q3 2015 newsletter - 29sc - final
TRANSCRIPT
Newsletter Content
1. Letter from Stan2. US Housing Market Trends3. Multifamily Trends4. Acquire Properties - YTD5. Deals Under Contract6. Sold Properties7. Recent Hires & Promotions8. Contact Information
Lake Merritt, Oakland, CA
3rd Quarter 2015Newsletter
Letter From Stan
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Dear Investors and Colleagues:
Last quarter, Q3 was a strong period for 29th Street Capital in terms of both realized executions and new acquisitions. In September alone, we closed on three unique properties in three separate markets, Des Plaines, IL (Chicago MSA), Arvada, CO (Denver MSA), and Pasadena, TX (Houston MSA). These achievements provide distinct examples of our company’s breadth, depth and ability to run a national platform while executing nimbly at the local level. This period also marks a major milestone for our firm in that we closed on our 40th multifamily acquisition. We also sold two assets that were held between 3 and 4 years that produced noteworthy returns (IRRs) between 36% and 55% and equity multiples between 2.3x and 3.0x (see Pages 9 and 10). We not only were able to return all invested capital to our investors in these projects, but we also created over $31MM of value that was distributed among our equity partners.
While we continue to implement our proven “boots on the ground” strategy, we believe that we will continue to outperform our competitors by strengthening our team with new, experienced talent. Our local acquisition and asset managers continue to source off-market deals, engage less expensive and more efficient contractors, and continue to recognize issues in their markets earlier than those who are not local. Despite this success, we understand that we will have to work harder in today’s market to deliver on our commitment to provide opportunities for our investors to achieve their financial goals. The way we differentiate ourselves in the marketplace will become even more critical as we approach the second half of the current market cycle and the rising interest rate environment. Short-term interest rates have been held near zero since December 2008 in an effort to stimulate the economy. Now, all signs point to a December interest rate hike by the Federal Reserve. Officials are more confident in a healthy economy, and with the threat of inflation looming, they believe now is the time to start raising interest rates at a gradual pace. Based on today’s yield curve and the expectations of future interest rates, the consensus view is that the 1yr, 5yr and 10yr treasury rates will remain under 3.0%. The direction and pace of interest rate movements administered by the Federal Reserve are not something we can control, buttheir impact on markets and our corporate strategy are something we consistently monitor and discuss.
Despite the growing debate over the duration and levels of multifamily performance returns for institutional and non-institutional asset classes, 29SC believes that demand for moderately priced apartments will outpace supply over the next several years. There are numerous factors that support this viewpoint, but none more influential to multifamily housing demand than the overall demographics, tastes and preferences of the Millennial cohort. This cohort is now experiencing job, wage and household growth momentum that is releasing pent-up demand for multifamily housing options in cities providing jobs that match their skills and with wages that support their budgets. Apartment rentals offer affordability, flexibility, location and a lifestyle choice that Millennials prefer.
As we close out 2015, we are pleased to have grown our portfolio by ten (10) properties and by over $92MM in additional assets under management. We expect to have a strong start to 2016 with two (2), two-property portfolios under contract in League City, TX (314 units) and in Hayward, CA (69 units). Once we close on these four assets, we will add $40MM to total assets under management ($470MM) and add 383 units to our growing 6,000+ unit portfolio. As we enter the new year we are eager to close on the deals that we have under contract and are excited to see more fantastic executions through strategic asset dispositions. I would like to congratulate our team for their hard work and thank our investors for their trust and commitment to our vision of transforming communities throughout the country.
Please contact me or Cody Harper if you have any questions or investment interest:
Stan Beraznik, Founder & CEOCody Harper, Vice President of Corporate Development
Market Outlook – U.S. Housing Fundamentals
US Housing Market Trends
US Home prices, including single-family homes as well as apartments, continued their rise across the country over the last 12 months, but at a slower pace. The S&P/Case-Shiller Home Price Indices for August showed YoY gains of 4.7% and 5.1%, respectively as measured by the 10 and 20-City Composites. Home prices continue to rise and outpace both inflation and wage gains. The index has seen 34 consecutive months with positive YoY gains led by San Francisco, Denver and Portland with price increases of 10.7%, 10.7%, and 9.4%, respectively. All 20 cities have shown YoY gains every month since the end of 2012. While nationally, prices are recovering, new construction of single-family homes remains very low at 1/3 its long-term average despite low vacancy rates among both renter and owner-occupied homes. Many housing developers have been focused on building multifamily over single-family to absorb significant pent-up demand within the Millennial cohort.
The highest home prices seen in eight years is producing many single-family homeowners to sell. According to RealtyTrac, homeowners who sold during Q3 2015 realized an average price gain of $40,658 (17%) from the purchase price of their property, the highest average price gain for home sellers since the Q3 2007. On average, these sellers owned their home for 6.72 years. The average sale price of single-family homes and condos nationwide during Q3 2015 was $263,976, up 0.2% from the prior quarter and up 2.4% from Q3 2014, the slowest YoY price appreciation in any quarter since home prices bottomed out in Q1 2012. RealtyTrac reports that homes are not affordable for average wage earners in 65% of zip codes with good schools. Workforce housing located in good school districts is at the heart of 29SC’s multifamily acquisition strategy. Fear of affordability, rising interest rates and flat home price appreciation in many high growth markets by existing homeowners has created the incentive to cash out home equity to become a renter by choice.
Using data provided by Zillow, the Economist has compared prices against two affordability metrics: income and rents. On this basis, affordability looks stretched in areas like San Francisco with prices at 9x household income and nearly 20x annual rents. Areas like Denver are also exhibiting a growing concern for housing affordability with prices at nearly 5x household income and 13x annual rents. These data compare to a long-run city average of 6x income and a national average of 3.3x income and 11x for rents. Over time, prices should adjust (or equivalently incomes and rents will rise) to return affordability ratios to their long-run averages. But gauges of affordability are affected by interest rates, which are at an all-time low, making housing artificially cheap to buy. As and when interest rates do normalize, prices will face pressure to return towards their long-run relationship with income and rents.
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Market Outlook – Multifamily Apartment Trends
Multifamily Fundamentals
The strengthening economy continues to produce positive job growth and other favorable demographic factors, which are driving housing fundamentals to improved levels. Even as we enter the fourth quarter of 2015, the demand for investment-grade rental housing remains steady. Data through October show that the multifamily rental market continues to tighten despite increasing new supply, as the multifamily rental vacancy rate fell to 4.9% as of October, 2015 compared to 5.0% one year earlier. Estimated effective rents increased again, at 0.6% since the fourth quarter of 2014, marking 21 consecutive quarterly increases according to Axiometrics.
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Based on this trend, it is estimated that institutional multifamily rent growth in the U.S. for 2015 will be 4.2%, a 39-month high. Though apartment market performance is still solid, the typical seasonal trend of decelerating fourth-quarter rent growth took hold in October. As the chart above shows, rent growth is forecast to remain relatively steady over the next several years, though 2016 will likely see further moderation as the impact of new supply takes hold and job growth decelerates to a predicted 1.7%.
Oakland, CA remains at the top of the list at No. 2 for annual effective rent growth, with a rate of 12.3%, well above the national average. 29SC will acquire two properties (see Page 8) in the City of Hayward in Q1 2016, which will be its 9th and 10th
acquisition in the East Bay near Oakland. Effect rent growth continues to outpace the national average of 4.9% in many other cities where 29SC is local: Denver, CO, Phoenix, AZ, Nashville, TN, Las Vegas, NV and Atlanta, GA.
With new supply rising, but still modest by historical standards, and demand surging forward, rent growth has accelerated over the past two years, to the fastest pace since 2008. Net absorption for the first half of the year rose more than 77,000 units. While the number of completions has been slowing over the past few months, an anticipated 332,000 new units are expected to come online this year alone, a rate well above an anticipated absorption rate of 155,000 units, based on year-to-date projections by Reis.com. Based on these trends, 29SC believes it is well positioned to maintain itscompetitive advantage by meeting the supply needs for modestly priced housing.
Acquired Properties – YTD 2015
Seven Oaks TownhomesDurham, NC – 272 UnitsPurchase Price: $15.3MM
Village Green ApartmentsMesa, AZ – 108 UnitsPurchase Price: $6.12MM
Rosemont ApartmentsConcord, CA -- 48 UnitsPurchase Price: $5.9MM
Williams Landing ApartmentsGilbert, AZ – 72 Units Purchase Price: $4.7MM
Rose Oaks Apartments (formerly Dolphin Point)Iowa City, IA – 400 UnitsPurchase Price: $6.2MM
Asbury Plaza ApartmentsDenver, CO – 110 UnitsPurchase Price: $10.2MM
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Acquired Properties – YTD 2015 (cont’d)
The Edge ApartmentsHouston, TX – 284 UnitsPurchase Price: $16.4MM
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Village West ApartmentsArvada, CO – 58 UnitsContract Price: $8.0MM
1443 Ashland AveDes Plaines, IL – 17 UnitsContract Price: $1.875MM
Casa Palmas ApartmentsPasadena, TX – 308 UnitsContract Price: $13.5MM
Portfolio Under Contract – League City, TX, | Houston MSA
Crow’s Nest Apartments (176 units) & Harbor Walk Apartments (138 units)
Under contract, the $28MM ($89K/unit) acquisition of a 314-unit, two-property portfolio located in the Houston submarket of Clear Lake in League City, TX. League City has experienced tremendous job growth fueled by the aerospace industry, the refining industry, the growing health care industry and the Port of Houston, which continues to expand and will double its capacity by 2016 once the Panama Canal expansion is completed. Both properties are in the Clear Creek Independent School District, ranked as the best large school district in the Houston MSA and one of Houston’s “Top Work Places” by the Houston Chronicle. Despite the fall in oil prices, downstream oil & gas employment remains strong causing significant demand for multifamily housing. Given the restrictive zoning for new multifamily development in the Clear Lake area, competition brought on by new supply is low. This acquisition will be 29SC’s 5th and 6th property acquisition, totaling 1,745 units, in the Houston MSA.
Renovation Plan
Lead by Senior Vice President, Javier Bustillo, 29SC will implement a $1.64MM ($5.2K/unit) capital improvement plan to upgrade kitchens, bathrooms and improve the overall curb appeal of both properties. Furthermore, 29SC will add washer/dryer sets to Crow’s Nest and a new grill/playground area to Harbor Walk. Rents will be increased by approximately $70/month, which will still be substantially lower than the neighboring new properties. This investment is scheduled to close in January, 2016.
Underwriting Metrics
The going-in cap rate is 7.2% based on current rents, which are at a ~13% discount psf relative to comparable properties. The purchase price is at a +20% discount to comparable sales. The projected IRR realized at disposition is 18%, based on $9.6MM of required equity, a $1.64MM renovation budget and using an 7.25% reversion cap rate. 29SC anticipates cash flow at the property should generate an average cash yield of 10%.
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Portfolio Under Contract – Hayward, CA, | SF Bay Area MSA
Plaza Verde Apartments (44 units) & Eden Apartments (25 units)
Under contract, the $11.5MM ($167K/unit) acquisition of a 69-unit, two-property portfolio located in Hayward, CA (southeast of Oakland). These properties are being acquired from an elderly owner who has operated the assets for over two decades, without professional property management, and has focused on keeping the properties 100% leased rather than increasing rents. Spillover from San Francisco, Silicon Valley and Oakland has created a tight rental market throughout the East Bay as demand exceeds the limited supply of housing. Hayward is one of the most affordable cities in the submarket and is quickly attracting renters. Rents grew almost 14% in 2015 for comparable property types in Hayward and is expected to continue as the job market continues to expand. These circumstances provide 29SC with the opportunity to quickly bring rents up to market, decrease operating expenses, and capture a premium at sale through the execution of our proven strategic renovation plan.
Renovation Plan
Lead by Vice President, Casey Davis, 29SC will invest $855K ($12.4K/unit) in capital improvements to upgrade kitchen cabinets, countertops, flooring, bathrooms and improve the overall curb appeal of both properties. Furthermore, 29SC will add microwaves to Eden Apartments. Rents will be increased between $75 and $200 per month, which will still be substantially lower than the neighboring new properties. This investment is scheduled to close in January, 2016 and will be 29SC’s 9th and 10th property acquisition totaling 289 units in the East Bay of San Francisco MSA.
Underwriting Metrics
The going-in cap rate is 4.2% based on current rents, which are at a 11-17% discount psf relative to comparable properties. The purchase price is at a 23% discount to comparable sales. The projected IRR realized at disposition is 20%, based on $4.4MM of required equity, a $855K renovation budget and using an 6.25% reversion cap rate.
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Renovation Plan
29SC renovated the property’s exterior and all interior units. Completed improvements include new paint, roof repairs, concrete and beam repairs, enhancements to pool area as well as landscaping. All units received modern kitchen reconfigurations, new cabinets, countertops, appliances and flooring. The plan is to invest $225K in capital renovations ($1,775/unit)
Execution
Post-renovation, the property achieved net rental increases from $1,513 to $1,610 and captured a tenant base with higher credit quality and incomes. In 3.5 years, 29SC sold the property for $25.7MM, an $8.71MM net gain. The residents reside in a safe, higher quality community as a result. 29SC investors received a 54.5% return (IRR) and a 3.0x multiple on their initial investment, exceptional execution.
4703 West 52nd Avenue, Denver, CO
Oct. 2015 - 29SC successfully completed the deal execution (Acquisition, Rehab, and Sale) of a 127-unit property, among 13 buildings set on six acres of land in a prime West Denver, CO neighborhood for $16.25MM ($128k/unit). Located between Interstates 70 and 76, Regis Place is a short 15 minute drive to downtown Denver. The below market acquisition price and renovation plan presented an opportunity for 29th Street Capital to benefit from not only the rapidly expanding economy and asset price appreciation, but also the shortcoming of the previous owner.
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Sold Properties – Regis Place Apartments, Denver, CO
Renovation Plan
29SC renovated the property’s exterior, club house, fitness center, pool amenities, playground and all interior units. Completed improvements include new paint, roof repairs, concrete and beam repairs, exterior staircases and landscaping. All units received modern kitchen reconfigurations, new cabinets, countertops, appliances and flooring. The plan is to invest $971K in capital renovations ($3,570/unit)
Deal Execution
In 3.5 years, 29SC sold the property for $23.2MM, a $6.55MM net gain. The residents reside in a safe, higher quality community as a result. 29SC investors received a 36% return (IRR) and a 2.4x multiple on their initial investment.
4839 S Darrow Drive, Tempe, AZ
Sept. 2015 - 29SC successfully completed the deal execution (Acquisition, Rehab, and Sale) of a 272-unit property located in Tempe, AZ for $16.67MM ($61K/unit). Located steps from Arizona Mills Mall and less than two miles from the South Mountain Park Preserve, Green Leaf Sienna is a short, 12 mile drive to downtown Phoenix, AZ. 29SC was able to acquire the property at a below market price, implement a quality renovation plan, upgrade property management and drastically improve the overall aesthetics and curb appeal of the property.
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Sold Properties – Sienna Apartments, Tempe, AZ
Recent Hires at 29th Street Capital
New Hire – Adam Miller - Vice President of Acquisitions
Adam Miller is the Vice President of Acquisitions for the Southeast region for 29th Street Capital. He is the local market expert in charge of all multifamily acquisitions in Tennessee, Kentucky, Northern Alabama, Georgia and the Carolinas. He has over 16 years of investment experience both within and outside of real estate transactions.
Previously, Adam started and ran his own real estate investment firm where he focused on single-family and multifamily value-add opportunities. He oversaw all aspects of each project from property acquisitions, financing, and overseeing the execution of the property improvements.
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Prior to joining 29th Street, Adam worked in the securities investment industry, most recently with Driehaus Capital management where he was an active member of the investment committee managing over $5 billion in capital. He received a Bachelor of Science in Business Administration with a concentration in Finance and a Bachelor of Arts in Economics from the University of Evansville. In addition, Adam obtained his Master of Business Administration from the Booth School at the University of Chicago where he concentrated on Analytical Finance, Economics and Accounting.
Adam resides just outside Nashville with his wife and three children.
New Hire - Connor Osburn – Acquisitions Analyst
Connor recently joined 29th Street Capital an Acquisitions Analyst where he will be focused on underwriting new deals as well as assisting with investor relations. He works closely with the Director of Acquisitions to identify the best value-add opportunities. A native Texan, Connor is a graduate of Abilene Christian University near the Dallas-Fort Worth Metroplex, where he earned his Bachelor's degree with majors in Finance and Accounting.
Contact Information
Stan Beraznik 1
Founder, CEO & Managing [email protected] #: (415) 643-6875
Cody Harper 1
Vice President | Corporate Development
Phone #: (312) 339-9330
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Robert BollhofferManaging Director | Multifamily Acquisitions & Managing Principal
Phone #: (312) 933-2668
Patrick Hinsberger
Vice President | Accounting & Controller
Phone #: (312) 379-8934
Other Team Members:
Javier BustilloSenior Vice President | AcquisitionsHouston MSA and Atlanta [email protected] #: (312) 848-2994
Dan HowardDirector | AcquisitionsChicago, [email protected] #: (773) 510-9505
Adam MillerVice President | AcquisitionsNashville, TN, KY, AL, NS & [email protected] #: (812) 204-4381
Casey DavisVice President | AcquisitionsNorthern California & Reno, [email protected] #: (707) 696-5121
Jay NealVice President | AcquisitionsDenver, [email protected] #: (720)-980-1166
Office Locations:
SAN FRANCISCO4251 23rd StreetSan Francisco, CA 94114
CHICAGO320 W Ohio Street, 3WChicago, IL 60654
John Price, PhDSenior Vice President | AcquisitionsAustin, [email protected] #: (512) 422-9292
John LauderDirector | AcquisitionsChicago, [email protected] #: (513) 255-3592
Dusty EddyVice President | AcquisitionsArizona & [email protected] #: (312) 401-4668
Chris FunkVice President | AcquisitionsJacksonville, [email protected] #: (904) 814-7428
Connor OsburnAcquisitions AnalystChicago, [email protected] #: (817) 522-2259
1 For investment inquiries, please contact