The Kensington Ridge Story
Simple Per Annum Return (to date): 14.46%
NCREIF Benchmark: 7.8%
Net Equity Multiple: 1.85x (via refinancing proceeds, not a full sale)
The Opportunity
Kensington Ridge is a 150-unit apartment property that was owned by a local partnership whose original purchase was poorly timed, and the group had insufficient capital to complete their business plan. This led to significant deferred structural and cosmetic maintenance issues. When the property was listed for sale, most buyers avoided it due to the deferred maintenance. We liked Kensington Ridge because it was located in the middle of an obvious growth corridor, it had good construction quality, and it was well-located within its submarket.
The Obstacles
Kensington Ridge needed significant new capital to cure the deferred maintenance. Major building components that needed to be replaced included all roofing systems on 19 buildings and 8 covered garages, all cantilevered balconies property wide, new new retaining walls, and new interiors including new appliances, cabinetry, flooring and lighting. In addition, the waterproofing on several buildings had failed, which meant we would need to raise them in order to replace the sill plates and ground level floor joists (all of which had rotted). Due to the condition of the property, occupancy had sunk to below 80% occupancy. Accordingly, the acquisition was very difficult to finance.
What We Did
If we had allowed ourselves to be distracted by the condition of the asset and the financing challenges this created, we would not be able to participate in the future promise we saw in this market. The condition of the asset and the dearth of financing options created a buyer's market for this property. This enabled us to negotiate very favorable acquisition terms that would almost fully protect our downside. In addition, although turning this asset around would involve an enormous amount of work over multiple years, owning the property also meant that we could participate in the upside we envisioned in this market.
Epilogue
We closed the purchase of Kensington Ridge late in the afternoon on New Years Eve, using CMBS debt. And then the fun began. Two months later, we experienced the first of FIVE fires during the initial ten-year hold period. TWO of these fires took out entire buildings. These five fires were simply the most prominent of the unexpected trouble we encountered with this property. Despite all of these unwelcome surprises -- and the monstrous costs to insure this property due to its loss history -- we managed to double gross income vs. the acquisition and quadruple NOI. This far exceeded our original business plan.
in 2023, we refinanced the original acquistion debt, and the proceeds were sufficient to return 100% of initial capital and a multiple of 1.85x, in spite of the insurance costs. To date, the cash flows have been sufficient to return 100% of initial equity, generate a multiple of 1.85x, and a 14.46% simple per annum return. Best of all, nearly all of the refinancing proceeds were tax deferred because we did not sell the asset. Today, we still own & manage Kensington Ridge, and we are looking forward to generating even more value with continued property upgrades and improvements.
*Unaudited. Past performance is no guarantee.