LSCRE 2025 Annual Letter

LSCRE 2025 Annual Letter

From the Desk of Rob Beardsley, Founder / CEO

As we reflect on 2025, I am filled with both pride and gratitude for the progress we made during a year that challenged the multifamily industry in profound ways. Volatile interest rates, shifting fundamentals, and a competitive landscape demanded clarity, discipline, and hands-on leadership. Through these conditions, LSCRE achieved meaningful growth, refined our long-term strategy, strengthened our operational foundation, and executed in a way that served our investors exceptionally well.

This year reaffirmed the value of staying grounded in principles that do not change: disciplined acquisitions, rigorous underwriting, conservative leverage, operational excellence, and a long-term perspective that prioritizes capital preservation above all else. Most importantly, it underscored the importance of our partnerships with our investors. Your trust is the foundation of everything we do, and every improvement we made in 2025 was done with you in mind.

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A Year of Transformation and a Powerful New Partnership

One of the most impactful milestones of 2025 was our acquisition of Sunset Capital and the addition of its founder and former CEO, Sam Morris, as a partner at LSCRE. Sam brings tremendous experience and deep insight into the Houston market built on a lifetime in the city and 20 years of local multifamily investment and operations. He also has a background in corporate banking and sits on the board of a local bank in Houston. Through partnering with us on numerous transactions, Sam and I discovered a natural alignment in financial and cultural values. Through this collaboration, it became clear to both of us that combining forces would best serve our investors.

Sam’s transition into LSCRE strengthened our acquisitions process, improved our due diligence rigor, expanded our investor base, and enhanced our asset management capabilities. His impact on the firm is already evident, and we are thrilled about the next chapter of LSCRE.

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Refining the LSCRE Strategy for the Next Decade

In 2025, we codified the investment philosophy that will carry LSCRE through the next generation of growth and capital preservation. This included raising our standards for both location quality and asset profile, adopting a more conservative debt strategy, and deepening our underwriting discipline.

We now prioritize exceptional locations above all else. While it is easy to appreciate this concept in theory, its application demands discipline since lower quality locations/assets on paper show higher projected returns. Poor locations carry hidden risks such as delinquency, turnover, operational challenges, and weak long-term demand that often far outweigh any discount on purchase price. We will still consider select 1980s properties and older assets, but only in great locations with strong population growth, job growth, and low crime.

Alongside this emphasis on location, we adopted a new standard debt strategy of 65% loan-to-value, full-term interest-only payments, and a long-term fixed-rate structure. This approach provides consistent cash flow, improves breakeven occupancy, and aligns perfectly with our long-term hold philosophy.

Perhaps our biggest advancement this year was formalizing the “Loaded Interest Coverage Ratio” (LICR) as a core underwriting metric. LICR measures revenue minus all expenses other than debt service, divided by interest costs alone. It captures true recurring cash flow, including capital expenditures and below-the-line expenses that DSCR overlooks (DSCR is debt service coverage ratio which is calculated by dividing NOI by amortizing debt service). We now target a minimum LICR of 1.50x, which provides meaningful downside protection and real transparency into actual cash flow sustainability. Discovery at West Road, one of our acquisitions of 2025, projected a Year One LICR of 1.61x under modest revenue growth assumptions, a powerful indicator of conservative, sustainable performance.

These refinements make us more selective and conservative in the short term, but they will generate more stable and consistent outcomes for investors over the long term. We want to under promise, overdeliver, and build a portfolio of assets that performs in both good times and challenging ones.

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A Unified Brand and a Stronger Company Culture

Another major milestone of 2025 was our transition from Lone Star Capital to LSCRE. This rebrand reflects our evolution from a Texas-focused sponsor into a national private equity firm with long-term ambitions. We also unified our onsite management division by retiring the Lone Star Communities brand, bringing all operational functions under the LSCRE identity.

This cohesion has strengthened our culture significantly. Every month, more than 200 team members, spanning both corporate and onsite communities, gather for our “Town Hall.” We use this platform to celebrate wins, reinforce standards and culture, and align on company-wide initiatives. Our goal is for every individual, from corporate leadership to onsite leasing agents and maintenance technicians, to feel connected to our mission of delivering exceptional experiences for both our residents and investors.

While our focus remains on Dallas-Fort Worth, Houston, and San Antonio, we also spent considerable time studying the Phoenix multifamily market, touring assets, and submitting offers. Phoenix remains weak fundamentally and has very little transaction activity due to oversupply, but the pipeline is shrinking rapidly. We believe 2027 may be an ideal entry point and will continue monitoring the market closely.

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Strengthening Our Operations Through Vertical Integration

Operational excellence is central to who we are, and in 2025 we took important steps to bring even more capabilities in-house. At select properties, we brought valet trash services (door-to-door trash pick up) in-house which provides healthy cost savings. This year, we also changed utility billback providers and brought invoice processing in-house. These enhancements save each property thousands monthly. These are just a few examples highlighting our constant efforts to improve property operations.

On the corporate side, we hired a CPA to be our full time tax manager and expanded our accounting team to gain full control over financial reporting, tax preparation, and K-1 delivery. This will allow us to operate with greater speed, accuracy, and transparency. Our goal is to reconcile monthly financials by the 10th of each month and provide K-1s to investors by March 1st.

This year also gave us a standout example of what our strategy can deliver when executed well. After acquiring Preserve at Copperleaf in May 2024 and securing a property tax exemption later that year, we executed a cash-out refinance in July 2025 at a valuation of $53 million, a substantial increase from our $34.25 million purchase price without spending any money on renovations. Thirteen months after acquisition, we returned 45% of investors’ original capital while continuing to distribute 8% monthly cash flows. The deal highlighted our ability to navigate complex REIT structures, operate with discipline, structure tax-advantaged transactions, and deliver results through relentless execution. See the full case study: HERE.

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A Challenging Market with a Clear Path Forward

The broader multifamily industry continued to encounter headwinds in 2025. Oversupply in several Sunbelt markets kept pressure on rents and occupancy as communities competed for the same pool of residents. While this created short-term challenges, it also set the stage for a meaningful rebound. Because development starts have fallen sharply since 2023, many markets will soon move into undersupply. In 2026, we expect Houston to strengthen while Dallas-Fort Worth rebounds. San Antonio and Phoenix should reach healthier equilibria in 2027.

At the same time, some expenses softened in 2025. Property taxes moderated after multiple difficult years of large increases, insurance premiums declined substantially as more carriers re-entered the market, and improved repairs and maintenance cost control and vendor management supported NOI gains even amid flat revenue. Most of the NOI improvement tracked by national data providers came from expense reductions rather than rent increases, further underscoring the importance of vertically integrated management where we control the entire scope of a property’s operations.

Interest rates also behaved more predictably than in 2024. The 10-year U.S. Treasury yield remained range-bound in the low 4% area, while the 5-year U.S. Treasury (the index rate for the 5-year loans we closed in 2025) stayed in the high 3% range. This created all-in borrowing costs around 5% on our 2025 acquisitions, making assets acquired at 5.25% to 6% cap rates attractive on a risk-adjusted basis as well as a long-term cyclical basis. We believe cap rates are closer to a cyclical high which gives us confidence to invest today.

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Acquisitions

We had a slow acquisition year due to the low transaction volumes in our target markets as well as weaker fundamentals due to oversupply. These factors have caused a persisting gap between buyers and sellers since real values are where buyers want to buy but most sellers, if they don’t have to, don’t want to sell at today’s prices. While this is understandable, it has been frustrating as a buyer given our desire and conviction to take advantage of the market cycle. Nevertheless, we remained disciplined, taking heart that no deal is better than a bad one.

Fortunately, buyer competition is also down since many of our peers are struggling to raise the capital they used to or have exited the multifamily market completely. We are incredibly grateful that this has not been our problem as we remain consistently oversubscribed on each capital raise. With all that being said, we acquired two outstanding properties in 2025, both of which reflect our disciplined strategy, our operational capabilities, and our long-term investment philosophy.

Discovery at West Road is a 280-unit, 2005 vintage community in Houston that aligns perfectly with our approach to workforce housing. We acquired the property at 65% LTV and underwrote it with an impressive Year One LICR of 1.61x (as discussed above). We identified multiple roof issues, including missing shingles and active leaks. Thanks to our in-house roofing team, we were able to address these problems quickly, cost-effectively, and with full control over quality. Resident sentiment improved immediately, with several residents immediately noting the professionalism and responsiveness of the new management team. Here is what one resident had to say,

"As of 10/ 24/2025 The Discovery Apartments have new management and new leaders running the community. I must say that they are really serious about the residents and getting things right. Yaitza Delacruz, Property Manager, Keila Pagan, Assistant Manager and Amanda Burst, Leasing Agent. These women are a breath of fresh air in comparison to the last bunch. Thank you for helping me with my concerns."

Another exciting element about the Discovery at West Road acquisition is that it exhibited our full capabilities as the industry leader in 1031 exchanges. We facilitated over $4 million in exchange investment into the deal via 1031 exchanges, reverse 1031 exchange, and even a 1033 exchange. Dasha Beardsley, my sister and Director of Investor Relations, heads up our 1031 exchange efforts and makes the process for investors seamless amidst all the complexities, deadlines, and trust that goes into it. Dasha also published her book this year, Maximizing Wealth Through Syndicated 1031 Exchanges. You can reach out to us and we’ll mail you a copy or you can simply purchase it: HERE.

Whispering Winds, a 286-unit, 1985 vintage property in Pearland, is another example of our strategy in action. Pearland is one of the strongest and fastest-growing suburbs in Houston, with median household incomes above $93,000, excellent schools, and great retail. Shortly after signing the contract, U.S. News & World Report ranked Pearland as the third-best city to live in the country.

Given the property’s strong location but older age, to maximize returns while reducing risk, we structured an affordable housing partnership that restricts rents on half the units in exchange for a 50% property tax exemption. This increased our going-in cap rate from 6.3% to 7.4%. Even though the property could have supported higher leverage, we maintained a disciplined 65% LTV approach. Whispering Winds perfectly illustrates our commitment to buying high-quality locations at attractive bases, structuring for downside protection while optimizing for cash flow.

We did not sell any properties in 2025, as the market heavily favored buyers. We expect more attractive exit opportunities to emerge around 2028 and will time our dispositions accordingly to ensure investors achieve the strongest outcomes.

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Why This Moment Matters

Across our entire portfolio, LSCRE has never issued a capital call or delivered a loss for investors. We have consistently protected investor principal by combining conservative underwriting, hands-on operations, and prudent leverage. We have executed multiple successful refinances, tax-exemption structures, and difficult management work that many operators avoid. While we do not chase short-term projections, our long-term strategy has allowed us to exceed expectations on several investments while maintaining a risk profile far below industry norms.

Although the past few years have tested the multifamily industry, they have also created one of the most compelling investment windows of the last two decades. Development starts have dropped sharply, interest rates have stabilized, and many competitors remain cautious. These factors have generated a rare dislocation: high-quality assets are trading at attractive prices just as future supply is thinning and the foundation for rent growth is being set.

We believe that 2026 through 2028 will be a generational buying opportunity across Texas and the broader Sunbelt. With our refined investment philosophy, conservative leverage with a new emphasis on high LICR, and vertically integrated operations, LSCRE is positioned not only to navigate this environment but to thrive in it. The assets we acquire during this period will likely become the strongest performers in our portfolio.

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Looking Ahead to 2026

As we move into 2026, we are excited to continue building on 2025’s momentum. Our biggest goal is to continue to achieve record-high revenue and net operating income at each property in our portfolio. Our acquisitions target for the year is $200 million, across 4-5 properties. Because we expect to need close to $100 million of equity to achieve our 2026 goals, we are raising our public minimum investment to $100,000. That said, we will continue to honor a $50,000 minimum for long-standing investors who have been part of our journey.

In closing, I want to express my deepest gratitude on behalf of the entire LSCRE team. You are at the center of every decision we make. We treat your capital with the same seriousness as our own, and our team invests alongside you in every opportunity. Every choice we make, from the opportunities we pursue to the leverage we use, reflects our long-term commitment to protecting and compounding your wealth.

We view our relationship with you not as a series of individual investments, but as a multi-decade partnership built on transparency, discipline, trust, and shared success. Thank you for giving us the opportunity to steward your capital and for allowing us to build something enduring together. We are excited for what 2026 and the years ahead will bring, and we look forward to continuing this journey with you.

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Warm regards,

Rob Beardsley

Founder / CEO

LSCRE

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