When I look back at my time at Atlas over the past 11 years, the mistakes we’ve made have primarily been selling multifamily assets too soon. Selling class B assets in Tampa or Salt Lake in 2016/17, for example.
These mistakes inspired me to put a note on top of the deal plaque which says “never sell winners”. The more refined quote I remind myself of is to “hold winners as long as possible and sell losers as quickly as possible.” I look at it every day.
A few weeks ago, we sold a winner. One of the first deals we acquired when I joined Atlas in 2011 was a property in Naples, FL. The property was developed in the 90’s as a LIHTC deal and had transferred to market rate after a foreclosure in late 2010.
Naples was a sleepy leisure/retirement destination in 2012 and we were in the early days of the multifamily recovery following the GFC. Fast forward 10 years, Naples is one of the hottest multifamily markets in the country and Meadow Brook Preserve is highly desirable asset with soaring rents and strong occupancy.
While we were directionally right with our investment thesis, no one saw what was coming. Today, I wanted to share some of my reflections from this deal:
The value of not knowing what you don’t know. The property was just the 2nd large multifamily transaction we did at Atlas. We didn’t over-analyze the market and lack of sales comps, we didn’t stress test various downside scenarios, and we weren’t aware of some of the physical issues that come with 90’s vintage apartments. Our investment strategy was simple; we’d move the tax credit units to market when the tail expired, upgrade the units, add new amenities, and hold long-term. That’s exactly what we did, and it worked.
The value of long-term compounding. I’ve said it a million times – real estate is best held long-term. The path from $800/unit rents to $2,000/unit over 10 years certainly wasn’t a linear one. The market ebbed and flowed with modest rent growth some years (2016/17), declining rent (2019), and eye-popping rent growth in others (2021). The road is bumpy, but over the long-term rents and values go up and to the right.
It’s hard to beat good timing. The deal was fully marketed by CBRE and being sold by a sophisticated owner. We didn’t have any inside edge and there was no forced seller situation. We simply paid market for the deal at a time where there was little competition. When we brought the deal to market in early 2022, the story was quite different. SW FL was on the map, institutional buyers had entered the market, and there was tons of capital chasing deals like this one. We bought at a good time and sold at a good time – hard to do poorly when those conditions exist.
We were directionally right but also way off. When we bought the asset, we were bullish Naples. Here’s what we said in the original investment memo.
“Naples is forecasted to experience 6.5% rent growth in 2012, 5.0% in 2013, and 4.0% in 2014 (according to AXIOMetrics). The property is expected to take advantage of improving market fundamentals.
Naples is the premier city along Florida’s southwest coast. The immediate area surrounding the property continues to boast strong demographic trends. Furthermore, there is a strong quality of life, the Wall Street Journal recently named Naples the 3rd best place to retire in the U.S.”
Our thesis was spot on and boy did we take advantage of the improving fundamentals. However, our underwriting was way off. Rents and income grew faster than projected, cap rates compressed significantly, and we sold the asset for more than double what we underwrote.
We were correct, but it’s hard to pat ourselves on the back and say we were right, when our projections were so far off. But that’s how it goes with real estate. Executing real estate deals is hard. As Peter Linneman says, ‘Football plays always work on paper’. However, in a real football play you have missed tackles, guys fall down, and players make unexpected moves. The play may work, but it likely doesn’t work the way you drew it up.
While it’s bittersweet to see this one go, the investment was a great success for the firm and our investors and highlights the power of long-term compounding coupled with great timing and a little luck!