May 30, 2023
By: Joe Fairless, Co-Founder and Partner & Frank Roessler, Co-Founder and CEO
Since its inception, one of the founding principles of Ashcroft Capital LLC. has been to preserve investor’s capital. With the Fed’s mandate to bring inflation under control, the ensuing interest rate hikes over the last 12 months have pushed the financial markets to the brink, adding significant uncertainty to the overall market. But with this uncertainty comes opportunity.
Banking Relationships
Ashcroft holds its accounts with First Republic Bank. Immediately following the collapse of Silicon Valley Bank and Signature Bank, we had implemented an Insured Cash Sweep on all accounts, meaning if any account exceeds the FDIC insurance limit of $250,000, the excess is automatically swept into a new account. This keeps all balances fully insured.
Lender Relationships
Historically, Ashcroft has utilized a combination of agency loans through Fannie Mae and Freddie Mac, and private loans through strong relationship lenders. We continue to grow these relationships and expand our network of lenders.
It is through our strong relationships and track record that we are able to create additional flexibility in our lending terms.
Interest Rate Exposure
Ashcroft has historically utilized both floating rate and fixed rate financing, based on the overall business plan of each asset. Our floating rate loans have been impacted by the interest rate rises over the last year. We have hit our caps across our portfolio. Depending on the assumptions going into each deal, this has had varying impacts on the asset.
In addition to the impact on current interest expense, the increase in interest rates has caused our interest rate caps to cost much more at expiration. Across our portfolio, we have interest rate caps expiring anywhere from this summer through early 2025. We are constantly monitoring the various factors that affect the rate cap pricing, primarily the forward curve. We are updating the capital needs in our budgets and reforecasts on a monthly basis in an effort to maintain adequate liquidity within each offering as these caps expire.
Going forward, we are going to continue matching our loan products with the business plan for each asset. This means we will continue to seek both agency loans and private loans. We are in regular communication with our relationship lenders in order to continue to find the best available lending product to minimize risk while maximizing our returns for investors.
Refinancing and Dispositions
A silver lining in all the volatility in the market is: demand for quality multifamily assets remains high, keeping strong upward pressure on valuations. While cap rates have increased with the increase in interest rates, the overall demand remains high. Well-located, strong performing assets within in-demand metro areas are continuing to see interest.
At Ashcroft, we are seeing deals continue to trade at cap rates below 5% due to the strong overall fundamentals of multifamily in these markets. This has expanded from deals trading in the 2% range 18 months ago, and still falls in line with our projected exit cap rates that we initially modeled across our portfolio.
We are exploring strategic refinances and possible sales, where we can generate strong returns. Both of these options rely on our continued focus to drive Net Operating Income (NOI) at the asset level, as higher NOI will create higher refinance proceeds and sale proceeds.
Acquisitions
As we continue to raise for the Ashcroft Value-Add Fund III (“AVAF3”), we believe we are in a strong position to acquire assets at relative discounts compared to 12 months ago. That being said, the acquisition market is still relatively quiet. This is due to a large bid-ask spread, where sellers are still wanting early-2022 prices, while buyers are continually looking to hedge the uncertainty in the capital markets.
Through conversations with both brokers and other operators, there is continued strong demand, but many buyers, like Ashcroft, are being patient and prudent. Once we see interest rates level off, and likely some levels of distress entering the market for those owners that did not hedge their interest rate exposure, we anticipate more transaction volume to come back to market. With both sellers putting assets to market with reasonable pricing, and buyers having better understanding of where interest rates will be to more confidently underwrite their purchases.
Operations
A large reason for the continued strong demand of multifamily assets is the strong underlying fundamentals that continue to aid our operations. This is not to discount the work that Birchstone Residential and our Asset Management team are doing to further drive these results. Birchstone executes the value-add business plan for each Ashcroft property, optimizing financial returns while obtaining high resident satisfaction.
Our NOI is budgeted to stay ahead of projections, even with sizeable increases in several of our expense items. Specifically, payroll and insurance are ahead of proforma. COVID created a strong upward pressure on payroll and the strong job market has continued to drive salaries faster than projected for quality candidates. On the insurance side, providers are reassessing their risk profiles and, across the industry, pushing large premium increases. However, on the remaining operating line items, our team has done a great job holding those expenses close to, if not below budget. We continue to strive for further operational efficiencies, such as outfitting our maintenance teams with paint sprayers to allow for easier paint touch-ups at turn over, versus a full repaint, minimizing turnover costs.
Overall, we continue to remain conservative in our current budgets for all of our assets. The Fed has raised rates at a faster pace than any previous round of rate hikes in the past 30 years. We are coming off a global pandemic which had created first its own challenges, followed by a robust expansion. At the end of the day, we remain confident in our business plan and long-term outlook for both our existing portfolio and future acquisitions. We continue to make strides to further hedge our risks across the portfolio. This started with bringing our management in-house in 2021 and continues through diversifying our geographic concentration, lender and banking relationships, and ultimately exit strategies for our portfolio. We are starting to see signs of light, with the slowing of rate hikes, but we are still planning that at least one, if not two more hikes are coming in the upcoming Fed meetings. We will continue to monitor our capital position for each of our assets and make decisions in line with one of our primary principles: capital preservation for our investors.
If you would like to learn more about investing in multifamily assets, visit https://info.ashcroftcapital.com/fund, or schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com.
