A recent deal that we invested in and are very excited about was the ‘Warner Robbins Portfolio’. This was a two property portfolio (Tanglewood and Northlake) near Macon, GA.
THE OFFERING WE REVIEWED
As often happens with portfolio deals, the seller was grouping multiple assets together, indicating an openness to negotiation as they wanted to unload all their holdings in the region.
DETAILED SPECIFICATIONS:
MSA (metropolitan statistical area) of 187k
CSA (combined statistical area) of 420k.
Acquisition cost: $16.7M or $61k per door.
Property classification: “C” class, are in very good condition,
Improvement budget: $1.8M
Occupancy: 96% occupied and have significant opportunities for adding value and increasing rents.
Return specs: 20% IRR
EM (equity multiple): +2.1x
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?
YES - we invested $50k
Why? Because the most attractive characteristics of this investment can be divided into four categories;
Financials and Underwriting
Value Add opportunities
Current Market Position
Property Management
Financials and Underwriting
When we acquire a multifamily asset, one our favorite scenarios is what we call the ‘Holy Trinity’. This refers to having three different streams of cash flow/cash benefit, *in addition* to the final payout when the deal sells at the end of the holding period.
In this deal the Holy Trinity includes (assuming $100k investment amount);
Return ON Capital - annual distributions of 8% (Preferred) – of $40k+ over the hold period
Return OF Capital - refinance in year 3 returning nearly 50% of original investment amount
Tax Shelter From Bonus Depreciation – $50k depreciation in year 1, $80k over the entire project
We like to have the opportunity to de-leverage our risk profile as the deal progresses and in the best of situations can sometime approach the ‘infinite return’ scenario where we have received nearly all of our capital back and are still in the deal and receiving distributions and entitled to all gains at disposition. In this deal we will have received just under 60% of our original investment back by the end of year 3. Deals with healthy distributions enable investors to use these depreciation benefits sooner and thus increase their value.
We love deals like this with simple and generous waterfall structures, like the 70/30 split seen here with the distributions being preferred, which means the limited partners (investors) get paid first, before the deal sponsors. The overall cash on cash return of 12% is pretty significant as well and will likely exceed that of most deals with newer/sexier properties.
The underwriting of this deal is where we really start to see how conservative this investment is and thus likely to meet and exceed the target return specifications. At takeover, the breakeven occupancy is 67% and the breakeven rent is $515. This means that before any increases in rent or any value add plans are undertaken, vacancy would have to decline by more than 29% or rents would have to drop by more than $100 (and they are currently $150 below market) in order for expenses to exceed income. The cap rate assumptions and reserve contingency amount also assume worst case scenarios, giving us plenty of room for error.
Value Add opportunities
We like properties that have a multitude of options for increasing revenue. Just thinking rents can be increased to account for inflation or cost of living adjustments does not constitute a business plan. Ideally, we’d always acquire properties, such as this one, with below market rents, outdated interiors and other significant revenue generating enhancements that can be made. The value-add opportunities with this property, include, but are not limited to;
$1.8M capital expenditure budget to be solely dedicated to upgrading unit interiors and building exterior
Plan to add washer/dryer to all units and then convert current laundry facility into new, additional units
Plan to convert current model unit, managers office, storage and maintenance shop into further new, additional units
Ability to do significant renovations to 80% of the units
Plans for other property-wide amenity enhancements
Expense reduction initiatives through water and electricity savings plans
Ability to move rents up to market (see graphic below)
So, in addition to the increase of rents to market levels (+$150), there will also be two other rent bump opportunites (interior rehabs and addition of laundry), plus roughly 8 brand new units and then expense reduction initiatives all of which will boost net operating income and overall property value. All of the above initiatives should be able to be implemented within the first 24 months of ownership or less.
Current Market Position
As shown in the graphic above, there is plenty of room for rent growth in this sub-market for this class of property, even prior to doing any renovations or capital expenditures. The net population growth of this area has been over 20% since the last census and the nearby Robins Air Force Base is one of the largest in the country, by personnel, accounting for more than 24k jobs. There is a wide diversity of employment sectors accounted for in the local economy, above average rent growth and very strong historical residential occupancy (> 95% for the past three years). The income growth in the Warner Robins area is also above average, growing by more than 34% during the period of 2000-2019. We find that ‘C’ class properties like this are particularly well suited to being able to be repositioned in areas experiencing growth like this and in the path of progress of new development and relocation. The unemployment rate for Warner Robins is 3.07% compared to 5.1% for the country as a whole (rates from August 2021).
Property Management
One of the most critical pieces of an overall strategy for a multifamily property is the property management team. The property management team can make or break a business plan. In this case, we have a very seasoned management team in place, MMG (Meridian Management Group) with extensive experience in the region and whose track record we are intimately familiar with, as they also manage some of our other investments in the area. They will be able to leverage existing resources in terms of property management personnel, contractors, inspectors and local sales force and offices. Having this existing relationship and known quantity in place is really the icing on the cake for this already very attractive investment.
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