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SAI investor update

Dear Partner,

We wanted to provide an update on SAI’s recent activity as well as your investments with us. Please see below for additional details.

Exited Investments

We have been active sellers since the second half of 2017, as we exited our investments in Hawthorne at Lake Norman, Tryon Park at Rivergate, and Waterford Terrace. We were able to take advantage of favorable market dynamics, resulting in attractive pricing in all three transactions.

Mooresville Apartment Partners

Mooresville Apartment Partners was formed in April 2014 to purchase The Venue in Mooresville, NC. In March 2015, the partnership sold a majority interest in The Venue, which was subsequently renamed Hawthorne at Lake Norman. The partnership used the sale proceeds to do a like-kind exchange, and bought a majority interest in Tryon Park at Rivergate, a complex located in the Steele Creek area of Charlotte, through a joint venture with Rivergate Apartment Investors. In August 2017, we sold our remaining interest in Hawthorne at Lake Norman, and in October 2017, we sold our interest in Tryon Park at Rivergate. This partnership produced a 2.9x multiple of invested capital and an IRR of 47% for limited partners.

Rivergate Apartment Investors

Rivergate Apartment Investors was formed in April 2015 to purchase a minority interest in Tryon Park at Rivergate alongside Mooresville Apartment Partners. The partnership sold its interest in Tryon Park at Rivergate in October 2017, producing a multiple of invested capital of 1.4x and an IRR of 20% for limited partners.

WTA Holdings

SAI served as an equity consultant for Waterford Terrace, a complex developed by Hollis Fitch in Rock Hill, SC. The entity was formed in October 2014. The complex was sold on February 1, 2018, producing a 2.3x multiple of invested capital and an IRR of 29% for limited partners.

Performing Investments

Hawthorne at Concord

Hawthorne at Concord, our complex in Concord, NC, continues to perform well, with occupancy at 97%. We own a minority interest in the complex through a joint venture with Hawthorne Residential Partners. Hawthorne strategically operates as a long-term holder of real estate, so we would anticipate continuing to hold this asset alongside them, unless Hawthorne offers to acquire our interest at an attractive valuation, as they did at Hawthorne at Lake Norman. The property was refinanced in 2016, which allowed us to return 24% of the limited partners’ original investment. The asset is performing well and produces a yield on our remaining equity of 13%, so we are happy to continue holding it for the foreseeable future.

The Presley

The Presley is holding its own in a competitive environment in Uptown Charlotte, as the complex is around 90% occupied. Apartment development in Uptown has made leasing more challenging, resulting in the use of concessions. We expect this to persist into the near future, as three new complexes are expected to deliver units to the Stonewall corridor in the next 12-18 months. Despite these pressures, we expect the Presley to be able to weather the softness in the market better than the competition, as its cost basis is significantly below that of the new projects on Stonewall, thereby enabling it to perform better in the face of lower rental rates. We also have a conservative financial structure, with a modest loan to fair market value and long-term fixed rate debt in place. Though it will take some time for the market to absorb the new supply, we believe the Presley’s location will improve through time, thus making it an appealing asset to hold into the next real estate cycle. We are currently evaluating refinancing proposals that will allow the property to make a substantial distribution that should pay the accrued preferred return and perhaps allow for some return of investor capital.

Opal Holdings / Fitch Irick Partners

Fitch Irick Partners had a solid 2017, and the company paid the 10% preferred return as expected. The company will not make a surplus cash payment for 2017, as the timing of asset transfers related to the acquisition of GEM Management and fee collection from new projects took longer than anticipated. We expect the company to have a strong 2018, as its budget anticipates a 14% total cash return to investors (10% preferred return and 4% surplus return). We continue to believe that our investment in Opal Holdings is a sound one that will produce extremely attractive risk-adjusted returns for a long period of time.

KT Land Acquisition

Through our relationship with Fitch Irick, we gained access to another attractive opportunity in December, as we were able to acquire land in Columbia, SC on which Fitch Irick plans to develop a large affordable housing complex. Fitch Irick was unable to purchase the land before their option expired because of financing concerns related to tax reform and the status of private activity bonds, so we agreed to step in and purchase the land and hold it until the situation was resolved. They hold a 1-year option to purchase the land from us. With tax reform passed and private activity bonds left in place, Fitch Irick plans to exercise their option to purchase the land from us at a predetermined markup to our purchase price before the end of this year. Had private activity bonds been struck from the tax code, we felt confident that the attractiveness of the site in a growing area of Columbia as well as our cost basis (almost $1 million below appraised value) would have allowed us to contribute the land into a development deal for a conventional multifamily project. This is the type of opportunity that excites us, as we had multiple avenues for attractive outcomes with significant downside risk mitigation.

Projects Being Developed

Overton Row

Overton Row (formerly 1201 Central), our joint venture with Campus Works in the Plaza Midwood area of Charlotte, is in the final stages of construction, and first units are expected to deliver in March. The pre-leasing effort has begun, and the first potential tenants were recently approved for leases by property management. Issues in the construction phase, primarily related to unsuitable soils, have caused construction costs to come in significantly higher than what was originally budgeted. Once complete, we expect the project’s attractive location and quality construction to drive strong interest from prospective renters. Despite the cost overruns, we believe that if the lease-up goes well and current pricing for institutional-quality multifamily assets holds up, the project is still well positioned to deliver an attractive return for investors. We anticipate exiting this investment in 2019 once construction is finished and the lease-up phase is complete.

800 St. Mary’s Place

We continue to make progress in the pre-construction phase for our 800 St. Mary’s project in Raleigh, and we closed on the second equity tranche earlier this month. Now that the project is fully capitalized, we plan to begin construction in the second quarter with an expected completion in late Spring/Summer 2019. We are excited about this project, as we are targeting an underserved population in the apartment rental market, and have been encouraged by the performance of similar properties in Charlotte.

Outlook and Potential Future Opportunities

We are pleased with the developments in 2017 and early 2018, as we were able to exit several successful investments and find select attractive opportunities for new capital deployment.

The market for multifamily development and acquisitions is in the late stages of this cycle. Acquisitions look expensive, so we are better sellers than buyers at this time. We will continue to look opportunistically at potential liquidity events for our existing investments. We believe that there will be better opportunities for acquisitions and development down the road once the market has had a chance to absorb this latest wave of new supply. We believe the assumptions used to justify some of the latest developments will prove to have been overly optimistic, leading to disappointing returns for those who lacked discipline.

Meanwhile, the supply/demand dynamics appear more favorable in the single-family market. It is likely that we will be doing a small townhome project in the Myers Park neighborhood in Charlotte. We are also evaluating a land deal in a Charlotte suburb with property that would be suitable for an age-restricted community. If we decide to move forward with these opportunities, we will be looking to raise money before the end of the first half of the year.

We have attached a summary of your investments with us to this letter. We are happy to say we are pleased with their performance. We pride ourselves in evaluating real estate through the lens of an investor, and will always focus on finding opportunities that are attractive on a risk- adjusted basis. We thank you for your continued support, and please know we are always available to answer any questions you have.

Sincerely,
Southeast Apartment Investors