Just Get the Rents
The difference between The Bascom Group’s current acquisitions strategy and traditional buy-it, better-it, sell-it-for-more value-add plays is that the company is not singularly focused on raising rents via improvements in design and product selection. Instead, today’s renovation mind-set commands an understanding of how to achieve an occupancy improvement and/or shrink rent disparities compared with market averages. In short, Bascom is looking for properties with lower occupancy and rents versus their comps, where the primary reason for that disparity involves deferred maintenance and a lack of cap-ex investment.
Triple Play
The Bascom Group’s 2010 roster of acquisitions showcases the gamut of the company’s strategy, which sweeps across asset classes, market geographies, and repositioning goals.
The Retreat at Canyon Springs Apartments
The Market: San Antonio
The Asset: 360 Class A luxury units constructed in 2001
The Deal: $47.5 million, via receivership sale, in August 2010
The Upshot: Immediate vacancy improvement from 22 percent to 16 percent via completion of deferred maintenance and operational improvements courtesy of Houston-based GreyStone Asset Management
In Short: “The Retreat is the kind of deal we like: great location, huge units, Class A, and benefiting from good market demographics,” says Bascom managing partner David Kim. “We’ll spend a couple thousand dollars per unit to paint, clean it up, and improve the cosmetics of the property.”
The Maples at Crestwood Apartments
The Market: Denver
The Asset: 300 units of Class C stock constructed in 1973
The Deal: $7.9 million, via off-the-market lender foreclosure, in August 2010
The Upshot: Bringing back off-line units to generate NOI and improving occupancy from 50 percent on an asset that previously sold for $19.4 million in 2002
In Short: “The previous owner was a nonprofit group that foreclosed in the midst of renovation, and had also cannibalized units,” says Bascom managing partner Jerry Fink. “We are spending $13,000 to $14,000 a unit to continue renovations and reposition, and we are simultaneously in the process of re-leasing up right now.”
The Parc at Dunwoody Apartments
The Market: Atlanta
The Asset: A 312-unit, Class B property constructed in 1980
The Deal: $10 million, via courthouse trustee sale, in September 2010
The Upshot: The property offers immediate NOI gain through drastic occupancy improvements and completion of deferred maintenance after previous renovations in 2007 and 2008
In Short: “The Parc at Dunwoody was a trustee auction—an all-cash purchase with the Carlyle Group, one of our long-standing partners, that closed in one day,” Fink says. “It’s an acquisition of an asset in a distressed market with high subÂmarket vacancy and a dramatic loss in rents from 2008 through 2010.”
“The metric is not that complicated. We buy where rents are in the first quartile, and, through capital improvements and investments, our end rents have to be in the second quartile,” Kim says. “If we can create newer inventory and newer product where the community is priced in the middle, but the functional aspects and service aspects are in the 90th percentile, we can always make that equation work. It’s not that sophisticated.”
Not that Bascom is oblivious to the higher risks of owning and operating in the B and C markets, where rent and occupancy distress is more prevalent. With unemployment still prolific among renters in these asset classes, buyers “need to make pretty realistic assumptions of how long it will take to shore up occupancy and see a return to revenue growth,” says Bascom Group senior vice president of business development Chad Sanderson. “Unemployment continues to be a very real issue for apartment operators in those markets. You see it in increased delinquencies, and you see it in increased turnover.”
Indeed, Bascom itself has experienced difficulty with some of the toughest assets in the firm’s history. In June 2009, five Phoenix properties held by the firm’s Bascom Arizona Ventures subsidiary fell into foreclosure. Those properties, however, were the only Phoenix assets that the firm wasn’t able to unload via disposition in a 2007 move to vacate the market via a 12-property, $427.5 million portfolio sale.
Those types of risks are exactly what have kept the vast majority of apartment investors and their institutional equity away from the B and C deals that Bascom finds attractive. With challenging rent fundamentals and no clear rent-lift-for-cap-ex parity, assets not firmly in the flight-to-quality, Class A space aren’t the kind that most fund managers are bringing to acquisition committees. Bascom itself is witnessing the reticence in institutional investor psychology among its own equity partners, and is consequently doing more deals with its high-net-worth equity providers versus pension fund partners and like-minded money managers.
