Welcome to another week and the beginning of the fourth quarter. It’s amazing how quickly we’ve gotten through 2023 so far. For those of us keeping an eye on the Fed, we’re pleased to hear there may be one more interest rate increase this year, with expectations of flat to lower rates in the future. This is good news for those who are concerned about valuations, as prices for debt-related assets have been declining. Real estate, as a safe but leveraged asset class, has been particularly affected by this trend. By and large, retail investors are still very scared. Institutional investors (the ones who started sitting on the sidelines in 2022) are leaning in. I believe that as expectations stabilize over the next 6-12 months, we’re going to see a lot more money ready to jump on solid opportunities.
This week I want to dig into an operational update, discuss our thought process for adding development deals, and talk about why value-add opportunities are just around the corner.
Multifamily Marketing
Before we dig into those topics, let me share some interesting statistics about how residents prefer to interact with their community directors and leasing agents. According to recent surveys, most people prefer to communicate through text, email, or other digital means due to its convenience and flexibility. In response to this demand, we are continuously improving our AI capabilities to enhance our leasing platform. This will make it easier for potential residents to find us online, schedule a 24/7 tour, and get their questions answered quickly. In the last week alone, we have generated almost 3,000 prospects through our digital platforms and in-person visits.
When it comes to marketing for multifamily properties, it’s important to use multiple channels over time. This way, potential residents will remember and find us. We also focus on creating ad copy that attracts the right type of resident for our property. It’s crucial to avoid wasting time on disqualified traffic during the leasing process. That’s why we pay close attention to the wording, location, and appearance of our ads to increase the number of qualified prospects. Out of 3,000 prospects last week, we were able to approve 90 leases. We’re excited to welcome these new residents into their new home!
Staying Focused
Recently, there have been some concerns about our development deals taking away attention from our existing portfolio. I would like to address this question and share my thoughts on the matter. It’s understandable to be worried about this, and I hope to provide some clarity for those who share this concern.
Our top priority is safeguarding our investors’ capital, both present and future. To meet the funding requirements of our properties, we do not rely on capital calls. Instead, we utilize a combination of property working capital and company working capital. In cases where a property is facing significant delinquency or eviction problems, we may provide additional company working capital to protect our investment and restore the property’s health.
As our company expands, the financial needs of our underperforming properties become smaller in proportion to our overall size. This ensures that both your investment and our financial well-being continue to flourish. While we are currently facing a scarcity of reasonably priced value-add deals, I believe it’s a perfect time to leverage our fully entitled land. My top priorities are safeguarding our capital, maintaining the stability of our business for our employees and investors, and ensuring the consistency of our vision. As a result, we are committed to continually reinvesting in our company.
I think this is a great time to invest in multifamily development. While many lenders and investors may be hesitant about the future and unsure about the market, we have a unique opportunity to break ground and create new housing options. Developing properties requires different skills than buying or renovating existing ones, and our expertise puts us in a great position to succeed. With new construction starts declining and demand increasing, we are poised to profit from this market inefficiency. As we near completion in the next 12-24 months, we can also anticipate lower interest rates and increased rent growth.
Regarding my personal focus, and the focus of our company, I want to avoid being too distracted by new deals. To achieve this, I brought in a VP of Development who takes care of the majority of the work on these deals for me. He has done an excellent job of conducting due diligence and coordinating the architecture, engineering, and city aspects. He takes all the heavy lifting off my shoulders. All that to say, I feel like I’ve structured a win-win where we can continue to build our working capital, maintain focus on the existing properties, create some amazing new opportunities, and stay true to our mission – doing the right deals with the right people. Thank you for joining us on this journey!
Opportunities Ahead
As the interest rates stabilize in the coming months, I anticipate that sellers who have been holding off will come to terms with reality. This will result in the expansion of cap rates and the emergence of new opportunities in the market. In the past, we always sought positive leverage in our acquisition criteria. This means that the cap rate at the time of acquisition was higher than the interest rate. For instance, if the current interest rate on a 10-year term agency debt is around 7%, purchasing a property at an 8% cap rate would ensure immediate cash flow.
I’m not sure about you, but I’m still receiving promotions from brokers claiming that a property can achieve an 8% cap rate. It doesn’t seem feasible in the current market. As with many things in the market cycle, these numbers will continue to fluctuate based on the new reality. Recently, a solid B-class deal came our way that targeted a tax-adjusted (and insurance adjusted) cap rate of 7.6%. Not too shabby. With a good agency loan and lower leverage, it could present a great opportunity.
Many markets have experienced a 20-30% decrease in prices. Those who own high-quality assets and have the means to hold on to them will likely do so instead of selling them at a discount. Although we are currently in the “winter” of the economic cycle, I anticipate that the next 6-12 months will bring opportunities akin to a “spring” season. It may take some time before you hear positive news, and by that point, the greatest potential for profit may have already passed. However, opportunities will eventually emerge, so it’s best to be prepared.
Operational Update
In the last month, our portfolio has experienced a rental growth of 1.1%, bringing us to a YTD growth of 9.7% for 2023. The highest growth in rent was observed in Texas at 13%, followed by the Southeast at 11% and the Midwest at 10.6%. Last week, we had a successful move-in of 50 residents, which has increased our occupancy rate to 89.4%. Although we didn’t quite achieve our third-quarter goal of 90% occupancy, we are hopeful to reach our end-of-year goal of 97%. Our biggest challenge remains with our properties in Fulton and Clayton Counties in Atlanta, where we are facing ongoing eviction issues due to courts that are backed up and under staffed. We have recently resorted to moving some of our evictions to state court to expedite the process, save time, and get a more unbiased judgment. Although the situation is unfair, we are determined to overcome the challenges.
Our new CFO, Rebecca, is making significant improvements to our financial reporting process. She has set a goal of completing the close process in under 10 days each month, which is a remarkable achievement. Her technical and managerial skills have proven to be invaluable for our team. Additionally, she’s working on creating a quarterly financial reporting package for our investors, something we’ve been striving to achieve since the inception of our company five years ago. Rebecca is also orchestrating a meticulous process for draw requests to enable us to progress with critical capital improvements at many of our properties. We’re grateful to have her on our team.
While our 2022 deals are not out of the woods yet, the momentum is shifting in our favor and we’re seeing the light at the end of the tunnel. At the end of the day it’s really all due to great teamwork. I’m honored to serve with a group of folks who truly care so deeply for their residents, their fellow team members, and these investments.
That’s all for now. I hope you have a great week!