In December 2017, RREAF launched an offering for an opportunistic portfolio consisting of four multifamily assets, totaling 1,086 units, located along the Gulf Coast in Mississippi and Alabama.
RREAF viewed the portfolio as a light value-add opportunity with an approximate $3.4M rehab budget spread across the four properties to maintain occupancy and foster rent growth, including upgrading interiors of targeted units and making exterior improvements.
Besides offering what RREAF believed to be friendly terms to investors, two of the properties were purchased at a discount to the appraised value. In November 2017, CBRE’s assigned as-is values for two properties came in at $2.9M and $3.8M above their respective purchase price.
The portfolio was sourced through RREAF’s Multifamily Acquisition Program, which was established to acquire, develop, and operate existing multifamily assets located in secondary and tertiary markets in the Southwest and Southeast United States, with an initial focus on Texas, Oklahoma, Mississippi, North and South Carolina, Alabama, and Georgia. RREAF had identified these markets as having an imbalance between supply and demand and little or no new development occurring to keep pace with the population growth.
During the first quarter of operations in Q1 2018, RREAF implemented a name change across all four properties to develop a brand and a reputation of high quality, integrity, and professionalism for the assets. The property management company (and partner in the deal) transitioned smoothly, mitigating the customary decline in occupancy attributable to a new takeover and managing the assets to outperform expectations early on. In Q2, RREAF continued to work closely with the project development team on the bidding process and implementation of unit renovations. RREAF was impressed with the range of bids that had come in so far, which could potentially result in savings in the projected capex budget at some of the properties. With these potential savings, RREAF would look to reinvest in other projects at the properties, generating higher rents and improving the overall tenant class. As a result of strong performance early on, RREAF began making distributions ahead of schedule, distributing at an annualized 8% rate for both Q1 and Q2 2018.
Preparing For Sale
Overall, the portfolio continued to perform well throughout 2019, with RREAF following the original business plan, renovating units, maintaining occupancy, and increasing rental rates. In Q4, RREAF informed investors that it was contemplating listing the portfolio for sale. It had received Broker Opinion of Value (“BOV”) from Cushman Wakefield, Colliers, and Newmark Knight Frank. Under the three different firms’ average broker strike prices, the approximate IRR to investors would exceed projections assuming a hypothetical June 30th sale date. In Q1 2020, RREAF executed an exclusive listing agreement with Colliers providing a minimum strike price. Although the marketing materials were already completed, the official listing was put on hold as a result of the COVID-19 pandemic.
RREAF decided to cut short the marketing process in Q3 2020 after the initial offers came in. Instead, it elected to work on a sale by way of interest purchase by the property management company, which was also an investor in the deal. Supported by the initial offers that came in, the interest buy-out equated to a purchase price in line with what RREAF could have expected to receive if the portfolio was sold to a conventional buyer. After receiving approval from the lender on the loan assumption, the sale transaction officially closed in March 2021.
An attractive basis and good business plan execution, including effective management, property upgrades and unit renovations, and rent growth, allowed RREAF to exit the investment and achieve favorable returns for investors.
*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 RREAF Gulf Coast Portfolio II offering that resulted in an approximate 25.7% (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.
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