Esplanade Apartments, Orlando, FL
THE RECENT RATE HIKE
I’m sure you’ve seen the latest Fed hike. Nothing new there. And expect the Fed to overshoot their goal as they move forward. This is in part due to the fact that they use lagging indicators to make policy decisions about the future. Big picture, though, here are my thoughts:
As interest rates rise, the cost of doing business will increase for everyone – homeowners, home buyers, business owners, etc. And that increase will lead to less growth (that’s the Fed’s goal here right?). As that happens, there will also be more fear in the economy. And some of it rightfully so. However, we can make the most of that situation by thinking ahead to what the next 12-24 months will have in store.
First, we’ll finally start to have some ability to negotiate with vendors, get more consistent supplies, and control our costs. Second, we’re spending more on interest payments today, but we’re purchasing our assets (properties, renovations) at a lower basis. Third, once our developments and value-add deals are completed, we’ll have the ability to re-finance into long-term lower-cost debt. So we will have a lower basis combined with a future ability to drastically lower our monthly payments. It’s a win-win and for our strategy and because of that I believe now is one of the best times to invest.
SITE VISITS
While this week is Texas travel week – reviewing our properties in Houston, San Antonio, and Dallas – I’m also keeping a close eye on the hurricane headed straight for our home! Not a little unnerving given the predictions. My flight back to Tampa on Thursday has already been canceled. Hoping Friday flights will be back online.
It’s been a productive week that started on Monday with a visit to Westbury Reserve, our C-class turnaround project in Houston. Brenda (onsite manager) and Lana (regional manager) have been working hard to right the ship. It’s been a little frustrating since we’re about 6 months behind schedule due to some hiring challenges we’ve had. But I am encouraged by our current team and the fact that we’re fully staffed. I spent some time digging into the numbers, ensuring they understood the big-picture budgets for CAPEX, and we set a target for 90% occupancy by the end of next month (with a nice bonus attached).
Yesterday was focused on San Antonio and mostly our new development deals – Lake Vista and Bandera. Lake Vista is just about to go vertical pending a couple of final permits/approvals from the fire department and CPS (the electric utility company). After a couple missteps out of the gate with one particular vendor who did not perform, we’re slowly getting things back on schedule and are still planning for an end-of-year soft-open (meaning we’ll be officing out of the completed clubhouse). Until then the focus is on pre-leasing units. Bandera is our other deal (listed below as the “Class-A Development”) and is currently raw land with a planned initial 2 phase development with 500 units and a secondary third phase plus a retail component. I drove the site (we closed on the land last week) and made a few more observations/conclusions on how we’ll landscape the area and which parts of the current native vegetation we will want to preserve. It’s a beautiful site that is going to offer folks a unique experience of luxury with nature.
Today and tomorrow will be all about Dallas. Our Millennium Dallas deal is humming along well these days but still achieving nice rent bumps as we continue to push increases and further renovations. Deferred maintenance is complete and this project is in the steady cash flow stage (love that!). The team at North Creek has blown us away with the phenomenal turnaround that’s taken place there from a scrappy C-class property to a clean, safe B minus with great residents. I’m looking forward to seeing some of the final exterior CAPEX items that have been installed since my last visit. I also want to meet a couple of new maintenance guys who have joined the team recently. Last but not least we’ll be tackling the latest updates on Cottonwood Dallas. For the most part, our resident demographic has improved tremendously but we still have a lot of room to push rents. I’ll be working on reviewing that as well as our current personnel needs to ensure we have the manpower to stay on target for turns.
DEAL UPDATE
I left our three deals posted below for easy access in case you haven’t had a chance to review. We’re making good progress on our capital raises. Slower than usual but I think that’s to be expected. I’m trying my best to help keep us all from falling into the fear trap by staying focused on the data. Times of uncertainty require more homework and less emotion. I’ve also decided it’s a great time to step back from acquisitions and focus more on operations. Uncertainty brings opportunity but in order to capitalize on the opportunity you have to be on your game.
City Park, Atlanta, GA
- 10-12% COC
- 15-18% IRR
- 8% Preferred
- B-class
Esplanade, Orlando, FL
- 10-12% COC
- 15-17% IRR
- 8% Preferred
- B-class
Class-A Development, San Antonio, TX
- 25-30% IRR
- 15% Preferred
- A-class