Redevelopment vs. Investment
PMGÕs strategy is to find and acquire multifamily properties in our target markets that are in need of renovation and re-stabilization, a process in which the property and the tenant base of the property can be upgraded to improve the value of the property itself. The value of a multifamily property is a multiple of the Net Operating Income (“NOI”) of the property. A poorly performing multifamily property has low NOI and will trade at a low multiple of NOI when it sells. The same property, renovated and well managed, will have substantially higher NOI and will trade at a higher multiple of this NOI, creating a form of value compounding that can dramatically affect the value of the property. PMG’s strategy is based on five key ideas: The Redevelopment Concept™, The Opportunity Lifecycle™, The Phoenix Project Archetypes™, Value Creation Levers™, and The Redevelopment Timeline™:
The Redevelopment Concept Summary™
PMG does not create value through traditional investment, we do so through a systematic campaign of redevelopment of the multifamily project. Traditional investment relies principally on the passage of time and improvement of the local market to create appreciation in the property. Redevelopment is a form of “forced appreciation” where the property is brought to current market conditions and, as a direct result, is more valuable. By purchasing multifamily properties in improving markets PMG does get direct benefit from increasing values over time, but the core of our value creation is a direct result of a strategy of redevelopment.
The Opportunity Lifecycle™
PMG’s process of creating value in our multifamily properties is really just implementation of a strategy that reverses The Death Spiral™ that engulfs a poorly managed multifamily project. (See The Phoenix Opportunity Lifecycle A™ figure below). The decline in value of a multifamily property begins when the property enters The Indifference Zone™. In this phase, the property is being ignored or poorly managed by either the owner or the management company or often both. As indifference leads to mismanagement, the property enters The Neglect Zone™. In this phase, poor tenant screening and poor maintenance of the property lead to declining cash flow and a gradual transition to less desirable tenants that drive off the good tenants and attract a growing stream of weaker tenants. By this time the occupancy of the property is falling from 90%+ to the eighties or even seventies or less, dramatically reducing cash flow and restricting the owner’s capacity to keep up needed maintenance on the property. By this time the cycle of lower occupancy, weaker tenants, reduced cash flow, and poor maintenance becomes self-reinforcing. The property has now entered The Death Spiral™.
The Phoenix Project Archetypes™
PMG purchases multifamily properties of three primary archetypes, depending on where in the course of the decline of the project we become involved. As noted in The Phoenix Project Archetypes™ diagram below, we define these three project archetypes as Momentum Projects™, Value Added Projects™, and Turnaround Projects™.
In The Opportunity Lifecycle B™ diagram to the right, these three project archetypes have been superimposed onto the Phoenix Opportunity Lifecycle™.
The Value Creation Levers™
To reverse this death spiral, we employ a series of improvements that follow the concept of Value Creation Levers™. (See The Value Creation Levers™ diagram below.) At its core, the Value Creation Levers™ concept is a reversal of the elements that led to the Death Spiral™. The process of creating value begins with aggressive improvements to the property itself, which paves the way for a campaign to increase occupancy and to increase the average rents paid by current and new tenants. This renewed emphasis on the proper tenant base and addressing deferred maintenance leads to a reduction in the operating costs of the building, both in an absolute sense and as a percentage of revenues collected. Over a period of two to three years the improved Net Operating Income (NOI) of the project not only contributes to achievement of targeted cash flow goals, but the now well maintained and well managed property is worth a higher multiple of a now higher NOI, substantially increasing the value of the property.
The Redevelopment Timeline™
With the Value Creation Levers™ concept in mind, once PMG acquires a multifamily asset we immediately begin a three stage redevelopment of the project during the phase of the Opportunity Lifecycle™ we call The Recovery Zone™. (See The Redevelopment Timeline™ below.) This collection of three overlapping stages is divided into a period of emphasis first on the physical condition of the property (the Asset phase), next on proper business management of the property (the Business phase), and finally on the creation, improvement, and retention of the tenant community that resides in the project (the Community phase). Our goal is to produce a well-managed, well maintained, high occupancy multifamily property with market-leading rents and a reputation that leads to a continuous waiting list of tenants seeking an opportunity to live in the property.