All Forum Posts by: Ben Leybovich

Originally posted by @Eric Berkner:

Yes... I understand that when you raised rents, the LTL went up. Now from November to December, your LTL shrunk considerably but I'm not understanding why, because most of the 35 units were then renovated? The total rental income went down between those 2 months. Those units must've been sitting vacant or you renovated them while the tenants were inside of them?

Thanks for the help, I'm more excited to see these kinds of numbers and am very inspired to see what is possible in this MF space. 

No, but once the unit goes into renovation it is now considered at a higher GPR, which means that the LTL assiciated with it has now been captured. The vacancy goes up, but the LTL comes down because while vacant for the duration of the renovation, the unit is now in the RR at market, just vacant.

Every PM and sponsor handles this differently. You could leave the GPR at classic level until the unit is out of reno, and I don't see much harm in that if you are a long-term hold guy. However, in a value-add situation, lenders, investors, buyers all want to know the potential of the asset at any given time. Personally, I think this is more clearly stated, numerically, if each unit that legally has the potential to be at market is marked as such.

Originally posted by @Eric Berkner:

Can you help me better understand LTL calculations? It's not simply the GPR-current rents because your numbers then don't add up.? It's basically the difference between the current rented (non vacant) units and the potential (after renovation) units?

Thanks and wow this must've made your investors very happy. How many years did you hold or do you plan on holding this asset?

So, if you signed a lease 11 months ago for an apartment at $1,000/month, but you are signing leases today for the same apartment and in the same condition for $1,300/month, then there is $300 of in-place LTL on the RR attributable to this apartment. Further, if today you are getting $1,650/month for the same apartment but one that has been fully renovated, then if your plan is to renovate the occupied unit once the current lease is over and rent it for $1,650 then the LTL associated with that unit is actually $650.

The total LTL presumes that all units have been renovated and rented at post-renovation rates. Furthermore, the GPR (gross potential rent) changes every time you bump the rents, which may be every month in a high-growth market. So, if next month I think I can get $1,670 for the same unit post-renovation, then the LTL goes up to $670.

Makes sense?

I find myself on the opposite end of @Jay Hinrichs in this, and that doesn't happen very often. The thing I want you to understand is that $10M is not very much money as it relates to wealth, and specifically not if you project it forward and experience the impacts of inflation. I do not believe that simply taking the easy way out with tax-free paper will suffice. With $10M you are not ready for preservation, you still have to grow.

Now, that said, Jay is probably right that some of this money should be converted into risk-free and low-risk cash flow. But, the rest needs to be deployed for growth.

Obviously, being that I am in real estate, I am partial to real estate. Feel free to reach out if you want to have a more in-depth conversation.

Originally posted by @Joshua McIntire:

Units look great and beautifully done.  When you were analyzing this deal, what were some of the key numbers you modeled and found to be under valued?  We’re there any moments when you realized you had a great opportunity?

Josh, the number that matters most are the rents. We do value-add, which in multifamily is a function of improving the revenue. 

Originally posted by @Luke Grieshop:

Very insightful, Ben. Thank you for sharing! Couple quick questions from me: 

1) Can you provide more clarity on how it's decided what line item the losses show on? For example, there's the $42K deduction in December for 'Vacancy', but could this fall in the 'Down/Construction Units' or 'Loss to Lease' as well? Since you mentioned these losses are occurring due to rehabs

2) To your point about lack of cash-flow in Phoenix, how do you structure returns for your LP's? Is there a long delay in when distributions begin, awaiting units to be turned?

Thank you for sharing all of this!

 Luke, good questions.

Vacancy shown here includes all vacancy, organic and forced due to the renovations. But, this deals strictly with vacancy loss. LTL and other economic losses are their own respective line-items.

Our policy is that we distribute all available cash flow, when available, on a quarterly basis. That said, our investors are not looking for cash flow in the first 2-3 years for several reasons. One - they understand that cash flow at 3 cap does not exist, and if you want to participate in Phoenix that's your reality. Two - they could have cash flow in another market where there is less growth and therefore cap rates are higher, however, they want to create more wealth than cash flow is able to provide.

The best way to understand this is to internalize it in the following way. You have two markets. One market allows you to buy at 5.5 cap and have cash flow on day one. The other market allows you to buy at 3 cap, with no cash flow at first, but value-add available to build revenues to the point whereby upon your basis you end up at at the same 5.5 cap. Our investors chose door #2 because in the end, we will have the same cash flow, but the process of getting there doubles our equity position, which is the whole reason to be investing in real estate in the first place.

There are caveats to this, of course. One of the caveats is that we dramatically over-raise liquidity. The offering we currently have open, Haven at P83, is a $26M equity placement, however, almost $3M of that is all types of additional liquidity. We do this for a variety of reasons, one of which is the understanding that cash flow will be very limited for a couple of years.

The other caveat is that you really can only do extreme value-add deals, whereby even if you are wrong by a lot you still win. Additionally, you do need to make real improvements to the asset to limit exposure, which is why we have construction in-house.

Mostly, you just need to know what the hell you're doing :)

Originally posted by @Cameron Braig:

Thanks for posting Ben, very insightful. What's the current turn of a renovation? Have you seen tenants who's lease come up opt for a renovated unit or remain in their current? Thanks again for sharing and best of luck going forward. 

Cameron, I am not sure if you are asking about the timing and the scope, but the timing is 30-45 days, with the extra time being caused by supply bottlenecks. The scope includes new everything from drywall in. 

We do not typically renew existing leases during repositioning. About 1/3rd of the tenants typically move up to a renovated unit.

Hope this helps.

Originally posted by @John Leake:

@Ben Leybovich I did have a couple of questions come to mind. When you find these deals are they typically owned by someone in a cash flowing state or are they being run poorly and need saving? If they do cashflow has the owner just fallen out of touch with their market or more likely just comfortable with existing cashflow? Do you have a fair amount of luck in converting existing tenants to upgraded units? In buildings this large do they have a stock supply of appliances? 

Good questions.

When you find these deals are they typically owned by someone in a cash flowing state or are they being run poorly and need saving? If they do cashflow has the owner just fallen out of touch with their market or more likely just comfortable with existing cashflow?

Yes, they usually cash flow well, but this is mostly due to their basis relative to today's market being quite low. But, we've never been able to buy in Phoenix at over 3% cap, so there's never any cash flow for us at the outset. No, the owner is very aware of what they have, but typically their business plan w2as to ride the cap rate compression and then exit. Like us, don't see much value in cash flow. The difference is 

that because since they bought the rents came up so dramatically and cap rates compressed so severely, they typically don't have to do major renovations to achieve value. We, on the other hand, have to do the heavy lifting of truly re-positioning the assets, since the cap rate can be expected to increase, not decrease, meaning we won't get any organic help in that respect.

Do you have a fair amount of luck in converting existing tenants to upgraded units? 

About 1/3 of the tenant base typically is able to qualify at new levels.

In buildings this large do they have a stock supply of appliances? No

Originally posted by @Jill F.:

What nice looking units and thank you so much for posting these details. As a "little gal" value add investor, your numbers are a great touchstone/reference for us as we grow.

 JIll, I see you are in Akron. I got my start in a little town in Ohio called Lima, right on I-75. Almost went to college in Akron. They gave me a full ride, but I ended up at Cincinnanti.

Good luck!

Originally posted by @John Leake:

Awesome work! I hope to be at this level some day, making big value add plays that can be an example of what can be done with the experience and the team. I'll be keeping an eye out for whatever you have to share with us next. Thank you @Ben Leybovich!

Glad you found this post interesting, John. Feel free to ask questions. And, yes, we'll post more going forward. We are about to close on another one. 

You may have a bit of difficulty seeing the numbers on the photo, but for educational purposes just wanted to share this.

The image captures the income side of the reporting at Haven on Thomas, which is a 104 unit property we purchased about 9 months ago. The columns are for October, November, and December.

As you can hopefully see, the GPR in October was $144k, but we increased rents again in November and the GPR went up to $152k. When we did this, the LTL increased from $23k to $28k, because we were taking units into renovation faster than we were renting them.In December, which is the column on the right, the GPR stayed at $152k, but the LTL shrunk to $18k. The new rentals are saturating the rent roll and burning through the LTL to a tune of $10k in one month. That said, look at the vacancy. We went from $1,400 in October, when we momentarily did not have much in the renovations, to $22k in November, and almost $43k in December. We currently have 35 units in renovations.

Now, if you look at the bottom of the picture, you'll see that December's income is $97k. This is after a combined $61k of economic loss between LTL and vacancy. What will happen once the renovations are complete in 3 months is that we will be left not with $61k but perhaps $5k of losses, while all the rest will flow into the income and down to the NOI - let's say $55k.

Taking December's income of $97k and adding to it $55k that we'll be recovering should leave us with about $152,000 of monthly stabilized revenue at this property. The OpEx has been running at $46k, which is high but this project was a tough lift and we need to spend a bit more. Regardless, this would mean a projected stabilized NOI of $106,000.If we annualize this revenue and capitalize at 4%, we back into a value of about $32M.

We paid $16M. 

The CapEx budget on this property is just under $3M, and includes new cabinet boxes, granite, full-size W/D, and the rest.

Happy to answer questions on this. @Sam Grooms, jump in if I missed something.