Challenging Situation?  Face Everything And Rise

Sep 2023
A view of the city skyline at sunset.

Happy Tuesday and welcome back! I hope you had a great weekend. I’ve got a lot of economic/industry data to share but am going to defer that until next week. Today I wanted to share something that I think is relevant to today’s economic situation…

I know many of you are invested in multiple deals across multiple sponsors and I’m sure you’ve heard, to one degree or another, how the current economic environment has affected various deals in our industry. Despite our best efforts, we have not been immune to the current challenges facing multifamily. As I’ve mentioned many times before, our goal has always been to be one of the “last men standing”. In other words, our reserves allow us to last a little longer and take a bigger hit during a challenging environment. That being said, over the past couple months we’ve pulled back on about half of our distributions (primarily deals done in 2022) as the effects of delinquency, slowed evictions, tax/insurance hikes, and future financing costs have begun to affect our current and projected cash flow. Over the past year and a half, rather than try and predict what the Fed was going to do, we’ve been tracking their decisions and watching the data. It’s been quite the wild ride, but given where things are at, we feel like most of the “pain” is over at this point (i.e. rates aren’t going much higher and distributions aren’t going much lower). Inflation ticked up last month but it’s down significantly over the past year and trailing data point to continued retraction.

I sometimes feel defeated that we bought/own/manage excellent assets in great locations that are suffering due to a broken eviction system. I feel frustrated that we’re not achieving our financial projections even though the reality is that our insurance has more than doubled in 24 months and our taxes are up 30% (we certainly didn’t model either of those) – not to mention labor costs are up 20-30% (although we did model that one). Being caught in a situation like this during the first 2 years of ownership of a value-add deal is pretty rough. It’s easier to manage these huge shocks to the system when you’ve owned an asset for several years and you have a very dependable resident base (Fairfield Lakes in Beavercreek Ohio, purchased in 2018, continues to generate annualized 10% cash dividends).

Fear is a powerful emotion that can lead to forgetting everything and running or facing everything and rising. It’s during these times that it’s super important to stay focused – and we’re super focused on protecting our capital and turning these investments into profitable cash-flowing assets. We’re in the business of creating cash flow even when the chips are down. Even as our focus has shifted from outperforming our proforma to protecting our capital (and we’re doing several specific things to accomplish this) we’re also focused on getting back to the first goal. In the meantime, I’ve also had many people ask if we’re going to have a capital call. These are unprecedented and very challenging times and while we can’t predict the future, we have never had a capital call and never plan on having a capital call.

Our biggest risk right now primarily comes from two sources. Rate cap replacement cost (driven by actual and expected interest rates) and delinquency (driven by ongoing problems from pandemic rent assistance and severely backed up courts). To address our rate cap replacement cost, we’re focused on adding to our existing reserves to deal with this future cost. Simultaneously we are driving property performance so that we have the option of refinancing our debt into long-term fixed rate debt that would allow us to forego these expenses altogether. To address the issue of delinquency we’ve tightened up our screening process while also driving exponentially more traffic to our properties. We are now able to book tours 24/7 and we’ve seen a marked increase in tours setup during our “off” hours.

While staffing was a problem for us 6-12 months ago, things have mostly stabilized on that front and by and large we have an experienced and dedicated staff that is moving in the right direction on multiple levels. Saying we have a lot to do is an understatement, but I’m super proud of the work our team has been doing and feel like we’re beginning to see the light at the end of the tunnel. We’ve been blessed to add some amazing folks to our team and it’s exciting to see their hard work slowly come to fruition. The job market, thankfully, has begun to stabilize, albeit at a higher level, and we’re no longer seeing folks jump ship for massive pay increases. The inflation of 2022 definitely affected labor costs!

Here’s the good news. In less than 2 years, the current clouds will clear. We will still own great assets in great locations at an attractive basis. Demand for apartments will continue to outstrip supply and I believe, as was the case in 2011-2013, we’ll be very glad we stayed the course.

All that is the technical side of the business – and certainly handling the technical aspects are absolutely key to being successful – but there’s also another side to the future success of these investments that involves my commitment (and our commitment as a company) to your investment. I’ve spoken with most of our investors and I gave them my word that I would treat their investment better than my own money – and I do. Obviously there are no guarantees in life, but I can assure you these properties are getting our absolute all as we push against the tide. I want you to know we’re not leaving a stone unturned as we face everything and rise. Thank you for joining us on this journey.

That’s all for now. I hope you have a great week!