Devin and Justin Liggitt, Manager of Investor Relations at DJE get together to reflect on the multifamily industry in 2021 and look forward to 2022.
To join the DJE Investor list and see upcoming projects, go to https://djetexas.com/access
For multifamily investment coaching & mentoring go to www.apartmenteducators.com
Podcast: Play in new window | Download
Subscribe: Email
Transcript
Devin Elder:
All right. Let’s get the podcast kicked off, kind of an in-house thing. Justin Liggett, welcome. How are you?
Justin Liggitt:
Thank you. I’m doing well. Thanks for having me today.
Devin Elder:
Yeah. Always going to do an in podcast studio and today we’re doing an in company podcast.
Justin Liggitt:
In company. It’s very small today.
Devin Elder:
Good stuff. Yeah, a lot easier to schedule. We just both walk in here, right?
Justin Liggitt:
I know, right.
Devin Elder:
Yeah. So good, good. Well, excited to kind of dive in. On this episode, we wanted to talk about coming to the close of the year, closing out 2021, what we see for next year, talk about some of those things. So let’s jump in. This should be good for our investor base to kind of catch up and also for folks that are kind of in our universe, or just kind of aware of us. What are we up to and what are we going to do?
Justin Liggitt:
Yeah, exactly. It’s that time of year where people start reflecting on what’s happened, what they’re thankful for, what the things they want to change maybe in 2022. So-
Devin Elder:
Sure.
Justin Liggitt:
… that kind of would be a good conversation to have to talk about what’s happened up to this point really in 2021, maybe even what are some of the things that happened in 2020 that have beared fruit for us in 2021 kind of thing. And then, ultimately, what are our resolutions going into 2022 and what are… what does the lay of the land look like for us?
Devin Elder:
Yeah. I love it.
Justin Liggitt:
So what have we seen so far in 2021 up to this point? What does the year look like? How would you describe that, Devin?
Devin Elder:
Yeah, I think fast, right? Every things’ relative. 2020 for everybody was such a drag in so many ways. I really don’t want to beat that horse anymore than it’s been beaten, but tough year, longest year on record. 2021, seems to be the consensus to everybody I talk to, can’t believe it’s over. We’re launching this episode on Thanksgiving, the year’s gone. It’s just amazing how quick it’s gone.
Justin Liggitt:
Literally preparing for this conversation, I kept defaulting back to saying 2020, because it’s almost like a trauma response.
Devin Elder:
It is.
Justin Liggitt:
I still feel like we’re recovering from 2020, but it’s almost… 2021 is almost over and we’re heading into the new year. So, I feel like a lot people kind of have that sentiment or at least they are still kind of psychologically and emotionally and professionally kind of getting to this point now to where they’re like, “Okay, it’s not 2020 anymore. It’s actually 2021 and it’s almost over”. So, yeah, I mean, I definitely get that and definitely sympathize with that, especially whenever it relates to our investors.
Devin Elder:
Yeah, that’s right. It’s good. One of the interesting things about our transaction life cycle, it takes so long to close these multifamily deals that we’re really squarely in 2022 right now, because if we’re going to close stuff in 2022 and map out our targets and goals, well, we need to get those things on our contract right now, because they’re going to take 75, 85 days to actually close from the time we go into escrow, which is a big chunk of the year.
Justin Liggitt:
Absolutely. I kind of mentioned a few seconds ago, things that we kind of did in 2020, I don’t want to necessarily talk about COVID response things, but things that just kind of coincided with us kind of taking a step back and working on the business that we kind of saw bear fruit in 2021. I know on my side of the fence and things that I deal with and the most consistent piece of feedback that we’ve gotten or that I’ve gotten from investors is just the enhancements to frequency and actually what we reporting from a consistent basis just improved dramatically during that timeframe. And that was very much a deliberate effort, I think on our part to make sure… to assure people on a consistent basis with the same data sets that are basically how we measure success at a multifamily investment, what is happening at the asset and how is it still just business as usual for [DJing 00:03:42] our investments.
Justin Liggitt:
So I think that that really kind of… in the feedback that I’ve gotten from some of our investors really kind of gave investors a lot of confidence as far as our business plan is concerned, but also our investment thesis and multifamily. And that ultimately, that was really kind of capped off by the fact that distributions were continuing on in that [sort of 00:04:07] fashion kind of giving people that warm and fuzzy with the mailbox money on a monthly basis was definitely something that really kind of helped that. But at the same time, people just felt communicated with, I felt that. And they felt like we were at least being empathetic to the fact that there was no evasiveness, there was no hiding or anything like that during that timeframe. Even whenever it was hard news, we were at least willing to have that conversation.
Devin Elder:
It’s really important. I think that it’s two forms of communication. We do spend a lot of energy and time on the timeliness of the communication and photos and metrics and things. And then there’s the money, right, which is they’re both important. The consistency is vitally important. And I talk to a lot of new or aspiring sponsors and kind of try to drive that home with them that the 15th of the month… We communicate on the 15th. It rolls around quick. I mean, it’s like you get it done and holy smokes, it’s all on you again. And it takes some effort and forethought to make sure you’re getting those communications out in a timely fashion. So, I always encourage new sponsors or aspiring sponsors to really put that forefront, right. And I think you’ve done a great job with the firm. We’ve done a great job kind of communicating as a team in order to get that out. Super important.
Justin Liggitt:
But the exclamation mark is the [mailman 00:05:24].
Devin Elder:
Is the mail. Yeah, that’s right.
Justin Liggitt:
Or the punctuation, I guess in the sentence.
Devin Elder:
Yeah, it is. It’s like, I know. I always joke around, we work so hard on our communications, but people are like, “Show me the money”. Right?
Justin Liggitt:
Right. I mean, and it’s… They’re two different things. One is an [immediate 00:05:42] for gratification, sort of quick hit sort of thing with the money and the account sort of thing. Communications are, I think something that is a buildup over time. It’s something that moves a lot more geologically as far as moving the needle on it. And you just have to build upon it because it’s in line with consistency kind of like we talked about. It doesn’t happen overnight.
Devin Elder:
For sure.
Justin Liggitt:
So, yeah. So it’s definitely two different types of plays, but they definitely work rowing in the same direction.
Devin Elder:
Yeah. My experience as a passive investor with some other sponsors and friends of mine, I’ll get the email that I got the distribution. And then later that day, maybe I get the communication on kind of the details of the project and occupancy. And it’s almost like an afterthought. It’s like, well, the money came in, so the details of the property, obviously it’s important too. It was kind of a two part communication and we do the same thing. 2020, the big things for us, we’re getting the property management company off the ground. I mean, that was something that I never envisioned, never wanted to take on that piece of the business.
Devin Elder:
It’s an entirely different business. But like a lot of things that was kind of born out of some pain with an existing third party management company that we just had some serious issues with on two assets. And it was so painful that it was… it drove us to create that management company, which turned out to be amazing, because the property management is really hard work. I think it’s often overlooked from sponsors that are putting deals together and running spreadsheets all day.
Devin Elder:
And you can’t just plug in some third party and off you go and the investment’s going to do great. So, we put together an amazing team on the property management side. It’s grown. We’ll be north of 50 employees on that division. It’s just incredible. But what that’s given us is fundamentally control.
Justin Liggitt:
Absolutely.
Devin Elder:
And so having that control and being our own client, so to speak, all the way through the stack, I mean through… all the way through the cycle, from looking at deals and underwriting deals and knowing that we’re working with real numbers that our company is projecting, through the operation is very important, all the way through to the exit and going full cycle on deals. It’s just a hand in glove approach. I am way more confident about the numbers that we can project knowing that it’s our company that’s actually executing vertically integrated, top to bottom, the whole stack. So tough to get that set up and running, but we have an awesome team. It’s grown like crazy, a handful of folks on the corporate staff there. And just, it’s been a lot of fun too. We have this big company now and that’s kind of interesting. Had the kickball tournament-
Justin Liggitt:
I know, right.
Devin Elder:
… a few weeks ago, and I was like, “Holy Moly. Our people wearing shirts”.
Justin Liggitt:
Scored simply because there were so many people.
Devin Elder:
So many.
Justin Liggitt:
This wasn’t like this [crosstalk 00:08:43]
Devin Elder:
Right. And it out of nowhere. Yeah.
Justin Liggitt:
Exactly. And that’s the thing though, is kind of going back to using that and the communications though, we wouldn’t have been able to make the enhancements to communications if it wouldn’t have been for the property management company, I think. That was a very big part of just not only me being able to buckle down on what are the metrics and what are the things that we’re going to report on consistently across our portfolio, but at the same time, like you said, control, having absolute certainty that those numbers are good to pass along to our investors. And so, I think that that was a huge thing kind of just working hand in hand or hand in glove, kind of how you described.
Devin Elder:
Yeah. Yeah. Starting things is hard and it was uncertain. I mean, starting a new company and having kind of putting some of my own capital to start that business right in the middle of COVID was kind of crazy, but now that it’s up and running, so grateful that that’s there. And it’s really enabled the rest of our growth, too. One other thing, just kind of changing gears on 2020, we only closed 400 doors. We had a target of 800 doors in, I’m sorry, in 2021 just because we’re picky about deals, we’re going to be owning these things for several years. We’re going to bring on millions of dollars in investor capital.
Devin Elder:
We don’t just do it willy-nilly, there’s a whole process that goes into it. But one thing we’re able to do in the last several years is get into this land investment stuff. And I don’t want to belabor that too much, but if when I look at 2021, we had some nice base hits throughout the year, which helps everybody, right. It helps us with deal flow. It helps put something in front of investors. It’s a great return. It helps us kind of supplement our multifamily acquisitions. And so that was great in 2021. We love the [landings 00:10:35]. Yeah. It’s been a simple-
Justin Liggitt:
Been Raving Fans at least, because a lot of our investor… especially for our investors who are so long in the tooth on multifamily, not just with us, but with other operators as well. This is a real nice short term compliment that’s not a CD, some sort of… I mean, basically some other sort of product, it allows them to still be in real estate, but doesn’t allow them to be in such a long time horizon inconsistently across the portfolio. So, I’ve got nothing, but, but just Raving Fans as far as some of our investors who like that.
Devin Elder:
Yeah. So, that’s been great. I foresee lots of that in 2022. Very simple. I mean, we’re not even taking on debt on these projects, right? It’s like a very low risk proposition for investors. Come in, we syndicate the capital. We invest in it. They invest in it. There’s literally no bank. It’s first [lean 00:11:23] and we’re out in 12 months max. It’s also fun. We’re buying ranch land in Texas. I love that stuff. It’s an easy business model and fundamentally, it’s a nice supplement. It’s another menu item to have.
Justin Liggitt:
Exactly.
Devin Elder:
And obviously, we’re going to continue to do multifamily. But that was a nice element I think of 2021 in the business.
Justin Liggitt:
Arrow in the quiver kind of thing.
Devin Elder:
There you go. Yep.
Justin Liggitt:
Yeah. So, the rest of the year, what do you see in the sprint towards the end of 2021?
Devin Elder:
Yeah, it’s interesting. There’s a point that comes, I guess in kind of October-ish where we were… a few weeks ago where it’s like, “Hey, if we’re going to close in 2021, we need to be under contract either on the sell side or the buy side”. They take so long to close. So, we kind of miss that window for deals that could close in 2021 and immediately pivoted to like, “All right, what’s Q1 look like?” It’s kind of a rush up to that period. Can we close something in 2020? And then once that very small window passes, hey, we’re onto Q1. So that’s kind of where we are, which is kind of nice. We’ve got some things in escrow, Q1 type stuff that we can work on. And that means really… and on the acquisition side, no more closings for 2021 and push them into Q1. And then we’ve got some other stuff going on.
Devin Elder:
I mean, I always marvel at how this stuff stacks up, but refinance yesterday, big property, a sale kind of pending any day. I might check my email after this and we may be closed, but right there. And then some acquisition stuff happening, really all piling up in the same week. It’s madness. But that’s how these things go.
Justin Liggitt:
Exactly.
Devin Elder:
But for 2022, we’ve got our targets and I think we’re going to need a really strong start in Q1. I mean, it’s fantastic, which should put us ahead of the curve for next year.
Justin Liggitt:
Excellent. And so anything else as far as 2022, from an industry standpoint that you kind of see happening or that might kind of especially affect San Antonio multifamily or anything like that?
Devin Elder:
Right. I mean, I think the compression of cap rates has kind of been a discussion for many years now, right?
Justin Liggitt:
Yes.
Devin Elder:
Several years ago, we were seeing cap rates in the sevens or the sixes or whatever. Now we’re seeing consistently in the fours and the compression is across A, B, C assets. There used to be some stratification where B deals are traded a higher cap and C deals, slightly higher cap. And now it’s really kind of all compressed together. I get questions from investors and other folks interested in the space about where cap rates are going. That’s clearly a forward looking guess.
Justin Liggitt:
Sure.
Devin Elder:
I can’t possibly see them compressing another two basis points and put us in the two. So, I think we’re going to kind of settle out with where cap rates are now. I think we’re going to be in a low cap rate environment for the foreseeable future because the cap rates are a indication of the desirability of a market and an asset class. And at the end of the day, this is all driven kind of by population trends. And we’re just seeing high, positive net migration into San Antonio. We’re seeing San Antonio be a more attractive market for private equity groups and from the coasts, that kind of thing. And I think that continues. Now, San Antonio has always been a great market because it’s relative to Texas markets. It’s slow and steady. I mean, Austin, Texas is this whole other animal.
Justin Liggitt:
It’s a new [crane every 00:15:00] time I drive down [crosstalk 00:15:01]
Devin Elder:
Yeah. And then Dallas is just this massive market. Houston’s this whole other thing. So San Antonio, I just… it’s the same thesis we had for a couple of years, but we’ve got deep knowledge, expertise, experience, and relationships here. And if we can continue buying a handful of deals in San Antonio every year and selling a few as we kind of go through the business plan, that really satisfies it for everybody, satisfies what we need for the firm to run, it satisfies us being able to put deals in front of investors to hit or beat our projections. I mean, it kind of checks all the boxes and then holy smokes from an operational perspective to just spin up another deal in San Antonio and put our existing team right on it. I mean, that is like a luxury that it cannot be overstated. Right? But the cap rates, that’s a component,
Devin Elder:
Rent growth is the other just crazy number, rent growth we’ve seen since COVID, inflation in general. I mean, I was kind of on a rant last night for an event we were at about inflation, which is if you got a $100,000 in a savings account, it is just get eroded. It’s really an awful, insidious, invisible tax on all of us.
Justin Liggitt:
Exactly.
Devin Elder:
And so if you’re in a cash position, inflation is just eating away at that. And so obviously, that… the thesis, that being in hard assets, that’s nothing new, but I think we’re seeing that more than ever now. And so it’s a double-edged sword because hey, rent growth helps all our business. It helps asset valuations, all that stuff. But also, it’s an indication of, I think just very high inflation numbers that we’re seeing. We’re not going to know the true number, the CPI is going to be one number, but that’s a basket of goods that, is it fully correct? We don’t know. But rent is very real time indication of what’s happening.
Devin Elder:
So, seeing a lot of inflation, which is going to push our rents up. Of course, on the expense side, we’re seeing payroll inflation and maintenance guys are hard to come by, stuff like that, too. So there’s always going to be headwinds and tailwinds, but it does make it difficult to underwrite deals. We used to underwrite 3% rent growth for this deal. And it’s like, well, you’re seeing sometimes double digit rent growth. We can’t underwrite that, but we are seeing it, so that’s been interesting. Overall, I think it bodes well. We’re buying assets that are irreplaceable. We’re buying them below replacement cost. And I think that bodes well for our ownership period and I think it bodes well for the market three, four years from now when we go to sell whatever asset we’re in.
Devin Elder:
So, high level, I think it’s all good news. We’re going to be fighting rising expenses across the board. We’re going to be fighting supply chain issues, just like the rest of the planet. And then we’re going to have the tailwind of, I think some tremendous, tremendous rent growth and staying in a low cap rate environment. So, those are kind of my thoughts about the future. And I always like to caveat saying, and I sat down in January 2020 and had all the grand plans. I was totally wrong. So, I will be the first one to point that out. But fundamentally, multifamily is a very resilient asset class. If you’ve got a good operator, your capital stack structured correctly, and you’re in a good growing market, those are all… if you’ve got those pieces, I feel real good about placing my own capital in that type of a setup.
Justin Liggitt:
Absolutely. Should we wrap? Well, Devin, I really appreciate you taking some time this morning, have a discussion with us and appreciate all our investors and friends and people in our network who are logging on, on Thanksgiving when we’re publishing today. So, have a happy Thanksgiving. Spend some time with you for friends and family, and can’t wait to connect with you in the near future.
Devin Elder:
Awesome. Justin, thanks for jumping on. Everybody have a happy Thanksgiving. We’ll catch up soon.
Justin Liggitt:
All right. Thank you.