In September 2017, Henley USA launched an offering for the repositioning of two existing multifamily housing communities in the Phoenix-metro area from Class C to Class B (488 units in total). Henley USA sourced the transaction off-market through a relationship with the property management company. The business plan called for a deep value-add program that included investing $7,500 per unit, re-branding, renovating unit interiors and exteriors, converting parking stalls from uncovered to covered (a key upgrade for a Phoenix-metro property), as well as adding a central clubhouse.
Opportunity for an Early Sale
At the time, cap rates in the Phoenix market were compressing, indicating a strong market performance and rising prices. After receiving a Broker’s Opinion of Value (BOV) for two other properties in the submarket, Henley USA began contemplating an early sale in Q2 2018. BOVs for the comparable properties indicated that Modern on the Rail could likely be sold early in year two (three years ahead of plan) at a price that was originally underwritten for year five.
Substantial Exterior Improvements Completed
By Q3 2018, the property-level branding had been finalized and most exterior capital improvements were in process and/or completed, including the exterior painting, the initial phases of covered parking, and landscaping improvements. The design submittals for the leasing office/clubhouse were also in process. Concessions to tenants were suspended as the property became fully leased and occupied. Approximately 325 units (67%) were lightly renovated after just one year of ownership.
By Q4 2018, the property was under contract and the purchase-sale transaction was completed in May 2019. At the time of sale, Henley USA had lightly renovated approximately 360 units (74%).
Favorable market conditions, an advantageous location (the light-rail extension area, just north of downtown Phoenix), and the successful execution of the business plan created the opportunity for Henley USA to exit the investment approximately three and a half years earlier than planned and achieve a higher-than-projected IRR for investors due, in part, to the early exit.
*Net of the most onerous fees charged to clients of CrowdStreet Advisors, LLC, our registered investment advisor subsidiary; an investor’s actual returns on a realized investment may differ.
This report contains explanations of a series of events associated with the Modern on the Rail offering that resulted in an approximate 40.7% (net of most onerous fees) IRR to investors (including those from the CrowdStreet Marketplace). Certain aspects of the report such as dates of major events and the final outcome are easily verifiable while others, particularly underlying reasons behind the sponsor’s business plan execution, are not.
The report partially relies upon the sponsor’s explanations, the information contained within sponsor-produced quarterly reports, and conference calls. This analysis is not an assertion of independently verified facts but, rather, is for informational purposes only, to convey CrowdStreet’s understanding of what transpired.
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