A recent deal that reviewed had an attractive pitch deck and tempting returns.
BUT WE DID NOT INVEST - READ FURTHER FOR OUR RATIONALE
THE OFFERING WE REVIEWED
DETAILED SPECIFICATIONS:
RM Communities is acquiring Haverford Place for $31.05 million, which represents a going-in cap rate of 4.7% on projected year one net operating income.
Haverford Place, built in 2001, is partially renovated and is primed for a value-add business plan through interior and exterior upgrades. With a $2.95 million capital budget, RM Communities is projecting to increase rents from an average of $1,097 per unit to an average of $1,458 per unit.
The unit sizes at the Property are on average 259 SF larger than other nearby comparable properties. These large unit sizes are highly sought after in today's market.
The submarket’s main employment driver, the Toyota manufacturing plant, recently announced that they are investing $461 million to upgrade the facility. The plant plays a critical role in Toyota’s global electrification strategy and produces America’s best-selling car, the Toyota Camry.
The transaction has relatively low leverage as loan-to-cost is approximately 62.7%. Additionally, the loan has an attractive interest-only period of five years. The projected year one interest-only debt service coverage ratio is comfortably 2.11X.
RM Communities will retain Village Green, a nationally recognized property management company. Village Green's expertise and familiarity with the market provide higher assurance of projected performance.
The exit strategy is to sell the Property in ten years at a projected cap rate of 5.0%.
AFTER APPLYING OUR FILTERS - DOES IT MAKE THE CUT?
While this deal was not in a red-hot, major metropolitan area
it had a large margin of safety
was conservatively underwritten
had many opportunities for improvement
multiple possible exit strategies
a great way to round out our portfolio
we like consistent cashflow from the outset and upside potential
DID WE INVEST IN THIS DEAL?
NO
Why? Because the hold period was for 10 years and based on our projections, locking up our capital on a 10 year deal with a 2.5x EQM was not as desirable as building an investment ladder across multiple 3yr and 5 yr deals over the same timeframe.
Take a look at the following chart. What this represents is equalized returns over a 10 yr period based on initial $100k capital investment.
If we lock up our capital on a 10 yr deal with a 2.5 EQM our return is +$150k. However over that same period of time a blended ladder of 3-5yr deals would return $200-210k. Why leave $50-60k on the table when we can identify 2-3 great opportunities over the same timeframe?
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