Inside the Deal: Lloyd Jones Capital’s Expanding Workforce Housing Portfolio
- Sep 06, 2018
Lloyd Jones Capital’s purchase of The Westcott Apartments marked its second purchase in the market in less than a year. The Miami-based real-estate private equity firm paid $57.8 million for the 444-unit garden-style apartment complex in Tallahassee, Fla., expanding its footprint in multifamily assets located primarily in Florida, Texas and the Southeast.
Lloyd Jones, which specializes in the multifamily and senior housing sectors, was launched just four years ago, but its principals have been active in the industry for 38 years. The firm’s core strategy is to invest in cash-flowing assets that are undercapitalized or poorly managed and therefore offer value-add opportunities.
Lloyd Jones acquires, improves and operates multifamily assets with a holding strategy that ranges from three to 10 years, depending on the needs of its investors, which include institutional partners, family offices, private investors and its own principals.
Despite headwinds faced by multifamily—such as rising interest rates and construction costs as well as concerns about oversupply in some markets–Chris Finlay, chairman & CEO of Lloyd Jones Capital, remains bullish on the sector.
“It’s absolutely the best asset class to invest in, primarily due to demographics,” he said. “You have 75 or 80 million Millennials, and about a third of them are still living with Mom and Dad, so there’s a huge untapped market. On the other side of the spectrum, you have the Baby Boomers, about a third of whom are renting now, and every indicator seems to show that percentage is going to increase as they get older.”
Finlay said he’s not concerned about an oversupply of apartments, an issue he feels has been “exaggerated.” Due to high construction costs, most of the new supply coming online is Class A, he said, but his strategy is to focus on what he calls “market-rate workforce housing,” or housing that’s affordable to a median-income family. Since there’s little new workforce product in the pipeline, Finlay is confident that Lloyd Jones is transacting in a niche that will lead to good returns.
Tallahassee is the state capital of Florida, and the multifamily market there is stable, with further growth projected. According to Yardi Matrix, in the second quarter of 2018, monthly rents averaged $1,173, up from $1,088 in the second quarter of 2016. Yardi forecasts average monthly rents to increase to $1,347 by the end of 2023. Occupancies have been holding steady, at 94.6 percent in the second quarter of 2018 and forecast to rise slightly to 94.8 percent by the end of 2023.
“The supply/demand balance is very good there,” Finlay said. “It’s an extremely stable market because the state government is there, and irrespective of the economy, that always chugs along.”
In addition, there are two major universities in Tallahassee—Florida State University and Florida Agricultural and Mechanical (A&M) University—that drive both the student housing and off-campus multifamily markets.
“Tallahassee is one of those markets that don’t boom but they don’t bust,” Finlay said. “It’s just a nice progressive growth—reasonable growth that you can count on.”
Other experts agree. “The Tallahassee market has seen consistent growth over the last few years, both from a value-appreciation standpoint as well as rent growth and stabilized occupancy,” said Jad Richa, managing director of Capstone Apartment Partners in Tampa, who handles investment sales.
Richa said that every deal he’s sold recently in the area “has some value-add component to it.” Cap rates on closed deals range from 6 to 7.5 percent, he said, attracting investors priced out of gateway markets that are “chasing yield” in Tallahassee.
The Westcott Apartments is a 444-unit Class B+ property located at 3909 Reserve Drive, just five miles from the state capital building. Most of the apartments were built in 2000 (300 units), with an expansion completed in 2005 (144 units). The floor plans include one-, two- and three-bedroom units. Rents at the time of acquisition ranged from $950 to $1,250, and the occupancy rate was about 93 percent. Finlay said the trailing cap rate was 5.5 percent.
“It’s a great asset in a great location,” he added. “It’s in an area of Tallahassee that we see a lot of expansion happening, so there’s still room for growth. And it’s very easy to get to downtown.”
Public records disclose that Lloyd Jones, which took title to the property in the name of an affiliated entity named LJC Westcott LLC, paid $54.6 million for the property. The $57.8 million purchase price reported by the company represents its total investment, including its anticipated capital expenditures and rehab costs.
Finlay said he was presented with the opportunity by the listing broker, Jones Lang LaSalle’s Capital Markets Group, which also arranged a $40.3 million 10-year floating-rate mortgage through Freddie Mac on behalf of the buyer. The seller was Irvine, Calif.-based Oaktree Capital, and the deal took about 90 days to close.
The prior owners invested $4.8 million in capital improvements such as landscaping, playground updates, exterior painting, two clubhouse remodels, two fitness center upgrades and unit upgrades. In line with its management strategy, Lloyd Jones plans value-add upgrades and improvements to The Westcott’s existing amenities, which include two swimming pools, two fitness centers, playgrounds and tennis courts.
Finlay said he’s spending some $7,000 per unit to upgrade about a quarter of the units, adding granite countertops, tile backsplashes, stainless-steel appliances, vinyl-plank flooring, and washers and dryers—what Finlay calls “a standard upgrade package typical in a value-add strategy.” Although the program hasn’t been implemented yet, plans call for an average $125 rent premium for upgraded units.
After improving the units, repositioning the project and raising rents, Finlay expects to sell. “This will probably be a five-year hold,” he said. “The strategy is to do the improvements and try to operate the property more efficiently and then position it to sell in five or seven years.”
The Westcott is just one example of Finlay’s strategy to capitalize on the critical need for workforce housing in the United States. According to the Joint Center for Housing Studies of Harvard University’s “The State of the Nation’s Housing 2018,” nearly one-third of all U.S. households paid more than 30 percent of their incomes for housing in 2016. For renters alone, however, the cost-burdened share is 47 percent. And of the 20.8 million renter households that are burdened, some 11 million pay more than half their incomes for housing and are severely burdened.
“What we focus on is something that differentiates us from a lot of investment firms,” Finlay said. “We focus on the affordability of workforce housing.”
He added that the firm’s first-year projected rents at The Westcott are at 25 percent of the median income for Tallahassee. “HUD basically stipulates that 30 percent is the guideline, and anything above 30 percent is considered rent-burdened,” he said. “We’re not even close to that 30 percent. We’re providing great housing for workforce families in that market when all the new stuff is unaffordable.”
You’ll find more on this topic in the September 2018 issue of MHN.