The sponsor's affiliate manages the asset. Is the operations story real?
LP position, 216 units, 2015 vintage, suburban submarket with a lot of new delivery. Sponsor's management arm operates it, which was disclosed and which I accepted going in. Fee is 3% of gross revenue to the manager plus 1% asset management to the sponsor, plus payroll and benefits reimbursed at cost.
Q3 report against the original underwriting:
Occupancy 91.2% against 94.0% underwritten. Concessions running about 1.5 months on new leases, which nobody underwrote at all. Effective rent growth 1.4%. Controllable expenses up 9.1% year over year. Insurance up 31% on renewal. Payroll reimbursement is $1,142 per unit per year and was $890 two years ago, headcount flat at 5.
So NOI is 11% under budget and the distribution went from 6% annualized to 3.5%.
The part I keep circling is the payroll line. Headcount flat, dollars up 28% over two years, and it's a reimbursement at cost so the manager has no incentive to hold it down. It's not a fee they earn a percentage on, it's a pass-through, and pass-throughs are where I've been burned before. I've asked for the payroll detail twice and gotten a summary both times.
The other thing is that this deal was sold partly on operational value-add. Centralized leasing, package lockers, a bulk internet contract. The bulk internet is in and shows up in other income at $38 per unit per month, which is the only thing in the report that beat budget. Everything else in that pitch I cannot find evidence of.
On the call in three weeks I get maybe two real questions. Do I spend them on the payroll detail, or do I ask them to put management out for a third-party bid so we have a market check? Asking for a bid against the sponsor's own affiliate is a fight, and I'm one of maybe thirty LPs.