At Cores Real Estate, we have developed a focused strategy for multifamily acquisitions that leverages our team's extensive experience and market knowledge. Our approach centers on two key geographical areas we know exceptionally well: the West Coast and the Southeast.
In due course, we will expand into other areas as market dynamics are always shifting but for now, our focus is on markets we know intimately ensuring we can offer our investors well-researched opportunities in markets we truly understand.
Cores Target Markets: West Coast and Southeast
Our investment strategy focuses on two distinct regions: the West Coast and the Southeast. Each area presents unique advantages and challenges that inform our investment decisions.
West Coast
The West Coast, particularly Southern California, remains an attractive market despite having a reputation for being a difficult market to conduct business in (which we like because it means less competition).
Historically, this region, with its enormous population and extremely diverse employment base, is usually one of the quicker markets to recover from market downturns and this resilience is a key factor in our continued interest in the region.
Of course, like all markets, the West is complex. It is challenging to find value add deals that can hit the metrics we are looking for in today's environment.
Factors contributing to this include low going-in cap rates as well as a less than favorable regulatory climate, with policies such as rent control.
However, these challenges also present opportunities. If you can get an asset at a strong basis, we know that 5 to 7 years down the road when we look to exit, we are sitting with a safe asset.
In other words, our downside risk is muted; protecting our and our investors’ capital is a priority for us and we therefore like this longer-term, safer approach to investing.
Southeast
The Southeast markets offer a different set of advantages. We expanded into the Southeast at a time when there was especially high demand from renters. This demand was, and is, in part driven by several factors, including a favorable business climate.
For example, there is no rent control or threat of rent control in the Southeast which allows for more flexibility in our value-add strategies. This lack of rent growth restrictions also means the region offers potential for higher yields relative to West Coast markets.
While we underwrite conservatively with an eye on protecting investor capital, the Southeast presents the chance for a pleasant surprise on the upside.
In both regions, we carefully analyze supply-demand dynamics (pipeline of proposed new- build apartments), demographics (we look for population growth trends), and economic factors (particularly the variety, stability, and growth trends of local employers).
This allows us to create a diverse portfolio that can weather various market conditions while providing attractive returns for our investors.
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Key Evaluation Criteria
We employ a rigorous set of criteria when evaluating potential multifamily acquisitions. Our methodology is data-driven and purpose-built to identify properties that align with our investment strategy.
Here are some of our evaluation criteria when looking for acquisition targets:
Untrended Post-Rehab Return on Cost:
One of the biggest metrics that we look at is the untrended post-rehab return on cost. The untrended post-rehab return on cost is the stabilized net operating income of the property if it were fully renovated today divided by the total project cost (purchase price plus closing costs plus deferred maintenance and renovation costs).
We typically aim for this return on cost to be at least 100 basis points higher than what we believe an appropriate exit cap rate is for that market.
This gives us downside protection, a solid return on invested capital (cash-on-cash), and the opportunity of doubling our equity investment upon sale (including cash distributions along the way).
Demographics and Economic Drivers:
We look at and prioritize the growth potential of markets for our acquisitions. Our team meticulously examines economic indicators, population trends, and job growth projections.
We have observed that markets such as Charlotte are especially appealing. This city has an impressive migration narrative, with a significantly higher number of people moving in than those moving out relative to other similar cities. This type of population growth is a key factor we consider in our investment decisions.
Our evaluation process also includes a comprehensive look into the local market including analyzing the household income of the market (considering whether it can support the renovated rents that we are underwriting) and examining crime statistics.
Rent vs. Own Dynamics:
Understanding the balance between renting and owning in a market is crucial to our strategy. On the West Coast, it is usually always far and away more expensive to own. In contrast, some Southeast markets present a different dynamic, where you can buy a house for as little as $150,000 to $200,000.
Understanding these different dynamics helps us tailor our investment approach to capitalize on the unique opportunities and challenges of each region, ensuring optimal returns for our investors.
Acquisition Process
We have developed a comprehensive acquisition process that allows us to thoroughly evaluate potential investments, as follows:
Initial Deal Screening – a step by step approach
When a potential acquisition comes across our desk, we begin with a rapid initial assessment. The first thing we do is plug the deal into our proprietary underwriting model. This initial step requires key inputs, including a rent roll and a T-12 (prior twelve months profit and loss statement). With this information, we can form the basics of underwriting a deal and generate a 5-to-7-year cash flow proforma (financial analysis).
In-Depth Market Analysis:
For deals that pass our initial screening, we conduct a thorough market analysis. We utilize various data sources including CoStar, Yardi and REIS to name a few.
These sources contain a wealth of information, including factors such as household income within predefined areas surrounding the target asset, crime statistics, the number of renters in a particular market, population growth, employment growth figures and future supply in the area.
They have an abundance of data on rent comparables and sale comparables as well.
Financial Modeling and Underwriting:
Our financial modeling process is conservative and thorough. We typically project rent growth of around 2-3%, even if market forecasts are higher.
We also carefully consider exit scenarios by underwriting exit caps we see being achieved in the market today and run sensitivities to make sure on downside scenarios that our investors’ capital is always safe. Interest rates are higher today than we expect them to be in the coming years but we still find it prudent to underwrite today’s exit cap rates for our exit 5 to 7 years from now.
We are long term players so our underwriting assumptions plan for 5 to 7 year time horizons, though we prepare for the possibility of needing to hold onto an asset for longer to avoid finding ourselves in a forced-sale situation or selling sooner if there is a favorable market environment and underwritten returns can be achieved sooner than the underwritten hold period.
Collaboration with Property Management:
A key aspect of our acquisition process is close collaboration with our in-house property management team.
Our property management team gives their input on how they think we would staff a project from a payroll perspective, and how many leasing agents we might need.
They also assist with cost assumptions, advise on where we can add value, and provide insights into what market rents are achievable.
This helps to ensure that our underwriting reflects realistic operational expectations and incorporates property management into the decision-making function to ensure a budget alignment once we acquire an asset.
Risk Management Strategies
We place a strong emphasis on risk management throughout our acquisition process. Our approach is designed to mitigate potential downsides while still allowing for attractive returns.
Conservative Underwriting:
Our underwriting process is intentionally cautious. We base our exit capitalization rates on current market conditions, considering today's higher interest rate environment. We use these conservative rates to project our returns 5 to 7 years from now when we plan to exit investments.
This approach provides a buffer against potential market fluctuations and helps ensure more reliable long-term performance.
As mentioned above, we also take a measured approach to projecting rent growth and typically try to stay around 2-3% rent growth at most, with a heavy focus on projections remaining realistic even in the most challenging market conditions.
Leverage Strategy:
We are also very mindful of the role that leverage plays in risk management. We try to stick to around 60 to 70% leverage. In the current market environment, we are often closer to 60% loan-to-cost.
This moderate leverage approach helps protect our investments against potential market downturns or interest rate increases.
Fixed-Rate Debt Preferences:
In this and any market environment, we have a strong preference for fixed-rate debt. This strategy helps protect our investments against potential interest rate increases over the hold period.
And we typically seek debt terms that align with our expected hold period of 5 to 7 years
In-House Property Management Advantages
Our competitive edge and ability to deliver higher returns to investors while mitigating the downside focuses on having asset management and property management in-house.
This approach gives us direct control over our assets and ensures we effectively manage our investment strategies at the property level. By maintaining internal management, we closely align our operational execution with our overall investment objectives.
Advantages over Third-Party Management:
Our experience has shown us the limitations of third-party property management because, at the end of the day, third-party managers will never care as much about the asset as we, the owners.
We have observed several challenges with third-party management. For instance, as our team points out, hiring quality people is a challenge. Without being able to directly oversee the on-site management team in-house, there is little visibility into the day-to-day operations.
This can lead to situations where an asset is underperforming, and it is very challenging to determine the cause. This extra degree of separation from the asset can make it very difficult to resolve operational inefficiencies quickly due to the additional layers between ownership and the property staff.
Another common issue with third-party management is maintenance responsiveness. Third party managers often share a maintenance team among too many properties in a particular area, thereby overburdening the maintenance team and leading to delayed response times.
This can lead to tenant dissatisfaction and potentially higher turnover.
Operational Efficiencies:
Our in-house management approach allows us to create operational efficiencies that directly benefit our properties and, by extension, our investors. We have implemented a rigorous system for tracking property performance against our projections.
This includes a proprietary template that we put together, which enables us to input actual data for any given month and compare this data with our original proforma model.
This real-time tracking allows us to quickly identify and address any deviations from our projections. The end goal is getting to the exit NOI that we initially underwrote, or better, in order to stay on track for the exit we had projected when we acquired the asset.
This level of oversight and responsiveness would be challenging to achieve with a third-party management company. Accomplishing this in-house allows us to align property operations closely with our investment strategies, leading to better outcomes for our investors.
Overcoming Market-Specific Challenges
Whether you’re in sunny California or the steamy Southeast, each market presents its own unique set of challenges and opportunities. It is our job to overcome these obstacles and identify and capitalize on opportunities in both regions.
West Coast: Rent Control and Low Cap Rates
The West Coast, particularly California, presents significant challenges, particularly when we are trying to find value add deals that can hit the metrics we are looking for in today's environment.
This difficulty stems from several factors:
Rent Control:
The West Coast rent control and regulatory environment limits our ability to increase rents, particularly with older properties.
Low Cap Rates:
Low cap rates, which translate to higher purchase prices and lower going-in yields, can make it tough to achieve our desired returns, especially given current interest rates.
Taking a longer-term view on the market, as we do, helps us find assets in these more challenging investment markets that make sense from an investor return standpoint. Historical data has shown that average values in West Coast markets tend to outpace those in other markets over longer periods of time.
Southeast: Supply Concerns and Affordability Issues
The Southeast markets, while generally more favorable from a regulatory standpoint, present their own set of challenges:
For example, the Southeast has seen a lot of newly constructed units delivered, which increases supply and puts downward pressure on rents.
This is an important consideration for us, and we are careful to invest in submarkets that maintain a balanced supply/demand relationship. We also look to invest in assets that are at an appropriate rent discount to newly delivered product.
Affordability Comparison:
The Southeast presents a distinct rent-vs-own dynamic compared to the West Coast. In several Southeast markets, monthly mortgage payments often rival or undercut apartment rents, shifting the calculus for potential tenants.
We address this by applying our market insights and data-driven approach.
Our focus remains on areas with robust population growth and diverse job markets and we look at assets where the rent levels remain attractive to those prospective tenants who otherwise might consider buying a home and taking on a mortgage.
Even if some of the population may be able to afford the mortgage payment on a home, many cannot come up with the down payment. This dynamic will continue to create apartment demand.
The Dual-Market Advantage
In conclusion, our dual-market strategy in the West Coast and Southeast allows us to balance risk and opportunity.
We leverage our deep market knowledge, conservative underwriting, and in-house management to maximize returns.
By focusing on growth markets, maintaining moderate leverage, and adapting to local conditions, we aim to create lasting value for our investors. Our approach combines caution with opportunity, positioning us to thrive in diverse market conditions.
