Lone Star Capital 2024 Annual Letter

As we reflect on 2024, it’s clear that this year has been a transformative chapter for Lone Star Capital. Together, we have navigated an ever-evolving market, embracing both challenges and opportunities to deliver exceptional results for our investors and partners. This progress would not have been possible without your trust and support, which continue to drive our mission forward.

The investment sales market and capital markets were volatile in 2024 to say the least. The 10-year US treasury yield started the year slightly below 4% then violently swung up and down to a peak of 4.7% in April. Then again violently vacillated up and down to a bottom of 3.6% in September, only to shoot up again into the mid 4s, coincidentally after the Fed cut their rate by 50 basis points. A volatile treasury market like this makes valuing real estate and subsequently transacting exceedingly difficult, since property valuations are generally predicated on the 10-year US treasury yield being the risk-free rate as well as the index rate for financing costs, which drive projected levered returns. 

Meanwhile, pricing for the more desirable assets (assets 30 years old or newer in strong locations) has gone up over 2024, meaning cap rates have steadily gone down over the course of the year. For multifamily properties that are 1980s vintage and older, there isn’t much of a market and price discovery hasn’t fully taken place. Safe to say, those deals haven’t appreciated in 2024 like the newer / nicer deals have. Focusing on the two largest markets in Texas (Dallas-Fort Worth and Houston), cap rates for more desirable assets, which are the deals that are actually trading since there are more buyers than sellers for these assets and therefore prices are acceptable to sellers, ended the year around 4.25% to 5.5% (cap rates are approximately 50 basis points lower in DFW versus Houston for like-for-like location/product). 

With fixed borrowing costs ranging from the high 5% to low 6% level, leverage is often negative (cap rate is lower than interest rate). This dynamic persists because buyers are looking beyond the current oversupplied market—where new apartment deliveries are at near-record highs, leading to flat or negative rent growth nationwide. Instead, buyers are optimistic about multifamily performance in the latter half of 2025, 2026, and 2027, when limited new supply is expected to drive a rebound in rent growth. The anticipated supply shortage is attributed to a slowdown in development starts over the past few years, driven by rising construction and debt costs, as well as reduced investor interest in development.

Operationally, multifamily has experienced similar challenges throughout 2024. As mentioned, the nation is oversupplied with apartments, which has led to an increase in vacancy rates and reduction in rents across the country. However, these headwinds are short-term; population growth and demand for affordable and middle income (workforce) housing continues to grow and the supply glut is on its way to being fully absorbed. 

At Lone Star Capital, we have focused much of the year on strengthening our operations to ensure we can ride out the storm and emerging on the other side where stronger net operating incomes and property values await alongside lower interest rates. We will cover all the operational updates in greater detail later.

With this letter, I’m excited to share an overview of our achievements, team developments, and vision for the future. Despite the complexities of the current market, we have remained steadfast in our focus on operational excellence and strategic growth.

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Acquisitions

This year marked several key milestones for Lone Star Capital as we expanded into new markets and strengthened our portfolio. While we continued to focus on Houston and Dallas-Fort Worth, we also made our first acquisition in San Antonio, which became a goal of ours towards the end of 2023. Overall, we acquired just over $190M (1,437 units) in multifamily properties in Texas in 2024, which puts our lifetime acquisition volume at $725M. 

Regency Grove (fka Aspire Apartments) – 335 units, 1986 vintage, San Antonio

Our first deal in San Antonio came with its fair share of challenges, as we acquired the property from GVA in a distressed situation. To lock in great long-term fixed-rate debt precisely when rates happened to fall lower earlier in 2024, we needed the seller to maintain 90%+ occupancy levels (a requirement for agency financing). For the seller to do this, they essentially removed all creditworthiness leasing requirements and halted all evictions to fill up the property to meet the 90%+ occupancy clause per our purchase and sale agreement. Unfortunately, this created more work for us upon takeover as we had to contend with serious crime elements, over 200 nonpaying tenants, and a soured local reputation. 

We quickly acted by hiring the right team, capable of handling a distressed turnaround situation. Additionally, we aggressively pursued local precincts to attract police officers to live onsite, park their patrol car visibly, and patrol the property daily in exchange for free rent. With seven courtesy police officers and a rockstar team, we were successfully able to mitigate all major crime as well as handle all the necessary evictions. Unfortunately, these evictions slashed occupancy down to below 50%. Regency Grove continues to lease at a very aggressive pace and is already over 70% leased. The property is on track to be stabilized at 90%+ occupancy with high quality, on time paying residents. Fortunately, the loss of revenue associated with the eviction / lease up turnaround is made up for in savings found in the renovation budget, so the investment largely remains on track to perform as expected. We were able to achieve these savings via performing certain projects and ongoing repairs in-house, adjusting the scope of the interior renovations, and utilizing our conservatively underwritten contingency. It is unrealistic to assume a deal will always go exactly to plan which is why it is critical to underwrite conservatively with room for error. 

These efforts come amid significant challenges for multifamily fundamentals in San Antonio, as both Austin and San Antonio lead the major Texas metros—and even the nation—in new supply as a percentage of existing inventory. This influx has temporarily impacted occupancy rates and rent levels in San Antonio, but a rebound is likely over the next few years

Another interesting point to note about Regency Grove is that it was our first 506(c) offering, which means we were allowed to publicly advertise the investment opportunity. Normally our deals are 506(b) offerings which are very similar except you can’t publicly advertise but the positive is you don’t need to do 3^rd party verification of all your investors’ accreditation status. We generally feel 506b offerings are a better fit for us since most of our investors come from referrals rather than public advertisement. Moving forward, we foresee continuing to do mostly 506b offerings, unless a big partner joins us and necessitates public solicitation. 

Grand Riviera – 206 units, 1972 vintage, Dallas 

Grand Riviera marks our second acquisition in Dallas, strategically located in the robust workforce hub of Irving, between DFW Airport and the major business district of Las Colinas. This acquisition presented a compelling opportunity to purchase a Class C property in a high-quality area at an attractive price. The favorable pricing was largely due to the property's 1972 vintage, at a time when market interest in older assets was minimal. This resulted in limited bidding competition, allowing us to secure the deal.

However, raising equity for the investment proved challenging, as many investors remain hesitant about properties built before the 1980s or even the 1990s. This hesitancy stems from recent poor outcomes associated with 2021–2022 investments in lower-quality 1970s and 1980s properties, characterized by poor locations or overly aggressive business plans. As a result, investors often perceive similar risks with 2024 acquisitions of older properties, despite differences in quality and strategy. However, the most critical aspect of any investment isn’t simply what you buy but the price you pay for it. 

This principle parallels a common misconception among investors regarding floating rate debt. Many were burned by borrowing at low floating rates in the past, only to face significant challenges as rates climbed. This experience has led some to believe that borrowing floating rate debt today will result in similar difficulties. However, this outcome is highly unlikely, as current floating rates are already high and are projected to decline in the future.

Unfortunately, the hardest part of making investment decisions often lies in overcoming our own psychological barriers. While the logic of 'buy low, sell high' is universally understood, our instincts frequently drive us to do the opposite—buy high and sell low.

Three Houston Acquisitions from Cortland

·      Preserve at Copperleaf (fka Cortland Copperleaf) – 240 units, 2003 vintage

·      Lakes at 610 (fka Cortland Med Center) – 344 units, 2003 vintage

·      Vizcaya Apartments (fka Cortland Vizcaya) – 312 units, 2004 vintage

In Houston, we successfully acquired three properties—Cortland Copperleaf, Cortland Med Center, and Cortland Vizcaya. Each of these properties benefits from property tax exemptions through affordable housing partnerships, providing significant operational and financial advantages. These acquisitions highlight our ability to handle complex transactions and implement creative solutions that maximize investor value.

Across these acquisitions, we prioritized high-quality assets with solid fundamentals in markets with robust long-term growth potential. The first acquisition, Cortland Copperleaf (which became my temporary home – more on that later) was especially unique. Rather than a standard real estate purchase, the property was held in a single-asset REIT structure by Cortland and their equity partner, GIC (Singapore's sovereign wealth fund), for tax purposes. This REIT structure limited the pool of potential buyers, allowing us to secure the property at an excellent price. After acquiring the REIT entity, we unwound the REIT structure the next day, converting our ownership to fee simple.

This intricate transaction was made possible thanks to the expertise of my co-founder, Kent Piotrkowski, whose tax law background was instrumental in navigating the complexities. Our success with Copperleaf opened the door to a second REIT acquisition, Cortland Med Center, where we again leveraged a property tax exemption structure. Although other buyers offered higher bids, Cortland entrusted us with the deal due to our proven ability to perform on the Copperleaf acquisition (after other buyers tried to execute on the REIT acquisition and failed). This is a testament to the value of finding unique opportunities and building strong, trusted relationships.

Lastly, we acquired Cortland Vizcaya through a more traditional fee simple purchase (not as a REIT). While this deal did not involve a REIT structure, our track record on the prior acquisitions allowed us to stand out and secure the property. Together, these acquisitions underscore the importance of creativity, expertise, and reputation in achieving success.

In total, our acquisitions this year added significant scale to our portfolio, and we’re confident in the future performance of these properties.

Operational Excellence and Team Growth

Operational improvements and team expansion was our focus in 2024. Our commitment to strengthening our in-house capabilities has allowed us to better execute on our business plans and enhance property performance.

In May, Kent and I decided that I would take on the role of CEO, assuming responsibility for overseeing day-to-day operations, including acquisitions, operations, investor relations, and marketing. Before this transition, Kent was managing a wide range of tasks, from legal and tax matters to property, construction, and asset management. With this shift, Kent is now able to focus entirely on our specialized strategies and projects, such as REIT acquisitions, 1031 structuring, and affordable housing partnerships. 

With my new responsibilities, I made the move down to Houston (Preserve at Copperleaf to be exact) to focus on improving our property management division. This decision was a catalyst for transformative improvements across our portfolio. By working closely with our on-site teams, we achieved significant increases in net operating income at many properties and were able to raise monthly cash flow distributions to our investors. Symbolically, we changed the name of our property management company, Radiance Living, to Lone Star Communities to more fully show the true vertical integration we are striving for. Moving forward, we see our private equity and management businesses as one with the interchangeable names of Lone Star Capital / Lone Star Communities.

Unfortunately, we realized that the layers of bureaucracy, including regional property managers, construction managers, and vice presidents of operations, needed to be streamlined. While it was a difficult decision, we made the tough choice to let go of key staff at the top of the property management structure in order to rebuild a stronger team.

Through flattening the organization, our asset management team and I were able to be much more hands on, allowing us to identify and remedy property issues right away. However, I quickly realized that I couldn’t embark on this journey alone. I needed someone with experience, plenty of organizational skills, accounting experience, and someone who loves me unconditionally: my mom.

This year, we welcomed Inna Beardsley, my mother, as Lone Star Capital’s Chief Operating Officer. Inna has brought decades of operational expertise to our team, along with several key personnel players from her existing management team, including Melissa Walraven, who now oversees property management. Prior to joining Lone Star, Inna focused on managing her personal portfolio of 300 multifamily units which Lone Star helped her purchase back in 2019. 

Together, Inna and I overhauled our accounting department and processes, and these changes will continue to pay off in 2025. We’ve already seen improvements in turnaround times for monthly financial statements, more organized and accurate numbers, and streamlined payment processing. These enhancements have enabled us to send out our monthly investor reports by the 15th of the following month, rather than waiting until the 30th. This smoother process has also allowed us to issue monthly distributions on the 15th. Inspired by these accounting improvements, our asset management team and I revamped our investor reporting, including monthly update emails and quarterly reports, to be more efficient while delivering even more valuable information.

Inna and I also introduced a new onsite property team bonus program which incentivizes the entire team to maximize the number of PUUs (paid up units) – occupied units with no delinquent rent balances at the end of the month. In essence, our goal is to have the highest number of high-quality tenants who consistently pay their rent every month and choose to stay with us (renew their lease) because they value the product and service we provide. While most property management companies stick with traditional (read: broken) bonus programs, we’ve opted for innovation. Early data from our new PUU team bonus program has shown tremendous promise after four months of implementation.

In addition to the team bonus program, I’ve become very passionate about the integration of Culture Index in our HR processes. Culture Index is a leading hiring and promoting consulting firm which utilizes a 10-minute personality test to glean incredible insights into applicants as well as our existing team. Our entire team was won over by the efficacy of these tests and we have seen a boost in our hiring success, something that has become critical as we have scaled to over 100 employees. We will simply not hire someone without seeing their Culture Index results first. If you’re interested, I encourage you to reach out so we can send you our testing link and we can share your results with you.

Here are some other exciting projects we have been successful with:

·      Brought physical acquisition due diligence (lease file audit, unit walks, exterior inspections) in-house.

·      Created a takeover squad which includes key corporate management personnel to ensure a smoother acquisition takeover.

·      Hannah Wyatt brought payroll in-house and built an HR department with a brand-new employee handbook. These efforts earned her a promotion to Director of HR.

·      Started an internal training initiative with certifications called Lone Star University which will provide means for our employees to follow best practices to be successful as well as grow with the company. 

·      Overhauled our utility invoice processing and billback system. 

Marketing and Engagement

This year, we expanded our outreach efforts and continued to build strong relationships with our investors and partners. The Capital Spotlight podcast transitioned into the Lone Star Capital Podcast, co-hosted by Craig McGrouther and me. This rebrand reflects our commitment to providing even greater insights into the market, our operations, and the personal stories that drive our success. 

Additionally, we hosted our fourth annual LSC Summit at the One World Trade Center, which brought together around 100 of the brightest minds and our most valued partners in the industry. The event was another resounding success, offering unparalleled networking opportunities and fostering high-quality relationships.

Regarding other live events, we tried out many conferences in 2024 and were on the road a lot. In 2025, we plan to be more selective with our conference attendance and more strategic by hosting intimate dinners and get-togethers with our investors throughout the country – please let us know if you’d like us to take you out! Also, Craig has the golf bug again and is playing to a 3 handicap so reach out if you’d like him to take you out to your favorite course.

My books, The Definitive Guide to Underwriting Multifamily Acquisitions and Structuring and Raising Debt & Equity for Real Estate, have continued to sell well (over 30,000 copies lifetime) and attract new investors to our platform. 

Looking Ahead to 2025

As we turn our focus to 2025, we are excited about the opportunities ahead. Our acquisition goal is to acquire $250 million in multifamily properties across Dallas-Fort Worth, Houston, and San Antonio. In doing so, we are committed to maintaining disciplined growth by focusing on a maximum of six deals per year, each with a minimum deal size of $40M so we can focus on quality over quantity. This approach ensures we continue to scale at a sustainable pace while delivering on our projected returns and providing an exceptional investor experience.

Additionally, we remain focused on optimizing operations and unlocking value across our existing portfolio. By continuing to refine our processes and leverage the strength of our team, we aim to increase monthly distributions to investors where possible and continue to increase the value of our investments. If you have yet to invest with us or would like to share our opportunities with a friend, please use this link to get in touch: https://www.lscre.com/contact

In closing, I want to express my deepest gratitude to our investors, partners, and team for your unwavering support and belief in Lone Star Capital. Together, we are building something truly special, and I am excited about the path ahead.

Warm regards,

Rob Beardsley

CEO, Lone Star Capital