Investment Overview
From 2006 through 2009, Croatan Investments purchased three garden-style apartments located in the Atlanta. GA metro area. Park Place, The Clarion, and Magnolia at Whitlock comprised of 567 units. The properties were Class B physical assets in Class A-/A locations. In 2016, Croatan restructured and recapitalized these assets here in referred to as Croatan Recap.
Challenges
Despite temporary operational softness from the 2010-2012 post-Global Financial Crisis, the assets performed well until 2014. At that time, “value-add” started growing as a popular investment execution, and many properties in the assets’ respective sub-markets underwent renovations. Croatan’s assets then required defensive renovations to remain competitive, and given their older vintage, deferred maintenance increased dramatically. Despite diverting all available cash flow to fund repairs, we were still unable to address all necessary capital expenditure needs. At the time, our investor base was comprised of passive high-net-worth LPs, limiting our ability to effectively fund a capital call to modernize these assets. As a result, our rental rate growth lagged the sub-market.
Solutions
In 2016, Croatan recapitalized these three assets with institutional JV equity, while allowing the existing high-net-worth LPs to retain an interest in the investment. This recap generated a gross IRR of 15.47% and a gross equity multiple of 2.60x for our original investors. The capital infusion allowed for the execution of a value-add business plan and addressed all deferred maintenance. We were able to increase rents, and between 2018 and 2020, we sold the assets to generate a gross IRR of 46.06% and gross equity multiple of 2.98x on a 2.75 year average hold period.
Lessons Learned
▪ Looking back, Croatan should have been more effective in anticipating and forecasting the deferred maintenance needs of older vintage assets. Today, we have a much higher standard for underwriting and budgeting a repair & maintenance cushion for older assets.
▪ Croatan now ensures we have the appropriate investment partnerships which have the mechanism to fund unexpected capital calls for each project.