Lexington Square Apartments

Lexington Square Apartments
Independence, Missouri

Address: 13004 East Highway 40
Independence, MO. 64055

Year Built: 1968

Number of Units: 110

Unit Mix:

• 48 1BD/1BA
• 62 2BD/1BA

Structure:

• Exterior: Masonry and Brick.
• Roofs: Flat – Mansard composition shingle
• Parking Lot: Concrete
• Balconies: Wood framed   

The Lexington Square Apartments is part of a 3-property portfolio acquired by the fund, all of which are located in the Kansas City, Missouri MSA.  The 3-property portfolio, which totals 386 apartment units, includes the Lexington Square Apartments, the Rivermont Apartments, and the Mark IV Apartments. To understand the full potential of all three properties, it’s important to understand the strength of the Kansas City Metro market.

Kansas City Metro Rental Market

Being in a solid secondary metro area, the Kansas City MSA is the most populated metro in the state of Kansas, and the 29^th most populated metro in the United States. With its low crime rate, A-rated schools, Millennial aged populous, affordable living, and being the most geo-central location in the US, the greater Kansas City area has become one of the fastest growing job markets and an ideal spot for corporate headquarters. The metro’s location, lower cost of living, lower cost of doing business and educated work force are very attractive to companies and, subsequently, job seekers. Expanding industries in the metro include finance and insurance, engineering, life sciences, manufacturing, and information technology. Being selected for Google’s first location for Google Fiber Internet service, the area has also experienced a surge in tech start-ups. Kansas City is ranked 14^th in the country on the list of where tech companies are going, and ranked 30^th out of the Top 50 “Tech Talent Markets” in the US by CBRE Group.

As a result of continued strong leasing activity, the metro’s occupancy rate remained at a ten-year high of 95.4% for the second quarter in a row, and has remained within a few basis points of 95% each quarter for the past 2½ years. Based on the strong market drivers, the metro experienced year-over-year rental rate growth of 3.1%, which is slightly above the five-year annual average of 2.9% growth.

Workforce and low-end rental rates have doubled in the last couple of years, and still aren’t high enough to entice developers to build “affordable” multifamily housing. This creates a great opportunity in the affordable rental market that all the new amenity-rich Class A construction overlooks. The affordable renter sector is much larger in terms of population, yet is being overlooked in terms of new construction, which keeps demand high for older affordable units.

Lexington Square Apartments

Lexington Square Apartments is located in Independence, MO, part of the Kansas City metropolitan area and the fifth-largest city in the state of Missouri.

Based on the tight supply and demand of apartments in Independence, market conditions are very favorable. In the ten-year period beginning with Q3 2006, new additions to this submarket totaled only 240 units, amounting to an annualized inventory growth rate of 0.4%.  Over the same period, the metro growth rate has been 1.1%. As a result, rents have risen by a total of 4.3% over the last two years, and according to a REIS report, the average vacancy rates for the Independence submarket are the lowest since 1996 at just 1.9%, and finished 2016 at approximately 1.3%.

In addition to the strong economics of this region, Lexington Square is a property where an immediate boost in returns can be realized. Management already knows with a $3k per unit interior upgrade, rents can be increased $180 per month. With 110 units, that’s an additional $237k of net operating income per year. At an 8.6 cap rate, which the property was acquired at, that’s over $2 Million of increased value achieved by spending $330k on interior rehab. It’s difficult to imagine the magnitude of the refinance that can be done after completing that process. Of course any increase in valuation is in addition to the quarterly distributions of income from the property.

The 3-property portfolio was purchased off market on February 17, 2017. The selling group had some partnership issues and needed to turn some of their portfolio into cash. As a result, management worked directly with the sellers and negotiated prices that meet the fund’s return hurdle rate and are at a discount to prevailing market rates. Lexington Square Apartments was purchased for $3.96 Million.

Lexington Square exceeds our criteria for return. Initial cash on cash returns are projected at 14.3%, but after completing the refresh program and brining rents up to market levels, cash on cash returns are projected to increase to 25.6% with a 10 year IRR of 34.2%.