As requested, a rare peek inside 4 of our projects

Dear Investors,

Well, you’re not alone. Many investors have told us that they would love to know how our other projects are doing.

So for the first time ever, Grocapitus is releasing the May 2022 investor updates for a large number of our projects. These updates are exactly the same as the updates received by the actual investors in the project. We did remove the financial section, for confidentiality reasons. We also removed the Market analysis section, to make this email a quicker read.

This email contains four kinds of projects that Grocapitus builds or manages:

1. Value Add Project – where we buy an older building (usually built in the 70s or 80s) and upgrade it, and hold for cash flow and appreciation. We are sharing the May update for Country Place Apartments, our Killeen, TX property, which is early in its upgrade cycle. We are also sharing the final update for our Equinox on Prince Tucson project, which will be sold next month, with record breaking returns for our investors. Finally, we are sharing the final update for our Fairview project, which was sold this month for massive profits.




2. Super Value Add Project – Grocapitus is perhaps the only syndicator in the U.S. to have completed two Super Value Add projects. A Super Value Add project is a regular value added project with one extra component – we also build additional units, to turbocharge the project’s profit. Storage Depot in Tennessee, and Park Canyon in Dalton, GA, are incredibly successful Super Value Add projects, with 40% IRR now projected. At Park Canyon, we are now building even more units. Storage Depot will be sold next month.




3. New construction project – Our development division is building over a dozen projects at a time. In this update we present three of those. Mill Race in Provo is in late development stage and slated for delivery at the end of this year. The team projects that our rents will be massively higher than projected. Nova RTP has completed Phase 1 construction and is delivering Phase 2 and Phase 3 later this year, with units selling roughly 25 to 30% above proforma. And finally, the Grid has completed construction/lease up/refinance and is distributing double digit cash flow.




4. Duplex/Triplex/Fourplex project – Our development division is building many of these 100% ownership projects in Texas, Florida and Idaho. In this update, we present our Idaho Falls Fourplex project. Phase 1 is delivering next month, with Phase 2 delivering in August.

As you can see below, all of these projects are going great. To answer the most common question that our investors ask, The GRO team does not get saturated because we use technology automation and outsourcing teams to boost our output, productivity and project management capabilities. This allows scaling without impact on project quality.

Check them out !!

Occupancy at the end of April was 94.16% with $2,705 delinquent.

Currently in May, we are 94.89% occupied with $3,640 delinquent. We do have one eviction filing for this month but the management staff files all evictions quickly to minimize our financial impact. Our occupancy did dip at the beginning of May as move outs were processed but Heather has done an excellent job at getting them turned, and reoccupied. This project continues to tout high occupancy even after the market rent increase we implemented on April 1st. We currently have higher rents than our comps but have no issues with leasing quickly due to our close proximity to the base, and having a nicer, newer property than any of the surrounding properties.

The exterior work has begun. The carpentry repairs have been completed and the crews from 375 Renovations are beginning paint prep. We will start painting the community soon.

One of the big eyesores on the property has been the leasing office. As discussed in the webinar, we have boxed out the roman pillars in the front, and are working on a new sign design with our new color palette. Just this week, we were able to remove the shrubs in the front which really opened up the front. There is much more work to do here, but we can already feel the changes and everyone loves to see the transformation taking place.

Based on early math, we are expecting the equity multiplier to be between 2.75x – 2.95x, meaning that if you invested $100K in the project you can expect somewhere between $275K-$295K of monies back which include the initial investment.

Occupancy & Collections

We are currently at occupancy 91.07%, we are working with the buyer to deliver them vacant units per their request. We have only 3 units to lease which are rent ready and in the leasing process. Our collections for April were approximately $116K.

Interior Renovations

There are no more interior renovations in process. All the available units are being turned to their exiting levels.

Exterior Renovations

There are no exterior renovations in process.

At this point, the returns look to be as follows:

Equity Multiple 2.2x in under 2 years! (vs. the 5-year plan of 1.92x)
Internal Rate of Return (IRR) above 60% (vs. the plan of 16%)
Average Annual Return (AAR) above 70% (vs. the plan of 18.3%)

The final returns may be higher!

Sale

The buyer anticipates closing mid to late June. The contract sale price is $17.8m, up $8.825m from the $8.875m purchase price. Taking out the $1.4m in construction costs and the costs of the sale, the estimated net appreciation to the limited partner investors is 120.6%. Combining this with the 17.3% estimated cash flow through the sale, the total return is 137.9%, averaging 60.5% over the 2.3 year holding period. The estimated IRR is 48.6%.

Occupancy at the end of April was 98.89% with 0 delinquency.

Currently in May, we are 97.2% occupied with 0 delinquency. Our occupancy did dip at the beginning of May as move outs were processed but Glenda and Beverly have done an excellent job at getting them turned, and reoccupied. This project continues to tout high occupancy even after the market rent increase we implemented on April 1st. We will likely do another market rent increase sometime this summer if occupancy remains high.

Now for the good news. As it stands right now, Glenda and team are able to get the fully renovated rent price even without granite or cabinet fronts. We suspect this will not always be the case as many competing properties are beginning renovations of their outdated units, but for now it puts us in a great place. We will be able to get cheaper material costs while still meeting the expected fully renovated rents.

Currently, our most efficient plan is to place 1 building over the existing tennis court footprint (a flat surface), and utilize the existing grade as a potential “step-down.” This creates a building with 3 stories on the uphill side, and 4 stories downhill. The added benefit of this, is that we can move the dirt on the downhill side of the tennis court towards the south, creating additional dirt to support the foundation of another building next door. While the details are still to be determined, we currently feel that the most cost effective building layout will result in 36-42 units which will ultimately produce a large boost to the NOI of the property.

We have already designed floor plans and unit layouts, so once we lock in the building(s) layout, we will move directly to permitting.

Additional parking will need to be developed in order to meet the City of Dalton parking requirements. We plan to dig out an area behind an existing building to create this parking area. As an added benefit, this dirt is already planned to be used for the foundation of the other buildings, so there is limited added excavation cost to create this parking lot. Additionally, we have executed a parking study and plan to come out to restripe the parking lines which will allow us to add to our current parking count with simply the cost of new paint.

• Framing of all 5 floors is completed
• Windows have been installed
• Plumbing and electrical are almost complete
• We expect our 4-way inspection to occur on the 24th of May, which is a big Milestone
• The gypcrete process has started and we expect drywall to begin on July 1st which will give us a lot of time before any cold weather hits us again
• We continue to store a lot of materials on-site to help with any potential material delays

We still expect the project to be completed and leasing to begin in early Q1 of 2023. We have been fortunate that major supply chain or labor issues have not affected the project yet, which is great news given these issues with many other projects.

Market / Sub-Market

The Utah market remains incredibly strong, and demand for the sub market in particular remains high. A project just north of this site recently increased rents by $200 across the board and it had no effect on their occupancy. We are not concerned at all about achieving pro forma rents or higher once lease-up begins. There is also significant redevelopment activity in this particular opportunity zone, which we believe will help the project since all of those projects are still in pre-development but will have to achieve higher rents once delivered due to their higher cost structure.

Phase I Land Sale

We also still anticipate a sale of the remaining land to the Phase II entity to occur this summer, which will result in a distribution of profits from such sale to investors. Looking forward, investors should anticipate three distribution events to occur: (i) a distribution of excess land sale profits in August/September, (ii) a distribution of debt refinance proceeds in 2H of 2023 as permanent debt is placed on the project, and (iii) quarterly distributions of cash flow from rents to begin once the project leases up, which are also expected to begin in 2H of 2023.

Debt Markets

We are all watching very volatile markets, and expectations that the Fed will continue to increase rates at their June and July meetings seem to be incorporated into the markets already. Our pro forma assumptions for both cap rate on a terminal sale and permanent refinancing left room for rates to rise into the mid-5% cap rate range, which we feel is adequate right now. We will continue to monitor as the rate markets shift. Our construction debt has a “mini-perm” feature that allows us flexibility on the timing of permanent financing which we believe will work to our benefit as the project is completed.

We’re currently employing multiple sales strategies to attract investor-buyers as well as homeowners that want to settle near the desirable RTP area. Except for a few units that we’re marketing to investors, all units that are expected to be completed in Q2 and Q3 are already under contract – which totals 20 units under contract. At the upcoming webinar, we will show you a table of the 46 townhomes and contract prices for those under contract, along with the status of construction for each townhome, and an estimated timeline for each. We will also be able to project our sales/cash flow and timeline to return capital to investors.

Given the volatility in the construction market, price fluctuations continue as our subcontractors and materials face supply chain challenges. For example, the current shortages in TPO (roofing material) and ductwork have set some buildings behind – so recently Abraham has personally been traveling to neighboring states to lock material supply contracts with warehouses wherever he can find them. This has been an everyday scenario for months for various materials, but we continue to work hard to adjust the sequencing of construction trades in a way that optimizes our schedule and pulls out all of the stops to overcome these obstacles.

It is an interesting time in the construction industry for sure. We hope that the federal reserve’s decision to increase the interest rates will have a calming effect on the inflation we’re currently experiencing in the construction market, and that the supply chain settles down soon.

We are very pleased to see the final product coming to market and the outstanding response we have from the market.

The Grid has continued to outperform expectations in almost every aspect. The property is currently at 97.78% occupancy and has enjoyed tremendous rent growth as leases are turning. Our most recent lease trade outs are averaging a rent increase of 15.6%!

Recently, we installed an electronic package delivery system. This has improved the resident experience and helped relieve some workload from our office staff. It has been a huge hit so far and both our team and the residents are excited about it!

Buffalo as a whole has been performing well. Market occupancy remains very tight and the city is seeing an increase in population. This should lead to continued rent growth in the near future!

Development Update:

Exterior

Power, gas, and internet lines have all been laid and power will be activated in units this week as transformers are set. With the utility trenches backfilled, we are now working on the curb, gutter, and road. We expect the sitework to be completed by the end of the month. At this point in time, landscaping will come in to begin to lay the sod, rocks, native plants, and other items around the Phase 1 buildings. As these landscape items are installed, we will move construction staging infrastructure and all construction parking to the southern portion of the site. Per the city guidance, this will allow us to provide the tenants with the necessary safety in order to receive the Certificate of Occupancy.

The courtyard amenities will be completed at a later date as this area falls in Phases 3 & 4.

Interiors

Phase 1:

Once power is connected to the site, we can begin the final activities on the first buildings. This includes laying the carpet, installing light fixtures, and cleaning. We have had the carpet and lights ready for some time, however, laying carpet in an unconditioned space can result in expansion and contraction as the temperature fluctuates which can shorten the lifespan of the carpet. We expect the first building to be picture ready by Friday, May 27th.

Phase 2:

Phase 2 is trending towards an on-time delivery in August. The buildings in this phase all have completed city inspection for the HVAC, plumbing, and wiring. The Drywall is up and the buildings have all completed the drywall inspection. Over the next couple of months, the interiors will progress to trimming, painting, flooring, cabinets installation, and wrapping up with the installation of plumbing and electrical fixtures.

Phases 3 & 4:

Phases 3 & 4 have gotten off to a strong start with HVAC, plumbing, and wiring all tracking ahead of schedule. Our goal is to continue this progress to receive internal inspection approval and enable us to insulate the walls and put up drywall. If we can continue to trend ahead of schedule on these items, it will set us up well for an on-time delivery.

Leasing Update:

Leasing has officially started and we are currently taking applications. As the site continues to progress, we’ll be able to take videos and pictures of the finished product which will help improve leads. Additionally, we’ll be able to begin actively touring the property which will help increase leasing velocity. We have weekly leasing meetings with the property management company in order to monitor leasing activity and provide the optimal balance of lease up velocity and rental rates. Rents will be well above the $1,545 that was included in our buyer’s pro forma.

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The Grocapitus Team
Neal and Anna