Cash Out Refinance Case Study - Kensington Ridge
150 units in Middletown, Ohio
Simple Per Annum Return (to date): 14.46%
NCREIF Benchmark: 7.8%
Net Equity Multiple: 5.27x (refinancing proceeds + unrealized gains)
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, and the existing ownership group was struggling to maintain occupancy. When the property was listed for sale, most buyers avoided it due to these issues. However, Kensington Ridge was located in the center of an obvious growth corridor, it had fundamentally good construction quality, and it was well-located within its submarket.
The Execution
We closed the purchase of Kensington Ridge late in the afternoon on New Years Eve using CMBS debt with 76% occupancy. Within hours, we began investing in curing deferred maintenance and in exterior and interior upgrades. Unfortunately, the first of five resident-caused fires also broke out during the first year, and two of these five fires took entire buildings out of service for more than a year.
Despite these unwelcome surprises -- and the high costs to insure this property due to its fire loss history -- we continued with our $1 million upgrade program which involved installation of all new roofing property-wide, new siding, new windows and new parking lots. Interior upgrades included new stainless steel appliances, cabinets, countertops, fixtures, lighing, flooring and paint. Within ten years, we doubled gross income and quadrupled NOI. These results far exceeded our original business plan, in spite of the terribly bad luck with the fires.
Ten years after the acquisition, we refinanced the acquistion debt, and the proceeds were sufficient to return 100% of initial capital plus a multiple of 1.85x. To date, we have produced a 14.46% simple per annum return, and the property is currently producing strong distributable cash flow. We see additional upside through continued interior and exterior upgrades.
The Lesson
The condition of the asset and the dearth of financing options created a buyer's market for this property. If we had allowed ourselves to be distracted by the condition of the asset and the financing challenges this created, we would not have been able to participate in this market's future promise. Although turning this asset around would involve an enormous amount of effort over many years, upgrading this property also meant that we could participate in the local market improvements we envisioned with an extremely favorable basis and significant downside protection.
Tennis Court Prior to Pickleball Conversion
Tennis Court After Pickleball Conversion
*Unaudited. Past performance is no guarantee.