"Don't give up. Don't ever give up." Jim Valvano
The Kensington Ridge Story
Simple Per Annum Return (to date): 14.46%
NCREIF Benchmark: 7.8%
Net Equity Multiple: 1.85x
Kensington Ridge has generated a net annualized return to investors of 14.46%* vs. the NCREIF apartment index benchmark of 7.8% and the FTSE NAREIT Equity REIT index benchmark of 8.57% over the same period.
The Opportunity
Kensington Ridge was a 150-unit apartment property 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, and when the property was listed for sale, most buyers avoided it. 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 Problem
Kensington Ridge needed a significant capital investment to cure the deferred maintenance. Major components included all new roofs, new cantilevered balconies, new basement waterproofing, new retaining walls, and new interiors including new appliances, cabinetry, flooring and lighting. Due to the condition of the property, occupancy had sunk to 80%, so no Agency lender would finance it.
What We Did
If we had allowed ourselves to be distracted by the condition of the asset and the financing challenges this created, we could not participate in this market's future promise. The condition of the asset and the lack of debt availability created a buyer's market for this asset, and 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 a ton of work, owning the property also meant that we could participate in the recovery upside we envisioned.
Epilogue
We closed the purchase of Kensington Ridge on New Years Eve in 2013, using CMBS debt at 75% occupancy. 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 crazy 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. To date, the cash flows have been sufficient to generate a 14.46% simple per annum return, and nearly all of the income is 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.