How We Got It
Spyglass acquired Hawk Ridge in June of 2011 immediately after the property fell out of a prolonged escrow. We worked fast to pre-empt the property from being broadly remarketed. We did this by being putting up a non-refundable deposit within days of the deal coming out of escrow and agreeing to the Seller’s bare bones purchase contract. By pre-empting, we believe we acquired the asset below fair value, but a good acquisition price was only part of what made Hawk Ridge attractive.
A constellation of characteristics made Hawk Ridge attractive. It benefits from best-in-market schools and has a unit mix well suited for families, it has superb road frontage, it has a great site layout with pocket parks and a nice central courtyard, a prime location on a heavily trafficked road in arguably Winston-Salem’s best suburb (Clemmons) and proximity to area employers. It also benefits from low area unemployment and strong population growth. And as important as all of the factors already mentioned, it was a superb value-add opportunity because the prior owner let the property fall into disrepair creating tremendous upside to push rents and occupancy following some simple cosmetic fix-ups.
What We Did
Between 2011 and 2014, we invested about $650,000 to refurbish the clubhouse, repair the exterior, replace all signage, paint the woodwork, improve the amenities and upgrade many of the unit interiors. These improvements combined with rigorous tenant screening, have allowed us to completely reposition the tenant base. As a result, we’ve been able to push rents, improve occupancy and reduce bad debts and delinquencies. These improvements, along with rigorous cost control, have helped us grow Hawk’s annualized Net Operating Income from under $400,000 to over $700,000 in less than two years. Assuming a 7% exit cap rate, investors would realize a more than 2+x return multiple if we elected to sell Hawk Ridge.
The value-add program was a huge success. We grew Hawk’s annualized Net Operating Income from under $400,000 in Q2 2011 to more than $750,000 by Q3 2014. In June of 2013, about 2 years after closing, we completed a partial cash-out refinancing that returned more than 55% of our original investment. In October of 2014, Spyglass sold the property. Hawk Ridge produced 1.94x return on capital and just shy of a 25% internal rate of return to investors. We would have preferred to hold it longer but wanted to show a “round-trip” double up to our initial backers. It is the last time we sold for non-economic reasons.
Our lender (Freddie Mac) approved a $1.3mm cash-out refinancing in June of 2013 that would return approximately 60% of investor capital. This refinancing was not reflected in our Base Case; hence we were further ahead of our original projections and this investment was to produce an internal rate of return well in excess of 15%.