The Exchanges

Q What is the actual process of renovating a unit look like? The dollars you put in, what you're doing to the unit, and what you get on the back end?

A Most of the properties we buy, we typically underwrite somewhere between 12,020 thousand per unit for renovations. We'll do this all at the onset of the investment, so we call all of the capital up front. We have a large contingency fund for anything that can come up given our longer duration hold period. We'll give ourselves sufficient buffer, but we are going to look to renovate the community over the course of four years. We'll look for high ROI items that are going to drive leasing and demand for the community. Think fitness centers, pools, curb appeal from landscaping, signage, anything like that. I would say 70% of the equity allocated for rehab is going to the interiors. Kitchen and bath upgrades, it's flooring, it's things that are going to help us operate it more efficiently over the long haul. We don't want carpet in the units. We want wood plank flooring. We want stone countertops. Anything that's going to help reduce our capex spend down the road And enable us to charge more for a rent premium versus what's in place versus the comps is a good outcome for us. We'll end up renovating any given community, 10 to 20% of the units. We'll increase renewals to create a little bit more vacancy if we don't see that we're getting units back where we can renovate them. We're typically renovating anywhere from four to 10 units a month at most of our communities.

AI assessment note: “typically underwrite somewhere between 12,020 thousand per unit for renovations.”

Q What led you to leaving and joining Robert?

A When I met Robert, we had a cycle that was ending. I saw the opportunity that sounded amazing. At the same time, Jericho had evolved into more of a family business with the founder being close to 70 years old and his children coming into the business. It didn't make sense for someone who had an entrepreneurial aspect that they were looking for and looking to start their own business. Robert was a great partner and viewed the world through a similar lens. All the aspects that he likes about real estate, whether it's the tax efficiency, the distributions, It also aligns perfectly with my investment strategy, which is de-risk assets when you can own them for longer, when you're employing fixed rate financing, so it blended very well, and we knew very early days after meeting that this was going to be a great partnership. When I met Robert in January of twenty-twenty-two, multi-family, the acquisition volume had doubled since twenty-nineteen. It was just an incredibly compressed market where you had tight cap rates, an incredible volume of deal selling, but the playbook had, to Robert's point, Switched for a lot of groups where they began doing three to four year hold periods. Everyone was utilizing floating rate debt. You had all the non-traded REITs, which were raising a tremendous amount of capital. So you had these non-traded REITs that were actually buying about twenty billion…

AI assessment note: “Jericho had evolved into more of a family business... Robert was a great partner”

Q How do you think about the diversification aspects of a portfolio of these properties?

A It makes most sense for us to continue to be focused on the Midwest and the Sunbelt. We want to eliminate as much risk as possible. We do not touch California. We don't touch New York. These places where you don't know if there's going to be restrictions put in place that are going to impact our ability to manage the assets the way we need to, or that are going to increase taxes on the sale. We look for states where we know they're going to be landlord friendly. They're going to enable us to run the business the way we Historically have and know we need to in the future. We don't expect to be outside of 10 to 12 states ultimately, but we do look at diversity. It makes sense to be across a variety of states.

AI assessment note: “We don't expect to be outside of 10 to 12 states ultimately, but we do look at diversity.”

Q How do you balance the desire to bring certainty to the seller with needing to then either go find equity capital or having certainty of the debt markets?

A Most of our transactions, we're doing fairly quick due diligence. We know exactly what we're looking for. We're very thorough, and we can do it in about three weeks. I would say that's not much quicker than what's in the market, but once we complete that due diligence, we're putting up an outsized deposit. Typically, somewhere in the range from a million to two million dollars, so it's larger than most of our peers. We have a number of programmatic investors that have met us over the past two to five years, sometimes longer, Who underwrite us as managers. They understand our philosophy and what we're looking to buy. We have a fairly simple document that outlines exactly what we're buying. If it meets these thresholds, it's non-binding, but we present it to them and they've underwritten us as managers. They don't want to make the decision of, do I want to buy North Carolina or do I want to buy Ohio? Depending on what we're looking at, I'm going to sign up for the next five deals, 10 deals, whatever the number of deals is. They're programmatic in nature. So we know that when we're buying deals, we have about 50 to 70% of the equity already raised at the time that we actually go hard on the transaction. So that gives a lot of certainty to both the seller and us internally. A lot of times we're buying two, maybe three deals at a time.

AI assessment note: “we have about 50 to 70% of the equity already raised at the time”

Q When you decide you want to focus on multifamily, it's a lot of markets to choose from. How do you think about where you want to be buying assets?

A We're a little bit unique in this. We end up underwriting about a hundred deals a month. It's the best data that we can get out there. We subscribe to a number of different data providers. The best data we can get is from underwriting deals, looking at rent rolls, seeing where the rents are heading, seeing which markets are compressed right now. We focus primarily in landlord friendly states. That's the Midwest in select markets within the Sunbelt. Looking at about a hundred deals a month, Five of them might actually be interesting enough where they meet our narrow box, where they have the right in place performance. We can tell that it's a compressed market and the rents are heading the right direction. And then we can get it at the right price where we can generate the right cash on cash returns. For us, to Robert's point, we look to have about two thirds of our return to come from cash flow. That is the best risk adjusted way for us to look at these versus a floating rate buyer that might not care about cash flow and might rely on appreciation at the exit. And be reliant on what the environment is in three to four years. We want to look at over a longer duration time where we have a predictable revenue stream that we can improve by renovating interiors, figuring out how to operate more efficiently, drive ancillary revenue streams to drive overall cashflow in the asset, and t…

AI assessment note: “We focus primarily in landlord friendly states. That's the Midwest in select markets”

Q Once you pencil out the math on any one deal you're looking at and it looks good, What are the subtle things beyond what the numbers tell you that lead you to want to buy one asset versus passing on another?

A Looking at such a high volume of deals, we'll dig into the past five years of operating performance. We think the market's fairly efficient from a renter's perspective. If the rents are too cheap, the renters are going to find it. And there might be repositioning from a physical perspective. There might be upside there, but you can identify a lot of these compressed markets through occupancy and performance historically. What we gravitate towards is the deals where we know over the next. 12 to 24 months, even if we don't have to do anything physically to the community, We're heading in the right direction, and then we're going to be able to further improve it. It's finding the deals where we see strong renewal growth, strong income to rent ratio with employers in the market, and then really little supply. What's unique about us is that a lot of institutions focus on the highest population growth markets in the country. If you step back and look at the data, you look at over the past 10 years, 20 years, it's not the Austins, the Dallases, the Tampas of the country that are performing the best Because we're solving for rent growth. At the end of the day, we care less about population growth. We want population growth to be positive, but we're solving for rent growth, which is totally different than a lot of people's mentality and investment thesis. They're looking at population a…

AI assessment note: “strong renewal growth, strong income to rent ratio with employers in the market”

Q With the intent of having a long duration hold, how do you think about the exit strategy on an asset?

A In a perfect world, we would be selling during a compressed period. It makes a lot of sense for us to hold these and to sell inevitably if we're able to get interest rates coming down, or if we see that the market compresses and we can sell them during a compressed period, that's a benefit of the longer term fixed rate financing. Ideally, we could put together a handful of deals and get a premium, and that'd be a very good outcome for our investors. For us, we underwrite that we're going to be selling them in an environment similar to today, Which is largely a buyer's market. There's not a great time to be selling, but we think that we're going to have an opportunity to sell during ideally a compressed period, either as a portfolio with a handful of the deals or a larger transaction, if it makes sense. And there's equity out there that wants to pay a premium for portfolios.

AI assessment note: “In a perfect world, we would be selling during a compressed period.”