Asset Management Case Studies – Q3 ’22

October 10, 2022
By Soren Godbersen

Not long ago, we published results of exited investments during the first half of the year. Those results were attractive for most moments, but especially in 2022 with public markets facing severe headwinds. Since then, the capital markets news cycle hasn’t gotten much sunnier. As of October 3rd, the traditional 60/40 portfolio remained on track for its worst year ever. Investors are seeking alternative channels for both near-term yield and upside potential. 

As we closed the book on Q3 of 2022, we would like to share some more results from recently exited EquityMultiple investments. 

In sum, the three investments exited in Q3 yielded the following dollar-weighted results at exit:

 

Read on for more specific detail on the outcome of these three investments. EquityMultiple’s sustained success in 2022 reflects some of the core aspects of our value to investors like yourself:

  • Access to private-market commercial real estate — an asset class that can deliver returns derived from tangible demand factors and skilled management, even in turbulent times for public markets. 
  • Dedicated Asset Management — a team focused on working directly with sponsors throughout the term of the investment and pursuing the best outcome for your invested capital.
  • Diverse deal flow, giving you a range of options, all structured by our internal underwriting team to offer compelling a risk-adjusted return target in all cases

The Stonegrove, Fall Creek

The Opportunity

EquityMultiple investors contributed $1.25M to the acquisition and repositioning of Stonegrove Fall Creek, a 322-unit multifamily community in the Fall Creek submarket of Houston. 

The investment was alongside a repeat sponsor with deep experience in repositioning multifamily assets in Texas. The sponsor procured attractive bridge debt financing, and planned to exit the investment after three years at maturity of the loan, and after pushing rents and streamlining operational expenses. 

Because the sponsor was purchasing a recently developed property and looking to create value through pushing rents and improving operational economics, this was considered a “core plus” common equity investment. EquityMultiple worked with the sponsor to increase the preferred return hurdle rate from 8 to 10% for EquityMultiple investors. 

The Outcome

The sponsor’s property management partner brought on mostly new staff, kept expenses lower than budget, and achieved a first-year occupancy increase to 95% while increasing average rents by 6%. The sponsor also worked to evict delinquent tenants after the former owner signed on bad credit tenants to boost occupancy for sale.

Following execution of the business plan, the sponsor received a compelling offer from a 1031 buyer, 49% higher than the original purchase price.

EquityMultiple exited the investment in early July 2022, an effective 14 month term from the close date of the investment. EquityMultiple distributed $1.88M in profits to our investors in Stonegrove for a net realized IRR of 117% and a 2.5X net equity multiple. 

Target

Realized

Net IRR

13.7-16.3%117%

Net EquityMultiple

1.4x-1.5x2.5x

Term

3 years14 months

This type of core-plus investment and the opportune timing of exit both underscore the value EquityMultiple brings to investors. 

  • Through a well-capitalized and operationally efficient repeat sponsor, operating with boots-on-the-ground experience, we were able to offer an attractive core-plus investment thesis
  • Through vigilant asset management and working with the sponsor closely, we were able to exit the investment before the three year term and at a moment that effectuated net returns well beyond original targets for EquityMultiple investors.

Crossings at Elver Park

The Opportunity

The Crossings at Elver Park offering presented EquityMultiple investors an opportunity to participate in the acquisition and repositioning of 100 residential units at the Crossings at Elver Park, an existing 152-unit condominium community in the southwest submarket of Madison, Wisconsin. This “fractured condo” common equity investment opportunity came alongside a New York-based sponsor with specific experience in the niche fractured condo investment strategy, having already executed on five condo portfolio acquisitions, exiting three with returns in excess of 20%. 

EquityMultiple’s broad origination reach and sponsor network mean that investors like you can tap into highly specialized sponsors with track records of delivering on streamlined, repeatable business plans like this one. 

The Outcome

This investment targeted a net IRR of 13-22% to EquityMultiple investors, with a target hold period of two years, as well as an annual cash yield of 9.7-11.3%. 

Through membership on the HOA board, the sponsor was able to acquire more units. While spending around $250k to perform light value-add interior and exterior upgrades, the sponsor was able to sign 35 new leases with an average rent increase of 15%. 

Following the execution phase, the sponsor was able to exit via an attractive sale price in late August 2022. From there, EquityMultiple reconciled sponsor payments and issued proceeds to our investors, generating a net 36% IRR and 1.58x multiple over an 18 month hold (shorter than the initial target two year hold). Even over this relatively short time frame, the investment also generated interim cash flow amounting to a 5.8% annualized gross cash return to EquityMultiple investors. Both the cash flow and short term are potentially favorable outcomes given present inflation concerns.

Somerset Green

The Opportunity

Private commercial real estate debt investments have been a key piece of what EquityMultiple brings investors like you since 2016. During more volatile periods (like 2022 so far) debt investments can provide a stable and attractive rate of return.

In the Somerset Green Single Family Home Development offering, EquityMultiple participated in a $1.535mm loan for the refinance of a developer-owned model home and the acquisition of five complete and shovel-ready lots within Somerset Green, a luxury master planned community (MPC) in Houston, Texas. The loan was secured by the model home and nine lots, including four additional lots the Borrower, had previously acquired. We often prefer debt investments that offer downside protection in the form of being secured by first lien on the underlying property asset. 

The Outcome

The realized result on this investment was right down the fairway: a 12.6% net IRR to investors, roughly reflecting the 12% net target rate over the one year target term. 

The objective and result of this investment reflect a different risk/return profile from the other two offerings discussed here: debt investments can provide consistent yield to counterbalance equity investments (whether real estate or other types of equity). 

EquityMultiple’s breadth of offerings brings considerable diversification potential, as illustrated by the three exited investments discussed above. 

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