Phase 3 - Advanced (more than one main point to the post, ebooks)

Podcast - A Look Inside Today’s Multifamily Market

Marcia Cuenca
September 7, 2022
Podcast - A Look Inside Today’s Multifamily Market
I would encourage people to focus on the source of the data, more so than the data itself.”
- Nate Kline, Founder and Chief Investment Officer at OneWall Communities

On this episode we were joined by Nate Kline, Founder and Chief Investment Officer at OneWall Communities. Nate discusses today’s multi-family market and what he looks for in a sponsor. He puts on his investor hat and shares how he looks at an opportunity in today's environment with rising interest rates and inflation.

Nate has more than 18 years of institutional finance and private equity investment experience with the past eight years focused on commercial real estate. As Chief Investment Officer at OneWall Communities® he primarily formulates investment strategies; sources, underwrites and executes acquisitions; capital structures; monitors performance and compliance and provides day-to-day asset management oversight of our portfolio.


About OneWall Communities

OneWall Communities is a vertically integrated real estate firm that specializes in the acquisition, development and management of transit-oriented and lifestyle-oriented workforce housing in the Northeast/Mid-Atlantic. OneWall combines a strategic market approach, an entrepreneurial attitude and a commitment to creating great communities to optimize value for both investors and residents.

Links

Learn More About OneWall Communities, click here
Federal Reserve Economic Data, click here

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Transcript

Adam Hooper (00:03) Hello and welcome, I’m RealCrowd CEO Adam Hooper, and this is the Real Estate Investing For Your Future podcast. Here we explore the latest in commercial real estate trends, insights, and investment strategies that passive investors can use to build real estate portfolios that last.

Disclaimer (00:21) All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions to gain a better understanding of the risks associated with commercial real estate investing. Please consult your advisors.

Adam Hooper (00:40) Our guest today is Nate Kline, the Founder and Chief Investment Officer at OneWall Communities in today's conversation. Nate discusses the multifamily market in an environment with rising interest rates and inflation, the balance between profitability and housing affordability and the top things he would look for if he were investing with a sponsor. Be sure to check the show notes for links, to learn more about Nate and everything OneWall is up to, we hope you enjoy today's episode with Nate. Well, Nate, thank you so much for jumping on the show today. We've worked with you for, gosh, I think almost five years now in the marketplace. So excited to finally get you on the show and learn a little bit more about yourself and what you guys are up to at OneWall.

Nate Kline (01:24) Thank you, it's great to be here and been a pleasure working with you guys over the years.

Adam Hooper (01:28) So why don't you take us back? We were just talking before we started. Went to Penn state together. We were there at the same time. I don't know that we knew each other, but probably passed each other on campus at one point. Why don't you tell us a little bit about your career in real estate? How'd you get into the business? How'd you get into real estate? What attracted you to this asset class and career?  

Nate Kline (01:48) Yeah, of course. So, I think the origin story starts even before college. I was exposed to home construction and renovation projects over the years as a kid. And I took architecture electives both in high school and college, but I was always very focused on business. And, specifically when I went to university at Penn State, I was focused on going into investment banking and wanted to do mergers and acquisitions and knew that I would probably get exposed to not only real estate but many other industries. If I went that career path and then spent a couple years as an analyst at Merrill Lynch and   understand, where I wanted to go from there as it relates to real estate. I actually, ironically, my first deal that I closed at Merrill was a hotel restructuring project. That was pretty interesting.

Nate Kline (02:44) And because of working on that I got earlier exposure to the real estate sector than anybody else in the team and ended up being kind of one of the go-to analysts for M&A Real Estate. Did a pretty large transaction with Simon Property and Chelsea Property Group. We were selling Chelsea to Simon. And worked on a number of other real estate deals, both with some folks in the M&A department, as well as the heads of the M&A Group and the real estate group at that time. And eventually decided that I wanted to move into private equity after investment banking. And that exposure to real estate was something that stuck in my head, and I was doing a lot in industrials and other heavy asset, heavy industry type sectors. And that aligned really well with the job that I ended up getting after Merrill Lynch was working at Fortress as an associate in their private equity team. And they were entirely focused on asset-based investing. So naturally I was gonna get exposed to real estate as well in that we did some pretty interesting projects in terms of railroads and shipping. and the most real estate focused deal was one where we actually bought a public company that was both a railroad and a real estate developer. And so we had some pretty unique ideas about how we could drive value from that, including using excess land and real estate right of way that the railroad owned and applying real estate development opportunities to moving a rail yard from what would be very attractive industrial land near an airport in Miami. And then eventually using excess right of way to actually create a new passenger rail on the east coast of Florida. So had a lot of cool experiences that were real estate related, continued to grow in interest in it. And then, eventually when I was working on my own met current partners. Who had been very real estate focused and I was looking to either do private equity, just broadly speaking, or to do it within real estate. And because I met my partners, I chose real estate.

Adam Hooper (05:05) And there we go. So, it sounds like early career was more on the again M&A operating company side with a real estate component. And then how did that transition? Well you were obviously underwriting real estate as a component of those transactions. How did that transition then into. What we were talking about before we've seen on the marketplace. I think you guys have done a handful of individual asset acquisitions in the beginning and now have trans, switched maybe more into fund offerings. So, maybe tell us a little bit about how that transition went from more operating company, M&A side of things into the individual assets. And then now more into the fund space. Curious how that path has gone.

Nate Kline (05:42) Yeah. Naturally I've had consistently institutional finance knowledge and experience within both, as you said. Fund context and company level context started companies from scratch and private equity have done a lot of consulting and training, related to specific startup companies or companies of all different sizes. And when we looked at our strategy as a firm, we always had pretty aggressive growth plans in mind. And when we started out, we were buying relatively small assets and the single asset model of raising, a couple million bucks here and there for a deal worked out quite well. Until we were looking to scale much more dramatically and much more quickly. And so, when we started getting into bigger and bigger transaction size, the obvious move was to develop more institutional equity backing relationships on larger deal sizes, because it's just not efficient or in many cases possible from a regulatory standpoint to raise enough money. On a high net worth basis to do 10 or 20 or 30 million of equity in a large acquisition. That just lends itself to working more with larger JV partners on single equity checks, but we didn't want to leave our individual investors behind. We've obviously developed great relationships with hundreds of individuals over the years and have had success partnering together on many transactions and obviously our goal is to create performance for those folks. That's attractive enough that they just keep coming back to us and reinvesting over and over again. And we found that there would be wide swaths of time between when we would have a deal small enough to do where we would go to that individual investor base, as opposed to going to a single source equity check.

Nate Kline (07:50) And that led me to think about how could we structure some funds that would be attractive and suitable to high net worth investors, but get them exposure to the same opportunity set that we were delivering to our institutional partners. And do so in a way that was equivalent from a return and cash flow standpoint but also give people the benefit of diversification across multiple deals and individual investors. I know, like to look at specific transactions and make some determination about how attractive they think those deals are but what it comes down to for us is that we're underwriting every deal, very stringently. So, if we're going to do a deal, it's going to be a deal that we would've presented to anybody on an individual asset basis. Anyway. But for the fact that it might be 50 or a hundred million dollar purchase price, so they're never gonna see it. And we said, how do we bridge that gap? And the thought was a series of co-investment funds where when an investor participates in it, they know that by joining that fund, they're actually going to invest in every single deal that we're doing, for the period of time that that fund is open and so they do that and then they still get the same return profile, and they get consistent cash flows and they get diversification. They may or may not care about, but they get it and it's good for everyone.

Adam Hooper (09:16) Yeah. And I guess, as you look at the arc of a real estate manager's life cycle, right. It seems to be a path there that normally follows that right. Kinda start out, smaller friends and family, smaller syndications, and maybe you grow that syndication pool. Then at some point it's almost, is it a philosophical decision as to whether or not you continue to work with individual high net worth or going more the institutional route? Like how. It seems like that's, again, that's a fairly common arc, right? Once you get to a certain size and you kind of forgo or migrate in away from the syndicated investor based into more institutional capital. And so how does that decision making process play out or how has that played out in your case of is it truly a philosophical decision of wanting to continue to provide high net worth individuals? Is there an efficiency benefit one or the other? I'm just curious how that, how that thought process goes?

Nate Kline (10:06) Yeah, I think it's mostly practical in the sense that there's valuable, each party is a valuable source of equity in the right scenario. and the way that we've always looked at our deal structuring and our presentation of opportunities to investors is knowing that each investor has their own requirements, parameters, expectations and so on to include naturally just different levels of returns.  The amount of capital they have to deploy and over what period of time and how they like to do it and so on. And we try to say yes to all investors in some way, shape or form, right?  I don't want to turn away somebody who's interested in what we're doing, who I think can benefit from what we are doing. And so that's led us down the path of always considering as a strategy, remains the same, but our scale continues to increase. How do you continue to attract the same and additional investors over time and keep all the people that wanna work with us over and over again, coming back to the well and able to do so.

Nate Kline (11:24) And so practically speaking, individual investors can only take you so far on a deal size standpoint because of the natural amounts of money that they're deploying. SEC limits on entity fundraising in terms of number of investors and then getting into all the other various compliance and management issues. I wouldn't want to have 10 people in IR because I had to manage 10,000 individual investors. It’s an unwieldy process to do so, but if I can maintain. Hundreds of investors with a more efficient staff and do more deals more frequently by coupling those folks with institutions that might write somewhere between 20 and a hundred million dollars of equity to us per year. Everybody's happy. Yep. Good.

Adam Hooper (12:21) So now I guess then talking on the more asset acquisition side one while you guys are focused on multi-family, let's talk a little bit. First off why multifamily, what you like about multifamily. And then I think the biggest questions we're getting today from investors and listeners is inflation and interest rates, right? Those are the two big bogies that are causing a lot of concerns. So maybe through your lens of why you guys like multifamily, tell us generally what you're seeing in the space and then maybe how those factors are influencing or affecting how you're looking at acquisitions here, going.

Nate Kline (12:58) Yeah, sure. So, we like it so much. It's the only thing we've been doing for the past nine or 10 years. And not only that but the niche that we focus on, which is now colloquially known as workforce housing, has been the only thing that we've done over that period of time as well. And there are an enormous number of reasons why we like multifamily I'll touch on a handful and try to answer your specific question, without having to create a second podcast for all of the reasons we have. Going back to day one, when we started investing in this sector of the market, there were some underlying trends that we recognized in the market, and there were a lot of demographic reasons for focusing. And there was an element of matching the strategy with the capital and then the ambitions that we had as a firm from a growth standpoint. Right? So it was a lot of different elements coming from different directions, thinking about the trends. What were some of the things that we were seeing then that we're still seeing now as the US has evolved demographically. It's led to this just tremendous supply demand crunch for affordable housing. Within the Northeast of mid Atlantic where we focus, there's always been scarcity of land, much higher housing prices, much higher incomes as a whole relative to the averages across the US. It's been harder to develop and replace assets here. Construction and labor costs have been growing tremendously and people's wages have not kept pace with basically their ability to afford. New construction homes or Class A apartments, which are the only two things that the real estate market in this region has been developing for decades now. And they've been doing that fundamentally because of economic reasons, right? You just simply can't, construct, property and title property. Get to a concluded open building in a non subsidy environment. Affordable to the average, middle income wage earner. And, because that applies an increasing, but the demand is there's just this ongoing need for it and there's a lot of efficiency benefits from an operator and an acquirer standpoint to be able to assemble a portfolio. Over a shorter period of time. Invest capital more efficiently by buying things that are far below replacement costs such that when you put CapEx dollars into it, you're still below replacement cost and you can compete with newer product at a much lower basis.

Nate Kline (16:05) Attract residents, if you're trying to reposition the property or just simply be the most highly occupied, most popular spot in a submarket because it's been so well maintained and so well positioned in the marketplace. And so those are some of the kind of basic reference points that, that we've had. and then it's traditionally been very efficient to finance multifamily property and a lot of that has to do with the role of Freddie Mac and Fannie Mae and HUD in terms of the government associated. Enterprise lending, benefits with focusing on mission driven, affordability, which lends itself to giving us more attractive financing rates, which is where I start to answer your question about interest rates and how that's affecting what we're doing. Because of the sector that we're working in, we seem to have access to the most efficient capital, regardless of what's happening in the market, in terms of better rates, better leverage, better IO. Lower debt, service, coverage constraints, and so on. And that's been the case throughout and doesn't show any signs of changing and if anything, there's more weight being put on the affordability end of the spectrum of multi-family housing than there is on any of the other spectrums in terms of the agencies in terms of governments, in terms of people wanting to support this business. So that's very attractive for us just generally speaking as a tailwind for the opportunity set. The rates have of course gone up, pretty significantly in the last several months, that's had two primary impacts on us, both of which are the first, is that you already were seeing 20% increases in housing prices annually for the last couple years through, starting during COVID through now. And that was making housing even more unaffordable than it already was. And here in the Northeast, we have the highest, some of the highest housing prices in the country.

Nate Kline (18:18) And so there was already a significant gap between the monthly cost of owning a home versus the monthly cost of renting. And on top of that, now that the mortgage rates have gone so high so quickly. That's impacted frankly the, the single family home, ER, more than it has the big institutional real estate buyer like us, right? We're still borrowing at rates that are much lower than what individuals are getting on their mortgages for their new home purchases.  And when you couple, the mortgage rate increases on single family homes with the price increases on single family homes.  depending on what market you're looking at, a lot of the places where we're acquiring apartments, those monthly costs have as much as doubled in the last year. And so if it was already 20 or 30% more expensive to own, now it's a hundred percent more expensive to own. And so that's led to high, very high occupancy, very market in terms of demand. Where as soon as somebody moves out, there's somebody moving in, we have waiting lists, set virtually all of our properties right now, because there's just so little, turnover happening, despite the large renewal increases that we're getting as well. And so that's one, one item. That's benefiting us with the higher rates. The second is that it's really kind of knocked some people out of the market, right.  Things were very frosty several months ago on the buy side, anybody that wanted to invest in real estate had finally decided that yes, they were gonna invest in apartment buildings now and tremendous amounts of capital chasing the deals that we've been analyzing has driven prices up tremendously. And we were getting out bid on virtually every deal by five, 10, even 20%. Up until a couple months ago. And when, when the rates kind of flipped gears and all of those weak buyers left the market and the price expectations finally started to meet the market, or those sellers decided that they weren't actually sellers.

Nate Kline (20:42) Number of bids went down. The market became less competitive. The only people out there selling were people that you knew actually had to sell. So you could be more aggressive in terms of low balling bids. And the other thing that happens when you see such a dramatic increase in rates, that people don't necessarily expect as you see deals fall apart. And so we've benefited from two deals coming back to us just in the last couple months where we were the second bidder and we were way. And we're getting those deals at the prices that we wanted to pay, or even a little bit below because of the dynamic shifting in the market and so that's been a benefit to us. I tell they think I'm crazy. I tell people I'm happy about everybody thinking is a recession because it's making it less competitive and easier for me to buy.

Adam Hooper (21:35) So a couple things here for maybe newer listeners to the show, you threw out some terms. So when you're looking, loan terms, debt terms, just real quick IO interest, only CCR debt, service, coverage ratio. And then where are you guys seeing rates now, maybe relative to what they were, how much of an increase are you seeing in those rates?

Nate Kline (21:57) You know it depends on how you look at it. The rates have natural, I mean the tenure peaked close to 340 or 350, I wanna say. And it's back down to like 270 now. We were not locking any rates. When it was as high as it was, we recently locked, the index at around 277 on a couple of our deals right now, those have spreads of plus or minus 171 80. So we're in the low fours on fixed rate and we're still in the kind of three’s on floating, mid to high three’s on floating. We're not really doing floating right now, primarily because the interest rate cap costs are so high, which was again, a natural outcome of the rate gyrations and the volatility and the UNC. I like floating rate conceptually because I actually think that rates are gonna be trending flat to down now, that people are acknowledging the recession. But it's still difficult to do those deals because the rate caps are so costly. So, if you, if you have a short-term business plan, with a bridge and a refi takeout a couple years from now, which we have one deal like that, then it makes sense if it's more of a stable, existing asset, light, moderate value add, we're generally focusing on the fixed and baking in some kind of prepayment penalty. If we think that we' re gonna exit, on a shorter duration or we are trying to go in lower leverage and shorter term and then be able to have our options open on an exit.

Adam Hooper (23:51) So on a relative basis, yes. Interest rates have increased substantially a hundred basis points, 125 basis points over where we were a little bit ago, but historically this is still incredibly cheap debt.

Nate Kline (24:03) Yeah. I mean, we have existing loans on our books that are at similar rates on deals that we've own for a few years. So, people kind of have very short memories as it relates to interest rates.

Adam Hooper (24:14) Yeah, that's really interesting. Again, I think there's context of where we are overall in the bigger picture of where we've been these last few months, right?  It's been pretty crazy. It's been super volatile and there's been a lot of concerns out there. But if you look at it on a little time, longer time horizon, look real estate is generally. We do look at things in a much longer horizon than most other asset classes. So good to see some comfort there in the fact that these are still historically really attractive financing for the properties that that can still pencil, especially where we've seen rent growth. And those demand pressures that you were talking about earlier.

Nate Kline (24:51) Exactly. And the other nice thing that I like to point out is that when you own real estate privately, it's not repriced on a daily basis, like the stock market is. So, nobody's going into a real estate investment expecting to day trade it. So, if you buy right, and you structure it right, and you capitalize it, right, your holding period can fluctuate from three to 10 years. But you just pick your right time to exit and you're good.

Adam Hooper (25:21) Yeah. And so, I guess maybe switching a little bit more to the strategy. You've mentioned a few things in there that we can maybe explore a little bit so focused on Eastern seaboard, maybe higher income areas, more supply constrained areas. Once you've identified the markets that you're interested in. And you mentioned again, a couple of these deals are falling apart, right? That, other buyers who maybe outbid you and then they're financing, maybe didn't come together or something didn't work out. So, you're able to pick up those deals. How do you go about sourcing and underwriting and figuring out the right business plan with those assets? Is it more science, more art, more experience, a combination of all of that?

Nate Kline (26:00) Yeah. I think it's a combination of all of that. We have the benefit of being vertically integrated and having, tremendous experience across a lot of different, submarkets and assets over decades of experience from multiple different people within the firm, both on the investment and asset management side, as well as on the property management. So, one thing that I think sets apart our underwriting is that fact itself, right? The fact that we have the property management, and the construction management resources and folks in house that are tied with us on the investment side, at the hip, as we're underwriting these deals. So, we have a very strong understanding of what it takes to operate these properties. We're not gonna be relying on a third party property manager to operate them on a day to day basis. And mind you that third party doesn't have an ownership mentality. Right. And, we have a fund that our employees can invest in. So that they're not only ownership mentality because of the way that we're structured and culturally, but also actually so that's a big, different differentiator. And then as we're sourcing deals, naturally we're a pretty sizable firm. The region, we of course have the broker relationships that we've been developing over many years.

Nate Kline (27:24) We see a lot of activity sort of pre-market. So, there's a lot of different layers to the way that brokers go about selling properties for their clients and clients themselves had a lot have different approaches to what they want to do. We have a few deals tied up right now. One of them essentially was only shown to a handful of people. And we were part of that handful because the broker who's engaged, didn't market it widely, but we are one of his top buyers for anything that he's doing in New Jersey and Pennsylvania. We got the opportunity to look at it and we won it. I already mentioned the two deals that we bid on. They were marketed widely. But again, we were the first call when the first buyers bowed out. And there may have been a couple other folks that were in striking distance of whatever that winning bid was. We were either there or right below or whatever. And I personally felt very confident that both of those deals were gonna come back to us as soon as the rate thing happened. And they did, we've had our other two deals that are in our preferred fund. One of those was the same broker I just talked about in New Jersey off market scenario, where the seller wanted to get out of something quietly without a process.

Nate Kline (28:45) We and the seller kind of knew each other tangentially. And that's the case as well. Like most operators of size in this region kind of either know each other directly or have crossed paths at one way or another. And it's also very important to us and has been successful for us to be the winner on a deal where we're not the highest bidder because the institution selling it is most comfortable with our sophistication and institutionalization. So, there's a lot of syndicators out there that are bidding higher prices than we are. And they're not getting the deals because the seller doesn't trust them to or to close at the price that they're getting. So that's a big element of our sourcing strategy as well is just using our reputation and our relationships to get better pricing and get deals that come back because they fell apart and get deals that never reached the market either because we're directly talking to the owners or because we have the relationships with the brokers that the owners are talking to when they're trying to do things quietly.

Adam Hooper (29:57) Do you see much of a difference in strategy or business plan with those assets depending on the source that you guys are finding them through?

Nate Kline (30:04) The sourcing doesn't necessarily impact that directly, but from a business planning standpoint, I would say, something that's differentiated for us is the way that we approach our business plans and the way that we approach value, add investing just generally. And so, what I mean by that is the standard approach and the approach that I think investment sales brokers use in their marketing is very simple. Right? It's here's the top rent in the market, renovate every unit as fast as possible to get to that rent. And there are buyers out there that that will say, okay, Let's do that. And they're flippers or traders or whatever they are and we have never taken that approach first of all, but more importantly, we are looking at a significant amount of data and analytics behind that to understand not what's the maximum rent, but what is the most appropriate rent level? To not have decay in the demand for that property and so that involves understanding at a very granular level, who are the residents living there now, who are the people that are gonna be moving into this property? If the rents are changing and it may not be a different set of people, it may be the same people just recognizing that there's a more attractive, better standard of living at this property than the one down the because of our management and our renovations and our curb appeal and our repositioning and everything else that we're doing. So, there's an element of understanding that at a much more granular level that I don't think most people are getting into. We are maintaining affordability, even if it's not necessarily a formal agreement with some, regulatory body. If I buy something that's affordable to somebody at an 80% meeting income level. My goal is not to make it unaffordable for that person as quickly as possible. My goal is how do we manage the turnover that we expect at that property to where we can maintain very high occupancy, because we're flipping units from move outs to move ins very quickly.

Nate Kline (32:33) And then we're taking an appropriate percentage of those units offline to renovate and get the bigger rent bumps. And if we have 30% turnover. We're probably not gonna be renovating more than 10 or 15% of the units per year. And I think most people underwrite things to renovate 20 or 30% of the units per year. And when you actually do the math and you figure out what's the time that unit's gonna be offline. And how are you gonna manage that to where you have demand for your apartments, but you have nothing to offer them because everything's being renovated. And so, people basically ignore the occupancy assumption despite what their renovation plan is. And we say, no, the occupancy is an output of how many renovations and turnovers are you doing?  You have structural vacancy and then you have the renovation vacancy. We add those two together to get to a rational answer, not just say it's gonna be 5% vacant, no matter what we do, right. So, there's that level of detail involved and then there's the entry in the exit point, right? And this is another one of those sort of underwriting assumptions that gets very dicey, is cap rate. And you can make any deal work if you sell it for a low enough cap rate.

Adam Hooper (34:00) Right. Yeah. You can make any deal look good based on the exit, right?

Nate Kline (34:02) Yeah. So, what are we doing? Well, predominantly we're increasing our cap rate versus where we bought at, but more importantly, we're triangulating the exit value with other statistics that don't involve an arbitrary cap rate. What is the replacement cost percentage that I'm buying at? And what is the replacement cost that I'm selling at? How does that compare to what I think the replacement cost is going to be in five years or seven years or 10 years based on the replacement cost trends and construction cost trends in that particular market and the development pipeline in that market. I know how much money people are spending to build buildings that aren't gonna be open for three or four years, which is roughly around the time that I'm gonna be selling something that I'm buying. Based on what they're spending on, that I know where they're gonna have to sell their asset. If they're a merchant developer, I know what rents they're gonna have to charge. I know what rents we're gonna be projecting to and I wanna make sure that I'm at an appropriate discount for quality differences and other differences at the asset relative to the competition in the future, not just the competition today and leave some meat on the bone for somebody so that if cap rates do stay as low as they are, then somebody else will pay me the same cap rate that I paid when I bought it. And then I'll show a really nice return. Where I under promised and over delivered to my investors rather than the reverse.

Adam Hooper (35:26) So you mentioned something in there that I want to pull at and I think it can be a touchy subject in the real estate investment world. And I think it's a valid criticism, right? This balance of this is a for profit enterprise, right? I mean the goal of investing is to generate cash flow and wealth through increasing the values. But maintaining that focus on affordability. Right. That's I think, again, a lot of the criticism of real estate managers in general in the multifamily space is they come in and they kick everybody out and they raise the rents to whole bunch and nobody can afford it anymore. And it's a terrible thing. Right? So how do you guys look at that balance. Cause I think that is important to talk about. And I don't think really gets talked about a lot. Those are kind of opposing goals, right? Keeping affordability or addressing affordability and generating profit, right? Increasing cash flow, increasing value. Those are, those are kind of opposed goals. So how do you guys look at balancing that? Cause I do think that's an important topic that doesn't really get addressed all that much in our space.

Nate Kline (36:29) Yeah, no, that's a good point. And I think they don't have to be in opposition if you identify the right markets and you have the right business plan and the right execution. So, there's inherent risk, right in the strategy of maximizing rents and kicking everybody out and doing the full aggressive value add business plan. So, I would argue that even when you do that you might not be getting an appropriate risk adjusted return. Based on whatever return is being forecasted. We look at it as saying, okay, our approach is lower risk and we're delivering market-based returns. Such that one would look at our deals and say, you know what? This is a better risk adjusted return than that other one that I'm looking at because guys are getting to a similar IRR and you're not kicking out the entire building in three years. And all the things that go along with that. So that's one element of it where, I think there is some alignment in a more measured or moderate approach to this than the super aggressive strategy. But as it relates to the actual fundamental pricing and affordability equation, there's also the component of sustainability of those rents and again the maintenance of the value of that property. Right? So, you might be able to grow NOI by a certain, very high percentage, but, bringing up the cap rate again, right. That's ultimately gonna be derived from what is the long-term growth rate potential of the income at the property. And If you've raised rent so high so quickly that you're now maxed out and you can't get any growth after that and basically everybody moves out after a year, you spend money turning over a unity, you get the same rent you had last year. Your growth is gonna drop off a cliff and your value of that property is gonna decline over time or at least stay flat. And so, you don't want that to happen as an investor. So, you do have to balance, I think in some respects again, if you have an appropriate lens through which you're looking at your investment projections and your exit projections and so on. We think there's a lot of value in the people aspect of maintaining the affordability, right?

Nate Kline (38:52) Because if you're doing what we're doing and you're only really raising rents significantly on new residents that are coming in, those residents don't have any relative concern about. They were paying before because they made a decision to move into that unit at the price you were charging. And so, if you slowly grow that base of renters over time and the folks that are still there are getting reasonable increases, right? You're not just jacking up rents to get them to leave. They can be happy or as happy as the person moving into the new units and should their income support it. They're gonna want newly renovated units as well. And we see people coming to us and saying, Hey, I referred my friend or my family member to the building. And I just saw their unit for the first time. And it's amazing. Like, how do I get one that looks like that. Right? And, because again, we're not trying to overshoot the market. Chances are that person who's asking us, can I get one like that? They could actually afford it. Because we're not going in there and saying that these units are $1,200 today, and they're gonna be $2000 tomorrow after a renovation. Right? It's more like the renovation premium is a hundred bucks or 150 bucks. And if the average rent was affordable at let's just use that 80% of meeting income reference point. I mentioned earlier. Well, if the person who's living in that unit is an average household, they can afford the extra a hundred or 150 bucks for a nicer without alienating them without harming them economically without kicking them out.

Nate Kline (40:27) And, so rather than trying to change the income levels of the people, what we're trying to do is find markets where there's a disconnect between the in-place rents and the affordable rents with increases. Such that the people already living there and the people moving into that area because of migration patterns or the people that are there working and have wage growth of X percentage are going to be your target are still going to be your same target audience in that market and there's plenty of places out there where people go and invest in things and they just pick the highest price point that there is, but there's no actual market for that beyond the hundred units that exist in that new Class A building. It's a depth of market discussion.

Adam Hooper (41:21) I think that's where you were saying before. It kinda gets back to your initial underwriting going in and digging deeper. Then what are the highest comps in this market to support this proforma, to target this return? It's more about, again, it sounds like you guys are going a couple levels deeper in terms of really understanding. Demographics and fabric and, and what those income levels are. And being able to deliver that renovated newer products at a not ridiculous price increase to be able to keep those folks housed.

Nate Kline (41:51) Yeah, exactly. And honestly if that equation doesn't work, like I'm not working backwards from a return, I'm working forwards from a business case. So, if the underwriting doesn't make sense in the deal, then the deal is one that we move on from, right. There's no shortage of deals for me to do. We've received analyzed, underwritten several hundred deals since the beginning of this year. We closed one, we have several under contract and if I review 500 deals and closed 10. I would be perfectly happy, looking back on that year.

Adam Hooper (42:34) Perfect. That's a great answer. Thank you for sharing that. So, switching gears a little bit, if you were to put your investor hat on as an investor in your product. What are some of the things that for listeners out there. What are some of the things that you might be looking for knowing what you know about the business? In looking at investment offerings from other managers, right? Any insights or tips that you can share with listeners as to how to look at some of those different factors?

Nate Kline (43:03) Sure. I think I would focus initially more on the sponsor than the opportunity as just a simplistic scenario. And I would ignore the returns entirely before I understood what it was that actually I was investing in.

Adam Hooper (43:24) Can you say that again? Like tip like maybe 50 times.

Nate Kline (43:25) Yeah. Because, I'm very skilled at finance. I can present any number to you and make you believe it. But it's not ethical. It's not appropriate. Right. And there's a lot more behind the curtain than what's the IRR on the deal. I think nobody is educated as much as all of us in the market would like them to be in this concept of how I evaluate risk adjusted return. Right? I mean I have two degrees, one in finance and one in economics and there wasn't a course.  In risk adjusted returns, it's something that you have to grasp from experience. And from integrating all sorts of other data points into analyzing a particular opportunity. Right. And so, I think if you ask the same question to let's say a venture capital investor, right? Like they might even go so far as to tell you, I don't care what the business is. If I trust and believe in the founder. That's enough.

Adam Hooper (45:02) We've long been proponents on the show of you pick the jockey, not the horse. Right?

Nate Kline (45:05) Exactly. Exactly. Yeah.  And so, understand. So, putting a cap on that. The last thing I would say is just like buy into the strategy before you buy into the deal. Right. Does the thesis make sense? Does the math make sense? Do the assumptions make sense? Do you trust in the ability of the sponsor to execute and deliver what they're saying, and do you feel like you're taking an appropriate amount of risk for what you're getting in return.

Adam Hooper (45:43) Yeah. And that's something that's been a challenge or behavior that we've seen certainly on the marketplace, right. Is definitely chasing returns. Right. And that's kind of the primary focus rather than necessarily digging in on some of those deeper points and really understanding the strategy behind that. I think it's easy to get attracted by a big number without necessarily doing the dig in, to really understand the fundamental opportunity underlying. So, I think that's great advice. Definitely, agree with you on that one, for sure. Okay. So, let's kind of wrap it up here. We've certainly taken, we're at the end of our time limit here, 45 minutes in. Why don't you tell us real quick when you're looking at real estate data out there for some of the listeners. What are some of your most turn to or trusted resources for data when you're looking at new markets or different acquisitions.

Nate Kline (46:40) So, I mean, most of the data that we use is subscription based. So, I don't know how many individual investors are gonna be able to access what we're looking at. But I would emphasize that most of that data is ultimately sourced from, either government data or other reputable data gathering sources, as opposed to journalistic or sponsor driven articles in white papers. Right?  So, I would encourage people to focus on the source of the data, more so than the data itself.  And I was just, for example, and this is like, fairly esoteric, but like the fred.stlouisfed.org. Right? Is a great place to see charting of all of the government data in one place. Right. And so, when we're looking at comparisons between regions and locations it's a very easy place. That's publicly available to listeners to look at quarter over quarter changes and incomes and housing prices and so on detached from whatever journalistic bias might otherwise be attached to an article.

Adam Hooper (48:11) Yeah. We're big fans of Fred as well. Tons of good data in there. Well, we'll put links in the show notes to those as well for anybody that wants to go poke around. Okay. Final three questions here. What has you most worried or concerned right now about either real estate in general or what you guys focus on with multi-family?

Nate Kline (48:31) I'm very optimistic in general about our industry and about the opportunities that lie ahead. Biggest concerns are generally always tied to regulatory situations. Right? And I'm not, I don't have anything to point to specifically. It's just the unknown. Right? And so, the best example I can give is like, make sure you're not getting yourself into an investment that is going to be impacted the way that rent stabilized housing was impacted in New York City. When the political environment just did a 180 and completely destroyed the business plan of every operator of value-add rent stabilized housing New York city, right? So only those types of governmental or regulatory bodies really have the, in my opinion, the power or ability to harm the sector as long as people are mostly hands off. It'll take care of itself and do very well.

Adam Hooper (49:42) Okay, well, the follow up to that one is. What has you most optimistic? It sounds like you maybe got a dose of optimism there. So why don't you share what you're looking forward to the most or what has you most optimistic about the space?

Nate Kline (49:53) Yeah, I think just one of the things is just the realization among the investor community. And I think the public at large, that there are really exciting opportunities to invest in private real estate and to do well while doing good in this from the standpoint of like the ESG mindset and the affordability things that are going on. We see a lot of opportunities, to be able to perhaps, get involved in more public private partnerships in the space and not really change our return expectations or our results. But have recognition that, hey, this is actually something that's a really interesting investment. And it's also something that is supporting a dire need in society, to be able to make sure that everybody's living in an attractive home.

Adam Hooper (50:57) Perfect. Well, Nate this has been a fantastic chat. One, you let listeners out there, know how they can learn more about what you guys are up to with OneWall?

Nate Kline (51:07) So they're more than welcome to check out our website.  OneWallCommunities.com. We always are posting news on there about what we're up to. There's an investor page, more information about our strategy in our team. And anybody that wants to be kind of, marketed to or ask questions. There's an ability to send us feedback and questions through that page. And so on.

Adam Hooper (51:36) Perfect. Again, we'll have links in the show notes for all of that. So again, really appreciate your time and thanks for sharing your thoughts with us today.

Nate Kline (51:43) Great. Thank you. It's a pleasure.

Adam Hooper (51:47) All right, listeners. That's all we've got for today as always. If you have any questions or comments, send us a note to podcast@realcrowd.com with that we'll catch on the next one.

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