How We Got It
501 Estates was acquired as a 1031 exchange replacement asset for Madison at Schilling Farms (324 units, Collierville, TN). We preempted the marketing process on the third day after the deal was launched. We had to pay up to take it off market, but the premium was small because the seller valued certainty of execution. We posted a seven-figure hard money deposit and were among the most active private buyers in 2018 so selecting Spyglass was not a hard decision for the seller.
We wanted to reposition out of a risky, low value-add asset in Memphis, TN, and into a high value-add deal in Durham, NC. So we sold the Memphis asset after completing a robust value-add enhancement and rolled those proceeds via a 1031 exchange into 501 Estates. That sale of our Memphis asset was motivated by 2 factors. First, the quadrennial reassessment was pending and there was little doubt the assessment would spike due to the substantial escalation in area property values. That’s a big concern in Memphis because of the high millage rates. We believe the buyer underestimated the pro forma tax hit which made it easy to exit at a then record price per unit for the area. Second, we believe the buyer saw more value-add upside that was achievable. We know we picked the bone clean since our efforts to upgrade more units was met with tepid demand making any further investment unprofitable. But we rarely sell unless we find a compelling 1031 exchange. Hence, we were fortunate to identify 501 Estates. This 2000-vintage asset has the bones to compete with brand new products. It has an irreplaceable site plan of almost 30 acres which sit between Duke University, Duke Hospital and UNC Chapel Hill and their renowned hospital. The property also benefits from unique characteristics including two-thirds townhomes and cottages that are not otherwise found in the submarket.
What We Did
First, we were able to elevate the amenity package from worst to best among 10 rent comps. Every existing amenity was overhauled, and we added almost a dozen new amenities including a soon-to-be completed freestanding gym, club room and dog spa. Second, we hired Hawthorne Residential Partners as the property manager who we believe runs circles around the former property manager. Third, the unit interiors were dated and are now being upgraded to best-in-submarket allowing us to capture more traffic and close a higher percentage of property tours. We are fortunate that none of the other dozen nearest properties are upgrading right now since it allows us to create an even higher return on investment for our ambitious capital improvement programs.
As of August 2021, we had closed the $150+ rent gap to the neighboring property that’s 10 years newer, and now write leases at a level higher than them on a consistent basis. Spyglass expects this to be a long-term hold given the exceptional employment base and physical characteristics of this lovely asset. It’s approaching a 2x ROIC using today’s spot valuation in just 2 short years.