December 8, 2024
2024 Investor Letter
coming soon
This has been an exciting first quarter for m5x2 Fund III. Since launching our fundraising efforts in March, we are pleased to announce that the fund is fully subscribed, with fundraising completed ahead of schedule.
We have deployed 92% of committed capital across 7 properties and 228 units:
We are enthusiastic about the value creation potential of these properties, all of which offer opportunities for operational improvements. Each asset has significant potential for enhanced management, and our objective is to create value through a combination of physical improvements, fair rule enforcement, and rent adjustments to reflect current market rates. We also benefit from reduced operating costs from our fully verticalized operations. Beyond the investments above, we are actively conducting due diligence on three additional deals that could result in a final capital call in Q1 2025.
With interest rates showing signs of softening, the Inland Northwest market is at an inflection point from the cool 2022-2024 era. For context, multifamily interest rates are tied to the 10 year treasury, and lending institutions add a 200-300 basis point spread to the 10 year treasury to calculate the interest rate they are willing to offer, which currently ranges between 6-6.5%.
While we do not expect interest rates to fall monotonically, the recent macro environment has produced a higher volume of deals in the commercial real estate market. Many sellers, having been reluctant to part ways with their assets during the high-interest-rate environment, are now adjusting their expectations to more realistic valuations. This shift in the market presents us with promising acquisition opportunities.
We will have closed 7 investments in Fund III by mid-November. As our track record expands, more brokers are reaching out to us with attractive off-market and on-market opportunities. For instance, three of our frequent broker partners brought The Jackson to our attention right when it became available in September, reaching out to us as their first point of contact. Over the last couple weeks, we learned about an additional 582 units across 5 properties in Spokane and 377 across 2 properties in Tri-Cities that potentially meet our investment mandate and return threshold. This is a sign of the potential deal flow that lies ahead in 2025.
Overall, we are ahead of budget over the first three months of operation at Cedar North. We have proven both pro-forma expenses and income, and we are currently running the property at a September NOI that is 71% above that of the seller earlier in the year. Our Q3’23 average NOI was $82k/month, or 70% of total revenue, vs. prior owner’s $48k/month, or 42% of total revenue, averaged over the prior 12 months.
Due to strong demand on our two bedroom units, we've been able to increase our market rate above the pro-forma rate while maintaining 100% occupancy for this unit type. That has increased our gross potential rent as well as our loss-to-lease as current tenants catch up to the current market amount. Keeping up with our stabilization targets will be most difficult over the winter as we have multiple leases renewing during low season at higher prices. We intend to address this with incentives and shaping leases to be more summer oriented for the long run.
RUBS (Ratio Utility Billing Service) remains below target and this will be an area of focus across the portfolio and for this property in Q4. This refers the means by which property managers recoup utility costs (e.g. water, gas, electricity, sewage) by allocating them across tenants based on square footage. RUBS is billed two months in arrears, meaning there will be no RUBS income for the first two months of ownership. For example, July usage gets billed to us in August, and then we can charge this amount to tenants in September.
In the “other income” category, September financials include two months worth of laundry income, however we will be increasing this income as we move to first party washing machines that feature wireless payment. Late payments at this property are less than the portfolio average, and that will over time translate to fewer write offs.
Our expenses are trending slightly above target, both due to transition and onboarding maintenance that was not completed by the seller and a few plumbing issues occurring simultaneously. We do not think this will affect our long term maintenance costs as we continue to stabilize the property.
We are targeting a refinance for September 2025, at which point we will have renewed all leases. We are using the excess cash flow from this property to fund ongoing construction at The Oxford. Once we have significant excess cash flow we will start investor distributions.
The redevelopment of The Oxford, at an entry cost basis of $15k/unit, is progressing on time and trending in between our base and upside case scenarios in terms of costs. With a total budget of $1.4m, we have utilized $85k thus far. We remain on track for first occupancy in H1 2025 and aim to either sell or refinance the property in late 2025, depending on market conditions.
We have de-risked many of the unknowns and crossed several milestones. For example, we have cleared all abandoned property and trash from the premises, repaired the elevator and acquired an operator’s permit, all at a budget that was a fraction of our original estimate. We have also repaired the main water lines, with repairs on individual unit water lines currently underway. This will allow us to maintain heat in the building and units while we continue work over the winter.
Before vs. Current photos:
To work with the city on a renovation plan, we used lidar scanning to build drawings and get approval for a rehabilitation plan. We have also submitted our permit application and are currently working through revisions. Furthermore, we have completed a preliminary walkthrough with the Fire Department, resulting in approval of a fire alarm permit that was left open by the prior owner. Each of these steps substantially reduces regulatory risk preventing occupancy.
Looking ahead, once the permit is approved, we will begin unit finishes, which include new flooring, paint, kitchen cabinets, fixtures, and entry doors. The bidding process for updating the unit ventilation systems is ongoing, while bidding for electrical repairs and re-trimming is complete.
We are off to a great start and excited to keep this momentum going!
In September, we completed our quarterly roadmaps across the operating business units, laying plans for Q4. Much of this work will center around absorbing the third wave of acquisitions while maintaining our momentum on stabilizing Cedar North and The Oxford.
Property management: Roadmap
Repairs & maintenance / Renovation: Roadmap
Q4 Goals
