So far, 2021 has been a very productive year for our business. We close on our 4th acquisition of the year in a couple of weeks, and we have our third slated disposition of the year being marketed right now. The rhythm of buying a few deals and selling a few deals each year is starting to feel routine, and the Wildhorn portfolio is looking strong.
A lot of that is due to the continued strength of the Central Texas market, and we’d be silly not to acknowledge that. We often say that those of us that have grown up in Austin are like the kid that was born on third base but says he “hit a triple.” Sometimes we forget how lucky we are to be located in Central Texas. Between the incredible lifestyle that we enjoy here coupled with an economy that continues to attract jobs and migration in loads, it is easy to think the rest of the world operates in the same reality.
In reality, we know that isn’t the case–otherwise we wouldn’t continue to lead the nation in job announcements and population growth. Clearly the secret has been out for a while, and all signs point to that continuing. With that growth and attention, investor interest in Austin and San Antonio is extremely high and as a result cap rates have compressed as our economy leads the way in recovery coming out of the pandemic.
Partly due to that interest, and the fact we’ve executed our value add business plan we have seen the business plans on many of our current assets fare better than we could have ever imagined. In a few cases, we think current values come close to our projected 7-year business plan in the span of only 2 years–on assets we’ve only executed a fraction of our business plan on. And assets that sit in locations we wholeheartedly believe will continue to be attractive to residents and investors over time. The question we are asking ourselves is pretty simple–when is the right time to harvest an asset? And what is the best outcome for investors?
At Wildhorn, we believe our primary responsibility is to be a good steward of our investors’ dollars. We prioritize preserving capital first, and then delivering at or above our projected returns. We’re in a good position to fulfill that responsibility and hit better than projected returns across our portfolio. At the same time, finding interesting opportunities in this market has never been harder. As capital has flooded into the market, underwritten returns have come down and every new deal becomes a dog fight against a host of new players that have just shown up to town.
All of this has created an interesting dilemma we are working through in real time. Values are high and we can deliver against our business plan yet we think these deals will continue to get better. Do we exit now or do we continue to hold on? Below are some of the questions that we are asking ourselves as we evaluate our options and look to provide the best outcome for our investors.
- What do current exit projections look like? This is pretty simple. If we were to sell today, what sort of returns would investors make? We’ve got to factor in (in some cases) some rather large prepay numbers on our loan, but given all the fees and costs to sell would an outright sale create a great outcome for investors?
- Where does our current financing sit? We have to study the loan we have in place and look at how much term we have left and what (if any) costs are involved if we sold today. Again, in several of these cases we were planning for a 7-year business plan that we’re only 2 years into. We also have to think about interest rates and where those may be headed (Don’t we wish we had a crystal ball?), as that impacts floating rate debt products.
- Could we/should we refinance? If we believe in the deal and the future prospects of it, what happens if we take advantage of the value we’ve created and refinance the asset? This might allow us to return significant capital to investors, while staying the deal longer? Of course understanding current cash flows and what sort of new debt we can qualify for and support are critical to this equation.
- How far along are we in our business plan? When you own value-add assets, we always want to leave “meat on the bone” for the next owner to realize their vision for the asset and create value for themselves as well. The more meat the better. But in some cases we’ve only renovated 15% of the units–and we’re seeing incredible rent premiums for our renovated units. Would we be better off renovating more units ourselves and committing to holding the asset longer, driving the NOI higher and creating even more value for investors?
As you can see, the decision matrix in these decisions is quite complex. Every question is important, and our north star of ensuring we have investors’ best interests at heart guides our direction. At the end of the day, we’re comforted knowing we operate in the best market in the country, that demand and interest for multifamily housing and investment is strong, and that any outcome we’re looking at is going to be a big win for our investors.