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Ashcroft Capital - Annual State of the Union

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State of the Union

2022 IN REVIEW

Highlights Discussed Below

Selective Portfolio Growth

We acquired 3,300 units in 2022, bringing the total portfolio AUM to $2.5 billion and 13,062 units.

Continued Focus on Infrastructure and Operations

Our talent pool grew by over 35% to 372 team members. The hard work of these deeply talented team members created some incredible results.

Ashcroft Procurement Process

In order to save on interior renovation costs, we purchase high-quality materials in bulk from international manufacturers, ship them to an Ashcroft-controlled warehouse in Dallas and disseminate them to our communities throughout the Sun Belt.

Ashcroft Value-Add Fund III

We are targeting value-add multifamily communities throughout top submarkets of the Sun Belt. If you'd like more information on investing, click here


2023 Economic Outlook from Our CIO, Scott Lebenhart

The Sun Belt continues to see relatively strong multifamily fundamentals.


2023 Plan and Strategy from Our CEO, Frank Roessler

We will remain hyper-focused on the strength of our current portfolio while acquiring only when the right opportunities present themselves.

Dear Ashcroft Investors, Associates, and Close Friends,

It's that time of year again where we step back, reflect on our accomplishments, assess the current economic landscape and create new goals for the upcoming year. At Ashcroft Capital, although we routinely assess and reassess our investment strategy on a more frequent basis, we like to take this moment each year to provide our insights and analysis to our closest partners. 

As you'll see below, we cannot speak about 2022 without mentioning The Federal Reserve's battle against inflation and the impacts of these efforts on the capital markets. In response to this, you'll note that we remained highly selective while acquiring new assets and continued our efforts to strengthen our infrastructure and operations. You'll also note that we had no loans maturing in 2022 nor any in 2023, which limits our downside risk through this period of uncertainty. Perhaps most importantly, we're happy to report that the multifamily industry continues to demonstrate strong investment fundamentals within our high growth Sun Belt metros. We can observe that strength within the performance of our portfolio and our revenue growth. And on the new acquisitions side, strong multifamily fundamentals in the face of fluctuating capital markets can create opportunity for disciplined firms like ours. Before we dive into our 2023 strategy and outlook, we'd like to provide you with a few high-level updates on Ashcroft Capital's 2022.

In 2022, we increased our unit count to just over 13,000 and finally broke into the Raleigh-Durham market.  Due to this growth, our total portfolio valuation is now $2.5 billion.  We also invested in ourselves to better maintain best-in-class operations over our existing portfolio. Part of this investment was growing our team member count from 274 highly talented individuals to 372 across Ashcroft Capital and our in-house property management company, Birchstone Residential.

Though we're proud of this growth we don't measure our success by corporate growth or assets under management. In 2022 we sold nine assets, resulting in 26 full-cycle transactions over the history of our firm. These 26 transactions have provided our investors with the returns highlighted below. In addition to this, we closed on several successful refinance and supplemental loans. We are proud of this track record and will continue to focus our efforts and resources toward delivering outsized returns.

The following report contains some highlights from 2022 and Ashcroft's outlook for 2023.

Measured Portfolio Growth

To say that 2022 was a turbulent year for the capital markets is an understatement. In a quest to deflate inflation, we witnessed The Fed hike rates at the fastest pace since the 1980's. They increased rates seven times in 2022 and four of those increases were 75 basis points. To put into perspective how steep that growth is, the last time the Federal Reserve hiked rates by 75 basis points was in 1994, and it did so only one time that year. 

Due to this unprecedented rise in rates, Ashcroft Capital tempered its planned growth for 2022. Some readers might recall that we originally intended to acquire up to 10,000 units last year. However, we only added about 3,300 units to our portfolio, with over two-thirds of those acquisitions occurring in the first half of the year. This ease on acquisitions was intentional and the primary driver was a large bid-ask spread between buyer and seller expectations. Rather than acquire great assets at the wrong price, we elected to wait for the right deal at the right price. 

That's not to say we didn't find a few exceptional opportunities along the way. During the second half of the year, we acquired three outstanding communities and broke into a new market within our target Sun Belt region, Raleigh-Durham. Looking forward to 2023, aside from the capital markets, multifamily fundamentals remain very strong compared to most other asset classes. We are hopeful that excellent opportunities will present themselves, but we will continue to stay disciplined and conservative in our selection. More about this approach at the end of this letter.

Continued Focus on Talent and Development

As always, in 2022 we remained focused on strengthening our existing portfolio. And we do this, in part, by investing in ourselves. We pride ourselves on being best-in-class operators, which means we stay focused on improving the quality of life of the residents at our communities. We have found that creating exceptional resident experiences will foster strong investment returns. And the best way to focus on our residents is to invest in highly talented and experienced team members.

At the end of 2021, Birchstone Residential had an employee count of 243 and Ashcroft Capital had a staff of 31, for a total employee count of 274. As of today, Birchstone has 330 team members and Ashcroft has 42, for a total count of 372 highly talented professionals. So, our human capital grew by over 35% year-over-year. Moving forward, we will remain focused on offering above-market benefits in order to attract and retain top talent.

The results of the collaboration and hard work of so many talented individuals are demonstrated in our operations. Below are just a few key accomplishments from 2022.

Internal Customized Procurement Process

In order to save on interior renovation costs, Ashcroft purchases materials in bulk, direct from international manufacturers, and ships them to a warehouse in Dallas.

We take great efforts to deliver stunning renovations to our residents while spending much less than other operators. Beyond our vertical alignment of property and construction management, we have honed and optimized an internal procurement process to buy the materials we use to upgrade our apartment communities. These materials include but aren't limited to lights, faucets, sinks, door handles, ceiling fans, and much more. This procurement process allows us to buy very high-quality product at a fraction of the retail cost. Rather than just buy in bulk from retail providers or buy materials when we acquire new communities, we buy high-quality renovation materials in mass quantities direct from overseas manufactures. In fact, we buy enough materials to cover upwards of nine months of renovations across our entire portfolio. These materials are then sent to us on shipping containers and delivered to an Ashcroft-controlled warehouse in Dallas. From there, we unbox and repurpose the materials into individual, customized kits. We then truck and disseminate these kits to our apartment communities in our Sun Belt markets. As you can see, we've virtually created a mini-Amazon-like environment within our company. 

This process creates several competitive advantages for Ashcroft. First, we sidestep the challenges caused by global supply chain issues because our warehouses remain stocked with product. Second, we can get ahead of inflation because we purchase everything in advance, and we can time future purchases away from pricing spikes. Third, we increase our investors' return on investment by saving money through direct bulk purchasing. Our recent estimates demonstrate savings of over 30% compared to bulk purchasing from retailers such as HD Supply and Lowe's. Most importantly, this system allows us to control the quality of our materials. As mentioned, we focus first on the quality of life of the residents of our communities. Therefore, when working with manufacturers, it is important that we buy product that will satisfy the exacting tastes and demands of today's modern renters. If a picture is worth a thousand words, then we will let the following before-and-after images do the talking.

VIEW BEFORE-AND-AFTERS

Ashcroft Value-Add Fund II and III

In 2022, we launched Ashcroft's second fund, the Ashcroft Value-Add Fund II and closed out the funding period before year-end, with just over $115 million raised. With this fund, we diversified our partners' investments over three states, five metros, six assets, and 2,120 units. Though this fund is now closed for investing, we are pleased to announce the launch of the Ashcroft Value-Add Fund 3 (AVAF3). If you'd like more information on how to invest, please CLICK HERE.

LEARN MORE

2023 Economic Outlook

A Message from our Chief Investment Officer, Scott Lebenhart

In order to look forward to 2023, let's take a quick look back to help us understand where we stand today. 

2022 was truly a tale of two halves. Depending on who you speak with, the first half was filled with market optimism that this historically long period of economic expansion would continue, while the second half was met with volatility and incredible uncertainty. Over the past year, we experienced milestones like historically high rents and historically low interest rates, but we also faced inflation, supply chain issues, and the global effects of the conflict in Ukraine. When the whispers of inflation became a reality and the Federal Reserve began aggressively increasing rates in mid-2022, the markets became paralyzed as investors searched for clear guidance on what the future would hold. Without being able to clearly understand the cost of capital and the impact of the rate increases on the overall economy, real estate transactions came to a screeching halt.

The rapid and aggressive actions by The Fed to combat inflation were widely unforeseen by economists, which contributed to the volatility in the marketplace. From the end of 2021, very few predicted that interest rates would rise to anything remotely close to what we are seeing today. Below is a chart showing the wide divergence between economic projections and actual interest rate growth:

Looking forward to 2023, there is optimism that there will be more clarity on what peak interest rates will be. Inflation may begin to taper to targeted levels, and rates may ultimately start to decrease. We are expected to be in a recession throughout 2023 as we continue to see high interest rates and the impacts of economic policies. This will create challenges for commercial real estate and similar investments. However, the recession is not expected to be particularly deep. Companies still have relatively strong balance sheets, which should help avoid excessive layoffs as the skilled labor market remains tight. Additionally, the average household debt is low compared with the onset of previous recessions, per CBRE. Inflation is expected to be significantly lower by the second half of 2023, which should set the stage for falling interest rates and the beginning of a new cycle of economic growth. 

Multifamily fundamentals in 2023 are expected to be remain strong; however, the growth will represent a major slowdown from the past few years. Per CoStar, as of the third quarter of 2022, the national average rent growth was 4.0%, which is down significantly from 11.1% rent growth in 2021. The projected average national rent growth for 2023 is 2.9%. Although this is a stark deceleration from recent years, the average rent growth across the country from 2010 through 2020 was only 2.4%. Other fundamentals such as vacancy and absorption are off of their historic rates, but are still at levels that signal a healthy multifamily market. 

Specifically, the markets that we target throughout the Sun Belt – Dallas-Fort Worth, Atlanta, Orlando, Tampa, Jacksonville, Raleigh-Durham, Charlotte, and Phoenix – are still seeing relatively strong multifamily fundamentals. With escalating mortgage rates and housing costs squeezing out potential buyers, more people are looking to relocate from big cities to Sun Belt states where the cost of living is relatively cheap. According to Redfin, 25% of search queries are for homes in cities outside of where that person currently lives. Among the top 10 most searched cities, eight are in the Sun Belt. Not only are people continuing to move to areas in the Sun Belt, companies are also relocating to and/or expanding in these markets as the labor pool is becoming more educated and skilled. We will continue to focus on buying properties in specific locations that are benefiting from these positive trends. 

Additional factors are expected to keep multifamily fundaments strong. There is a significant housing shortage in the U.S. Right now, according to CBRE, there is an estimated shortfall of 1.6 million homes. Rising construction costs led to a 41.4% decrease in single-family home completions from 2007 to 2021. CBRE calculates that the average mortgage payment for a newly purchased home in third-quarter 2022 was 57% more than the average monthly apartment rent, the widest cost gap on record. The premium to owning a home averaged just 8.5% before the pandemic. Even if home values continue to fall and mortgage rates drop in 2023, the relatively lower cost of renting will support multifamily demand. The home-buying affordability issue has led to an increase in demand for rental housing, evidenced by a 1.9% increase in renters in third-quarter 2022 compared to pre-pandemic levels, per the Census Bureau. Multifamily is expected to continue to reap the benefits from the shortfall and cost of single-family housing. Regardless of the state of the economy, people need a roof over their heads. Downsizing baby boomers are losing interest in owning, while many millennials have delayed or abandoned home buying plans, and Generation Z, now coming of age, is largely entering the housing market as renters.

Although the multifamily market is down from its historic highs in transaction volume, we still expect to be an active buyer in 2023. The transaction environment has shifted from being a "seller's market" to a "buyer's market," which gives companies like Ashcroft an advantage because of our positive reputation and strong track record of execution. Over the first half of 2023, we expect there to be a lot of pricing discovery as buyers and sellers try to figure out where property valuations will reset. As of now, we have seen asset values decrease about 20-30% from their peak pricing in early 2022. With the higher cost of debt and subdued projected growth, buyers need to pay less to hit their desired returns. We expect there to be opportunities to acquire properties at a significantly discounted basis relative to where the assets would have traded in the beginning of 2022. Per CBRE, following the Great Recession of 2008, the trough in pricing only lasted around six to nine months before cap rates began to compress. Given expectations for a relatively moderate recession, the window of opportunity may be even shorter this time, which is why we are excited to acquire some incredible properties in the near-term. Our aim in 2023 is to continue to target high-quality properties in extremely desirable locations with strong fundamentals in order to deliver strong returns for our investors.

2023 Plan and Strategy


A Message from our Chief Executive Officer, Frank Roessler

Our strategy for 2023 begins with a tight approach to asset management over our existing portfolio.

Our top priority at Ashcroft is capital preservation, and that means maintaining strong property-level operations on each asset in the portfolio.  As mentioned above, we averaged 94% occupancy on  our portfolio while growing NOI by over 13%. And we will focus all of our efforts on continuing this success in 2023. 

While considering acquisitions, we are entering a buyer's market. But it's important to understand what kind of buyer's market we're in and how we got here. As discussed, in 2022 we witnessed a historic rise in interest rates. However, the last increase was a more moderate 50-basis-point rise. Expectations are that we will see another 50-basis-point increase by the end of the first quarter and a leveling off thereafter. If things play out as such, uncertainty will decrease and activity will rise again, though much more modestly than in recent years. This will also allow liquidity back into the debt market. 

However, it is not just activity we seek, but great assets at appropriate pricing. Good opportunities will present themselves but we feel it's critical to remain disciplined and patient. And we do believe that the next 12 to 18 months will present great opportunity. Many economists feel that it is more likely than not that there will be some distress in the market. As owners seek liquidity and the bid-ask spread tightens, we do foresee a window of opportunity to take advantage of some compelling acquisitions. And we will do so with a careful and highly selective approach. 

In short, we will remain hyper focused on the strength of our current portfolio while buying only when the right opportunities present themselves. 

Take care, 

Frank Roessler

Founder and CEO

Joe Fairless

Co-Founder and Partner

i Investing in securities involves substantial risk.  See the partnership's private placement memorandum for more information. Past performance is no guarantee of future results.  

ii This communication is for informational purposes only and is not intended for any other use. This communication is not an offering memorandum or prospectus and should not be treated as offering material of any sort. The information contained in this communication shall not constitute an offer to sell or the solicitation of an offer to buy securities. The communication is intended to be of general interest only and does not constitute or set forth professional opinions or advice. The information in this communication is speculative and may or may not be accurate. Actual information and results may differ materially from those stated.  Ashcroft Capital and its respective affiliates make no representations or warranties which respect to the accuracy of the whole or any part of this communication and disclaims all such representations and warranties. Some of the data and industry information used was published by third-party sources and has not been independently verified, validated, or audited. Neither Ashcroft nor its principals, employees, or agents shall be liable to any user of this Presentation or to any other person or entity for the truthfulness or accuracy of information contained herein or for any errors or omissions in its content, regardless of the cause of such inaccuracy, error, or omission. Furthermore, Ashcroft, its affiliates, principals, employees, or agents accept no liability and disclaim all responsibility for the consequences of anyone acting, or refraining to act, in reliance on the information contained herein or for any decision based on it, or for any actual, consequential, special, incidental, or punitive damages to any person or entity for any matter relating to this communication even if advised of the possibility of such damages.


Ashcroft Capital
461 5th Ave
New York New York 

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