Midtown Nashville/Artemis & Apollo, 251 Units, Nashville, TN
How We Got It Spyglass acquired two assets in midtown Nashville adjacent to Vanderbilt University in late 2019 that had just fallen out of contract. The going-in cap rate was sub 4% which made it hard to get a reasonable LTV and other bidders simply did not want to write a thick equity check. Further, at the time the properties were marketed for sale, downtown concessions were still running at well over 1 month on average making the near-term outlook unappealing to most bidders.
Investment Rationale These assets were acquired for less than $237,000 per door, about $30,000 a unit less than comparable assets sold at that time. These are not the best assets in downtown Nashville, but the low entry basis and exceptional location–across from Vanderbilt and in the middle of the medical district–were too compelling to pass up. The entry basis was reduced by the poor operating history of both assets which made it hard to secure attractive financing and suppressed the going-in cash-on-cash yields and thereby the valuation. But we believed the operating challenges were fixable. Longer-term, we saw few if any larger sites for similar podium style construction which suggests most new development would come in the form of expensive towers, providing Spyglass more head room to push rental rates. These assets were 1031 tax-free exchange assets for two properties sold by Spyglass in late 2019. At the time of this acquisition, Spyglass had not done an entirely new money acquisition since 2016, the last time we found valuations compelling.
What We Did The assets had the worst online reputations of any of the several dozen downtown assets, for several fixable reasons. First, both assets were tired and poorly maintained. And the original design of a few critical amenity spaces was less than ideal. Those cosmetic deficiencies were addressed within 9 months of closing. Second, the prior owner became reliant on Airbnb hosts who rented units overnight to unruly guests who bothered the properties’ long-term tenants. Airbnb tenants were more than 15% of the tenant base at closing and were reduced to under 3% within 9 months. This repositioning was expensive, but necessary and fortuitous. The pandemic made clear that Airbnb hosts don’t pay rent when their bookings dry up so we’re happy to have mitigated our exposure to this unreliable and disruptive tenant base before the pandemic hit. We set up a single online landing page for both assets, allowing Spyglass to channel 100% of a highly successful ad-word campaign to that single page to improve the efficiency of that program. We re-branded both assets and hired a world-class leasing team to keep both assets full. At the start of the pandemic, we were an early adopter of virtual leasing as well as self-guided tours to close on more traffic than area peers.
Results Our midtown Nashville assets were performing on-plan before COVID-19. Both assets had successfully transitioned away from Airbnb tenants that had previously represented more than 15% of the tenant base. Both assets were far along on the property enhancements just six months from closing. We sold both assets in February 2022 before valuations fell and realized a 12.5% net IRR and a 1.21x multiple on invested capital (after exit costs and after the sponsor promote).The early exit was our effort to reduce risk in a high growth town that occasionally overshoots the market on new deliveries. Since we closed, Oracle has announced a new tech campus that will bring 8,500 direct jobs to the city over a 10-year period and possible 2 or 3+ times that number of indirect jobs greatly expanding the demand for downtown rental housing.