00:00You know, we last spoke to you early last month, and it was a really different macroeconomic
00:05environment. The inflation outlook was different. There was no war in Iran going on. Oil prices
00:11were around $60 a barrel. How has all of that affected your world?
00:15Yeah. Well, look, I think we're in a transition market right now, where fundamentals aren't
00:20really changing as far as the fundamentals of housing, but we are seeing transaction volume
00:26increase. So I think this is because we are finally seeing some stability in interest rates,
00:32even though they didn't go exactly where everybody thought they would go or where everyone wanted them
00:36to go. What happened is now people know what to underwrite to as far as buyers, and sellers aren't
00:43sitting there waiting for these massive rate cuts and waiting for cap rates to drop. And so we're
00:49getting a little bit more alignment on pricing. So like people aren't just waiting around. Well,
00:53maybe it could get better. We kind of have, we have an understanding of kind of where we're going
00:56to be. Exactly. Like this is what you get right now. And sure, we're getting a little bit of
01:01volatility right now with the war on rates. But generally speaking, Fed's not cutting rates right
01:07now. Nobody's expecting them to. And so now we also have, at the same time, a slowing down of
01:16construction starts, which is going to create future supply constraints. And so that sets us up
01:22for a very solid investment period for particularly what we do, workforce housing, where you still have
01:30those fundamentals that are strong, people still need a place to live. And now we can, we provide that
01:37without having this extra supply coming in. And so it creates that extra value.
01:41What do you think about on the demand side, though, in terms of people who need this housing? Like,
01:45you know, this is one of the things we talk about in terms of AI and work. And if the
01:50economy starts
01:50to have some issues, you know, people, maybe they think differently about their living situations.
01:55How does that stuff impact you as well? Yeah, well, or could we do always have a demand. Now,
02:01that doesn't mean that there's always going to be demand for affordable housing, because these are
02:05renters by necessity, not lifestyle renters who are choosing where they're going to live,
02:10right? That being said, that doesn't mean that the bottom sector doesn't get hurt by macroeconomics.
02:17And so then we have to deal with that. And of course, we've got rising labor costs and material
02:23costs. And when you get inflation, it's going to hurt your tenants. At the same time, on the flip side,
02:29real estate is a hedge against inflation. So for investors, this is where they want to be.
02:34Does it dwindle supply for you? Because I know you're very picky about what markets you're in,
02:41and you've decided not to work in some markets that you used to be in, and you've decided to
02:45exit or enter different markets based on timing. But if this is an asset class that is attractive
02:50right now in an environment such as this, then does that make it more difficult for you to acquire
02:55new targets? So for us, it's all about acquiring at the right basis. And so right now, it's about being
03:01a
03:01very discerning investor. But it's a very efficient market because there are a lot of people who are
03:05looking at this stuff. Sure. So we, in particular, are buying highly distressed deals. They have a lot
03:11of managerial distress, high vacancies, high delinquencies. And then we're catering to a need
03:16that we're not competing with new building against. So we are catering to tenants who have
03:21an AMI or area median income between 30 and 80%. You can't build new construction without government
03:29subsidies and compete against that. And so for us, that means there is great value there, right?
03:35But what we have to do is we find things at auction, or we're finding things that are negative
03:40cash flowing. And that's where we are basically taking existing supply that is not functional,
03:47and unlocking it and bringing it back on the market.
03:50So one of the things we were thinking about, Amy, before when we were on our planning call this morning,
03:53is that what we love talking about you is, you know, in an environment where, you know, we don't know
03:59when this war is going to end, and that opens up so many different questions about the outlook, right?
04:04And so we're just dealing with lots of questions. But talking to someone like you, like, are you seeing
04:10more distressed opportunities to buy as an indicator that things are getting tougher out there? Or no?
04:16Does that pool kind of stay constant?
04:17So for us, it does. The level of distress that we're buying is not macro distress. I think that
04:23you do, it's not based off of macroeconomic distress, right? I think you do see, you know,
04:29as when you look at properties that are a little bit less distressed, you're seeing more trading
04:32right now, because as maturities are coming up on loans, and it's harder to refinance into new
04:38things, and you see sellers kind of lowering their expectations, right? But for us, it always is going
04:43to exist. It's just about finding those deals that are really hurting. And not because of
04:47interest rates, but something bigger than that.
04:50When you find a deal that might be negative cash flow, or there are managerial issues,
04:56what are the reasons why it's not working for that particular management company?
05:00So the properties that we buy need a serious infusion of capital. And so if an owner does
05:06not have that capital to put back into that property, now why did it get to that place? It could
05:12be a
05:12combination of many different things. So it could be that the operator didn't quite know how to operate
05:18this kind of asset, this sort of workforce housing asset. Often the buyers that the sellers that we
05:25are buying from are not traditional real estate operators. Maybe they have a different career path.
05:30They've gotten over their heads?
05:32Yes.
05:32Okay. So if you're in a situation such as that, and I know every situation is different,
05:36every building or every asset is different, what percentage of the renters typically stick around
05:43during this overhaul? Can you keep them in their homes while you're making these changes?
05:48We want to keep our tenants. We do not want to displace them. That being said, sometimes we do
05:55lose tenants if we're trying to clean up crime in a property, or if someone flat out refuses to pay
06:02rent and cannot find any sort of financial help, which we are pretty good at pairing people up with
06:08some sort of financial help. But there are cases where people do have to vacate.
06:13It sounds like a lot of the macro doesn't necessarily impact you guys directly in what you're doing.
06:18Is that fair to say?
06:19I would say we're fairly hedged from macro. It doesn't mean we don't get headwinds or tailwinds,
06:23but we're fairly hedged in our asset class.
06:26So what is the biggest thing then in terms of risks that you think about most often? And we've
06:30just got about 40 seconds left.
06:32Sure. I mean, the risks we see is the pace of lease up or the amount of delinquencies that we
06:38see
06:38and the pacing of that. Our returns are a bit outsized, so we do have cushion to absorb some of
06:44that as they have to be when you're investing into distressed real estate.
06:48Okay.
06:48Alright.
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