Fund V Closed: a Reflection and What's Next

We are thrilled to announce that Fund V closed in September. Our top priority is completing and stabilizing our existing portfolio, which now consists of over $270M of housing and hospitality assets. 

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That said, we are beginning to patiently evaluate new investment opportunities. What we invest in next may look different than our greenfield Opportunity Zone (OZ) development investments, but will certainly rely upon deep knowledge of the markets we enter.

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Slowdown in Development Investment

Our fifth OZ Fund was not an easy equity raise in this capital environment as the pace of capital gains slowed and the cost of capital rose significantly. As a result, our fundraising pace also slowed for Fund V in comparison to prior funds. We are grateful that the fundraise is complete and to see continued conviction for our investing throughout Colorado even as investor sentiment shifts.

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Through 2021, investors were especially focused on taking advantage of the benefits of the OZ legislation which pointed towards greenfield development and patient capital. Today, many investors we speak with are focused on immediate cash on cash yields, fueled by a market where it’s possible to make 5%+ on your cash essentially risk-free. As the macro environment has changed, we are looking at new ways to uncover nascent opportunities in under-the-radar markets.

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The Elephant in the Room: Debt

The most frequently asked questions from investors and peers alike are about debt financing. All of our greenfield projects that are stabilized are exceeding top-line revenue, and were delivered on budget and on schedule. However, the sharp rise in the cost of capital (over 3X more expensive than where we were less than 18 months ago) is of concern. Fortunately, we have been able to navigate through this environment and have attractive long term debt on many of our properties. 

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The contrast in the cost of capital is apparent when we compare two of our recently stabilized assets - The Eddy Apartments and The Altitude Apartments. Both projects had very similar development and leasing schedules, but had starkly different financing resulting in materially different cash flows. 

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Altitude Apartments in Glenwood Springs

HUD loan at 3.2% interest rate, 40 year amortization, 73% leverage through construction that converted to permanent financing. Cash flows for this property will exceed 10% in year two of operations driven by this very attractive cost of capital and strong leasing.

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Eddy Apartments in Grand Junction

Conventional construction loan, started at 3.5%, floated to 8.75% with rate hikes, and recently refinanced to HUD at 6.45% with 35 year amortization and 60% leverage. With strong leasing, cash flows for this property will reach 4% in year two and we expect to create 6-7% cash on cash over the investment period. 

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Looking ahead, we have 4 properties to refinance in 2025/2026, and will continue to monitor the macro backdrop to ensure we take advantage of any pull backs in the market relative to the cost of capital as we seek refinancing. We are fortunate that we have the time to determine when is optimal to refinance as our current construction debt does not come due until 2026. 

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Both the amount of leverage and the cost of leverage creates a very different hurdle for development projects, which is why we are seeing such a strong pullback in new development activity coming into 2024. 

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Portfolio Stabilization

Across about one million square feet and 878 multifamily housing units, 48% are under construction (one planned to break ground in Q1 24), 43% are fully stabilized, and 9% are finishing leasing. Thus far, rents and leasing have generally exceeded expectations. We have stabilized or are developing large housing projects in every target market we highlighted at the beginning of our OZ investing four years ago (with the only exception being the town of Avon). These markets include Durango, Buena Vista, Estes Park, Glenwood Springs, Idaho Springs, and Grand Junction.

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Across our hospitality portfolio of ~450 units, we have permanent debt secured across the board (with the exception of Camp Eddy, which is expected to close in Q1 24) and we see material improvements in revenue, operations, and staffing each year. These assets are diversified across Colorado consisting of lodging, glamping, camping, RV parks, and a hot spring.

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What’s Next? Fund VI?

Considering the current backdrop we have highlighted, we will most likely be looking for opportunities that are focused on underserved markets without pursuing greenfield development.

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To qualify an investment as OZ, in addition to being located in an OZ, the investment must double its basis in the first 30 months. This is much harder to accomplish when purchasing an existing building and is therefore why we are unlikely to pursue an OZ strategy even if a new project happens to be located in an OZ.

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We are testing a few hypotheses that involve value-add investing. This would either involve purchasing existing housing or repurposing non-housing assets to become housing. More details to come here depending on whether we choose to proceed.

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To reiterate, our existing portfolio of assets remains our priority. We are grateful that we built across Colorado early and uniquely. Even though demand remains at or near record highs, it’s unlikely that new construction in our markets will make sense for the near/medium term due to the cost of capital and construction. In many of our markets there is simply little buildable land remaining, which serves our existing portfolio well. Our conviction for the markets we have invested in remains incredibly high. Thank you for reading and never hesitate to reach out with any questions or to schedule time to meet.