Southeast Multifamily Portfolio II, DST

Macon & Warner Robins, Georgia

ASSET CLASS:  Class B Value-Add Multifamily Portfolio
OFFERING SIZE:  $54,230,000
LEVERAGE:  54.34%
# OF UNITS:  904
YEAR BUILT:  1996, 1985, 1987-1989, 1992
HOLD PERIOD:  7-10 Years
REMAINING EQUITY:  $27,000,000

The seller has completed more than $2.2 million of capital projects at the four properties since 2015, including updated landscaping, repairing, replacing and painting exterior siding as well as asphalt repairs. Additionally, significant improvements were made to amenities at each property, including clubhouse renovations, new business centers and new outdoor grill areas, resurfacing the pools, pool-deck repairs, fitness center upgrades and new dog parks.

Capital Square has established a capital budget of approximately $8.1 million to fund additional improvements to property exteriors, roofs, landscaping, asphalt, amenities and interiors to increase the portfolio’s income and value as well as to improve the physical condition and appearance of each property.

The seller has upgraded 393 apartment units in the portfolio since 2015, equal to approximately 43.5% of the total number of units, and several of the remaining 511 units were previously upgraded by the prior owner. A total of 96 of the seller’s upgrades were completed to their “second generation” scope, which includes stainless steel appliances, subway tile kitchen backsplash, resurfaced countertops, painted cabinets with new cabinet doors, new flooring, lighting, hardware and plumbing fixtures. The “second generation” apartments have achieved an average in-place monthly rent premium of $114.

Each of the properties has a new, 10-year Fannie Mae loan with a fixed interest rate of 3.38%. Each of the loans requires interest-only debt service payments for the first five years and principal and interest payments for the second five years of the loan term.

The Sponsor budgeted approximately $6.29 million from the initial capital expense reserve to enhance the properties’ exteriors, landscaping, and amenities. Exterior and landscaping capital projects include exterior siding repairs and replacements, exterior paint, roof repairs and replacements, asphalt repairs and replacements, tree removal and tree trimming, drainage repairs and additions, and new building and property signage and lighting. Amenity additions and enhancements include renovating, adding, or replacing property clubhouses, pool areas, fitness centers, outdoor kitchens, dog parks, package locker systems, tennis courts, laundry rooms, and playgrounds.

The Sponsor has also budgeted approximately $1.00 million from the initial capital expense reserve to update 290 apartment homes in the portfolio and add 105 washer-dryer appliance sets to apartment homes. The Sponsor identified upgrade opportunities based on premiums that are currently in place on upgraded apartments compared to non-upgraded apartments among the properties and their competitors. Among the budgeted interior upgrades, the Sponsor plans to complete 110 upgrades to a scope similar to the seller’s “second generation” renovation, including new appliances, new flooring, new lighting and plumbing fixtures, and updated countertops and cabinets, at a budgeted cost of approximately $6,000. The Projections anticipates a monthly rental rate premium of $100 per unit upon the completion of these renovations.

Two of the projects are located within Houston County, GA and within the Warner Robins, Georgia Metropolitan Statistical Area (the “Warner Robins MSA”). Consisting of Houston, Peach and Pulaski counties, the Warner Robins MSA is located just south of the Macon MSA. The population of the Warner Robins MSA was estimated in 2018 at 193,835, up approximately .96% per year over the 2010 census level of 179,604. The population growth within the Warner Robins MSA is slightly behind the State of Georgia growth rate of 1.04% per year and United States growth rate of .73%.

The unemployment rate within Warner Robins MSA was 2.70% as of November, 2019. The unemployment rate within the metropolitan area was below the State of Georgia unemployment rate of 3.30%, as well as the national unemployment rate of 3.3%, last reported as of November, 2019.

Two of the projects are located in Bibb County, and within the Macon, GA Metropolitan Statistical Area (the “Macon MSA”). Bibb County is geographically located in central Georgia, and is the largest county in the Macon MSA. The City of Macon is the principal city within the Macon MSA; it lies near the center of the state, hence the city’s nickname “The Heart of Georgia.” The population of the Macon MSA was estimated in 2018 at 229,737, down approximately -0.14% per year over the 2010 census level of 232,293. The population growth within the Macon MSA is behind the State of Georgia, which has seen growth of 1.04% over the same period and the United States growth rate of 0.73%.

The unemployment rate within Macon MSA was 2.90% as of November, 2019. The unemployment rate within the metropolitan area was below the State of Georgia unemployment rate of 3.30%, as well as the national unemployment rate of 3.3%, all figures reported as of November 2019.

Submarket Highlights:

The Macon-Warner Robins apartment market had an occupancy rate of 97.6% and year-to-date annualized rent growth of 4.0% as of September 2019. REIS forecasts an average annual rent growth of 3.1% and an average occupancy rate of 96.5% in the Macon- Warner Robins apartment market through 2023. The unemployment rate was 3.2% in the Macon-Bibb County-Warner Robins, GA combined statistical area as of September 2019. Site Selection magazine named Georgia as the state with the Best Business Climate for a record seventh year in a row, reflecting the state’s attractive workforce, infrastructure, economic development policies, and business costs in November 2019. Robins Air Force Base, Georgia’s largest single-site industrial complex, is a major contributor to economic growth in the Macon-Warner Robins market.

Our market analysis was based on a Performance Monitor report for the Macon, GA apartment market (as defined by REIS) containing 3rd quarter 2019 information. According to the report, the Macon apartment market had a vacancy rate of 2.9% during the 3rd quarter of 2019, up 70 basis points from the prior quarter, however, up just 30 basis points from the level found a year prior. After a surge in multifamily permit filings for the Macon market from 2011 to 2013, averaging 236 permit filings per year for that span, the multifamily construction boom subsided. In 2014 and 2015 no new permits were filed and in the years since only 11 were filed in 2016, 15 in 2017, 18 in 2018, and 25 in 2019. With very limited forecast population growth as well as very limited new construction, REIS has forecast the vacancy rate to remain relatively steady, at or near 3% for the next several years. Of note, a vacancy rate in the 5.0-6.0% is considered “healthy” by industry standards and the vacancy rate in the Macon market has remained at or below 4.4% since 2015.

Historically, average asking rents have posted modest but positive gains. The average rent gain from 2014 through 2018 was 2.10% with 2018 posting the strongest rent increase at 4.1%. REIS has forecast the 2019 asking rent rate to have increased 4.30% to an average of $764. When broken down by unit type market rental rates now average $669/unit per month for a one-bedroom ($0.86/SF), $782/unit for a two-bedroom ($0.71/SF), and $895/unit for three-bedroom ($0.67/SF). REIS has forecast asking rents to grow by an average of 2.80% per year over the next four years.

Pursuant to the First Half 2019 CB Richard Ellis Cap Rate Survey, on a national basis cap rates for suburban multifamily fell slightly during the first half of 2019. The average suburban multifamily cap rate was 5.49%, down six basis points from the second half 2018 cap rate. Cap rates changes were marginal across all classes; Class C cap rates fell by the greatest margin, down 10 basis points to 6.12%, while Class B cap rates were down two basis points and Class A cap rates were down by six basis points. The cap rate spread between Class A and Class B cap rates was just 38 basis points, the lowest level ever reported by the CBRE Cap Rate Survey.

Investor buying activity also would indicate a preference towards secondary and tertiary markets. Tier I cap rates were up slightly, while Tier II and Tier III cap rates were all down. The cap rate spread between Tier I and Tier II markets fell to 15 basis points, another historic low reported by the CBRE Cap Rate Survey.

According to CBRE, suburban multifamily pricing was anticipated to remain stable in the 2nd half of 2019 by 82% of survey respondents, up sharply over the year-end 2018 responses. Another 14% expected modest cap rate decreases during the second half of 2019.

All of the Project Appraisals included the same six sales comparables, all of which were located within the State of Georgia. Three of the comparables occurred in the past year, while the remaining three comparables occurred in 2018. Sales prices ranged from $94,643/unit to $128,922/unit with an average of $106,892/unit. The most recent comparable represented the sale of a 176-unit property which was constructed in 1996. The comparable sold in November of 2019 towards the bottom of the range of the group at $94,744/unit and a 5.47% capitalization rate. Overall the capitalization rates ranged from 5.19% to 5.67% with an average of 5.49%.

The sponsor expects enter into a separate property sub-management agreement for each Project with BH Management Services, LLC, an Iowa limited liability company, as the onsite manager of the Project (“BH”). BH was formed in 1993 and currently manages 271 properties with approximately 80,000 units across the United States. The Sponsor believes that BH’s strong operational history in the area and broader management across the region uniquely qualifies the group to provide property management services for the Projects. The Sponsor has indicated that BH will strive to maintain as much of the on-site team that is currently in place at the Projects to provide a seamless transition and maximize the benefits provided by their history and working knowledge of the Projects.

Targeted Yr.-1 Cash-on-Cash: 5.61%
Targeted Cash Range: 5.04% - 6.60%
Targeted Cash Average: 5.71%
Targeted Cash Range w/ Principal Paydown: NA
Targeted Cash Average w/ Principal Paydown: NA
Projected IRR (based on sale at purchase cap rate): 8.67%

All-In Price: $118,775,000
Purchase Price: $99,100,000
Appraised Value: $99,300,000
Loan Amount: $64,545,000
Equity Raise: $54,230,000
Trust Reserves: $9,809,602
Reserves to All-In Price: 8.26%
Reserves to Equity: 18.09%
Net Load: $9,865,398
Net Load to Equity: 18.19%
Net Load to All-In Ratio: 8.31%
Appraised Net Load: $9,665,398
Appraised Net Load to Equity: 17.82%
Appraised Net Load to All-In Price: 8.14%

Net Operating Income: $5,670,347
Purchase Cap Rate: 5.72%
All-In Cap Rate: 4.77%
Breakeven Exit Cap: 6.88%
Breakeven Exit Cap Rate Spread: 116 bps
Appraised Cap: 5.71%
Appraised Cap Rate Spread: 117 bps

Loan Amount: $13,395,000
Term: 10 Years Fixed
Interest Only Period: 2 Years
Amortization Period: 30 Years
Interest Rate: 4.28%
Lender: Cantor Commercial Real Estate Lending
LTV: 50.95%
Non-Recourse: Yes to Investor

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Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC, and the issuer are not affiliated.