here

Emerging Leaders Group
Mock Investment Committee Session
Panelists:
Investment Committee:
Nickolay Bochilo
Bell Partners
Core Plus Bob Jeans
Prudential
Graham Carpenter
Pollack Shores
Value Add
Will Beam
Heitman
Mark Bates
Holland Residential
Development
Bob Weston
Alliance Residential
Investment Strategy – Core‐Plus, Major Market
Fair Oaks at Pender Creek Apartments (246 units, 1989)
Washington, DC (Fairfax County)
Presented by: Nickolay Bochilo, Bell Partners
Investment Rationale ‐ Fair Oaks at Pender Creek
Macro themes:
• Primary Market, Light Renovation, Long‐Term Hold (7 yrs base case)
• Cycle strategy – de‐risk, focus on in‐place cash flow, play in a “less crowded space” and position to withstand rise in interest rates in the near / mid – term • Focus on suburban‐urban locations with very low levels of new supply
Investment Rationale:
• Core suburban location and demographics:
‐ Fairfax County – 3rd highest income in the nation ($110,000 HH median)
‐ 23 million SF of office space and 12 million SF of retail within 5 miles of property
‐ Nationally ranked and highly sought after schools; high cost of for‐sale housing
• Opportunity to increase NOI by modernizing product:
‐ 45% of units have been renovated and are achieving $140 rent premiums
‐ 55% of remaining units can be upgraded; projecting $150 rent premium for slightly higher finish level
• Basis below replacement cost and minimal new supply in the area:
‐ All‐in cost of $240,000/u is 10% below cost of new mid‐rise product (garden product land is not available) ‐ Only 150 units delivered in the area in past 12 months and only 180 units in the pipeline
PAGE 3 | 1/21/2015
Maps / Aerials
Distance to…
DC
Tysons
Reston
Dulles Corridor
18 miles
9 miles
6 miles
7 miles
Demographics / Employment
Within 5 miles:
• Median HH Income - $111,000
• 23 million sq ft of office space
• 150,000 employees
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Maps / Aerials
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Maps / Aerials
PAGE 6 | 1/21/2015
Photos
Original
PAGE 7 | 1/21/2015
Renovated
Economics
CAPITAL STACK
Purchase Price
per unit or %
$55,350,000
CapEx
$225,000
per SF
UNIT MIX
Units % of Total
$240
1 Bedroom
94
38%
Size Market Rent
per SF
811
$1,294
$1.60
3,650,000
14,837
16
2 Bedroom
108
44%
979
1,603
$1.64
545,000
1.0%
2
3 Bedroom
12
5%
1,047
1,830
$1.75
Total Cost
$59,545,000
$242,053
$259
Loft
32
13%
1,316
1,940
$1.47
Debt
38,704,250
65%
Equity
20,840,750
35%
Total
246
100%
936
$1,540
$1.65
Closing Costs
MAJOR ASSUMPTIONS
RETURN SUMMARY
5 yr Hold 7 yr Hold
Hold Period (years)
5 and 7 scenarios
Cap Rate ‐ Stabilized Year 1 before rehab effect
5.3%
5.3%
Renovation Period
12 months
Cap Rate ‐ Stabilized Year 1 after rehab effect
5.6%
5.6%
Economic Vacancy
11% Yrs 1‐2; 6% steady state
IRR ‐ Levered
13.8%
13.5%
Average Rent Growth
5 yr ‐ 3.1%; , 7 yr ‐ 3.2%
IRR ‐ Un‐levered
7.1%
7.1%
Year 1 Expenses
$6,700/u or 37% of revenue
Equity Multiple ‐ Levered
1.75x
2.1x
Expense Growth Rate
3% per year
Average Cash Yield
9.1%
9.3%
Real Estate Taxes
93% of PP, 3% inflation
Profit from Cash Flow
60%
65%
Exit Cap Rate
5 yr ‐ 5.75%; 7 yr ‐ 6%
Profit from Appreciation
40%
35%
CapEx Reserve (per unit, per year)
650 for 5 yrs; $800 for 7 yrs
Investment Profit
$15.6m
$23m
$20.8m investment
PAGE 8 | 1/21/2015
7 year hold
9.3% avg cash yield
13.5% IRR
2.1x EM
Price Positioning / Renovations
Scope:
Interiors (kitchens and baths):
- Cabinet doors
- Granite counter tops (reconfigure
to differentiate vs comps)
- Stainless appliances
- Backsplash
- Wood-like flooring
- Light package
- De-brass hardware
- HVAC / Water Heater
Exterior / Amenities:
- Paint job
- Upgrade clubhouse
- New Resident Lounge
- Enhance Fitness Area
RENOVATION METRICS
Renovation Cost (per unit)
Target Rent Premium
$13,000
$150
Return on Cost
14%
Number of Units to Renovate
135
Incremental NOI Increase
PAGE 9 | 1/21/2015
$243,540
RENT POSITIONING ‐ Rank by Rent PSF
Rank
Property
Units
Size
Rent
per SF
1
Avalon Fair Oaks
490
761
$1,479
$1.94
2
The Courts at Fair Oaks
364
798
$1,518
$1.90
3
Target ‐ After Renovations
246
936
$1,690
$1.81
4
Jefferson at Fair Oaks
181
925
$1,667
$1.80
5
The Lincoln at Fair Oaks
280
977
$1,746
$1.79
6
Ellipse at Government Center
406
972
$1,718
$1.77
7
Target ‐ Before Renovations
246
936
$1,540
$1.65
878
$1,614
$1.84
AVERAGE without Target
RENT POSITIONING ‐ Rank by Rent Per Unit
Rank
Property
Units
Size
Rent
per SF
1
The Lincoln at Fair Oaks
280
977
$1,746
$1.79
2
Ellipse at Government Center
406
972
$1,718
$1.77
3
Target ‐ After Renovations
246
936
$1,690
$1.81
4
Jefferson at Fair Oaks
181
925
$1,667
$1.80
5
Target ‐ Before Renovations
246
936
$1,540
$1.65
6
The Courts at Fair Oaks
364
798
$1,518
$1.90
7
Avalon Fair Oaks
490
761
$1,479
$1.94
887
$1,626
$1.84
AVERAGE without Target
Risks and Unique Issues
• Greater metro supply concerns
Washington, DC and several suburbs (e.g. Tysons Corner) have elevated levels
of supply, which could have rippling effects on class B segment and areas with
no supply. Mitigating factor is rent spread between new product and post-rehab
rents of $300+ per month.
• Renovation program not accepted by the market
This is a common risk with rehabs and one that also affects capital allocation
decisions. Risk is mitigated by history of renovations at the property and similar
renovation programs at competing properties.
• Recent lease trends and ability to pin-point market rents
Revenue management pricing makes it challenging to identify “normalized”
rents. At the time of assessment (2Q14, shortly after the Polar Vortex), recent
leases were highly volatile, causing uncertainty around rent growth forecasting.
• PB piping
Property has partial polybutylene piping, which Seller has upgraded ($300k or
$1,200/u) several years ago by replacing piping in the A/C loop. History of leaks
has been minor / non-existent (~$20,000 per year). Mitigating risk by budgeting
$30k extra R&M per year and deducting trended cost of full re-pipe at reversion.
PAGE 10 | 1/21/2015
VALUE‐ADD ACQUISITION‐ COVES OF BRIGHTON BAY
Tampa, Florida
PRESENTED BY– GRAHAM CARPENTER, POLLACK SHORES
INVESTMENT STRATEGY
INVESTMENT STRATEGY RATIONALE: HEAVY VALUE‐ADD •
Value‐Add Conversion to Core‐Plus: Identify properties that have the potential to be repositioned as core‐plus assets following the execution of a heavy value‐add strategy
• Located within the Gateway submarket, the Tampa MSA’s 2nd largest employment concentration and proximate to the Westshore business district, downtown Tampa, downtown St. Pete and area beaches
•
Non‐obsolete properties in submarkets with upside potential:
• 2000 vintage and newer with 9ft ceilings and a comprehensive amenity package
• Submarket sales comps must support exit projections and rent comps must support significant growth potential • Institutional ownership in the submarket (Prudential, Heitman, TIAA, Hines, Invesco, and Cornerstone)
•
Submarket Employment • Over 8.2MM sf of Class‐A office space
• Over 60K employees and 2.7K businesses
• Employment driven by Financial Services, IT, Health Care, and Defense industries
12
AERIAL
13
PROJECT CHARACTERISTICS
PROJECT CHARACTERISTICS
•
Location: St. Petersburg, FL
• 15min drive to downtown Tampa and downtown St. Pete
• 20min drive to St. Pete beaches
•
Product Type: 382 units of 3‐story wood‐frame walk‐up buildings built in 2000
• Clubhouse and unit interiors had not been updated since original construction
• Major water infiltration issues existed with the original single coat stucco system •
Business Plan: • Building Envelope: Replace all stucco siding with new Hardi and replace all windows • Amenities: Install all new FF&E in the clubhouse, fitness center expansion and pool enhancements
• Unit Interiors: $6K/unit interior renovations in approximately 25% of the units for $135 rent premiums
14
EXTERIOR REHAB
Before
15
EXTERIOR REHAB
Under Construction
16
EXTERIOR REHAB
After
17
INTERIOR REHAB
Before
18
INTERIOR REHAB
After
19
UNDERWRITING METRICS
Project Costs
Purchase Price
Renovation
Amenity Upgrades
Deferred Closing Costs
Total Costs
Amount $36,396,000
$576,000
$238,800
$3,500,000
$986,970
$41,697,770
Project Capitalization
Total Equity
Total Debt
Total Capitalization
Type
1 bedroom
2 bedroom
3 bedroom
Totals
Per Unit
$95,277
$6,000
$625
$9,162
$2,584
$109,156
Amount Total %
$12,997,770 31%
$28,700,000 69%
$41,697,770 100%
Units
196
144
42
382
Size
730 sf
1021 sf
1242 sf
896 sf
Dec 2014 T12 PSF
$889
$1.22
$1,107
$1.09
$1,368
$1.10
$1,024
$1.16
Project Summary
Closing Date
Rehab Completion
Units
Rentable Square Feet
Parking Ratio
Per SF
$106
$7
$1
$10
$3
$122
Aug‐13
Spring 2015
382
342,292 sf
1.5
Major Assumptions
Timing:
Exterior Interior
Stab. Economic Occupancy
Income & Expense:
Aug 2013 T3 Apartment Rent 5‐Yr Avg. Rent Growth
Current Other Income Per Unit
OpEx & Reserves Per Unit
Current Effective Rents (Last 30 Leases)
Exit Valuation Yr. 5:
Hold Period
Exit Cap Rate
Gross Sale Proceeds Per Unit
Projected Returns Summary
Going‐in Return on Cost
Stabilized Return on Cost
5 yr Cash on Cash
Levered Project‐Level IRR
Unlevered 5 year IRR
Equity Multiple
Detail
20 Months
20 Months
94.00%
$1.05 3.00%
$1,537 $6,257 $1.29 5 years
6.25%
$133,060 %
5.71%
7.62%
13.36%
24.14%
7.81%
2.x
20
RENT AND SALES COMPS
Rent Comps
Property Name
The Coves of Brighton Bay Verandahs of Brighton Bay
Tortuga Pointe
The Reserve at Gateway
Villas at Gateway
Promenade at Carillon
Bay Isle Key
Property Name
Citrus Falls
Verandahs of Brighton Bay
Promenade at Carillon
Totals
Type
Garden
Garden
Garden
Yr Built
2004
2002
1994
2000
Type
Yr Built
# Units
SF
Rent
Rent/SF
Garden
Garden
Garden
Garden
Garden
Garden
Garden
2000
2002
2010
1999
2004
1994
1998
2001
382
381
295
314
300
334
534
896 sf
948 sf
989 sf
1,087 sf
994 sf
969 sf
976 sf
990 sf
$1,028
$1,092
$1,375
$1,514
$1,228
$1,086
$1,199
$1,236
$1.16
$1.15
$1.39
$1.39
$1.24
$1.12
$1.23
$1.25
Sales Comps
# Units Date Sold
SF
273
Sep‐14
962 sf
381
Sep‐14
948 sf
334
Jan‐14
969 sf
959 sf
$/SF
$135
$139
$139
$138
$/Unit
$129,500
$132,000
$137,126
$133,042
Seller Cornerstone Cornerstone AREA Property Buyer
Centenial
Praedium
TA Associates
21
Strengths:
•
Submarket: Proximity to the 2nd largest employment center in the Tampa MSA coupled with a high concentration of institutional ownership
•
Refurbished Buildings: Brand‐new building envelope and upgraded amenities leaves only the proven interior renovations for the next buyer
•
Yield: Produces returns comparable to ground‐up development without construction or lease‐up risk
Risks / Unique Issues:
•
Costs: Major stucco work can lead to the uncovering of hidden structural issues •
Operations During Re‐siding: Maintaining occupancy during such invasive work is very challenging •
Pipeline: 1,029 newly‐completed units in the sub‐
market in 2014
22
GATEWAY MARKET NEW DEVELOPMENT
Downtown Los Angeles, California PRESENTED BY – MARK BATES, HOLLAND PARTNER GROUP
INVESTMENT STRATEGY RATIONALE: GATEWAY MARKET NEW DEVELOPMENT
● The best real estate always wins
h As cycle matures this becomes even more critical
h Select markets, sub‐markets and product types that will outperform during all parts of cycle, not just booms
h Replacement cost will continue to rise
● Decision filters for market and site selection
h
h
h
h
h
Located in high barrier to entry markets
Must have rapidly expanding new economy jobs
Walkable to urban core or transit facilities that serve market employment centers
Sought after location by expanding gen y population
Site configuration allows for efficient design
● Metrics to consider during market and site selection h
h
h
h
h
Job growth
Population growth
Walk/ transit score
Median household income
Cost to rent vs. cost to buy
24
AERIAL
Wilshire Grand
JW Marriott
7th Fig
Metropolis
BLOC
8th+Hope
Staples
Center
Whole
Foods
Trader
Joes
LA Live
25
PROJECT CHARACTERISTICS
● Downtown LA as submarket selected:
h 500,000+ jobs; +/‐ 50,000 residents and +/‐ 30,000 housing units h Over $15 billion invested in Downtown LA since 2000, with over $5 billion more in the development pipeline creating 24/7 city
h Median income ‐ $98,700
h Median age – 34
h Submarket has Walk Score of 93 and Transit Score of 99
● Location: Heart of Downtown LA:
h One block from LA Live, two blocks from Staples Center, walkable to South Park and Financial District
h Site has Walk Score of 93 and Transit Score of 100
●
Product Type: 28‐story high‐rise
h Efficient units sized to provide renters affordable absolute dollar rent while maximizing returns on investment
●
Freestanding retail building
h Iconic structure designed by well‐know, innovative design firm
h Corner is one of, if not most visible corner locations in Downtown LA
26
UNDERWRITING INFORMATION
Project Costs
Land
Construction Costs
Soft Costs
Amount
$33,125,123 108,889,290
27,844,110
Per Unit
$97,141 319,323
81,654
Per SF
$110 361
92
Interest Expense
17,007,436
49,875
56
Operating Deficit
Total Costs
496,746
$187,362,705 1,457
$549,450 2
$621 Project Capitalization
Total Equity
Total Debt Amount
% Total
$955,599 1%
$186,407,106 99%
Total Capitalization
$187,362,705 Type
Studios (Incl 8 PH Studios)
1 BD / 1 BA (Incl 8 PH 1 BD)
2 BD / 2 BA
Penthouse 2 and 3 BDs
Totals
100%
Major Assumptions
Timing / Lease‐up:
First Unit Delivery
Stabilization
30 units
Lease‐up Concessions
Stab. Economic Occupancy
Income & Expense:
Apartment Rent PSF
5‐Yr Avg. Rent Growth
Other Income Per Unit
Commercial Rent PSF (annual)
Signage Income (annual)
1 Month
95.00%
$524,700 Operating Expenses Per Unit
$11,836 5 years
5.00%
Size
Rent
PSF
96
111
110
24
591
794
1,108
1,449
$2,142 2,984
3,965
5,800
$3.62 3.76
3.58
4.00
Exit Valuation:
Hold Period
Exit Cap Rate
341
884
$3,262 $3.69 Gross Sale Proceeds Per Unit
15‐Aug
18‐Jan
341
301,552
11,895
Month 27
Month 38
Leasing Pace (units / month)
Units
Project Summary
Construction Commencement Date
Construction Completion
Units
Rentable Square Feet ‐ Apartment
Rentable Square Feet ‐ Retail
Detail
Projected Returns Summary
Untrended Leveraged Yield on Cost Trended Leveraged Yield on Cost
Untrended Unleveraged Yield on Cost Trended Unleveraged Yield on Cost
Unleveraged Deal IRR
$3.69 3.00%
$2,140 $48.00 $742,000 %
5.66%
6.46%
6.23%
7.10%
13.40%
27
RISK AND MITIGATIONS
● Pipeline – Like all gateway markets, pipeline appears large
h Mitigated by severe job/ housing imbalance
h Typical West Coast market at 3:1 jobs/ residents
h An additional 50,000 residents would be needed to get to
5:1, which would still be under‐housed comparatively
h Those additional residents would need +/‐ 30,000 housing
units to be in balance
● Further mitigated by in‐migration from within MSA
h As Downtown LA becomes more amenitized, it becomes
more attractive to residents who previously lived in other
parts of Los Angeles
h Includes grocery, expanding high‐end retail and fine dining
h New Charter Elementary School opened for 2013‐4 school
year, allowing younger families to stay in urban setting
● Construction Costs – Rising in all markets across product types
h Cost escalations built into proforma
h High‐rise cost escalations smoother and more predictable
than wood‐frame
28
SUMMARY
● The best real estate always wins
● Core, urban locations are where new economy jobs are being created and residents want to live
● While costs are rising, the impact can be minimized with sponsor selection, efficient design, and
choice of market and product type
29