JANUARY 19, 2023 – SAN FRANCISCO
Hamilton Zanze entered its 21st year in business in 2022 and what a year it was – with new leadership roles and team expansion, the launch of a discretionary fund, robust acquisition activity, strong portfolio performance, and the first steps toward a new investment strategy. Here’s a recap of some of our biggest milestones in 2022 and a look at what lies ahead in 2023.
In early-2022, we announced a series of important leadership moves, positioning us for our next stage of growth and planning for succession and retention of key employees. After leading the firm’s investment efforts for more than a decade, President Kurt Houtkooper assumed the title of CEO from Founding Partner Mark Hamilton, who remains highly engaged in HZ’s senior ranks. We also welcomed six new shareholding partners from within our leadership ranks and promoted David Nelson to Chief Investment Officer. Our people have always been HZ’s biggest strength and we see continued growth with this team at the helm.
From a deal standpoint, HZ had another busy and successful year in 2022. We purchased 10 apartment properties (in five states) for $800 million, sold 11 others for $825 million, and refinanced four properties generating approximately $75 million in proceeds for our partners and ongoing property operations. On the capital side, we raised $441 million in equity for HZ-sponsored transactions. This would rank us in the top 10 (#7) in DST/TIC market equity, according to data reported by Mountain Dell Consulting for November 2022.
While many investment firms spent 2022 on the sidelines, concerned about their floating-rate debt and asset viability, HZ remained active in its pursuit of new properties. Our leadership team continued to take a thoughtful, conservative and selective approach with transaction activity. We recapitalized two properties, moving from institutional partners to private capital. We purchased assets with loan assumptions, taking advantage of cap rate expansion while also reaping the benefit of low interest rates. We continued to focus on growing markets with strong job expansion, such as Nashville and Colorado Springs.
Our portfolio remains healthy and financially resilient, despite a volatile market. While we have seen historic rent growth in the last 18 months, that growth is now moderating. We believe there is still significant loss to lease that can be harvested on our rent rolls, which will allow for Net Operating Income (NOI) growth within the portfolio, albeit at a more moderate, pre-pandemic rate. Our same-store revenues grew 8% in 2022, with NOIs growing the same amount. In 2023, we are budgeting 5% revenue growth, 8% operating expense growth and approximately 3.5% NOI growth.
One industry metric to determine the health of the portfolio is Debt Service Coverage Ratio (DSCR). Our portfolio DSCR is 2.58x. A DSCR greater than 1.0x means a borrower can service the debt. When we originate a loan, we are typically 1.25x DSCR. So a DSCR of 2.58x means we have seen significant net operating income growth in our portfolio and we are in a very healthy position compared to our debt (on a portfolio basis).
Another important milestone in 2022 was the expansion of HZ’s investment offerings to include our first discretionary general partner fund (HZ GP Fund I), allowing our acquisition team to invest in unique deal opportunities with more agility. In a competitive acquisition environment, this fund further differentiates HZ by providing surety of capital, which is highly valued by both sellers and brokers in the disposition process, and also helps position us for better deal terms and pricing.
The $52 million fund has invested into three transactions and is currently 33% deployed. We anticipate four to eight additional acquisitions in 2023 depending on market conditions. The uniqueness of this structure gives fund investors the opportunity to augment their returns through shared fees paid by joint venture partners, including acquisition, asset management and promoted interest. To date, we have worked on joint ventures with high-quality institutional partners such as Davidson Kempner Capital Management, Investcorp and DCA Partners.
While the HZ GP Fund I offering is closed for new investment, we will likely be back in the market raising HZ GP Fund II in 2024.
The next evolution of Hamilton Zanze will move us further into the fund world. We will be growing a Perpetual Investment Fund that will continue to purchase and manage real estate investments throughout the country. This fund will afford investors better access to a diversified real estate portfolio, more consistent distributions, improved liquidity, and simpler transferability of ownership shares. We are poised to officially launch HZ’s new Perpetual Fund in 2023.
Nonetheless, we will also continue our single-asset syndication business. We will continue to acquire assets on a one-off basis through joint ventures, separate accounts, and Delaware Statutory Trusts (DSTs). These DSTs give us the ability to continue to accommodate 1031 exchange investors into individual assets with an additional option to convert their investment into the Perpetual Fund.
To support these initiatives, we have invested in people who embrace HZ’s culture and vision, including: Peter Casey, Managing Director of Capital Markets, providing expertise in institutional capital and discretionary funds; Ian O’Connor, Director of Acquisitions, focusing on the strategic deployment of fund capital; Bob Shuttle, Senior Vice President of Construction and Development, working to increase density and development opportunities within HZ’s existing portfolio of assets; and David Cervantes, Senior Director of Marketing and Communications, to oversee our brand development, investor experience, and go-to-market strategies.
Over the last year, HZ made significant strides in our Environmental, Social and Governance (ESG) program, which we will roll out in 2023.
To help drive our environmental efforts, we are working with Measurabl, the world’s most widely adopted ESG management software for commercial real estate. The platform allows us to measure and benchmark property-level energy efficiency data as we continue investing in sustainability for properties fitting our value-add strategy. Energy- and water-efficiency improvements can reduce operating expenses, positively impacting NOI, helping lower resident utility costs, and reducing vacancy loss and turnover expenses.
In 2022, we convened an intra-company ESG Council with our sister companies and engaged The Cee Suite, a diversity, equity and inclusion and talent management consultancy, which completed an assessment of our company and identified strengths and areas of opportunity toward achieving our vision of building inclusive, people-centered practices.
Our diversified portfolio and conservative approach to the capital stack have helped us weather market volatility and regional risk factors. Moreover, most of the single-asset loans in our portfolio have fixed-rate 10-year financing. Thus, those loans are not subject to interest rate volatility. Also, we have proactively replaced debt that is maturing and have limited exposure to near term-loan maturities.
We anticipate continued strain in the real estate investment world in 2023, likely impacting some apartment owners, particularly within the Class A and Class C asset profiles in certain regions. Whether properties are considered “distressed” or not, we are well positioned to take advantage of this, with ample capital ready to deploy as attractive investment opportunities arise via our extensive industry relationships. We are actively pursuing value-add deals, including 1990s- and early-2000s era assets where we can utilize our property management and construction management arms to build value through expense reduction, green initiatives and interior improvements to grow NOI.
We look forward to an exciting year ahead for our team, our investment partners and the industry at large.
ABOUT HAMILTON ZANZE
Hamilton Zanze (HZ) is a private, San Francisco-based real estate investment company that owns and operates apartment communities. Since its founding in 2001, Hamilton Zanze has acquired over $5.9 billion in multifamily assets primarily in the Western, Southwestern, and Eastern U.S. The company currently owns and operates 132 properties (22,035 units) across 17 states and 30 markets. For additional information, visit www.hamiltonzanze.com.