WASHINGTON, D.C. – (RealEstateRama) — Why do some affordable housing properties perform better than others? What characteristics are associated with stronger-performing and weaker-performing projects? HDC’s Deep Dive project aims to shed light on those questions, through an analysis of financial data from 142 affordable housing properties across Oregon.
The Deep Dive project grew out of HDC’s work on Sustaining Portfolio Strategies (SPS)—a three-year grant with Meyer Memorial Trust, through which HDC is assisting 19 Oregon affordable housing sponsors with creating and implementing portfolio sustainability plans. Since HDC was already collecting SPS participants’ portfolio financial data, we thought it would be cool to do some further analysis to benefit the whole industry. So, we secured permission from the first SPS cohort of 10 organizations to anonymize and aggregate their portfolio financial data, analyze it, and share our findings. Chase Bank provided funds to kick-start the study.
HDC’s asset management team will present the initial study findings this week, April 19, at Oregon Opportunity Network’s spring 2016 Industry Support Conference. Meantime, here’s a quick overview of the study and a sneak peek at what we found.
The data. We looked at data for 142 properties, comprising 5,967 units. The properties were diverse in size (less than 10 units to more than 100), age (three years to more than 50 years old) and geography (located in urban and rural communities throughout Oregon). For each property we looked at two to three years of financial data, as well as building and construction information, compliance requirements, special-needs set-asides and affordability restrictions.
The analysis. Our analysis started with dividing the properties into “OK” properties and underperformers. Then we looked for property factors that correlated with stronger, or weaker, financial performance. (While these correlating factors don’t tell us why properties perform well or poorly, they will help guide further investigation into the causes of underperformance.)
The findings. Here are some of the takeaways:
Overall, the properties are doing well, with 97% average economic occupancy in 2014, 1.46 average debt coverage ratio and $455 average 2014 net cash flow per unit before waterfall payments (excluding some outliers).
But 19.7% of the properties (28 of 142) were underperformers, defined as having a negative cash flow for at least two of the years for which financial data was analyzed.
The following types of properties were overrepresented in the underperforming group:
- Properties with higher bedroom density (averaging 1.5 to 2.0 and over 3.0)
- Properties with fewer units (11-30)
- Older properties
- Rural Development–funded properties
- Properties managed by third parties
The higher the rents, the better a project’s financial outlook. Average rent restrictions (average % AMI of residents served) are strongly related to net cash flow and long-term project financial viability.
Newer projects aren’t immune from underperformance. Properties placed in service within the past 10 years have an underperformance rate of 17.5%, compared to 19.7% across all age categories.
Underperforming projects face high and mounting capital needs, with little ability to address those needs through refinancing.
These and other findings will be shared in detail at our OON presentation this week. Many of the findings are not surprising; others are less intuitive. But taken together, they provide an important factual basis to guide additional research and, ultimately, to develop policy and programmatic solutions to address our state’s pressing portfolio preservation needs. They point to questions such as:
- Should funders rethink underwriting assumptions for projects with higher bedroom density (family-sized units) and tighter rent restrictions?
- How can sponsors design projects to reduce maintenance and repair costs, for example by increasing the number of units per building?
- What level of public investment will be needed in the next ten years to preserve and recapitalize our existing stock of affordable housing?
We hope to see you on April 19, and look forward to continuing the discussion—and working together to improve the sustainability of Oregon’s affordable housing.
Source: Housing Development Center