Important note: The realized return on an individual project may vary significantly from your portfolio-level return as an investor. To learn more about why this may be the case, see the “How did this project impact your portfolio?” section.
In August 2017, we invested roughly $4.9 million in the acquisition and renovation of the Cedars of San Marcos, a 168-unit apartment community in San Marcos, TX, the heart of Texas hill country.
Our investment was made in a joint venture partnership with Railfield Partners. Prior to our investment, the seller had renovated 21 of the 168 apartments. Immediately after we acquired the property, Railfield started renovating the entire community, including its common areas, exteriors, and the remaining 147 apartments not yet improved.
As we stated in our progress update from early 2019, we uncovered unexpected repairs and maintenance needs, as well as property management issues. During the first few months of owning the property, occupancy fell and operating expenses rose. We ceased property cash distributions during the later part of 2018 and took a more hands-on approach, eventually choosing to replace the property management company.
Performance began to show some signs of improvement over the course of 2019, and renovations were completed as planned, including a refresh of the exteriors and common areas, as well as 142 of the 147 remaining unit interiors. With the onset of the pandemic in early 2020, however, rent growth and collections once again declined and did not meaningfully rebound in 2021. This stands in contrast to the broader Sunbelt multifamily portfolio, which, as we stated in our Q3 2021 performance update, not only weathered the pandemic with strong fundamentals but has seen unprecedented rent growth since. We attribute this primarily to continued staffing challenges at the property, as well as overall unfavorable supply and demand balance in San Marcos relative to other submarkets closer to Austin.
At the end of September, our partner sold the property. Between the rental income we received during the course of the investment and the profits from the sale, we achieved an annualized return of roughly 9.1% over the four years we held the investment,¹ which is below our previously announced projected annualized returns of 10.5% - 13.5%.
At a broader level, the San Marcos investment is a good reminder that even a thoroughly underwritten acquisition can have unforeseen problems, underscoring the value of a well-diversified portfolio as a hedge against the unexpected. Additionally, we feel it serves to highlight the strength of the overall macro thesis of Sunbelt rental housing as an investment. Even though at the asset level, the investment had unexpected issues and struggled to perform relative to its peers, our overall strategy — investing at an attractive price into an asset class where demand is being driven by long-term demographic trends — ultimately allowed us to achieve a solid result for investors in the face of the property-level headwinds.
Investor FAQ: How did this project impact your portfolio?
This investment was structured as equity, i.e. we were part owners of the property along with our joint venture partner, and entitled to our share of rental income as well as any profits from the sale.
Since acquisition, the rental income earned has contributed to quarterly dividends, while the increased value of the property has been captured in prior quarters’ adjustments to the Heartland eREIT’s net asset value (NAV) per share.
Note that investors who joined the platform more recently would likely not see as much of an impact to their returns from this investment, since most of the returns were realized before they joined the platform.
As always, if you have any questions or feedback, please visit our help center or reach out to us at investments@fundrise.com.
