Encore Memorial in Bixby, OK was one of the original acquisitions in Timberland Partners Apartment Fund VII. Many potential buyers were deterred from considering the deal because of the seller’s requirement to assume the in-place HUD loan on the property. Timberland Partners had previous experience with such an assumption and was willing to take on the challenge. In addition to the administrative burden of navigating HUD financing, the lack of an interest-only period means, other things being equal, a lower cash-on-cash return. The assumption provided an opportunity to utilize the HUD 223(a)7 Refinance program to reset the loan to the original principal balance at the prevailing interest rate. The Fund ultimately acquired the property for $114,000 per door (a particularly low basis to replacement cost) and was able to leverage the property up to 85% with a 35-year, fully amortizing loan.
Built in 2015, the property needed only minor capital improvements upon acquisition – most significantly, a new paint job and some trim work. Timberland Partners bet on the growth story of the Tulsa market, and was further compelled by the limited competition and particularly strong school districts in the Bixby submarket. Ultimately, the growth of this market since acquisition has exceeded our expectations.
The property’s annualized year-to-date cash-on-cash return (through November, 2021) stands at 11.8%. This performance is even more impressive for a 2020 acquisition in that with a fully amortizing loan, the cash flow from the property is paying principal as well as interest. The principal yield (also year-to-date) provides an additional 6.0%, for a total return of 17.8%. This value, however, attributes no value to equity appreciation. In reality, recent sales of comparable properties indicate that this asset would likely trade at a price of over $160,000 per door – a 41.2% increase over the purchase price less than two years ago.
Encore Memorial remains well situated in the marketplace and should continue to be a strong cash producer for years to come. Timberland Partners will continue to search out reasonably priced acquisitions in promising growth markets across the central and southeastern US.