B (7:45)

I'm not going to get into this.

A (7:46)

In crazy detail, but I do want to at least give you some reference points, some supporting data points to fact check the census. And if your investors are asking you about the census numbers, this is some good ammunition to, to give back to them to get the record straight. So after all, I think anyone would argue any would agree with this that if you see something that's questionable or debatable in a data point, it's always smart to cross reference. And, and so I think we should look at this like, are there supporting data points that could, that suggest those sentence numbers could be true? So let's look at it. Well, first we look at leading private sector data sources like Costar RealPage and they're showing apartment starts are the lowest levels in 12 to 13 years. That's a long time. That takes us back to the mid 2010s coming out of the great financial crisis and well before the years leading up to COVID 19. Now I do think we're maybe seeing those numbers leveling off a bit. And in fairness, you know, those data sets also, they're only reporting through Q2 at this point. But there's nothing in those data sets to suggest a big resurgence in June or any kind of massive early signs of a rebound. A big, massive rebound in the starts numbers that can take us to numbers surpassing the highs of 21 and 22 or even nearing those levels for June and July. So again, just nothing to suggest that could be there. Second, maybe you say, well, maybe, Jay, those private sector data sources, maybe they're wrong. Okay, well let's look at other supporting sources. Okay, the American Institute, Institute of Architects, they report an architect billings index for commercial real estate projects and they break it down by sector. So if we have a start or a permit, you need plans from an architect and that should generally get picked up by this index. But the multifamily category here has been continually trending negative for two plus years and no sign of a rebound or even yet of a leveling off. So that's a big red flag for the census data. Another leading indicator we have the National Multifamily Housing Council survey of multimillion builders and developers looking at reasons for delayed starts. And that survey still shows elevated numbers of delays for projects that just don't math out right now. They don't pencil out either. It's the reason cited are either economic uncertainty or project not economically feasible. Either way, that just means the math doesn't work. It's not penciling. And that's largely due to high costs of debt combined with flat to falling rents. Now, thankfully, and I mentioned this before, we are seeing that construction costs are pretty flat even with tariffs and whatnot. But financing costs are much higher today than they were when starts were booming a few years back. So this is another red flag for the census data. And then lastly, let's look at what people in the know are saying. We just wrapped up REIT earnings call season. I covered that on this podcast. And this topic, construction, that was a hot topic on those earnings calls. Now remember, I've talked about this before. Most people know this. The REITs have a lower cost of capital than most builders. So they'll even brag about this sometimes. They could, they'll say they could build, most others can't. But even the REITs are saying it's a tough environment to build right now at, at maa, the nation's largest apartment REIT in terms of units count. Brad Hill, the, the, the CEO of maa, he said, and by the way, they are an active builder, but they're also pointing out how tough it is. And Brad says if you look at the development pipeline, this is from the earnings call. If you look at the development pipeline and the new starts that we're seeing, they are significantly below these last 12 months are significantly below historical averages. Now we have certainly seen that trend down every single quarter for the last year. And then he also said for more products to work, quote, the returns are going to have to improve 10 to 20% or so to make those feasible. That's a combination of construction, cost reduction, rent growth, improvement in order to make those numbers work on a more broad basis. And then Avalon Bay, which is the nation's biggest department REIT by market cap. So MAA by units, Avalon Bay by mercap CEO Ben Shaw said this. He said new supply in our established regions continues to decline to levels not seen in over a decade. So I can go on and on, but the point here is obvious. If construction starts were up, the Reeds would know it, they would see it. You know, just between MAA and Avalon Bay, they're combined to operate in most of the nation's largest MSAs. But they're not seeing a rebound in starts. They're saying we're at historic lows. So that's another red flag for the Census data. And by the way, it's not just the multifamily side. Rick Palacios Jr. Palacios Jr. From John Burns Research and Consulting. He poked holes in the July data for single family starts to let me read what he wrote on X AKA Twitter. He says today's census print on single family housing starts was was a head scratcher. Homebuilders we survey with a consistent sample size with minimum noise saw starts per community drop 13% year over year nationally in July with all regions falling except for the Midwest. In order for the sense data to be correct on July, single family starts of plus 7% year over year, not seasonally adjusted builders would need to grow community counts plus about 20% year over year, which is very hard to believe and doesn't match what we're hearing even from the big builders. Okay, so I hit you a lot, but let me close with this. You know, I'm not sharing all this just to poke at the census. You know, I, I actually, I do.

B (13:17)

Believe they've got a lot of good people.

A (13:19)

I do believe they're trying to do the job right, but they've been under resourced for years. This is not a new thing. By the way, if y' all remember, I was posting a lot back in 2023 about the census missing the big decline in starts that we saw first in the private sector data. They were still showing an incline when, when COSTAR and Real page were showing starts on the decline. So this isn't new and there are real consequences to bad data. You know, something I think has to change because our policymakers, they rely on census data and I don't think they have the right data on housing starts. And just think about the potential major consequences or potential consequences to the census materially overstating housing starts if this trend continues. First inflated data ultimately starts. You know, that could remove some of the urgency to adopt policy solutions that we need both at a local, state and a federal level to get construction going. Again, that, that's a, that's a real risk. If they say, hey, no, look, the numbers are actually pretty good, that could give a false sense of accomplishment that when those numbers really aren't going up. Second thing, inflated data on starts might also convince the Fed that high interest rates aren't slowing down construction starts when in fact we know they are. Now, of course, thankfully, I'm sure the Fed has access to higher quality private sector data sets too. So hopefully they're relying more heavily on that. All right, so let's move on to rental Housing trivia. All right, so speaking of housing starts, in what year did multifamily housing starts peak in the US and the census started tracking multifamily housing starts in the I believe it was the mid-1960s. So I'm going to give you five choices here. What year did multiple housing starts peak in the U.S. is it A, 1972, B, 1977, C, 1985, D, 2006 or E, 2022? So give that a guess and we will come back to the answer in a bit. But first in the news. All right, this one we review headlines touching on single family rentals and multi family rental trends. This first headline comes from Boston public radio station wbur. They reported international students are signing fewer Boston leases amid uncertain future. I'll read a little bit from this article. It says, as anyone familiar with the Boston rental market knows, a Sept. 1 lease usually is secured months in advance, given how the region's housing cycle revolves around the academic calendar. But in student heavy neighborhoods, including Allston and Mission Hill, lease signings have been sluggish. Data show some Boston Realtors who work in the neighborhoods near large universities like Boston University and Northeastern attribute the slowdown to new student visa processing protocols, which has imposed additional restrictions on foreign born students seeking visas to come study in the U.S. all right, so there have been some rumblings across the industry about seeing less demand from international students this summer slash fall for apartments near major universities and not just student housing specifically, but even conventional projects in major college markets like Boston and elsewhere and then specifically to Boston Equity Residential. On their earnings call a few weeks back, they did note that, quote, it does appear that the student inbound activity through the end of July is a little bit below normal. And they also noted it's a small piece of the resident base, though. So that is certainly a trend to watch. And I'm sure we'll know more over the next month. All right, our second headline this week comes from CNBC. And this is from Diana Olich's property play newsletter and article she wrote for CNBC.com it says AI is moving into the apartment market, taking over work orders, lease renewals, showings and more. I'll relive the article. It says technology has been stepping in to address the needs of tenants, landlords and large multifamily operators. And now AI is turning that slow progress into a rental revolution. One of the more mature categories for AI in the apartment space is virtual agents talking to prospective residents. And then it goes further on and it's a, it's a good read. I think Dana did a good job on this. I've talked about this before. I talked about this in the Apartment Rent Apartment REIT recap episode as well, because it was a recurring theme in many of these earnings calls. And what struck me from the comments this past quarter from the REIT executives is that they're suggesting they're really starting to see real returns from these investments in AI on leasing and renewals and other operations. I shared this in that in that episode. But EQR pointed out that it's not necessarily reducing expenses, but it is reducing the rate of growth and so the rate of expense growth, I should say. So we're likely still in the early innings here, of course, but it's going to be interesting to see how this space continues to evolve, both in operations and potentially even the investment side as well. All right, so let's circle back to this week's rental housing trivia. Again, the question was in what year did multifamily housing starts peak in the US and I give you five choices and the correct answer is a 1972. They peaked that year with more than 900,000 multif family units starting. So that's obviously an incredible number. And so it was 906,000 units that started in 1972 and, and then in the year before and after that it was approaching 800,000. So that was the real you know, we think we built a lot in 2000 in the here in the 20 twenties and we certainly have. But the real golden era for multi Valley construction was certainly in the 1970s and early 1980s. All right. And so with that, it's going to take us to today's interview. And so we'll be switching gears from construction data to now talking all things LP equity. So again, everybody wants it, everybody needs it, but a few can get it right now. So let's hear from one of the larger LP equity shops from multifamily and BTR Trinity Investors. Dan Meter, our guest this week. He is the founder and managing partner of Trinity Investors, which is based in South Lake, Texas, outside Dallas. Trinity says they are a $6.5 billion investment shop with 150 real estate investments and 20 operating company investments. And as you hear today, they really like multifamily. And so we're going to talk with Dan about what he's looking for in multifamily investment opportunities, what he's looking for in a GP and what type of of opportunities really interest them right now. So let's talk with Dan.

B (20:36)

Foreign.

C (20:43)

Now.

B (20:43)

We Enter the interview portion of today's podcast. And I am honored to welcome in studio Dan Meter, founder and one of the partners at Trinity Investors. So, Dan, thank you so much for being with us.

C (20:54)

Well, Jay, thank you for having me. It's great to be here on a beautiful Friday afternoon and so excited to talk about multifamily housing.

B (21:02)

Nice and hot in August.

C (21:04)

So.

B (21:05)

So, Dan, before we jump into it, tell us a little. You came right down the street from South Lake, home of Trinity Investors. So tell us a little the background of Trinity.

C (21:12)

You bet. So I think first and foremost, I'd like to talk a little bit more about a little bit of background on myself, please, and a little bit of background on Trinity. So I'm not a native Texan. I actually grew up in Colorado, grew up in the greater Denver area and came to Texas to seek my fame and fortune, I guess, for college. I went to. I did my undergraduate work at SMU here in Dallas, which is what brought me to North Texas and never left. So it's been kind of an interesting sense of a bit counterintuitive. I spent the first 20 years of my life in Colorado, which is where everybody wants to go later in life, and then I've spent the last 40 years here in Texas. But, you know, it's interesting, Jay, and in conjunction with preparing to come and talk to you, I was trying to think a little bit more about how I've shaped my investment philosophy. Right. Today, we're obviously talking about multifamily investing. We're talking a little bit about the current market and really talking about sort of how do the players come together to. To get things done. And so I'm going to be a caveman. I don't know. I just turned 63 this week, so maybe I.

A (22:21)

More about.

C (22:22)

Thank you. About. About my age. But. But many of your listeners may or may not know about the concept of having a paper route. So when I was at junior high school, I had a paper route. What does that mean? That meant I got up at five o' clock in the morning and they dropped the Rocky Mountain News on my front porch. And then I had to fold the paper and I had to deliver the paper in my neighborhood. And it was opportunity to make a little money. I think my parents were probably pleased I could get up and do something productive.

B (22:51)

They.

C (22:51)

But the thing that will blow people's mind is I had to collect my receivables. That meant that if that the people paid, it was $3.10 for a month's subscription to The Rocky Mountain News. So my first introduction to multifamily, jay, was collecting $3.10 from apartment renters who took the Rocky Mountain News. So here's the reason I bring it up. It taught me about cash flow.

B (23:18)

Yeah.

C (23:18)

Right. Because if I want to go to the movies with my buddies, and this is 1977, I might have to go collect receivables. Right. I mean, there's nothing more telling about a tenant when an 8th grader knocks on your door and you ask for $3.10. And I kid you not, I got paid in pennies once.

A (23:39)

Wow.

C (23:40)

Right. So this whole idea about multifamily and tenants and absorption and affordability, sometimes you learn by collecting $3.10. So anyway, so I just thought that's kind of an interesting introduction to multifamily and certainly was introduction to business for me. And. And most importantly, cash. Right. One of my many phrases, Jay, is that cash is more important than our mothers. So. And my mother, by the way, is 94 and a half and still alive, Dolores. And she reminds me about collecting receivables. I think the second thing that I do want to touch on, other than coming to Texas, is that I really realized that, you know, accounting is a language of business. So in addition to having an undergraduate degree from smu, I do have a. What's called a cfa, a Chartered Financial Analyst designation. And I actually was the chairman of the cfa, but I also am a cpa. And really, the. The reason I bring that up is that this idea of how we evaluate quality of earnings, how do we really get a sense of what the true cash flow of any asset, but certainly a real estate asset, really comes with not only the creation of the financial statement and then the disaggregation or the analysis of that. It's always felt like that in order to really understand the financial process, understand sort of how accounting works, how cash flow works, he had to sort of understand how financial statements are created and then how they're. How they're analyzed. And so that's something that's been important to me, and it's something at Trinity Investors. You know, we do take an analyst approach to what we do. And I think it's very important for listeners to understand that while we all want to learn how to make money in commercial real estate, I think it's really important we have to understand some of these foundational principles about cash management, about quality of earnings, about financial reporting, because all of that really sort of foundationally builds what we hope are successful investments. Yeah.

B (25:38)

And Speaking of successful investments, you all have been successful in multifamily. So at what point did you see an opportunity to focus in on multifamily and what did you see that I guess, drove that interest into the sector?

C (25:51)

Yeah, great. Great question. So, first of all, Trinity Investors, we're a six and a half billion dollar investment shop. We're based in South Lake, Texas. We've got 150 real estate investments and 20 operating company investments. So we do two things, Jay. We do spend a lot of time and effort in commercial real estate, but we also have a division that focuses on control investing with operating companies. And we'll touch on that a little later in our discussion because there really is a lot more interaction and overlap between those two investment styles. But really, Sanjay Chandra and I have been business partners for 26 years now. And Jay Fuquay also has become an owner. So the three of us as owners in the firm have built a team of about 50. So when we decided that, hey, do we want to get into multifamily? It really came out of the great financial crisis. We did our first real estate investment, which is actually in senior housing. We did that in 2009 and then we sort of built from there. But, but ultimately, Jay, I think, you know, we have over 22,000 multifamily units in our portfolio today. But you've said this many times in your podcast series. You know, multifamily is a, is a core asset for lots of people. Housing is a core asset for lots of folks. So from our perspective as a multi strategy investor, which means we're in senior, we're in multi, we're in industrial, we are in hospitality. I mean, for us, we had to have of footprint in multifamily. And while we've seen ups and downs, you know, we've now been in it for 15 years and, and we're pleased that we're, we're here.

B (27:30)

Yeah. So with that much scale, multibillion dollars, 22, that 22,000 units, why stay in the LP role as opposed to, you see, some groups that rather be in the control position at the gp.

A (27:43)

Yeah. All right.

C (27:44)

Well, one of the things we're going to talk about today is I'm going to call it the B rule. There's three Bs.

B (27:49)

Okay.

C (27:50)

That we're going to keep coming back to today. Okay. The first one. And because it's the 1st of August, we're going to talk about baseball.

B (27:56)

Yeah.

C (27:56)

Okay. Because I'm a huge baseball guy, I'm a huge Rangers fan, and you know, we just saw enormous activity at the trade deadline. The next six weeks, for any of you, baseball fan or not, the next six weeks are going to be great because both leagues, American and National, if they're wide open, lots of people could, could win. But the reason I bring a baseball number, not because it's a sport, Jay, because it's not a sport, it's an institution.

B (28:21)

Yeah.

C (28:21)

The institution of baseball teaches us not only about sports, but teaches about behavior.

A (28:28)

Yeah, right.

C (28:29)

Because so one B is baseball the second B business models. We really need to think about business models. When we get into this GPOP thing, we're really thinking about what are, what is, where's the value at, what's the business model and what are the interests between those two. And last of all, and this is always going to be true, are balance sheets. Right. So the three B's today are baseball, business models and balance sheets. Now I do have a bonus. Okay, that's another B bonus because the bonus is books. I'm a big book guy. So sometime during the course of our discussions today, I do want to bring up a couple of books that I think will, will help our listeners better understand maybe some of the dynamics around not just the capital markets, but how we put together deals and how we begin to establish healthy relationships between LPs and GPs. Now let's get back to your question. Yeah, okay, that was a pretty long preamble. Yeah. So why are we an LP instead of a gp? First and foremost it gets down to domain expertise. Right. So if you think about, let's just stay in the development world, let's say we're going to build a 300 unit apartment complex in Frisco, Texas. Right. So it all begins with what you have to go out and look for land. You've got zoning issues, you've got pre development issues, but those, there's a lot of details there. Right. And so if you're trying to put money to work in the space and you decide you want to take it one development at a time, it's a little bit like one at bat at a time, it really becomes a very tedious business. And if what our mandate is is to go out and find well priced, well structured alternative asset investments, we trinity are not in a position to go out and get down to the development level. So from our perspective and our investment philosophy, we really want to find domain experts that are in the development business. Right. Because there's so many details around that. And as a limited partner or as an institutional investor, one of the things you have to do is you have to say, okay, am I going to be involved in all those details where I'm going, am I basically going to share the economics with someone else that does that? Right? So I think the first and most important part of that GPLP dynamic is who is bringing what value add to the party. How do you line the interests between the GP and the lp? And this is the part that your listeners are most sensitive to is, well, how do we get those juicy GP economics, right? I mean, how do we get something for nothing? And the answer is you generally don't. So even within this concept of the COGP or the split gp, if you're not bringing value add and what that means is generally either a business model with employees and, and, and goals and targets, or you're bringing capital, but that capital band up being in the form of free development. It may be credit enhancement, right? We talk a little bit about balance sheets and how do balance sheets support the need for credit in real estate. That's its own podcast, isn't it Jay? Just how do we figure out how to put the pieces together? But certainly for folks listening today, I think what's most important is GP economics are not as good as you think they are. And LP economics are generally a function of balance sheets.

B (31:49)

So is that part of the attraction for an investor to, to, to invest with you as opposed to what's the advantage? I guess.

C (31:56)

Oh yeah. So let's, let's, let's digress from there a second. So everybody loves to talk about real estate, right? And so what? One of the things that I, I talk about is the country club deal, right? Where guy comes in, you just finished around, everybody's the 19th old, he's like, hey, there's this 32 unit apartment complex that we can buy to steal. And it's a great, we get the, we get the tax write off, yada, yada. Well, so everybody throws some money in the pocket bucket and the next thing you know, well, we got to go get a bank. Oh well, who's going to guarantee that? But, well, I'm not going to guarantee. So you get into the, to get into the credit enhancement, you get into the liability, but ultimately you cobble it together and you buy a 32 unit apartment complex. Well, guess what? Tuesday night at 11:00pm Unit 212 toilet breaks. Well, who's going to go fix that? You know, so one of the things that I think is underappreciated when you see what I'll call residential investors or retail Investors investing in real estate is they underprice their time and they underprice the reality of managing real estate.

B (32:58)

Right.

C (32:59)

So one of the reasons that we like people to come to Trinity is we are going to evaluate sponsors, we are going to evaluate structures and risk, we are going to provide direct real estate exposure, limit liability and make sure that nobody calls you to fix their toilet at 11 o' clock on Tuesday night.

B (33:18)

So if someone's investing with an LP as opposed to a GP, you're basically doing all the front end screening of the assets, the sponsor, all that yourself and have the expertise to do that.

C (33:25)

Yes. Not only do you have to do that, but you really have to not only understand it sort of on the going basis, but then there's this ongoing situation. Jay, one of the realities of the market we're in now is that we do have some multifamily that's under stress. And what we've seen certainly is that when you have deals that underperform, sometimes people decide to just quit working. Right. And so one of the things that we do provide for investors is even if we're seeing underperformance, we're going to stay at the wheel, we're going to work through that, whether it's directly with a bank, with a development partner, but we want to work to preserve capital, you know, good times and bad.

B (34:02)

So in doing that, talk to us about how do you evaluate a potential.

A (34:05)

GP as a partner?

C (34:07)

Yeah. So this gets right in the middle of this concept of business model. So, you know, it's interesting. Everybody talks about a track record, right. One of the things that cracks me up particularly having done this for so long is is it really your track record? Is it someone else's track record? You know, it fascinates me how many people have, have, you know, everyone wants to take credit blackrock's track record, right. I mean I, I walked in front of the blackrock building so I, I have a piece of their track record.

A (34:36)

Right.

C (34:37)

So I think track records are a little bit overrated now. I don't want to diminish. There's a lot of great firms out there that have, you know, done a lot of things. But I think it's very important when you're looking at GPS to not only look at their track record but look at their, their participation in the track record. And as you would expect, one of the first things that we're, we're going to spend time on when we're evaluating GPS beyond just their domain expertise, you know, how many developments have they Done. What's their particular area? Real estate. But really what have they done in, in stressful environments? What have they done, you know, in downsides?

A (35:14)

It.

C (35:15)

One of the realities of the digital world, Jay, as, as you will know is that, you know, sooner or later we're going to find this out. So we always ask early on, you know, did you have to give something back to the bank? What did you do in difficult or downside situations? Listen, you can't take risk without downside. Yeah, but what we're looking for is really transparency, character, you know, what, how do they handle that situation? So track record is really important. You know, one of the things we're really, we talk a lot more about now is well, how many cycles have they lived in? Right. We talk about and certainly in multifamily, where we have been or near the bottom of a cycle and there's certainly things we've all learned or had to relearn. But different types of real estate have different kinds of cycles. And I do think that for a GP that I think would shine or be in that upper quartile analysis, not only would we see a track record that shows their leadership and their ability to correct challenges, but also have they been able to move through difficult cycles, have they built longer term relationships or are we one of the 20 LPs? So there's a number of things that go into that. We, we have developed a fairly regimented approach to due diligence on general partners and obviously it's dynamic and organic but, but ultimately it's, it's several of these things. I will say one of the things that we particularly push on is we want to talk to other of their investors. Yeah, right. Because ultimately to better understand how a GP works or how they manage is to talk to people that they're working with now.

B (36:55)

Yeah, that makes sense. Just getting references like anything else. Like.

C (36:58)

Yeah, just like, just like pediatricians and gardeners.

B (37:02)

Yeah, yeah. Except a lot more money at stake.

C (37:04)

Right, yeah.

B (37:05)

So you alluded us a little bit earlier, but do you prefer investing in a fund? Individual assets, the operating company? What's the best approach?

C (37:15)

Yeah, so again, obviously in the commercial real estate side of our shop, we generally look to do direct asset investing. You know, we, over the last 20 plus years we've aggregated high net worth investors into 250 different deals. So we, we've sort of developed and, and I think done a pretty good job of, of doing the single asset investing. But I think, Jay, what's very important to point out is that diversification has to remain in the middle of your strategy. Right. So if we do have an investor that wants to be in opportunity, particular multifamily investment, we're very mindful that we need to have them in other investments as well. Because certainly, and particularly what we've seen here in the last couple years is diversification becomes such an important part of longevity and sustainability. Right. I think a lot of times people see something, oh, this is too good to be true. Generally, it is too good to be true. But if you, if you put too much in any one investment, then, then problems can begin. So while we do single asset investing, we're very mindful with our investor base that they're in multiple investments. We've also found at times that if we put two or three similarly styled piece of real estate or maybe in a geographic area, so, so at times work will put multiple buildings or multiple properties into a single investment.

B (38:38)

And how are you and your investors thinking about multifamily right now? Obviously there's been some challenges. You know, we've had particularly supply side issues last couple of years, also higher rates, yields have compressed.

A (38:49)

So that's of course true for a lot of assets.

B (38:51)

But how are you thinking about multifamily relative to other alternatives and other types of real estate as well?

C (38:59)

Yeah, well, I think first and foremost, and you know, maybe we should get a bumper sticker that says this. Don't forget that real estate is cyclical. Right. So one of the things that we do appreciate about our model is that because we're in other types of commercial real estate, we're not seeing the same cycle in flat roof industrial or maybe in senior housing that, that we're seeing in sort of either ground up or, or existing multi. But at this point, what, what we see with multi right now is, is we're still waiting. Right? I think, you know, we, there are a number of, I think very smart people saying, hey, let's get a little bit of relief from the Fed and then we'll see 25 really start to loosen up. That has not happened. Right. I mean, you've done that on some of your podcasts, talking about, you know, rents have not really bounced back. We have not seen rates come down like people thought. So I would say at this point, multifamily still remains a very choppy market. I think you talked about it recently. The bid ask spread is not yet tight enough where we see buyers and sellers really agreeing on price. So I, I would say this. I, over the years, I've always respected cycles. I Mean, I started my career as in banking in Texas. My gosh. I mean, talk about cyclical.

B (40:17)

Yeah.

C (40:18)

But, but ultimately I do subscribe to the concept at the bottom of any market, whether it's real estate or commodities or equities, whatever is, you have to see capitulation. Right. You have to see people say, oh, it can never get worse. And about the time it never gets worse is about the time it starts to get better. So I do think that perhaps.

A (40:43)

Maybe.

C (40:44)

We'Re near the bottom. I'm not going to. I'm not a market timer, but I will say, because it's worse than it was, we're not at the bottom yet. And if we're not at the bottom yet, then I'm sure not a seller. I don't want to sell at the bottom. Yeah. And if we're not at the bottom yet, why should I be in a hurry to be a buyer?

B (40:58)

Yeah. Speaking of buyers. So as you know, a lot of today's deals require accepting some softness in the short term, even sometimes negative leverage on the belief that there's a longer.

A (41:10)

Term rebound to come.

B (41:11)

So when you're seeing deals across your desk where year one, the year one, the pro forma, is weak, but they're assuming some good optimism for years two, three and beyond, how do you think about those type of deals?

C (41:24)

Well, first of all, let's just, let's get some terms. I'm an analyst, right? So I want to get. So obviously this concept of negative leverage looks at yield on cost, right? So essentially, everyone's got a little definition of yield on cost. But the other side of that equation is what is your weighted average cost of capital? Right? And so again, I'm a CFA charter holder, and this is, this is down our fairway. What is weighted average cost capital? How do you calculate it? This and that. But just to remind our listeners that negative leverage is effectively the concept that our debt, our weighted average cost of capital is higher than our yield on cost. Right. So specifically to your question, how do we see under what circumstances can we believe that yield on cost will go up? Right. Or the other implied concept is that how will our cost of capital come down? So I think I would want to add a couple of concepts here for thought. First of all, you know, what deal are we in right now that doesn't have negative leverage? Right. At this point, you have to be realistic that if you can't grow, rents and expenses are rising and your basis doesn't change. Right. Your yield on cost is effectively disinflation Right. It's coming down and since rates aren't coming down, it's like, you know, we're on the short end of the stick. I, I think you need to add one thing that. Yes. I mean obviously if you're doing a ground up construction, your yield on cost is going to be based on, you know, 24 month out stabilized rents. Right. And so there's a range of outcomes. But one of the things that I think people should think more about is the risk of execution. Jay Fuquay in our shop, he's our chief investment officer, he always talks about the fact that one of the risks that you don't get paid for is the risk of execution. Right. So let me give you an example. We've got a project out in California where we bought a track of land and we're building out I think 16 different buildings on a retail, right? So you've got housing, you know, you got a grocery store coming in. But think about the complexity of building 16 buildings, right. I think about the difference between again, simple concept, building a hospital versus building a warehouse. Right. The complexity of building a hospital, oh my gosh, all of that versus you know, concrete tilt up walls with a roof, you know, and some doors. So I think people should add this question of both execution and complexity to the underlying assumption that your yield on costs are going to drift up.

B (43:57)

So let me go back to these last few questions I can ask you. So given those circumstances and the challenges, does that make multifamily more or less attractive than something else you can do these retail buildings or whatever the other options?

C (44:10)

Yeah. So let me try to answer that in two ways. I think first of all, today's market you really got to bifurcate ground up development versus buying existing or what we call workforce housing. We are bullish on ground up. We've just, in the last six months we've done a couple of ground up deals, one in North Texas and one back east. But ultimately you can define value add, right? You're taking a piece of dirt, you're evaluating a construction cost, you're looking at that risk of execution. So I think in the ground up market it really comes back to credit markets. You know, what is that? What's that loan to cost? What is that lender going to do? Do you have much interest rate risk? We feel like those are more manageable risks. I will tell you this to, to, to rush in and buy some workforce, multi, let's say we go in and, and we buy something in, in Arlington, Texas at you know, 185A door or something. The complexity in that market right now is amazing. Not only do you just have tenant management and repair and maintenance, but what are those properties going to be worth three years from now, four years from now? Boy, that I have no idea. I mean we know that urban core, fairly new product is still trading in that high fours, low fives. We see that. But if you take out a 85 vintage 300 unit apartment that's 87% leased at 1458 bucks average rent, I have no idea what that's worth.

A (45:41)

Yeah.

C (45:42)

So I still think that market is, is just needs time.

B (45:46)

Yeah, I agree. So, so you touched on this a little bit. But let's talk a little about your buy box. You know, when you look at multifamily or build to rent right now, locations, asset classes, it sounds like new construction is one of them. But what are you interested in and how does the underwriting process work?

C (46:06)

Yeah. So you know, first of all, you know, we have a bias to southwest, Southeast and whether that's just basis, whether it's, we don't have as long plane rides to visit our assets, I, I will tell you that, you know, and you go to our website, you know, traininginvestors.com and you can see we've got 90 assets in Texas. Right. We, we are strong proponents of demographic growth. You know, growth in jobs and income you talk about all the time. So we're, we're going to have sort of what I would call macro biases to certain markets generally in the Southeast and the Southwest. Some of that is basis driven, some of that is, you know, tax regimens. But, but ultimately, you know, a couple years ago I used to talk about why would anybody go to Buffalo, New York to build apartments. Right. When was the last time you heard somebody moving to Buffalo? And after that particular conference, I had a guy come up to me and say, hey, you know, I made a lot of money multifamily Buffalo. So I'm not saying you can't make money in Buffalo. I'm just saying that I don't think people wake up in Texas and say, hey, let's move to Buffalo, New York. Right. We need to, to pay attention to those submarket dynamics. So our buy box to, to your point is always going to be start and be biased by, you know, market submarkets, states. I mean, I'll tell you right now, you know, California is expensive, but you know, Illinois is bankrupt. Right. I mean you go buy real estate in Illinois and all they're going to do is find A way to tax you. Now, no disrespect to my friends and you know, I like the Bears, but Illinois is just, it's a third world country, right? I mean, so, so you can't ignore that stuff. In our senior housing portfolio, licensing, state level licensing is a huge issue, right? So let's look at taxes, let's look at basis, let's look at demographic growth. Let's, let's try to create as much of a tailwind as we can. Now once we get to that, as I said earlier, in today's market, the build versus buy, I think is still leaning to the, to the build side primarily because construction financing is a little bit more difficult to get. So we get balance sheets or is that B. Again, bigger balance sheets can get the financing that, that financing when it drops into 2027. Based on your podcast, I've heard we're gonna, you know, we're gonna burn off these absorptions, right? So I feel like that, you know, what's that old Wayne Gretzk Gretzky phrase we all know, right? It's not where the puck is, it's where the puck is going to be. What cracks me up is that nobody really knows who Wayne Gretzky is anymore. I mean, I'm 63 and I thought everybody knows Wayne Gretzky and they're always saying, well wait, isn't he the guy whose daughter's married to the golfer?

B (48:36)

Right, that's funny.

C (48:37)

It is crazy. But I don't know. I, I think the buy box at this point begins back with that GP balance sheet. It goes to, you know, is it reasonable, reasonable capital stack in terms of assumptions around your construction loan. You know, you got a lot of sort of pref equity or, or mez or you know, you have flavors of capital. But ultimately if you know that, hey, I think I can be into this property for 285 a door and I know I can get, you know, $3 rents or something close to that. It takes some of that out. I mean obviously you get into absorption and, and do I have a competitor opening across the street. But we, we generally are biased to, to ground up at this point. And, and again, when will we get back into the water on, on workforce multi? Not for a while.

B (49:32)

Yeah, I think that's going to be a while. And by the way, for our friends in Chicago, there's some nice parts of Chicago, there's some wonderful parts.

C (49:38)

And, and, and to be fair, Chicago is one of the better housing markets in, in the country because of that supply Demand imbalance. But it's a union town. I mean, you know, Jay, if you want to go up there and talk to those union guys, I'm good on you, man.

B (49:56)

Oh, no, I'm just going to talk to people, talking to them. So not.

A (50:01)

All right.

B (50:01)

So I'm sure we have some GPUs who are watching or listening and they feel like they've got a good story, they feel like they've got good opportunities, but they're struggling to find a way to get to the right LP partners. And so for those people out there, and this is a common theme, I hear this challenge a lot. And so what advice would you give them?

C (50:22)

Oh, I'm really not in the advice business, Jay. I can tell you a little bit, sort of how we look at the world, but, you know, it's, it goes back to business models. Where's your value add? I mean, don't, don't oversell yourself. You know, one of the things that we get a kick out of when, when we have groups come in and pitch us. And again, we are looking for new GP relationships, we are looking for new development relationships. So we appreciate when people knock on our door. But, but ultimately it starts with, you know, do you know what you're doing? Can you defend that? What you're doing, you've done before, and whether that's track record or whether that's development experience, you know, do you have a balance sheet that supports not just the project you're pitching me on, but your business? And I think last of all is, are you realistic about how hard this is? You know, one of the things, Jay, that, you know, because we look at a lot of businesses, I have enormous respect for people that own shitty businesses. Right. And I will tell you that property management at the multi family level, that's a shitty business.

B (51:33)

Yeah.

C (51:33)

And when I find groups that not only do they, you know, a lot of people suffered, oh, we're going to go to Gracetar. You know, we're, you know, but when I hear people say, you know, what, how we meet potential tenants and how do we screen leasing managers and how do we manage landscape contracts? You know, that's so important to us because it's the details. Right. Let's go back to baseball. You know, one of the great things about baseball is you evaluate hitters on their body of work. Right. A guy can go 0 for 4 or 4 from 4 that didn't make him a good hitter. And when I'm listening to a new potential general partner, where and how are they understanding the risks of their business model. Right. And so one of the early things is, oh, we're vertically integrated. We, you know, we manage to the, to the front door. Oh, I always, you know, outsource. I'm not saying that one is better than the other, but it has to fit their overall business model.

A (52:27)

Sure.

C (52:27)

Does that make sense?

A (52:28)

Yeah.

C (52:29)

I still think that, that the industry has outstripped its talent in property management. Just think about this, Jay. If you're a 28 year old college graduate and you're looking to try to do something and so you have an opportunity to, to get involved and next thing you know you're managing a 300 unit apartment complex. How hard that is?

A (52:47)

Worth $100 million.

C (52:48)

Worth $100 million. But you know, you've got all the, the building issues, you've got the tenant issues, you know, somebody, you know, shoot somebody in the parking lot. What? I mean, it just think of all of the moving parts that you have. You know, I have enormous respect for property managers and property management companies, but I do not want to own one.

B (53:10)

Yeah, but now it seems like they were in the role of counselor sometimes too. Now they're residents. There's so many. Yeah, it's, it's a, it's a critical role.

C (53:17)

You know, let me, let me bring up one other concept. This goes back to business models and this really goes again back to due diligence and underwriting. I don't think in today's market we spend, and I spend enough time talking about the cost of client acquisition in multifamily. Right. We talk about competing for tenants, we talk about affordability, we talk about background checks. But you know, when you bake in tenant credit risk, when you bake in the cost of turning apartments, I mean, do we really know the cost of a new client? You know, one of the things that we spend a lot of time on in our opcode division is, you know, if we see a company that's, that's driving a great business model, do they understand the cost of acquiring a new client? And what does that mean and how do you manage that? So I would encourage maybe some of your other speak, I mean, people that are in the development business because I'm not smart enough to know, but great question is, how do you decide what the cost of a new tenant is? Because it's a lot more complex than you think. And really price theory, right? Because ultimately everybody says, well, I'm pricing $10 less than the guy down the street. Right. Well, is that really the best way to approach Pricing? I would say maybe not and cracks me up, particularly with AI and dynamic pricing models. And really this idea that we don't have transparency in rents anymore. I think pricing strategy becomes a huge issue for successful apartment owners.

B (54:53)

So let's just add on to this a little talking about GP partners. Beyond delivering great returns. Everybody wants, of course, what are the characteristics and traits of an ideal GP partner for you?

C (55:06)

Well, first and foremost, about character, right? Who are these people, you know, do they stand behind what they do in more difficult times? I, I think an ideal GP partner at this point in this market is realistic, patient, dedicated to aligned interests, and has a decent balance sheet. You know, you know, there's, there's a lot of realities in, in investing, but one of them is that, you know, if somebody has a great track record, everybody wants to invest with them, right? So guess what? They don't have to really spend time raising money, right? Then the folks that are breaking into the business or don't have a track record, they spend all their time trying to raise money. So I sort of like a little bit of a balance. You know, we, we have no trouble, you know, if we find a GP we like and let's say we're going to do one deal a year with them. You know, we, we, we hope they find other LPs, we hope that, that they can build out and, and broaden out themselves. So I guess maybe what I'm saying is I don't like gps that, that present as an extreme, like, oh, we don't need anybody's money, or we will take everybody's money. Those are the two that I, that I probably would shy away from. Yeah.

B (56:21)

Dan, you mentioned some book recommendations earlier. Did you want to expand on that at all?

C (56:24)

Well, you know, obviously I'm a big behavioral finance guy, so Daniel Kahneman, you know, he's a Nobel Prize winner. I just, just a, just an aside here. Daniel Kahneman took his own life at the end of March of this year. He decided a long time ago, you know what? Why do I want to, to live out the end of my life unsuccessfully? And so euthanasia. You went to Switzerland. He said of March 2025. I'm doing it. And I was just like, what an amazing thing to say and then do, right? He did a podcast like five days before he died. Oh, my gosh. But Daniel Kahneman is the man, okay, because he's the father of behavioral finance. He had other guys that work with him, but to me, learning more about behavioral finance. So Richard Thaler. Richard Thaler's got a couple of books, Richard Thaler, for those of you that ever watched the Big Short, which is Michael Lewis. I'm also a big Michael Lewis guy. Spend more time with behavioral finance. I, I just whether, you know, Lewis has got great books. The Big Short, Money Ball, Blindside, Boomerang, I liked. You know, just because a spreadsheet says this is a good deal, it doesn't make it a good deal. Right, Right. It's what we call that desktop due diligence. It's about people, it's about culture, it's about process. So I think generally from a genre perspective, I'm a believer in and try to learn more about sort of how behavioral finance may or does get involved. You know, another book, and this is a book I give to my clients. It's the Psychology of Money, Morgan Housel. It's an easy read, it's a comfortable read, but it really talks more about the role of money and what does it mean. And there's so much emotion around capital and money liquidity that I think it's important that we, we all, you know, spend, spend more time thinking about it because, because ultimately as, as an investment manager, Jay, you know, we, we want our development partners to be good at developing. Now the fact that they may not be good at raising money, that's okay. If we find that they get too good at raising money and not good enough at developing, then then that's a problem.

A (58:39)

Right.

C (58:39)

So we don't expect our, our GP relationship, we don't expect those folks to necessarily go to the, the, the depths of finance or risk adjusted or how do we. But we want them to have an appreciation for it. Right. I guess last of all, oh, I, I always like to be reading a, a little bit of historical fiction. I always liked historical fiction. So Eric Larson, he writes some books I like. Generally my thought is, you know, as humans, we read to learn and we write to think. So as much as you think you can learn what you can by going to ChatGPT and asking that question, you know, pick up a book, read a book, find an author you like, find a, a type of subject and just dedicate some time to it, I guess is my, my final thought there.

B (59:31)

Well, Dan, thanks so much. Really appreciate all your insights today. Enjoyed talking.

C (59:34)

Thanks so much for having me. Enjoyed it.

A (59:50)

So that's a wrap on episode number 47 of the rent Roll. Big thanks to Dan for being our guest in studio this week and also a big shout out to JPI and Waymaker for sponsoring this week's episode. And thank you to all of you for spending part of your week with us. We'll see you next time.