My DMs have been flooded with responses and deal review requests... You guys have been enjoying them, so I am going to keep doing them.
Which brings me to the latest live deal review –>
The Villas at Sundance sponsored by Viking Capital
Which brings me to the latest live deal review –>
The Villas at Sundance sponsored by Viking Capital
My deal breakdown outline:
- Deal Story (what I gathered up to this point)
- Sponsors (and other important parties)
- Pitch Deck good/bad highlights
- Location and Physical Asset
- Business Plan
- Capital Stack
- Rent Comps
- Sale Comps
- Sensitivities
//
- Deal Story (what I gathered up to this point)
- Sponsors (and other important parties)
- Pitch Deck good/bad highlights
- Location and Physical Asset
- Business Plan
- Capital Stack
- Rent Comps
- Sale Comps
- Sensitivities
//
Deal Story
Villas at Sundance was originally sold in 2014 for ~$30M or $120k/unit. The asset was purchased in partnership by Berkson AM and RailField Partners. The deal was managed by Avenue5.
The property was refinanced in June of 2019 with $18,800,000 of 4.37% Fixed-Rate Debt with 5yr Term, serviced by Walker & Dunlop.
With this type of debt, it is safe to assume there was +3Y of IO payments, which would bring the annual IO payment to $822k.
My guess is they started to look at refinancing the loan and decided a sale was the better path for several reasons. The first, perhaps, cashflow.
The sellers engaged IPA and they ran a full marketing process, which was awarded to Viking Capital
//
Villas at Sundance was originally sold in 2014 for ~$30M or $120k/unit. The asset was purchased in partnership by Berkson AM and RailField Partners. The deal was managed by Avenue5.
The property was refinanced in June of 2019 with $18,800,000 of 4.37% Fixed-Rate Debt with 5yr Term, serviced by Walker & Dunlop.
With this type of debt, it is safe to assume there was +3Y of IO payments, which would bring the annual IO payment to $822k.
My guess is they started to look at refinancing the loan and decided a sale was the better path for several reasons. The first, perhaps, cashflow.
The sellers engaged IPA and they ran a full marketing process, which was awarded to Viking Capital
//
Sponsors (+other VIPs)
Viking Capital is the deal sponsor, managed by Vikram Raya and Ravi Gupta.
Vikram Raya () -
"In the field of medicine Vikram is an award winning cardiologist, international speaker, and functional medicine specialist. He has helped thousands of individuals overcome their heart and health challenges and eventually pioneering a pro-active cardiology paradigm that has led to the launch of the Vitology institute
Through his real estate company, Viking Capital, Vikram has a total of over $750 Million of assets acquired and is growing, while raising over $100 Million of private capital. His vision is to get to the elusive $1 Billion of acquisitions in the next year.
He has been honored by Forbes Business Council and has been named Top 50 Outstanding Asian Americans in Business".
Viking Capital was founded in 2015 and has acquired $830M of assets across 26 properties and +5000 units yielding 24% LP AAR (AAR is red flag... this a marketing thing. Just means ~18% net LIRR)
Looking through their performance track record, you see the AAR to LPs. The last 4 deals were sold at peak timing mid 2021 - end of 2022. They were 2-3 year holds, implying ~2019 purchases.
From 2019 to 2022, cap rates compressed +2-300 bps, which is to say sale multiples expanded by a factor of +10x (think 6% cap to 4% cap turns 16x to 25x on NOI). Furthermore, rents were increasing by 10-30% YoY!
With AAR in the 20-30%'s, on 3 year holds, that would equate to roughly 15-22% LIRRs.
It is a reasonable assumption to make that these operators were net negative on these purchases. That is to say, if rent growth was organically in the double digits, and cap rates compressed 2%, an owner would have to impede NOI growth to hit such low IRRs. (who knows though)...
There is not any mention on who is actually operating this deal which is kind of a huge deal. There portfolio is a mixed bag of property management groups. Not a great way to scale as managing various reporting, people, and asset management tasks becomes incredibly taxing.
->vikramraya.com
Viking Capital is the deal sponsor, managed by Vikram Raya and Ravi Gupta.
Vikram Raya () -
"In the field of medicine Vikram is an award winning cardiologist, international speaker, and functional medicine specialist. He has helped thousands of individuals overcome their heart and health challenges and eventually pioneering a pro-active cardiology paradigm that has led to the launch of the Vitology institute
Through his real estate company, Viking Capital, Vikram has a total of over $750 Million of assets acquired and is growing, while raising over $100 Million of private capital. His vision is to get to the elusive $1 Billion of acquisitions in the next year.
He has been honored by Forbes Business Council and has been named Top 50 Outstanding Asian Americans in Business".
Viking Capital was founded in 2015 and has acquired $830M of assets across 26 properties and +5000 units yielding 24% LP AAR (AAR is red flag... this a marketing thing. Just means ~18% net LIRR)
Looking through their performance track record, you see the AAR to LPs. The last 4 deals were sold at peak timing mid 2021 - end of 2022. They were 2-3 year holds, implying ~2019 purchases.
From 2019 to 2022, cap rates compressed +2-300 bps, which is to say sale multiples expanded by a factor of +10x (think 6% cap to 4% cap turns 16x to 25x on NOI). Furthermore, rents were increasing by 10-30% YoY!
With AAR in the 20-30%'s, on 3 year holds, that would equate to roughly 15-22% LIRRs.
It is a reasonable assumption to make that these operators were net negative on these purchases. That is to say, if rent growth was organically in the double digits, and cap rates compressed 2%, an owner would have to impede NOI growth to hit such low IRRs. (who knows though)...
There is not any mention on who is actually operating this deal which is kind of a huge deal. There portfolio is a mixed bag of property management groups. Not a great way to scale as managing various reporting, people, and asset management tasks becomes incredibly taxing.
->vikramraya.com
Pitch Deck
The whole thing is gloss. Very little data, and very little support.
I like the pictures.
The reserve LP class is really the only one I think makes sense for this operator on this deal profile. I don't think you pick up much distributions the entire hold, and I certainly don't think this quality operator is at a 70/30 split level.
The sensitivity analysis is laughable. Moving .1% on exit cap sensitivities is not helpful at all. Really, it shows just how sensitive the IRR is on the exit cap. AKA no cash flow. A .5% movement moves the IRR +2%.
We already went through this above... the current owners are making $25k/unit or 25% appreciation in 10 years! Why do we think this is going to go from $145k/door to $252k/door in 5 years....? It's probably not. I personally would feel ok with a 6% cap exit to show investors, but even then, this is a THIN deal. LIRR on a 6% exit is around 10%.
I do like the pictures lol. Looks like a nice asset.
The package is put together professionally though so someone spent marketing dollars to make this look good. Not to joke, but I would spend this same money on research instead. (But thats me and I'm not having fun buying deals)
The whole thing is gloss. Very little data, and very little support.
I like the pictures.
The reserve LP class is really the only one I think makes sense for this operator on this deal profile. I don't think you pick up much distributions the entire hold, and I certainly don't think this quality operator is at a 70/30 split level.
The sensitivity analysis is laughable. Moving .1% on exit cap sensitivities is not helpful at all. Really, it shows just how sensitive the IRR is on the exit cap. AKA no cash flow. A .5% movement moves the IRR +2%.
We already went through this above... the current owners are making $25k/unit or 25% appreciation in 10 years! Why do we think this is going to go from $145k/door to $252k/door in 5 years....? It's probably not. I personally would feel ok with a 6% cap exit to show investors, but even then, this is a THIN deal. LIRR on a 6% exit is around 10%.
I do like the pictures lol. Looks like a nice asset.
The package is put together professionally though so someone spent marketing dollars to make this look good. Not to joke, but I would spend this same money on research instead. (But thats me and I'm not having fun buying deals)
Location and Physical Asset
This is a neat location in between Austin and San Antonio called New Braunfels. Ton of growth happening.
- Good Schools (B rated)
- Strong MHHIs ($60k - 80k)
- High barrier to home ownership (+$300 - $500k)
- Not great access to high-dollar jobs (In Austin)
- Significant supply pipeline delivering soon (roughly 30% of existing inventory UC and roughly 50% of inventory planned)... Not good for rent growth
Deal is near fun and entertainment. Nice for residents.
Physical asset looks great. I would image hard costs alone would be around $180k/door, so maybe +$200k to build today. That's a solid discount. Sadly, the supply is already being delivered...
Area B- (due to supply and lack of jobs)
Asset A- (very nice, not trophy)
This is a neat location in between Austin and San Antonio called New Braunfels. Ton of growth happening.
- Good Schools (B rated)
- Strong MHHIs ($60k - 80k)
- High barrier to home ownership (+$300 - $500k)
- Not great access to high-dollar jobs (In Austin)
- Significant supply pipeline delivering soon (roughly 30% of existing inventory UC and roughly 50% of inventory planned)... Not good for rent growth
Deal is near fun and entertainment. Nice for residents.
Physical asset looks great. I would image hard costs alone would be around $180k/door, so maybe +$200k to build today. That's a solid discount. Sadly, the supply is already being delivered...
Area B- (due to supply and lack of jobs)
Asset A- (very nice, not trophy)
Business Plan
I honestly do not understand what the business plan is specifically. I get that the operator wants to do renovations and grow rent, but nothing else is really called out...
There is this little blip on capx spending, but none of this is going to move the needle beside pet yards.
We have this section that calls out 5k/unit for upgrades but I am unclear what the 5k is used towards. Do all these things exist? Online it looks like this does, so whats the 5k for? Thats like the granite and flooring alone if they wanted to change that. But you aren't getting a premium for these things based on rent comps.
Again, nearly 50% increase to NOI in 5 years but no idea how aside from 5% rent growth in years 2-5...With 20-50% of inventory delivering. idk
I honestly do not understand what the business plan is specifically. I get that the operator wants to do renovations and grow rent, but nothing else is really called out...
There is this little blip on capx spending, but none of this is going to move the needle beside pet yards.
We have this section that calls out 5k/unit for upgrades but I am unclear what the 5k is used towards. Do all these things exist? Online it looks like this does, so whats the 5k for? Thats like the granite and flooring alone if they wanted to change that. But you aren't getting a premium for these things based on rent comps.
Again, nearly 50% increase to NOI in 5 years but no idea how aside from 5% rent growth in years 2-5...With 20-50% of inventory delivering. idk
Capital Stack
I don't have to spend much time here, thankfully. The stack really isn't bad. Lower(ish) leverage, 65%, rest equity. The LP classes aren't great, but all things considered this isn't atrocious, its more like distasteful on the spectrum of LP respect.
They included their debt assumptions which is actually great.
Today, an agency loan would sit around 6% after buying down the spread. They are underwrote 5.7%, so maybe they timed it ok. You would be constrained to 1.25x DSCR which likely sits about 65% LTV. So unless there is a clear path to positive leverage, a deal may sit in negative leverage territory for some time.
According to the Offering summary, they are buying this deal at a 5% cap T12, with declining rents and expanding operations... It is very safe to assume this is around a true yr1 4.5% - 4.75% cap rate, meaning a ~4% yield on cost which would equate to 0-2% Cash on Cash / distributions if they even decided to make them. (this is quick in my head math, im in the range but not exact - someone feel free to nerd out)
I don't have to spend much time here, thankfully. The stack really isn't bad. Lower(ish) leverage, 65%, rest equity. The LP classes aren't great, but all things considered this isn't atrocious, its more like distasteful on the spectrum of LP respect.
They included their debt assumptions which is actually great.
Today, an agency loan would sit around 6% after buying down the spread. They are underwrote 5.7%, so maybe they timed it ok. You would be constrained to 1.25x DSCR which likely sits about 65% LTV. So unless there is a clear path to positive leverage, a deal may sit in negative leverage territory for some time.
According to the Offering summary, they are buying this deal at a 5% cap T12, with declining rents and expanding operations... It is very safe to assume this is around a true yr1 4.5% - 4.75% cap rate, meaning a ~4% yield on cost which would equate to 0-2% Cash on Cash / distributions if they even decided to make them. (this is quick in my head math, im in the range but not exact - someone feel free to nerd out)
Rent Comps
Here is their rent comps:
Here is mine I quickly pulled:
They are showing asking (which is right to proforma), I am showing effective (which is really happening).
This is clearly a $1300 - $1400 market with brand new deals in the $1500-$1600 range.
Villas is already at $1382 and there is tremendous supply coming online. Where is this deal supposed to go?
Honestly, it moves probably moves down to hold.
Here is their rent comps:
Here is mine I quickly pulled:
They are showing asking (which is right to proforma), I am showing effective (which is really happening).
This is clearly a $1300 - $1400 market with brand new deals in the $1500-$1600 range.
Villas is already at $1382 and there is tremendous supply coming online. Where is this deal supposed to go?
Honestly, it moves probably moves down to hold.
Sales Comps
They provided no sales comps.
I have a few in the $105k - $160k/unit range since 2016. But one sticks out to me.
Villas at Sundance, 2014, $120k/door...
They provided no sales comps.
I have a few in the $105k - $160k/unit range since 2016. But one sticks out to me.
Villas at Sundance, 2014, $120k/door...
Sensitivities
Honestly, this isn't worth my time. If you hold their NOI assumptions and move the cap rate to a 6% (which by the way San Antonio is in the 6% range), it moves LIRR to low double digits.
If you move rent growth to 3% and Cap Rate to 5.5%, you still are low double to high single digits.
The upside here is their proforma 15% LIRR. The Upside.
The downside is losing the deal.
Honestly, this isn't worth my time. If you hold their NOI assumptions and move the cap rate to a 6% (which by the way San Antonio is in the 6% range), it moves LIRR to low double digits.
If you move rent growth to 3% and Cap Rate to 5.5%, you still are low double to high single digits.
The upside here is their proforma 15% LIRR. The Upside.
The downside is losing the deal.
If you have made it this far, idk what to do with you.
You should've realized this isn't a deal to do long ago. Maybe even the third slide.
Look, the asset is sweet, location is unique but fundamentally troubling, basis is questionable, and the business plan and execution are nowhere to be found.
This would not get me over the line. Pass.
You should've realized this isn't a deal to do long ago. Maybe even the third slide.
Look, the asset is sweet, location is unique but fundamentally troubling, basis is questionable, and the business plan and execution are nowhere to be found.
This would not get me over the line. Pass.
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