Summer may be a slow time for some businesses, but at PPR we’re as busy as ever! In our upcoming quarterly update video, our Real Estate Portfolio Manager Chris Cordes will do a deep dive on all of our most recent acquisitions and the health of our current commercial real estate portfolio (which remain on track and on target) but for now, we wanted to talk about our latest acquisition that just closed a few weeks ago.
In last week’s newsletter we talked about why we’re buying multifamily properties in 2024 – and to sum it up, it comes down to 2 reasons: advantageous deal metrics and our choice of quality sponsors – and with this property it’s no different.
The following is a report from Chris on the deal makeup as well as his impressions from the site visit.
The Stats of the Deal:
Purchase Price: $37.55M
Equity required: $13M
Projected IIR to PPR : 17.59%
Hold period: 4 years
PPR’s Role in the Project: To provide main common equity and surveillance of operations, including renovations and CapEx projects
Why We Like This Deal
Our latest acquisition is a 252-unit property in Cleveland, OH. It’s spread across 17 acres in an unassuming yet idyllic neighborhood in the Eastern Cleveland submarket of the Cleveland metropolitan area (aka “MSA”). Before we go into more detail on the property itself, here are some high level facts of why we like this deal:
- Proven sponsor with professional reporting and track record of distributions
- Robust business strategy including complete unit renovation with $355 rent premium
- Advantageous Waterfall terms
- Smooth acquisition process as we were comfortable with the acquisition documentation used from a previous transaction with the sponsor
- Unique property within the submarket and consistent high occupancy
- Dedicated on-site team with 16-year average tenure
Location
It almost goes without saying that real estate location is key – location location location! – so it’s probably best to start there. This property is close to major highways, major employers, and commercial and retail centers are within a five-minute drive. There are no through streets on the property itself and the tightknit community atmosphere of the asset is a featured and felt amenity when on-site.
Part of the East Cleveland submarket, which is made up of 34,000+ units, the property is located in the largest inventory market in the MSA. Rent growth in the submarket is averaging 2.3% and is slightly below the Cleveland market average of 3.6%. Vacancy is higher than historical average (13.9% compared to 8.7%), although vacancy concerns are limited due to the high occupancy of the comps in the local submarkets.
Supply in the submarket over the next two years could increase overall unit count by about 5%, of which no deliveries under construction or proposed are located in the relevant surrounding neighborhoods.
Site Visit
I personally visited the property prior to purchase to evaluate the property and the management team on the ground. When I first arrived in Cleveland and began my drive over, I thought I had maybe taken a wrong turn as I was right in the middle of a single-family suburban community. But suddenly the property came into view and seemed to perfectly compliment the similarly aged homes in the neighborhood.
Tall trees and lush vegetation covered the entrance of the property where I was welcomed by the on-site team. The team included a property manager, full-time leasing agent, a maintenance supervisor, as well as two maintenance technicians. Collectively, they have an average 16-year tenure at the property (the property manager has been with the property itself for 27 years!) and all will be continuing with our sponsor partners at Berger Communities.
Throughout the tour I learned that occupancy at the time of the site visit was at 95% and the property has experienced years of consistent, stabilized occupancy from many of the long-term tenants. Tenant demographics range in age and occupations, with many working in hybrid capacities at nearby Cleveland Clinic facilities and the large Progressive Insurance corporate campus.
Overall, the units were in good condition and featured large bedrooms and closets. All units have a similar floor plan layout, with 25% of the units including a den. Each unit also has a balcony or walkout patio. On-site amenities include a leasing office, fitness center, pool with showers, a children’s playground and a racquetball court.
It’s customary for me to ask every current property manager during a site visit what’s on their wish list for CapEx projects. The property manager’s response was to update the laundry rooms and hallways, which are already included in our sponsor’s renovation plan upon takeover. This is a good indicator of a well-maintained property as requests from property managers related to their wish list generally include more high-priced capital items such as fitness center remodel, pool updates, etc.
Business Plan
Berger Communities will transition their property management to operate the property upon takeover. With the two other Cleveland acquisitions over the last six months, Berger Communities regional presence has expanded with the regional manager, with whom I communicate monthly for asset call updates.
Berger feels confident in their ability to move forward with the business plan to renovate the remaining 199 classic units on site (53 units were renovated by prior management). Additionally, a washer/dryer installment campaign will support the $355 premium for each upgrade. The unit renovation program is expected to be completed in 35 months. All in all, Berger is forecasting a 6% exit cap and a 2% rent growth with 8% vacancy for the first two years of the hold to incorporate down units for renovation.
The Risks
A few risks to consider include long-term tenant pushback to increased rents through renovation premiums, as well as the market reaction to the stabilized rents upon unit renovation completion. We’re comfortable being near the top of the market upon stabilization as we feel the strength of the property management team and the community feeling of the asset will support the new rents.
The washer/dryer strategy may also be hindered by unit layouts, as the one-bedroom floor plans have limited closet space compared to the two- and three-bedroom units to accommodate appliance installation, but it’s important to consider that the one-bedroom units make up only 13% of the unit mix.
Interested in learning more?
If you’re interested in learning more about our commercial strategy or want to discuss investment options in our fund, please feel free to schedule a no-obligation consultation with us at https://pprcapitalmgmt.com/schedule/.
Our flagship fund is currently offering up to a 14.38% preferred return if you choose to compound, or 12.00% if you elect to receive monthly payments.
Happy investing!
