Timberland Partners Apartment Fund VII jumped off to a running start in 2020, having raised over $36 million in January and investing $25 million in four apartment properties by early February.
Each of these four opportunities had a compelling acquisition story. They should prove to be valuable assets to the fund in the years to come. Our acquisitions team was busy underwriting a number of other opportunities when the U.S. economy was abruptly shut down in the wake of the COVID-19 pandemic. The pandemic, and our government’s response, has caused us to reevaluate and adjust our investment strategy in accordance with this new economic environment.
Acquiring apartments in secondary and tertiary markets where we can add or capture value and own long term remains fundamental to our business. Previously, our model was based on the thesis of adding value through strategic capital improvements and/or improved operational management and growing operating income over time to increase the value of the property.
Given the new economic outlook, forecasting the same level of rent growth and occupancy is no longer prudent. Instead, to capture value with more conservative underwriting (i.e. growth prospects), assets must be acquired at discounted prices to produce our required levels of return. We believe opportunities to make such acquisitions at these discounted prices will exist in, but not be limited to, the following scenarios:
1) Lease-up opportunities:
Before the economic downturn in mid-March, developers would have been unlikely to discount their sale prices on new developments, hoping to reach stabilization at proforma rents prior to selling to an operator such as Timberland Partners. The rent growth during lease-up that they had underwritten would not have factored in the pandemic-driven downturn. As they will be unable to meet projections, in some cases, they may look simply to get their money back and get out of the deal. At the right price, Timberland may assume some lease-up risk if projected returns can meet our return minimums despite significantly more conservative underwriting.
2) Discount to replacement cost:
We will pay much more attention to replacement cost than was previously necessary. When deals can be acquired at a purchase price below replacement cost, we can be confident that supply in that particular market will remain limited into the future. Owners may sell at a discount to replacement cost for any number of reasons, including a loan term coming due, lack of capital reserves to continue operating the property at its peak potential, or economic distress due to the new economy.
3) Deals that fell out of contract:
Sellers who lost a buyer under contract over the past few months may, in many cases, have retained the earnest money deposit. Given the stress of the new environment and not wanting to hold onto a property previously placed on the market, the seller may accept a significant discount to the previously agreed upon purchase price as no buyer would pay more for a property than it was under contract for two months ago.
Ultimately, any real estate purchase can be a great deal if acquired at the right price. These next few months will be a period of “price discovery,” not just for Timberland Partners but for the entire real estate market. With our outstanding reputation in the brokerage and lending communities, ample “dry powder” from our investment partners, and a more cautious discipline in underwriting, we will be prepared to take advantage of the opportunities sure to present themselves in the months ahead. We will call the next round of capital once we have the next assets under purchase agreement. If you would like to learn more about Timberland Partners Apartment Fund VII, please reach out to any member of our Investor Relations Team.