"A 560-unit value-add multifamily opportunity in the strong and stable market of San Antonio, TX, priced at an attractive post-COVID discount."

-Keith Page, Pearlmark

Top Questions

All answers are provided by the sponsors, Pearlmark & OTH Capital, or their representatives.

Why are you buying the property?

Keith Page, Pearlmark: "Pearlmark has been targeting the San Antonio market for some time given its attractive multifamily fundamentals and history as a stable employment market given its exposure to the healthcare, education, and defense sectors. San Antonio is the 7th largest city in the U.S. and has proven to be resilient through downturns (e.g. during the 2008-2009 Great Recession, San Antonio lost only 0.6% of jobs vs 1.1% for Texas and 5.1% for the US). The Airport Area submarket is particularly attractive with no new multifamily supply expected to deliver over the next five years."

"Pearlmark's co-GP partner OTH Capital, a value-add multifamily investor based in Austin, TX, focuses solely on the San Antonio and Austin markets. The seller originally wanted mid-$80,000's per unit pricing, but was willing to accept a low-mid $70,000's per unit price on an assumption basis. OTH was able to negotiate an off-market acquisition at $65,179/unit ($36,500,000) during the depths of COVID, which represents a substantial discount to the market for 1980's vintage product."

"The two properties are cross collateralized by a CMBS loan with a current balance of $21.9mm and a 4.52% fixed rate, with approximately 42 months of term remaining. The senior LTV is 59.9% at closing and Sponsor plans to assume the CMBS loan and originate $11.5mm of preferred equity to sit behind the CMBS loan, for a total loan-to-cost of 75.0% at closing."

"The Property will benefit from an exterior face-lift, interior value-add program, and remediation of deferred maintenance, for which Sponsor has budgeted $6.0mm ($10.8k/unit) in capital improvements. The exterior improvements will consist of replacing all of the siding at Parliament Bend and approximately one-third of the siding at Park West. In addition, the budget calls for repainting balconies, repaving a portion of the parking lots, installing covered carports, replacing exterior lighting, installing new signage, and addressing other deferred maintenance. The interior value-add program consists of $1.8mm ($4.7k/unit) to partially renovate 375 units (67% of total) to a mid-tier renovation level, and the underwriting assumes a rent premium of $90/unit per month (22.8% ROI). OTH will utilize its in-house verticals, which include construction management and maintenance teams, to effectively execute the value-add business plan while enhancing property operations with their in-house property management company."

What are the most important aspects of this investment opportunity for the investors?

Keith Page, Pearlmark:

• "Attractive Off-Market Acquisition Basis: Sponsor's diligent tracking of the Project prior to and throughout the COVID-19 pandemic enabled them to negotiate an attractive off-market purchase price of $65,179 per unit, which represents a 10-15% discount to bids Seller received pre-COVID ($72,000-$75,000/unit) and a discount to where competitive properties have recently traded (average $82,000/unit). "
• "Below Market Rents / Occupancy: Current rents at the Project are 11.5% below market on an unrenovated per unit basis and vacancy is 9.8% (excluding the 32 down fire units), which is above the historical average vacancy of the submarket (6.3%) and current vacancy of the comp set (5.9%). Pearlmark believes that combining its institutional asset management capabilities with OTH’s property management platform, in tandem with the robust capital investment program and enhanced marketing efforts, will enable the Project to achieve rents in-line with market."
• "Accretive Value-Add Program: The business plan includes spending $4.3m ($7,617 per unit) to renovate the Project amenities and exteriors. In addition, Sponsorship intends to renovate 67% of the unit interiors over a 27-month period at an average cost of $4,739 per unit, which is projected to generate a $90/month rent premium per unit (22.8% return on investment). Additionally, amenities will be activated and improved, common areas will be upgraded, ancillary income will be enhanced through installation of covered parking, and operating improvements should be realized through scale and management efficiency in the local market."
• "Regionally-Focused Operator: OTH Capital, a value-add multifamily investor based in Austin, TX, focuses solely on opportunities in the San Antonio and Austin markets. The team has acquired more than 80 multifamily properties (1,670 units) in the San Antonio and Austin markets since 2014."
• "Stable and Diversified San Antonio Market: San Antonio has a history of being a strong and stable employment market given its exposure to multiple low-beta job sectors including healthcare, education, and defense. San Antonio is the 7th largest city in the US and has proven to be resilient through downturns. San Antonio has received numerous accolades, including (i) #4 America’s Next Boom Town (Forbes), (ii) #4 for Millennial Population Growth (Business Insider), (iii) #5 for Best Big City in the US (Conde Nast), and (iv) #10 Top Cities in US for Tech Jobs (Entrepreneur Magazine). Several Fortune 500 companies are headquartered or have a large footprint in San Antonio, including GM Financial, H.E.B., Frost Bank, The Hartford, Rackspace, Boeing, Lockheed Martin, Toyota, USAA, Wells Fargo, Caterpillar, and Tyson."
• "Attractive Multifamily Market Fundamentals and Lack of New Supply: San Antonio has experienced strong job growth in recent years driven by a low cost of doing business, no state income tax, and low cost of living. The Airport Area submarket is well positioned just north of downtown and proximate to some of San Antonio’s largest employers including USAA, Valero, and the San Antonio International Airport. There has been no new multifamily supply delivered in the submarket over the previous five years and there are zero deliveries projected over the next five years. Vacancy in the submarket has averaged 6.3% over the previous five years and is projected to average 5.9% over the next five years. With low vacancy rates and no new supply projected, Sponsorship believes this submarket has strong and attractive fundamentals."
• "Capital Structure Optimization: There is an in-place CMBS loan at approximately 49% loan-to-cost and a maturity in 3.5 years. Sponsorship is layering in preferred equity from Brasa Capital, with whom Pearlmark has a good relationship, for the slice from 50% to 75% of the capital stack. The preferred equity will be co-terminus with the CMBS at 3.5 years, which aligns well with the timing of the renovation plan. The preferred equity will have an all-in interest rate of 11.0%, of which 5.5% will be paid current on a monthly basis. The preferred equity is highly accretive to the common equity investment returns and brings the total leverage to levels more typical of transactions of this type."

What is your investment strategy/business plan?

Keith Page, Pearlmark:

"The business plan calls for a total capital investment of $6.0 million ($10,790/unit) to fund light interior renovations, improve exterior/common areas, address certain deferred maintenance items, implement operational efficiencies, and monetize additional tenant amenities. Sponsorship plans to renovate 67% of the unit interiors across the Project at an average cost of $4,739 per unit to bring them up to market standard for renovated or newer vintage product. Amenity enhancements will include pool, common area, club house, and fitness center upgrades. Sponsor plans to drive ancillary income through the addition of paid covered parking and higher collection rates on the utility reimbursement program. Sponsorship believes that light value-add initiatives to the unit interiors and amenity/exterior improvements, including new siding/paint, should position the Property well within its competitive set."

"Pearlmark has underwritten a 27-month implementation plan and expects to achieve a $90 per month rent premium on average, which generates a projected 22.8% return on investment based on the $4,739 per unit interior spend. Interior unit upgrades are assumed to commence four months after closing (June 2021). There is no underwritten rent premium specifically associated with the $4.3 million of exterior and amenity upgrades, which Sponsor believes represents potential upside above the currently underwritten returns. OTH has carried out similar value-add programs at their other assets in San Antonio and Austin that have averaged nearly $100 per month on rent premiums."

"Sponsor anticipates selling the Project in three-and-a-half (3.5) years (August 2024) for $54.1 million (represents $96,655 per unit and an implied 5.50% cap rate on the forward 12-month NOI). The 5.5% exit cap rate is 20 basis points higher than where competitive properties have traded in recent years, when interest rates were much higher than they are today."

How has COVID-19 impacted your business plan?

Keith Page, Pearlmark: "Despite COVID-19, the Property has performed well with collections at 95%+, above US averages for workforce multifamily housing. Occupancy is currently 85%, which reflects 32 down units due to two recent fires at the Property - occupancy is 90.2% excluding the down units vs market occupancy of 94.1%."

"Pearlmark has underwritten an average 12% vacancy + 5% collections loss for the entire first year (through Feb-22) to account for the down units and potential collection loss issues due to COVID-19. Sponsorship plans to monitor collections diligently and perform credit checks on new tenants to ensure they have the ability to pay rent in full and on time. Sponsorship also plans to keep track of new legislation regarding additional stimulus checks and changing evictions laws in order to effectively manage the Property."

What are the risks and how are you mitigating those risks?

Keith Page, Pearlmark:

NOTE: All answers provided by the sponsors, Pearlmark & OTH Capital, or their representatives.

The above demographic and economic data is sourced from CoStar market and submarket reports, Axiometrics, Worth & Associates, Walker & Dunlop, and CBRE.
All information presented is subject to the PPM in the Documents section.