Purchase price below comparable sales and replacement cost

Property Fundamentals

Competitive Positioning – Proximity to RDU International Airport provides a competitive advantage in attracting tenants and protection against the threat of new development.
Stable Tenancy – Predictable income from long-term leases. High probability of tenant retention due to unique tenant business considerations, combined with below-market rents, create bargaining power for the landlord in negotiating future lease terms.
Minimal Short-Term Vacancy Risk – No rollover scheduled during the first four years of ownership.
Minimal Capital Expenditures – Expectation of low capital replacement expenditures due to (i) roof system with an expected 40-year life, and (ii) favorable lease expense reimbursement provisions.

Market Fundamentals

Local Economic Profile – Stable and growing local economy with an excellent history of below-average unemployment levels and above-average job and population expansion.

DRV leveraged its relationship with the project developer to purchase the property, a 108-unit/324-bed student housing project on approximately 8.7 acres and two blocks from North Carolina A&T State University, in an off-market transaction. The property possessed a distinct competitive advantage due to its location, amenity package and physical characteristics relative to competing properties in the market. In addition, demand for housing exceeded supply in the market and A&T’s enrollment was projected to grow at a healthy rate with limited new housing under construction or in planning. Despite these positive factors, the property was suffering from low occupancy. DRV identified an opportunity to apply its student housing knowledge to increase income.

Transaction

DRV purchased the property for $9,800,000 (below appraised value). DRV assumed the in-place life company first-trust mortgage and supplemented the capital stack with a new second-trust mortgage from a private pension fund. Mezzanine debt and equity were provided by a syndicate of private investors.

Strategy

The operating strategy was to leverage the property’s competitive advantages to increase full-year occupancy and reduce above-market operating expenses. Implementation included the creation of a formal marketing and retention program, restructuring of lease terms, renegotiating of service contracts and adherence to tight management controls.

Results

Within one year, the property achieved 100% occupancy (all 12-month leases) with increased rents, no leasing concessions and a 12% reduction in controllable operating expenses. After maintaining this level of operations for an additional two years, DRV retired all the outstanding debt and returned 100% of investor equity through a new 10-year interest-only conduit mortgage. The equity investors now earn an infinite cash-on-cash return.

DRV pursued an opportunity to acquire Boulevard Plaza Shopping Center, a Piggly Wiggly-anchored community shopping center containing 115,815 square feet of rentable space on 10.6 acres. The property was constructed in phases in 1966 and 1979. Adverse environmental conditions and extensive deferred maintenance presented an opportunity to purchase the asset at a discount to its intrinsic value. DRV was acutely aware that the historical stability of the property and strength of the anchor tenant provided the prospect of value-creation through the remediation of the property’s issues.

Transaction

DRV purchased the property for $5,375,000. The seller provided non-recourse first trust financing at below-market terms. Mezzanine debt and equity were provided by a syndicate of private investors.

Strategy

The operating strategy was to take advantage of low-cost governmental programs to remediate the environmental condition and make targeted investments in improving the property’s curb appeal. Simultaneously, DRV sought to renegotiate Piggly Wiggly’s lease to incorporate market expense reimbursements and an extended term; the discovery, during due diligence, that tenant failed to properly exercise a recent lease option created bargaining power. Collectively, these actions were intended to enhance the asset’s value and liquidity.

Results

The above strategy was executed over an 18-month period. Based on the improved property condition, several tenants extended their leases at increased rental rates. The property was sold for $6,950,000 after three-plus years, generating a 34.5% IRR.

DRV became aware of an opportunity to acquire Southport Office Park located in Richmond, Virginia. The property was comprised of eleven buildings ranging in size from 5,600 square feet to 6,600 square feet and one 23,000 square foot office warehouse building, totaling 85,000 gross square feet. The property’s high current and historical occupancy provided a steady income stream sufficient to yield double-digit annual equity returns. DRV, however, saw a unique opportunity to capitalize on the wide disparity between its acquisition cost and the price at which office condominium units were trading in the market.

Transaction

DRV purchased the eleven building complex for $4,250,000 (approximately $50 per square foot). Debt financing was sourced from a local commercial bank. Equity was provided by a syndicate of private investors.

Strategy

The investment strategy was to capitalize on a low cost-basis, the availability of favorable financing and many tenants’ long-term commitment to the property by converting to a condominium and selling individual units. DRV believed that the above factors would entice a significant portion of the property’s tenants to purchase their rental spaces. Further, units not sold to tenants would represent an attractive opportunity for individual investors for the same reasons.

Results

Immediately after purchasing the property, DRV implemented a condominium regime and began marketing units for sale to tenants, prospective owner-occupants and local investors. All equity was returned within eight months. Overall, the units were sold out over twenty-eight months at an average price of $88.55 per square foot, generating a 361.3% realized IRR.

Purchase price below comparable sales and replacement cost.

Upside Potential

Opportunity for income growth through the absorption of vacant space and below market in-place rents.

Property Fundamentals

Desirable Asset Class – Attractive attributes of medical office asset class: recession resistance, projected growth due to an aging population, high tenant retention, general tenant creditworthiness and premium pricing relative to conventional office.
Competitive Advantage – The presence of ancillary service facilities provides a competitive advantage in tenant attraction and retention.
Stable Tenancy – Long-term credit leases account for 52% of the Property’s rentable square feet.
Quality Location – Located adjacent to Hamilton Place Mall, the anchor of the East Brainerd submarket.

Market Fundamentals

Barriers to Entry – State regulations act as a barrier to the relocation of existing healthcare facilities or the establishment of new healthcare facilities.

Purchase price below replacement cost

Property Fundamentals

Competitive Positioning – High-quality, Class-B suburban property in a strategic location easily accessible to downtown, Columbia Metropolitan Airport, the Lexington Medical Center complex, and the region’s extensive interstate highway system.
Stable Tenancy – High-quality tenant roster, many with a long history in the property.
Minimal Short-Term Vacancy Risk – less than 30% of square footage up for renewal within three years.

Market Fundamentals

Local Economic Profile – Stable and growing local economy with an excellent history of below-average unemployment levels and above-average job and population expansion.

Ground-up Development – opportunity to generate substantial returns.
Risk Mitigant – The development is a JV with a leading regional multifamily builder. This alignment of interests provides cost advantages and increases certainty of product quality.

Property Fundamentals

Partial Site Work In-Place – The land was purchased with partial asphalt, storm water retention and curb and gutter work already completed. The pre-completion of this work provides a cost savings and eliminates potential construction cost variances.
Highly Desirable Location – The site is centrally located to employment, service and amenity bases, including: new 130-acre Greer Campus of the Greenville Hospital System (0.5 mi), US headquarters of Mitsubishi Polyester Film (0.6 mi), Greer city center (1.5 mi), Greenville-Spartanburg Airport (5 mi), The Village at Pelham, a mixed-use healthcare and wellness development (5 mi), BMW Manufacturing facility (5.5 mi).

Market Fundamentals

Private Investment – Greenville County has announced over $1.4 Billion in new capital investment and over 6,000 new jobs from 2002-2006. And for the past few decades, the SC Upstate has been the recipient of more foreign investment per capita than any other region in the US. The Greenville metro area ranked fifth in the nation for top cities in locating a new facility according to Plants, Sites and Parks magazine in 2004. The Harvard Business Review identified the Greenville-Spartanburg Area as the model of a manufacturing community
Public Investment – In February of 2003, the Greenville Hospital System announced development plans for new a $100 million medical campus on 130 acres, 0.5 miles from the site. This development will occur over 5 to 7 years and will be in addition to GHS’s facilities that are currently in Greer.