MC Companies' Plan to Buy $500 Million Of Real Estate

Welcome to the Real Estate Strategies podcast. Let's get right into this episode. So we own over ten thousand apartments, three hundred employees, and here's our plan to do over five hundred million in transactions in the next twelve months. And welcome Charlie. Thank you very much. Can't wait to chat with you. So Charlie's our CIO. He is in charge of our strategy. And you look at what ten fifteen, twenty deals a week? Yeah, dependently, I mean he changes right when it's a in a frenzied market. We were looking in twenty twenty one, twenty twenty two, you're looking at forty deals a week. It's a little bit slower now, so we're probably analyzing ten to fifteen deals a week. And by the way, Charlie bought over thirty thousand units in five years, so he knows what he's doing. And I think we'll hit it. What do you think? Yeah, I mean that is you know, when the time is right, you got to be in the place to strike. That's that's the key. I you know, I like to flow with where I think the best timing is to buy, and when it is the best time to buy, you just go and then you move from there. So five hundred billion in acquisitions in the next twelve months, I think that's superdeable. Yep, based on everything that we So what makes a good deal versus a bad deal? You know? I think it's kind of a I try to look at them in a financial aspect and then kind of the storyline behind it. Right, there's got to be a reason something about the project outside of just the numbers that make you want to own this piece of real estate. Right, you run your financial model, that's kind of phase one. Make sure that based on what you're seeing in the deal, it hits return hurdles that you think, a you hit your kind of boundaries of what you want to get, and then you know, are your assumptions the correct assumptions to get you there? And this is what got everybody in trouble, they'll exactly. Yeah, that's the key point, guys. Like it's so simple, Like when you're taking money from investors, they want to return, and when the property doesn't return, then obviously you haven't delivered. So it's quite simple. Yeah, we have to get past just what does the equity want? Right? Correct? Yeah, And that's the first piece and that's the technical and the financial piece, and then the second piece that we look at is the deal and the story that it presents. Right, I think value add gets thrown around a lot, but I think it can mean a lot more things than just new countertops and new cabinets. What is a story that makes you be able to have value creation somewhere inside of that project. It can be on a nineteen seventies deal. It also can be on a brand new construction deal. There's value creation everywhere, so you want to walk the deal see what the story is. Is there something about the neighborhood. I'm a real big believer in Right, We've all lived in apartments at some point in our lives, so it may not be a complex that you would live in now, But how does that feel? Like? What does a tenant see? Because what you see is what they see, and that makes a difference. Right, sixteen IRR on a deal that I'm not really madly in love with the ingress and egress, or I don't think the clubhouse is set up correctly, or I think I think the floor plans are pretty terrible and the units are seven hundred square feet, but they feel a lot smaller, like I could walk two seven hundred square foot units. That's why you got to be in them. And one feels really great and one feels really tiny. So it's those little pieces along the way that are the art form of it. What does the consumer wan? Correct? Yeah, that's an important piece. A lot of people forget. Yeah, So the two sixteen IRRs aren't the same, right, they're both sixteen IRRs, but they're not the same. Ones are better than the other one. One's more achievable the other one. So that's the there's the science, and then there's the art. So a lot of people throughout a value add a lot, right, and you touched on it, you know, value add the old value ad might be dead right now, Yeah, you're not buying old stuff and remodeling the interiors. And then jacket rates because we have a let's talk about the supply that's hitting right now right yacause there's like a million units it's wild being delivered in the next eighteen months, let's say, all over the place, by the way, and not specific, so you have to watch where that where that's heading. But because of that, when you have all that supply, hating and market it disrupts pricing period. So you're not going to buy something old to renovate it and try to get something you know, a bit you know, significantly higher rent. Right. So, however, so this is when I think, like the professionals like yourself, like when you know, I mean, you bought thirty thousand units in five years. There's other ways besides that, what I would call the layup of the renovated interior to provide value add. Right, We're heading into this period of time where the experience and wise investor is going to actually deliver in a value add way that the others didn't know because you know why, the market covered their butt. Yeah, and it was just a burning and it was also just a burning turn. Yeah, let's get as many of these classic units turned as fast as we can. I don't I don't care if my occupancy dips to eighty percent. I'm on a floating rate loan from a bridge lender who it doesn't have any markers that I need to hit in terms of that. And so it was that was just pump as much volume as you can. There's gonna be mismanagement along the way. I don't care because I'm just I'm getting my tour and fifty three dollars rent lifts. I'm just gonna turn this to somebody else in eighteen months. So there was just a lot of less focus on the little things and it was just a much bigger like plow and go. That's the last three years. That's what we saw. And the frustrating piece was we were bidding on all those projects. Yes, like guys, we were right there, like we were full on. Like we had the exact same numbers. Yeah, the exact same rent rolls, talking to the exact same sellers and the exact same brokers, and a lot of best in finals. I don't even know how many bestiles where we had last year. A lot thirty forty fifty maybe, yeah. Crazy. What that means is there might be thirty forty bids on something and then they get it down and let's say five, and then they say, you know, the dry powder, the tech shar fidg your fedslow. So we have kind of a high and a low. And then and then the next thing is this is what we come in again. And then of course they're putting the screws to us. They want you to sharpen your pencil into a knife. Yeah, their knife, Yeah, exactly to stab yourself with. Yeah, exactly right. So what's just started going like five hundred thousand dollars non refundable, no due diligence. Oh, it's got it got on. We're like what we saw? I saw five million non refundable day one on. You know, guys, think about this nineteen eighties product that could have significant deferred means, and and it was day one and the only out was environmental title, which you got kind of through your due diligence docks right away. So let's skip over this. What well, this is what we were dealing with at the time. So as this as a buyer, you have to look at these sites. So whoever did that five million down day one? That means as a seller, you've got five million you just you can you can actually roll that right into your bank account, regardless that they performed on correct. And also they haven't stepped on the property, correct, So well they've toured, well maybe they've stepped on it, but they've done a very glossy tour, yeah up tour with they're broke. Correct. Yeah, you didn't see any of the things would actually cost you yeah, yeah, problems. Yeah, so that's what we just came out of. And unfortunately that's a lot what a lot of people invested it during that period of time. So all that slowly changed when interest rates started to go up. Yeah, about a year and a half ago. And of course we're still you know, we're still actually trying to buy during this period of time. I mean it's down from twenty to twenty five a week. I guessed out of ten or fifteen. And so now what's happened is I think finally the seller's expectations have changed absolutely right, Oh yeah, non refunable day one is no longer. It's great and it's a great way to still go win a deal, but it is no longer. It used to be a necessity. If you didn't have it, you were not going to be awarded the deal. We had to do it many times, and I hated it. You know. We basically means that you don't have a look correct, you know, and if there's anything wrong, like imagine like I remember one time where we had a half a million up, let's say, and it was refundable and we found a half a million dollar roof problem. Yeah, okay, Well if you're the seller and you have a half a million non refundable, the seller is gonna say pound sand yeah right, yep. But in this particular case, because it's refundable, the seller's willing to work and they have construct knowledge of it now, so the next time they have to if it doesn't work out, and either not if they don't negotiate with you, then the next person knows about it as well, which will probably be the five one ThReD thousand dollars hit to their purchase price, So they might as well work with you because it was actually happening on the property. So there's a lot of disruption in the market right now, yep, A tremendous amount. I mean we're hearing it every day, right. I'm here from the LPs. You're hearing it from the brokers. You know what. A Charlie used to run acquisitions for a large company. Now he runs it here. He's or cio. But you now are eating with all these brokers. They've been in our office a lot the last few months. Right. What are they saying? What are they seeing in the market? I think it depends on the two classes, right, your class A versus your class B. And C, so class A, we're seeing a lot of product come online, and so there's some developers that just want to take their chips off the table. They're not they're merchant builders, right, so they're not meant to hold the deal long term. So that's most of the volume that we're seeing right now is going to be in your newer product. Not a lot of movement in the B and C space slowly starting to come, but their values are so depressed that a lot of people can't sell. So I don't think we've had any kind of price discovery on that yet, but that wave is coming, and so I think there'll be a ton of opportunities. I think, you know, you you always want to look to d age your portfolio a little bit, but I think they'll be opportunities along the way as well in that distressed stuff that I wouldn't want to be a long term owner over it, but I could probably I can take the reins of it for a couple of years, you know, work it through the course correction and then and then those of it. That's one of our issues, you know, Ross and I you know you, you know, we started off buying mid eighties, you know, because we were younger yep, mid eighties, wasn't that old started us? Right? Yeah? But now that stuff because we're holders, you know, it's it's getting older and and we've turned it a couple of times. We were financed and cash out a few times. Yeah, and you know, and you know it's it's just time. It's time to move it into some of the newer product, right correct. And so it's also a good time to be selling some of that stuff because right now the market's kind of in flux, right yep, And especially if you have product like like ours. I would say we own a lot of product that we've been long term owners of, so we have fixed rate debt on it. So when we are selling, because we want to dage our portfolio, we think this is an opportunity to maybe move it into newer product at a better basis than you've ever seen and you know, you haven't seen in a very long time. And when the when the market rebounds, that stuff will rebound quicker. But we I think, you know, it's an opportunity time for maybe move some stuff that you're not actually distressed on, right because when the distressed stuff comes your story of a really long term ownership, quality run product that gets lost in the shuffle of all the distressed and you get taken you're decently you're really well run, decently maintained, like eighty stuff. Right, that's like just solid, really good product will get lost in that shuffle, and you'll lose your pricing power when you're in the mix with a bunch of junk deals. Right, that's true. Yeah, as you start to see the stuff being we're priced, we're already seeing well below replacement costs. Yes, right, that's where the opportunity that's again in our in our plan to get to the five hundred million a lot. I mean a vast majority of that ninety percent of that is is taking advantage of institutions are not quite back in the market yet. They're not. They want to see a little bit more stability just because they've got four hundred bosses and nobody wants to be the one that like to them. They don't lose anything by like, hey, we missed. If they missed the bottom and they catch it when it's twenty grand up, that's better for them and their careers than buying it. It goes down ten and then goes back up. Right, if you can be a private buyer, we's got a lot more flexibility and runway. You can take advantage of opportunity to get deals you normally right in a frenzied market you do have sure you have no ability to get it because they're coming in with a seven r R all cash close in ten days, right, So this is a we see it as a really unique opportunity for private buyers to come in and take advantage and buy this really well built quality product because we you know, we're looking at we don't need to make our money in the first three years. It's we see we can make a significant profit for our investors in the second half of that envestment period. That's the cool part about this business. You know, they're more like a cruise ship, you know, moving along and hard. It's hard to stop, also hard to start. Correct or we're more like a speedboat. Correct we're coming in. Yeah, But there's a window, right, like you might start off for a while, but then after a while yeah right, right, So there's a little bit of a window here where there's disruption. There's disruption with loans, there's this disruption with equity and property management. Now let's talk about that, because I think the next two years are just going to be horrible for property management. You know, a lot of trading out deals. You know, we're already starting to see it. I was. I met with a guy this morning actually, and at the gym. I saw him and he's like, oh my gosh, Like you think about it. If a developer or a lender is losing a deal, or let's say a lender's taking it back or developers losing a deal, they're going to a third party management company. So the third party management companies are going to be really busy. They're already starting to get busy because the last thing the letter is going to do is say, hey, you've defaulted. You know, you go ahead and manage us through this tough time. Right, Yeah, So what do you see? That's part of the disruption. That part of the reason why some of these deals are in really good shape for us to buy, I should say, or I should say bad shape, is because of the management. Management kind of glossed over, got glossed over. Yeah, that was part of the that's part of the everybody was just in this I will value out and turn classics sent. Yeah, that piece and then there was so many groups or companies that have been formed in the past five years that they saw they as they were scaling, they wanted to scale with them and through property management. So you have a lot of infantile groups that have only seen from a property management standpoint, I have only seen an upswing. They've never they've never managed through anything other than with my rent roles just don't turn five hundred dollars a unit per month. That's so I think that's where a lot of the instruction is going to be is You're going to get a lot of newer property management companies that are tested in ways they've been been tested. So did they put the right people in the right seats or were they just putting people in seats because they were on this exponential growth pattern and it was just you know, fil filfill, you see it in every industry, right. It's like, that's why there was the tech dip last year, all of a sudden, all these job cuts because Google and all these companies is were like higher, higher, higher, higher, higher, higher, higher, salary, salary, salary. And then when there's the slowdown or there's a course correction, you've got to now you've got too many seats and not too many. Too many seats or too many butts in too many seats are not the right butts and not the right seats. And so I think that'll be the biggest construction is that you're gonna have a lot of untested, unseasoned management companies, which is the opportunity. That's kind of what I wanted to say. So, you know, imagine you guys have all been to like restaurants that are run really well, restaurants that are not run well. It's the same thing. So when a consumer goes in someplace to have a choice, and and that turns into higher vacancy, that turns into rents that are to market, that turns into concessions, that turns into delinquencies, that turns into unmanaged expenses. Yep, all of those things are great reasons to buy. Correct. That's that's the value creation outside of the generic term of value add that's been used for the last five years. So this this next two years is gonna be the year of property management. Yes, because what also I'm hearing is that a lot of these lenders, you know, not with us, you know, because we've had plenty of conversations with them. The first thing they say is, well, you know, we need to get ready to the management company, or we need to turn the management company, or you need to fire yourself and turn the management company. Luckily, after twenty some years of doing this in our business here we have an extremely solid manage company. Yes, right, So that's whether the dorman's seen all this stuff before, it's never come up. It doesn't come up because we're recognized as some of the better managers out there. It's interesting because I would say a year year and a half ago, because we were getting deals, we started to focus on operations internally because we said, okay, this cruise ship is is gonna be dead in the water soon. Yep. Right, the way the market was going, all this rent growth and all this stuff, and then the rates started going up, we started to turn inward, yeah, and started to you know, shore up if you will, you dug in when we talk about some of the kind that's kind of under the hood stuff like, but it's important because we said in one year, we just want to be at a position where we're completely managed as best we can. I know, last I looked our I think our occtituct for our whole company was ninety four point eighty eight percent. Yeah, which is why, which is fantasic for the whole company. Yeah. Right, But let's talk about some of the things we did internally, because you and I met a lot about that. Yeah. I think again, you're when you're in that frenzied of you're seeing such significant rent growth while you turn units either just classics that are just turning over or renovating. You know. I think you're so focused on that, a lot of stuff in that moment ends up getting third partied out because you're just you need it's a it's a it's a time management, right, It's like, where's the best use of my time? And right now, the best use of my time is turning these units and going that's what my team should be focused on. So a lot of stuff on the expense side tends to maybe get vended out a little bit. You get and you get a little bit, just your focus is not on the being as as trim and lean as you need to be. And I think that is where you We saw that coming a little bit earlier, and so we decided immediately to start turning that inside to make sure that we were all buttoned up on that piece so that when the cruise hunner comes through, we already have our life jacket on. I know the thing is though, but let's talk about it. Just a few things you do. I mean, you were on the phone with like real Page and you already and you what you physically flew to each project. You had people go around we shop all the markets well and because we and this is also the piece of having your in house management, your availability to data right of all the deals we're underrunning that we you know, you save all of that. You have that so you can say, okay, you can walk to your team and say, hey, I have the forty deals around you and I know what they're operating at and we have some outliers on either side. But like this is kind of our benchmark. This is what we're seeing in the market, and either we are beating it and we can be even better, or we're behind it and this is where we kind of need to work on it. So it's almost like like when you're taking a test, you got you get to see everybody else's test, correct, I mean, because like what he's what Charlie is saying is let's say, we have a property in Dallas and we like the market and it's doing well. We're looking at properties around it, and so we're getting data. We're getting real operating numbers, real railroles, real information, real rants, real concessions, real you know, it's just incredible. So we have it's a pure look under the hood. Yeah, it's a pure look of being able to look at how is this property operating one block away, one mile away, two miles away. And so with that information, gosh, it's just started well over a year ago, we started fine tuning our own stuff, right, And I know you were on the calls, you know, dialing in and and by the end of last year, we wanted all our market rates exactly correct. Yes, right, So that all happened, and and so then we know our true loss to lease, in other words, the potential inside of our rent role to be able to raise rents at current market, yes, right. And we've done an incredible job of being able to do that and be at the occupancy you were at. Right, you were able to do that without because we got ahead of the curve. We were able to achieve either our high a lot of times that they're they're at the cost of each other. But because we got ahead of it, we were able to you know, have rates where we want them without sacrificing in occupancy. And it never comes up now like and so obviously Shannon is just you know, she's been on a couple of times, she had our director or management. She's just a wizard and her whole team, right, And so now we're kind of focused on the expenses, which are a little bit of a you know jump ball. Well, yeah, because you're set, right, it's set between two things. One's controllable and one's uncontrollable. So there's some stuff you just there's there's not a lot you can do about them, right, your utilities, taxes, insurance. You have a little bit more of control of insurances because where you set premiums and things like that. But so you have that, there's some currents you're aswimming agains that are a lot harder, and then there's some that are in your control and you're a swimming down current. It's just can you do it right? Right, So this this long explanation is only to say this is precisely how you find value at So before you could say, hey, this this old sled. I'm gonna put somebody inside of the unit. I'm going to put new appliances and paint it and do all this stuff, and I'm going to get a hundred one hundred fifty to two hundred dollars more red. But now it's actually looking at the data, it's actually looking at the rent role, it's actually looking at the expenses with all the data we have around it and saying, Okay, inside of this you know, mildly poorly managed property that we believe that you know, there's all these inefficiencies that we can fix, right, yeah, correct, and that's how we get to our five hundred men. Yeah. Yeah. So So so with that, what are some of the best value add things that you've seen from buying all those units that you were able to buy to be able to, you know, increase the value. Yeah, I think understanding what services are out there so you can make this the best tenant experience for your residence. I tend to think that you don't always have to charge for it, if that makes sense. Like there's a lot of people just a lot of fees on I mean, there's like fee heavy on all these different things that the tenant has their rent and the fishes off the test. They show up and they're like, you advertise your rent at sixteen hundred, but by the time I actually get my monthly billets, it's two great, it's nineteen fifty Greene ridiculous. But I think you can provide those and have that as a service, which then you are you there's a lot of value in like getting a renewal, right, because then the unit it's just like having an employee for a long time if you can, there's a value in having that person stay in that unit. So if you can provide services, you may not get it, you may be charging less than your competitors, but you have a happy tenant who wants to stay. You can slowly move their rents on them, they can keep them with the market. But you've got somebody there that you don't have a unit down for you know, they leave, that mudn't be down for a month, Yeah, three weeks, that's longer or longer, right, Yeah, plus a concession to come in. And I think this is an interesting point. A lot of people always focus on the customer that they don't even have yet. Yeah, a lot of marketing dollars try to get people in and traffic. By the way, this is a systemic problem in most businesses. We have a whole program here for RESUD retention. You're better off spending money and taking care of the people that are your clients, your customers today, and so you know, we're talking to them six months out before they're their leases up and literally have a whole scripted plant to try to keep them to renewal. Yep, right, because a stable cash flow is better than something that's vacant that you're trying to fill, because when you're trying to fill it, you guys spend marketing dollars, go to spend maintenance dollars. There's often times concessions give it up front, so it just all falls to the bottom line. And these are all the things that that we can see now. They are all little nuances that most of the inexperienced syndicators just can't see well. And again, right, the more people that are renew that helps your occupancy stay up, which means that on the vacant units you have, you have left. I mean, it's just this step, right, It's this water falling, cascading thing where you have really good renewals that means you have less units available, which means that on the new rents going out, you don't have to follow the market as much on concessions. And because you don't, you're not If you have a bunch of empty units, then you're just kind of throwing whatever you can at the wa all to get butts in bed. And when you don't have that issue, that helps your your higher occupancy, which then allows you to charge a little keep your rents where you need them to be. You know, you're not panicking and just trying to like cut, cut, cut and slash right, right, So before we wrap up, there's two things I want to talk about. The first one is Limitless as you know, we'll have our whole team there, right. You were there last year. Was it's going to be incredible, right, So let's talk a little bit about that. Yeah. Uh So I went to the one last year was my first because I'd just come back to MC this is my first one. It was just it was great. It was just a great people and great minds getting together to kind of just sit around and discuss what they're seeing in the world and then have great speakers that you get advice from. But just even the get like there's the You go to a lot of events where the panelists are great, but that's it. This is a great panelist and a great attendees, and you could learn from the attendees, but just having conversations outside of the events, outside of the speakers you have, you have, I learned a ton. You'll bring your whole team. So you got the investor relations team or the property managers there, we got property in Texas. It's going to be and uh, Jerken put that up real quick. That's at the Galor Texan this year on the twenty ninth to the thirty first. So that's going to be a flipping blast. And then let's talk about at this at limitless. I think, Charlie, there's gonna be a lot of discussion about what's next, right because a lot of people, as Buffett says, you know, you don't see who's swimming naked until the tide goes out, right, yea, the tides out, Yes, wouldn't you say, yes, it's maybe waist tie, it's it's easy. Yeah, it's like right at the belt line. Yeah, you're about to see yeah, right right, So it's gonna be interesting timing because here we are in May, limitless is in August. So right now the tides at the at the waistline, yes, and it's headed out, yes, right for sure, guys. So what do you seeing? Just moving forward? Like? What does the next six months look like? What Marcus do you like? And we'll just wrap up there. Yeah. I think obviously the Fed has a lot to do with when I think the tide goes out. No matter what the Fed does, it just it will happen quicker. Yeah, it just depends on when it's gonna happen, on what they're doing. So they some of the pricing in twenty twenty one, in twenty twenty two got so high that that even if the Fed cut twenty five basis points two or three times, those people still aren't getting out. So it's happening. Like any sort of movement, it takes longer to get here than you expect it to, and then when it does, it happens quicker and you expect it to. I think there's going to be continued to be some class A that is really good product and really good locations that you're going to get a really good basis. I think that really is the opportunity and then this kind of the first wave of I think the B product that was way overpaid for us. You're gonna that's what you're gonna start to see. I mean, we've already seen it a little bit in the last month, so uptick. Like we in the first three months of the year we saw none, Like there wasn't an eighties deal on the market, and now there's two or three. They ran out of cash. Yeah, so it's happening. Yeah, I just think you're gonna start to see that wave. No, guys, it's just put it in perspective. So like like we'll just pick on Phoenix might as well. What was mid eighties trading for a year ago? Well at the peak, So twenty twenty two, February was your peak pricing, right, that was the stuff that was if it was just closing the end of their listing period and offers being made in February, that was your peak peak. You were over three hundred thousand unit Okay, And right now that same product, exact same property would be what I don't know, because nothing's traded yet high one hundred, high one hundreds. You're looking at really well located class A product in the Phoenix Metro at your like three ninety to three hundred doors. So there are the best of the best is already below, is already twenty to forty below what eighties product was training for. So we can we can easily say that almost everything is at least one hundred thousand unit last correct, right, Yep, that's a fact. Fact, that's where we are. Yep. Sweet, So you'll start to see that stuff happen. Oh, that's good stuff. Yeah. Thank you for listening to this episode of the Real Estate Strategies podcast. If you liked what you heard, please give us a five star review on iTunes and let us know what you thought of today's episode. Thank you, and we'll see you next week.