Houston, TX Multifamily, DST

Houston, TX

ASSET CLASS:  Class B Value-Add Multifamily
OFFERING SIZE:  $51,860,000
MINIMUM INVESTMENT:  $100,000
LEVERAGE:  61.76%
YEAR BUILT:  1990
UNITS:  580
HOLD PERIOD:  7-10 Years
TARGETED YR.-1 RETURN:  5.00%

Houston’s premier employment districts of the Galleria/ Uptown area, Texas Medical Center, and Downtown are all within a 5-mile radius. The strengths are good location, strong market, hometown market knowledge (Moodys is based in Houston and manages other multifamily properties within the MSA). Slowdown in completions, improved job growth, possibly under market rents ($1.24 per foot vs $1.40 average market rents), value add business plan should offer downside risk protection. $3,569,109 in upgrades will be performed over a period of 3 year period increasing rents by an estimated 15%.

Some offerings with a value-add component feature a more compelling return profile however, NOI growth should benefit the final sale price. Nearby competition with several complex's in the immediate area and two across street but appraiser believe rents below market which should allow property manager to meaningfully increase rents.

The property has high reserves at 4.19% of all-in price. Additionally, the Property appraised for $1.6M above the purchase price. There is a robust 86 basis point spread between the purchase cap and the exit cap (94 basis point spread on the appraised cap rate). The load and fees are reasonable at 9.4% decreasing to 7.96% (appraised net load).

The Property is located in the Houston–The Woodlands–Sugar Land metropolitan statistical area (Houston MSA), which is the fifth-largest MSA in the United States, housing approximately 6.9 million residents as of 2017 Between 2018and 2022, Houston MSA’s population is expected to continue growing, increasing at an average clip of 2.1% per year (Moody’s Corporation).

The Houston MSA is expected to outpace the population growth in both Texas and the Unite States As of June 2018, the unemployment rate within the Houston MSA was 4.6% (not seasonally adjusted), which lags the national average unemployment rate (4.2%) The Houston MSA’s economy is somewhat dependent on the energy sector; the appraiser notes that several firms experienced contraction in recent years. However, with commodity prices recovering, many of these firms have stabilized and expect growth in the near term

Houston’s health-care industry remains strong and continues to be a major driver behind development and employment. The Houston MSA employs more than 325,000 in health care according to the Greater Houston Partnership. The largest employer in the Houston MSA is Memorial Hermann Health System The Federal Reserve Bank of Dallas published the following local-area information in May 2018:  “Overall, the outlook for Houston remains positive. Job growth has been very strong and broad based, and the region is likely to receive a tailwind from strength in the United States & Texas economies. Local leading economic indicators suggest continued positive job gains the remainder of the year but at a somewhat slower pace.”

In the first quarter 2018, Houston ranked sixth for rent growth among the 50 largest U.S.markets. Over the past twoy ears ,occupancy in Houston has ranged from roughly 92.0% to 94.0%, and as of the first quarter of 2018, it is at 93.8%, which surpasses the metro’s 10-year average of 92.4%.

The Property is located in the Houston–The Woodlands–Sugar Land metropolitan statistical area (Houston MSA), which is the fifth-largest MSA in the United States, housing approximately 6.9 million residents as of 2017. Between 2018 and 2022, Houston MSA’s population is expected to continue growing, increasing at an average clip of 2.1% per year. The Houston MSA is expected to outpace the population growth in both Texas and the United States. As of June 2018, the unemployment rate within the Houston MSA was 4.6% (not seasonally adjusted), which lags the national average unemployment rate (4.2%). The Houston MSA’s economy is somewhat dependent on the energy sector; the appraiser notes that several firms experienced contraction in recent years. However, with commodity prices recovering, many of these firms have stabilized and expect growth in the near term. Houston’s health-care industry remains strong and continues to be a major driver behind development and employment. The Houston MSA employs more than 325,000 in health care according to the Greater Houston Partnership. The largest employer in the Houston MSA is Memorial Hermann Health System.

The Federal Reserve Bank of Dallas published the following local-area information in May 2018: “Overall, the outlook for Houston remains positive. Job growth has been very strong and broad based, and the region is likely to receive a tailwind from strength in the United States & Texas economies. Local leading economic indicators suggest continued positive job gains the remainder of the year but at a somewhat slower pace.” Observations and assessments related to the local multifamily sector include the following: In the first quarter 2018, Houston ranked sixth for rent growth among the 50 largest U.S.markets.

Over the past two years, occupancy in Houston has ranged from roughly 92.0% to 94.0%, and as of the first quarter of 2018, it is at 93.8%, which surpasses the metro’s 10-year average of 92.4%. Apartment development activity appears to be winding down following peak deliveries in 2017, and the market is likely to see occupancy rates remain near current levels, at roughly 93% to 93.5%, in the foreseeable future (Multifamily Appraisal Specialists). A stabilizing market, slow down in completions, and improved job growth are likely to give operators confidence to push rents. In turn, rent growth is expected to be at moderate to solid levels in the long term (Multifamily Appraisal Specialists).

The Manager considers the Property to be located in the Highland Village–Upper Kirby–West University submarket, which has the following characteristics as of July 2018: There are 63 apartment communities with 16,617 operating apartment units. There are no apartment units scheduled for delivery in 2018, and there are only370 apartment units scheduled for delivery in 2019. The average occupancy rate was 91.4%, and the average rental rate was $1,762. Over the past 12 months, the submarket has seen an annual occupancy increase of 6.3%, which is notably higher than the 1.6% increase experienced by the overall Houston market. Occupancy rates have been strong throughout 2017 and 2018 but have decreased slightly over the last couple of months as tenants displaced by Hurricane Harvey are returning to their homes. The submarket experienced an annual rent increase of 7.6%, as compared to the overall Houston market, which increased only 4.2%. Rents in the area are expected to increase 3.9% year over year by the first quarter of 2019 (MPF Research). According to the appraisal, in the coming year Houston MSA’s job growth is expected to increase as the area continues to recover from historic flooding in 2017. Meanwhile, apartment development activity appears to be winding down following peak deliveries. Overall, the Property appears to be performing in line with comparable properties on an occupancy basis, and apartment units in the Property’s submarket should hold significant appeal as growth in the job base spurs household formation and housing demand in 2019.

Total Private Placements: 46
Total Assets Purchased: $1.2 billion
Equity Raised: $437.7 million
Full Cycle Offerings:. 45
Years In Business 22 Years

The property is being managed in-house by the Sponsor.

1st-Year Cash-on-Cash: 5.00%
Projected Cash Range: 5.00% - 5.40%
Projected Cash Average: 5.20%

All-In Price:: $111,215,000
Purchase Price: $96,100,000
Appraised Value: $97,700,000
Loan Amount: $59,355,000
Equity Raise: $51,860,000
Reserves: $4,662,983
Reserves to All-In Price: 4.19%
Net Load: $10,452,017
Net Load to Equity: 20.15%
Net Load to All-In Ratio: 9.40%
Appraised Net Load: $8,852,017
Appraised Net Load to Equity: 13.28%
Appraised Net Load to All-In Price: 7.96%
All-in $/Ft.: $187.88
All-in $/Unit: $191,750

Net Operating Income: $4,977,980
Purchase Cap Rate: 5.18%
All-In Cap Rate: 4.47%
Cap Rate Spread: 71 bps
Breakeven Exit Cap: 6.04%
Breakeven Exit Cap Rate Spread: 86 bps
Appraised Cap: 5.10%
Appraised Cap Rate Spread: 94 bps

Term: 10 Years
Interest Only Period: 5 years
Amortization Period:. 30 years
Interest Rate: 4.37%
Prepayment: 1% of balance
Lender: KeyBank
LTV:. 61.76%
Non-Recourse:. Yes

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