Investment strategy

What we buy

Existing apartment communities of 150 to 350 units, built between 1980 and 2006, in Greenville and Columbia, South Carolina, and Charlotte, North Carolina. These are properties occupied by working households rather than newly built units at the top of the market.

Communities of this size support a full-time on-site management team. They are also generally smaller than the transactions large institutional funds pursue, which means fewer competing bidders.

Why these markets

Rent growth tends to follow employment growth, with a lag of roughly eighteen months. We therefore review employment data before property data. A market qualifies when payroll growth has been positive for three consecutive years, when the number of new units being permitted is small relative to existing supply, and when the median renter can afford the rent we intend to charge.

We do not buy outside these three markets. Operating close to where we live allows us to inspect properties in person and to know the submarkets in detail.

How the return is generated

A property produces a return in four ways, and a business plan is expected to use all four rather than depend on any single one:

• Rental income. Cash collected from residents, distributed quarterly after expenses, debt service and reserves.
• Tax depreciation. A cost segregation study allows depreciation to be taken earlier in the hold, which reduces the taxable income reported on an investor's K-1.
• Increased property value. Apartment buildings are valued on net operating income. Raising collected rent or reducing operating cost increases the value of the asset directly.
• Loan amortisation. Each monthly payment reduces the loan balance, which increases owners' equity over the hold period.

How a property is evaluated

Screening begins at the market level. If a submarket does not meet the employment and supply conditions above, the property is not modelled regardless of price.

Properties that pass are then underwritten from the rent roll, the trailing twelve months of operating statements, and a renovation budget priced by the contractor who would carry out the work. Rent assumptions are limited to what comparable renovated units within two miles are achieving today.

Each model is then re-run under three adverse scenarios: rents that do not grow, a higher capitalisation rate at sale, and a significant increase in insurance cost. A property is only pursued if it remains viable in all three.

How acquisitions are financed

Debt is fixed-rate, at no more than 75% of the purchase price, with a term that extends beyond the planned hold period. Twelve months of operating reserves are funded at closing out of the raise rather than from future cash flow.

The purpose of both constraints is the same: to avoid being forced to sell or to refinance at a time not of our choosing.

Holding period and exit

Five to seven years is the planned hold. The asset is sold when the business plan is complete and market pricing supports it. A sale may occur earlier if pricing exceeds the value underwritten at acquisition, or later if selling on schedule would materially reduce investor proceeds.

Principal risks

The following cannot be eliminated, only managed. They are described in full in the offering documents for any specific investment.

• Interest rates. Fixed-rate debt protects the hold, but a higher capitalisation rate at sale still reduces the sale price.
• Insurance and operating costs. Premiums in the Southeast have risen sharply and can exceed underwritten assumptions.
• New supply. A large delivery nearby can soften rents for twelve to eighteen months.
• Renovation cost. Labour and materials pricing can move faster than a budget, which is why contingency is funded at closing.
• Employment conditions. A regional downturn affects occupancy and collections.
• Sponsor experience. Mallard Legacy Partners has not yet completed an acquisition. Investors are relying on the judgement of a first-time sponsor, and should weigh that accordingly.