Property Details
Stabilized Occupancy  Below Market Rents  Repositioning Opportunity  NOI Growth 
Asset Profile
Value Add

La Jolla Terrace

Fort Worth, TX

Multi-Family Property
Pearlmark Chicago, IL
Pearlmark
  • IRR 17.5%
  • Equity Multiple 1.9x
  • Hold Period 5Y
  • Minimum Investment $25K
  • Year 1 Cash on Cash N/A
  • Stabilized Cash on Cash 11.6% Y4
  • First Distribution June 2021
  • Distribution Frequency Quarterly
  • Co-Investment 10%
  • Preferred Return 10% IRR
  • Investor Profit Share See Financials
  • Asset Profile Value Add
  • Loan-to-Value 71%
  • Current Occupancy 97%

About this Property

"La Jolla Terrace is a value-add multifamily opportunity in Fort Worth, TX, with an attractive post-COVID price discount and assumable agency financing."

-Keith Page, Pearlmark

Address 8900 Randol Mill Rd.
Square Footage 288,276
# of Units 340
Year Built 1984
Current Occupancy 97%
Market Occupancy 92%
Current Average Rent $887/unit
Average Market Rent $985/unit
Purchase Price $27,250,000
Price per Sq. Ft. $95

Top Questions

All answers are provided by the sponsor, Pearlmark or its representatives.

 

Why are you buying the property?

Keith Page, Pearlmark: "Pearlmark believes the Property has been substantially undermanaged since it was acquired in January 2017, and has since achieved rents far below the comp set average of $1.21 per square foot (current in-place rents at $1.05 per square foot). Meanwhile, the submarket has demonstrated robust fundamentals, with strong rent growth averaging 6.5% annually over the last 5 years according to Axiometrics. Fort Worth has seen consistent employment and population growth and no new supply has delivered in the submarket since 2009 (with no deliveries in the pipeline)."

"Underwritten post-renovation rents at the Property remain below the comp set average, positioning the Property to deliver an intriguing value proposition in the submarket. After achieving a $1,550,000 post-COVID purchase price discount, the basis of $80k/unit is below the seller's 2017 cost basis and represents a significant discount to sales comparables in the market (average $93k/unit). Conservative post-COVID underwriting includes a 10% vacancy assumption in years 1 and 2 (vs. only 3% in-place vacancy today) as well as a 10% Year 1 credit loss."

"The in-place assumable Fannie Mae loan at 59% loan-to-cost provides for the opportunity to take out a supplemental loan that is highly accretive to investor returns, allowing for a potential cash distribution to investors of $9.3 million (70% of initial equity) at the end of Year 3."

 

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

Keith Page, Pearlmark:

  • "Strong Local Apartment Market: This acquisition represents an opportunity to acquire a value‐add multifamily asset in a submarket that is expected to see stable rent growth over the next five years, driven by strong employment growth and no new supply (no planned units in the pipeline and none built since 2009)."
  • "Convenient Access / Proximity Demand Generators: The Property is well‐positioned to benefit from its proximity to major highways, including I‐30, I‐820, and Highway‐360, as well as Arlington Memorial Hospital – one of Arlington’s top‐five employers."
  • "Favorable Price Point: The seller has agreed to a $1,550,000 (5.4%) price reduction from the original $28,800,000 contract price, resulting in a net price that is below the seller’s 2017 cost basis and substantially below comparable trades."
  • "Below Market Rents / Strong Organic Growth Potential: The Property is 97% leased with average effective rents of $887 per unit / $1.05 PSF – 10‐12% below the comp set average of $985 per unit / $1.21 PSF."
  • "Accretive Value‐Add Program: The business plan includes renovating 85% of the units over a two‐year period at an average cost of $5,467/unit to realize $160 rent premiums on rehabbed units. Additionally, amenities will be improved, common areas will be upgraded, and the Property will be rebranded and utilize technology for ease of tenant living. Inclusive of interior and amenity renovations, the blended return on investment for the renovation capital is projected to be 24.7%."
  • "Conservative Underwriting: Cash flows have been re‐underwritten based on new projections to reflect the COVID-19 impact. Five‐year rent growth is now underwritten at a 3.0% CAGR based on Axiometrics’ post‐COVID rent projections for the submarket. Vacancy for years 1 and 2 is assumed to be 10%, vs. 3% in-place vacancy at the Property and 8% vacancy at the comp set today. Year 1 credit loss is underwritten at 10%, over 2x the previous underwriting and in excess of national post-COVID averages. Further, baseline controllable operating expenses are budgeted at 11% above the trailing 12-month level, reflecting planned investment in staffing and R&M."
  • "Highly Experienced Sponsorship: The Sponsor is experienced in business plans of this type having invested in a similar property in the Dallas‐Fort Worth market early last year – Pleasant Creek. At that property, the Sponsor completed the renovation program under-budget and achieved rent premiums of $175-200/unit vs. the $100/unit original underwriting."
  • "Near‐term Cash Out Opportunity: Rightsizing of leverage at the end of Year 3 is expected to result in a significant cash out distribution to investors."
  • "Outsized Expected Returns: Base Case investor returns are projected to be substantially higher than typical multifamily investments of this type, partly driven by the opportunistic price reduction achieved because of the current market dislocation."

 

What is your investment strategy/business plan?

Keith Page, Pearlmark:

  • "Unit Upgrades: Renovate 85% of the units at $5,467/unit to bring them up to the current market spec. Competitive market analysis supports the underwritten $160 targeted rent premiums. Unit upgrades are assumed to commence in February 2021 (6 months after closing).
  • "Exterior Improvements: Exterior painting of all buildings, repair of unit balconies, and improved signage."
  • "Amenity Enhancement: Clubhouse renovation, addition of a business center and launching of an after-school program."
  • "Other Income: Addition of paid covered parking at $35/carport/month and a washer/dryer rental program for tenants through an existing local partnership with an appliance provider/servicer (net $35/mo. to the Property)."
  • "Proactive Marketing: Investment in the Property’s online presence, outbound marketing and increased leasing staff."
  • "Loan Assumption (at close): Sponsor is assuming an existing $19.2 million Fannie Mae loan, representing 59% loan-to-cost, with a fixed interest rate of 4.64% and 30-year amortization through maturity in 2029."
  • "Refinance/Supplemental (Year 3): Once the rehab program is complete, Sponsor has underwritten the opportunity to increase leverage to 63% LTV / 1.30x ($9.3m of additional loan proceeds) via an available Fannie Mae supplemental loan. The supplemental loan would be co‐terminus with the existing Fannie Mae loan and would return approximately 70% of equity capital to investors."
  • "Exit (Year 5): Assuming a 5.75% exit cap rate, the Property is expected to be sold at $45.9 million (or $135k/unit) at the end of Year 5. In addition, the Sponsor conservatively assumes payment of a $3.1 million yield maintenance penalty at exit, resulting in net cash flow after closing costs of $15.9 million (vs. the remaining equity basis of $4.0 million at that time)."

 

How has COVID-19 impacted your business plan?

Keith Page, Pearlmark: "Post-COVID underwritten rent growth is now nearly 20% lower than the previous underwriting based on updated guidance from Axiometrics for the submarket. Underwritten credit loss has increased from 4.2% to 10.0% in Year 1 to account for an anticipated reduction in collections due to the global pandemic. Underwritten vacancy has increased to 10% in years 1 and 2, substantially higher than in-place Property vacancy of 3% and in-place competitive set vacancy of 8%."

"The unit renovation timeline has been pushed back, now commencing in 1Q 2021. Moreover, underwriting now reflects conservative leverage assumptions for the available supplemental loan (63% maximum LTV versus 70% previously)."

 

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

Keith Page, Pearlmark:

  • "Market Rent Growth: Underwriting the ability to increase revenue through improved property management, value-add initiatives and market rent growth per Axiometrics’ East Fort Worth quarterly rent growth data. Given what Sponsor perceives as under-management of the Property and robust fundamentals of the local market, we believe these assumptions are supportable. No unit renovations are planned to occur until 2021 and rent growth assumptions are based on Axiometrics’ post-COVID projections, which include 0% rent growth over the first year."
  • "Future Supply: No units have been built in the submarket since 2009 and no new units are in the pipeline, despite projected 6.3% population growth in the 3-mile radius over the next five years. Any new construction would require rents substantially above the in-place rents of $1.05 per square foot and projected renovated rents of $1.19 per square foot. In addition, permitting activity is expected to materially decline over the near term due to the global pandemic."
  • "Debt Assumption: An in-place loan is being assumed at closing and will need to be either (i) paid off at maturity in 2029, (ii) prepaid upon sale of the asset, requiring payment of a yield maintenance penalty, or (iii) assumed by the next buyer. Underwriting assumes taking out supplemental financing up to 63% LTV in July 2023, which would be co-terminus with the existing financing. The yield maintenance penalty is estimated at $3.1 million at exit (July 2025), which includes the supplemental financing and is assumed to be paid by the seller at exit. Underwriting also assumes exiting at a 5.75% cap rate. If interest rates rise, the yield maintenance penalty will decline and the fixed rate loan may become more attractive to a new buyer. If interest rates do not rise, cap rates may remain low."
  • "Suburban Location: The Property is located approximately 11 miles east of downtown Fort Worth, outside the true urban core. However, we believe this is a very strong and dynamic market. The Property is located near major employment and entertainment centers, including Dallas-Fort Worth Airport, Texas Health Arlington Memorial Hospital, University of Texas at Arlington, AT&T Stadium (home to the Dallas Cowboys), Globe Life Park (home to the Texas Rangers) and Texas Live!, a major mixed-use development. Demographics in the surrounding area are strong, with median household income of $59,600 within a 3-mile radius and a 1.2% population growth CAGR projected for the next five years, nearly double the national average."
  • "Physical Obsolescence: Given the Property’s age (36 years), there is risk that major building systems or structural components could be physically obsolete. Pearlmark and Sinatra have completed detailed engineering studies to identify and address any material deferred maintenance and have bid out the work to local contractors, which is reflected in the current capex budget. The budget includes $1.4 million of deferred maintenance capital and no associated rent bump."
  • "Collection Loss: Collection loss is expected to be higher than normal due to the global pandemic. Collections at the Property have fared relatively well in the wake of COVID-19, averaging 87% from March-June 2020, in-line with national averages for workforce housing. Underwriting assumes 15% credit loss for the month of August 2020, gradually reducing to 6% by the end of the first projection year and averaging 10% over the first year."
  •  

    NOTE: All answers provided by the sponsor, Pearlmark, or its representatives.

    About this Property

    "La Jolla Terrace is a value-add multifamily opportunity in Fort Worth, TX, with an attractive post-COVID price discount and assumable agency financing."

    -Keith Page, Pearlmark

    Address 8900 Randol Mill Rd.
    Square Footage 288,276
    # of Units 340
    Year Built 1984
    Current Occupancy 97%
    Market Occupancy 92%
    Current Average Rent $887/unit
    Average Market Rent $985/unit
    Purchase Price $27,250,000
    Price per Sq. Ft. $95

    Top Questions

    All answers are provided by the sponsor, Pearlmark or its representatives.

     

    Why are you buying the property?

    Keith Page, Pearlmark: "Pearlmark believes the Property has been substantially undermanaged since it was acquired in January 2017, and has since achieved rents far below the comp set average of $1.21 per square foot (current in-place rents at $1.05 per square foot). Meanwhile, the submarket has demonstrated robust fundamentals, with strong rent growth averaging 6.5% annually over the last 5 years according to Axiometrics. Fort Worth has seen consistent employment and population growth and no new supply has delivered in the submarket since 2009 (with no deliveries in the pipeline)."

    "Underwritten post-renovation rents at the Property remain below the comp set average, positioning the Property to deliver an intriguing value proposition in the submarket. After achieving a $1,550,000 post-COVID purchase price discount, the basis of $80k/unit is below the seller's 2017 cost basis and represents a significant discount to sales comparables in the market (average $93k/unit). Conservative post-COVID underwriting includes a 10% vacancy assumption in years 1 and 2 (vs. only 3% in-place vacancy today) as well as a 10% Year 1 credit loss."

    "The in-place assumable Fannie Mae loan at 59% loan-to-cost provides for the opportunity to take out a supplemental loan that is highly accretive to investor returns, allowing for a potential cash distribution to investors of $9.3 million (70% of initial equity) at the end of Year 3."

     

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

    Keith Page, Pearlmark:

    • "Strong Local Apartment Market: This acquisition represents an opportunity to acquire a value‐add multifamily asset in a submarket that is expected to see stable rent growth over the next five years, driven by strong employment growth and no new supply (no planned units in the pipeline and none built since 2009)."
    • "Convenient Access / Proximity Demand Generators: The Property is well‐positioned to benefit from its proximity to major highways, including I‐30, I‐820, and Highway‐360, as well as Arlington Memorial Hospital – one of Arlington’s top‐five employers."
    • "Favorable Price Point: The seller has agreed to a $1,550,000 (5.4%) price reduction from the original $28,800,000 contract price, resulting in a net price that is below the seller’s 2017 cost basis and substantially below comparable trades."
    • "Below Market Rents / Strong Organic Growth Potential: The Property is 97% leased with average effective rents of $887 per unit / $1.05 PSF – 10‐12% below the comp set average of $985 per unit / $1.21 PSF."
    • "Accretive Value‐Add Program: The business plan includes renovating 85% of the units over a two‐year period at an average cost of $5,467/unit to realize $160 rent premiums on rehabbed units. Additionally, amenities will be improved, common areas will be upgraded, and the Property will be rebranded and utilize technology for ease of tenant living. Inclusive of interior and amenity renovations, the blended return on investment for the renovation capital is projected to be 24.7%."
    • "Conservative Underwriting: Cash flows have been re‐underwritten based on new projections to reflect the COVID-19 impact. Five‐year rent growth is now underwritten at a 3.0% CAGR based on Axiometrics’ post‐COVID rent projections for the submarket. Vacancy for years 1 and 2 is assumed to be 10%, vs. 3% in-place vacancy at the Property and 8% vacancy at the comp set today. Year 1 credit loss is underwritten at 10%, over 2x the previous underwriting and in excess of national post-COVID averages. Further, baseline controllable operating expenses are budgeted at 11% above the trailing 12-month level, reflecting planned investment in staffing and R&M."
    • "Highly Experienced Sponsorship: The Sponsor is experienced in business plans of this type having invested in a similar property in the Dallas‐Fort Worth market early last year – Pleasant Creek. At that property, the Sponsor completed the renovation program under-budget and achieved rent premiums of $175-200/unit vs. the $100/unit original underwriting."
    • "Near‐term Cash Out Opportunity: Rightsizing of leverage at the end of Year 3 is expected to result in a significant cash out distribution to investors."
    • "Outsized Expected Returns: Base Case investor returns are projected to be substantially higher than typical multifamily investments of this type, partly driven by the opportunistic price reduction achieved because of the current market dislocation."

     

    What is your investment strategy/business plan?

    Keith Page, Pearlmark:

    • "Unit Upgrades: Renovate 85% of the units at $5,467/unit to bring them up to the current market spec. Competitive market analysis supports the underwritten $160 targeted rent premiums. Unit upgrades are assumed to commence in February 2021 (6 months after closing).
    • "Exterior Improvements: Exterior painting of all buildings, repair of unit balconies, and improved signage."
    • "Amenity Enhancement: Clubhouse renovation, addition of a business center and launching of an after-school program."
    • "Other Income: Addition of paid covered parking at $35/carport/month and a washer/dryer rental program for tenants through an existing local partnership with an appliance provider/servicer (net $35/mo. to the Property)."
    • "Proactive Marketing: Investment in the Property’s online presence, outbound marketing and increased leasing staff."
    • "Loan Assumption (at close): Sponsor is assuming an existing $19.2 million Fannie Mae loan, representing 59% loan-to-cost, with a fixed interest rate of 4.64% and 30-year amortization through maturity in 2029."
    • "Refinance/Supplemental (Year 3): Once the rehab program is complete, Sponsor has underwritten the opportunity to increase leverage to 63% LTV / 1.30x ($9.3m of additional loan proceeds) via an available Fannie Mae supplemental loan. The supplemental loan would be co‐terminus with the existing Fannie Mae loan and would return approximately 70% of equity capital to investors."
    • "Exit (Year 5): Assuming a 5.75% exit cap rate, the Property is expected to be sold at $45.9 million (or $135k/unit) at the end of Year 5. In addition, the Sponsor conservatively assumes payment of a $3.1 million yield maintenance penalty at exit, resulting in net cash flow after closing costs of $15.9 million (vs. the remaining equity basis of $4.0 million at that time)."

     

    How has COVID-19 impacted your business plan?

    Keith Page, Pearlmark: "Post-COVID underwritten rent growth is now nearly 20% lower than the previous underwriting based on updated guidance from Axiometrics for the submarket. Underwritten credit loss has increased from 4.2% to 10.0% in Year 1 to account for an anticipated reduction in collections due to the global pandemic. Underwritten vacancy has increased to 10% in years 1 and 2, substantially higher than in-place Property vacancy of 3% and in-place competitive set vacancy of 8%."

    "The unit renovation timeline has been pushed back, now commencing in 1Q 2021. Moreover, underwriting now reflects conservative leverage assumptions for the available supplemental loan (63% maximum LTV versus 70% previously)."

     

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

    Keith Page, Pearlmark:

  • "Market Rent Growth: Underwriting the ability to increase revenue through improved property management, value-add initiatives and market rent growth per Axiometrics’ East Fort Worth quarterly rent growth data. Given what Sponsor perceives as under-management of the Property and robust fundamentals of the local market, we believe these assumptions are supportable. No unit renovations are planned to occur until 2021 and rent growth assumptions are based on Axiometrics’ post-COVID projections, which include 0% rent growth over the first year."
  • "Future Supply: No units have been built in the submarket since 2009 and no new units are in the pipeline, despite projected 6.3% population growth in the 3-mile radius over the next five years. Any new construction would require rents substantially above the in-place rents of $1.05 per square foot and projected renovated rents of $1.19 per square foot. In addition, permitting activity is expected to materially decline over the near term due to the global pandemic."
  • "Debt Assumption: An in-place loan is being assumed at closing and will need to be either (i) paid off at maturity in 2029, (ii) prepaid upon sale of the asset, requiring payment of a yield maintenance penalty, or (iii) assumed by the next buyer. Underwriting assumes taking out supplemental financing up to 63% LTV in July 2023, which would be co-terminus with the existing financing. The yield maintenance penalty is estimated at $3.1 million at exit (July 2025), which includes the supplemental financing and is assumed to be paid by the seller at exit. Underwriting also assumes exiting at a 5.75% cap rate. If interest rates rise, the yield maintenance penalty will decline and the fixed rate loan may become more attractive to a new buyer. If interest rates do not rise, cap rates may remain low."
  • "Suburban Location: The Property is located approximately 11 miles east of downtown Fort Worth, outside the true urban core. However, we believe this is a very strong and dynamic market. The Property is located near major employment and entertainment centers, including Dallas-Fort Worth Airport, Texas Health Arlington Memorial Hospital, University of Texas at Arlington, AT&T Stadium (home to the Dallas Cowboys), Globe Life Park (home to the Texas Rangers) and Texas Live!, a major mixed-use development. Demographics in the surrounding area are strong, with median household income of $59,600 within a 3-mile radius and a 1.2% population growth CAGR projected for the next five years, nearly double the national average."
  • "Physical Obsolescence: Given the Property’s age (36 years), there is risk that major building systems or structural components could be physically obsolete. Pearlmark and Sinatra have completed detailed engineering studies to identify and address any material deferred maintenance and have bid out the work to local contractors, which is reflected in the current capex budget. The budget includes $1.4 million of deferred maintenance capital and no associated rent bump."
  • "Collection Loss: Collection loss is expected to be higher than normal due to the global pandemic. Collections at the Property have fared relatively well in the wake of COVID-19, averaging 87% from March-June 2020, in-line with national averages for workforce housing. Underwriting assumes 15% credit loss for the month of August 2020, gradually reducing to 6% by the end of the first projection year and averaging 10% over the first year."
  •  

    NOTE: All answers provided by the sponsor, Pearlmark, or its representatives.

    Offered By

    Pearlmark

    Pearlmark

    Chicago, IL

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    Assets Under
    Management

    Currently
    $782.4MM 20+ assets
    Exited
    $12.7B 100+ assets
    Portfolio LTV
    61.5%  
    Historical
    Realized Returns

    Total IRR
    27.9%  
    Equity Multiple
    2.1x  
    Annual Cash
    N/R  
    Years Of
    Experience

    As Principals
    30+ years  
    In Business
    24 years  
    Size
    20 Staff * Dedicated investor relations
    * All information is reported by Pearlmark as of 3/31/2020.
    Assets Under
    Management

    Currently
    $782.4MM 20+ assets
    Exited
    $12.7B 100+ assets
    Portfolio LTV
    61.5%  
    Historical
    Returns

    Total IRR
    27.9%  
    Equity Multiple
    2.1x  
    Annual Cash
    N/R  
    Years Of
    Experience

    As Principals
    30+ years  
    In Business
    24 years  
    Size
    20 Staff * Dedicated investor relations
    * All information is reported by Pearlmark as of 3/31/2020.

    Financials

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    Location Details

    Fort Worth, TX

    Keith Page, Pearlmark: "The East Fort Worth submarket has not seen any new apartment deliveries since 2009 and supply-side pressure is much less of a concern here than in the Fort Worth metro’s more construction-heavy submarkets. Due to this lack of supply and consistent absorption over the past few years, submarket vacancies remain near historic lows."

    "Rent growth has well outpaced the metro average – the submarket’s annual rental growth rate as of 1Q 2020 is 3.4% versus the Fort Worth market average of 2.5%. Out of the 14 submarkets in the market, East Fort Worth ranked 1st for annual effective rent growth this period, per Axiometrics."

    "The Property is in close proximity to key employment centers, retail amenities and entertainment destinations, as well as major highways providing direct connectivity to downtown Fort Worth and Dallas."

    Documents

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