some property manager fees, which are below the line.”

Waterford and CSCDA have not taken project administrative and authority fees “since November 2023 to preserve cash flow,” according to Waterford’s response to the recommendations.

After Waterford implements consultant recommendations, Century Urban projects the debt service coverage to increase to 1.11x by June 2025, inclusive of coverage reserve fund balances, according to the notice. Century Urban projects a net operating income of $11.3 million in FY 2025 for the workforce housing project.

For the 12-month trailing period ended Sept. 30, 2024, the housing project had net operating income of $9.3 million, according to quarterly financials. Westgate has $356.7 million of debt outstanding, according to quarterly financials ended Sept. 30, 2024. The apartments are averaging at 94% occupancy.

The table below includes Century Urban’s pro forma projections: