How We Got It
Spyglass acquired The Villages at Lake Jackson (“Villages”) in May of 2013. While in the Houston MSA, Lake Jackson was not on folks’ radar back in 2013. It helped that the broker was Austin based, so the property was arguably under-marketed. And Lake Jackson (a full hour south of Houston) is tertiary so competition was not yet fierce.
Like Hawk Ridge and The Paddock Club before it, we viewed the Villages as a tired 1990’s vintage property that would benefit greatly from modest cosmetic improvements. But Villages was not just a value-add story. It was mostly a story about a unique supply-demand imbalance. At the time of acquisition, many properties in the submarket had wait lists. And our forecast called for the supply/demand imbalance to worsen due to more than $10 billion of announced petrochemical investments that saw more than 10,000 construction workers descend on this small town during our period of ownership. We bought from a wealthy Portland-based family who acquired Villages as part of a larger portfolio. Since it remained full, they never took a trip to tour it. Our tour revealed a lot of rent lost to an unbalanced focus on occupancy. The antisocial onsite manager was terrified of notices and kept rents low to stay full. As evidence of this, we took the $725 rent on the smallest 1BR to $1,250 during our short period of ownership. It was a $950 unit the day we closed after revamping staffing and marketing. And it grew to $1,250 when construction staffing ramped at the neighboring Dow plant, their largest petrochemical plant in North America.
What We Did
Candidly, we mostly rode the wave of momentum that was apparent within 30 minutes of our 2nd property tour in that small town.
Wells Fargo quoted a 100% cash out refinancing within 2 years of closing. We chose to close on less leverage due to concerns about the long-term supply/demand balance in the market. And not that long after, we became concerned with declining rental demand as construction workers left for other jobs. The Dow construction project was a great example. They had 5,000 workers constructing a new plant but needed less than 300 full-time workers once the plant was completed. We saw that coming and exited before the job losses. We never fall in love with the bricks or great cash flow. We know exiting well is critical. There was fierce competition for Villages when we sold, creating a stellar 32% net IRR (net of sponsor’s Promote) and a 2.2x return on investor capital. Since we sold, the small 1BR that had rented for $1,250 was back down to $800 in May of 2020, a full 4 years after we sold.
We had not yet formulated a way to roll a 20+ high net worth investor syndicate using a 1031 exchange. This would be the last sale where we simply returned cash causing investors to take large capital gains with no option to defer those gains.