In the first of a five-part “Industry Insights” event series, The Real Estate Council and Real Estate Deal Sheet gathered top executives in the private investment realm to find out where they plan to focus their time and capital in 2016. Held at the Dallas Country Club, the morning event began with a keynote presentation from Albert Rabil III of Kayne Anderson Capital Advisors, one of the nation’s largest investors in its asset classes. A co-founder of the firm’s real estate platform, Rabil oversees origination, execution, and management of private investments, and has spearheaded more than $3 billion in acquisitions and dispositions.
His talk was followed by three rapid-fire panels moderated by Eric Beichler, managing principal of Mohr Partners. Here are excerpts from the presentations.
Albert Rabil III, Kayne Anderson Capital Advisors: History doesn’t repeat itself, but it certainly rhymes. We see real estate going in somewhat plus or minus 10-year cycles. I don’t have any specific prognostication about 2018, but what I do know is that we will see another dislocation at some point in time. Whether that’s 2017, 2018, 2020 … it will happen. We always seem to be going in this rinse, wash, repeat cycle. The way we approach investing is to do everything we can to get outside of real estate cycles and general economic cycles. What we’re trying to do is not be smart for seven years and dumb for three years, but really be smart whether we are in an up market or a down market. We initially started with student housing, and it has morphed into other niche real estate asset classes. Those asset classes share these dynamics: highly fragmented, recession-resistant, strong demographic trends, inefficient information and capital flows, and operationally intensive.
My view is that the two primary predicators for return in any operationally intensive asset class are, No. 1, cost basis, and No. 2, your operational capabilities. We see opportunities in the student housing, senior housing, and medical office sectors.
• Student Housing: We’ve essentially had unabated student growth in this country for the last 40 years, and it’s continuing at least for another 10 years. It’s highly fragmented with very little institutional ownership. The top 12 owners own less than 3 percent of the total space.
• Senior Housing: Unbelievable demographic trends are going to transform this sector. About 11,000 americans a day are turning 65 for the next 20 years; 5,500 Americans are turning 75 every day next 20 years. There are about 3.6 million units of existing senior housing, ranging from age-restricted communities to skilled nursing facilities. Just taking into account population growth, you would need to double the stock of senior housing in this country over the next 15 years. When you factor in the increase in penetration that we’ve seen in the last 15 years (meaning an increasing percentage of seniors who are option for some form of senior housing), you would need to quadruple the number of units. It’s a staggering statistic.
• Medical Office: This sector benefits from the same demographic trends, with the aging population. But there’s another dynamic at work, and that is that we’ve seen a change in the way healthcare is delivered. We’ve gone from a hospital-centric system to an outpatient-centric system; hospitals have really become acute-care facilities only, and everything else is done outside of the hospital. … It has created tremendous demand on the medical office side.
When we think about strategic advantages, we divide them into four categories: sourcing, financing, operating, and exiting. If you can have advantages in each of those, you’ve got a huge leg up on your competition. We try to get away from commodity real estate—something anyone can buy or the highest check wins—to a place where we can limit our competition. Our entire thesis is, in order to be successful over a long period of time in real estate, you really need to move away from boom-bust and away from beta- or macro-driven dynamics and get into alpha.
Brian Bischoff, Chief Partners LP: What we’re trying to focus on today is finding value. That’s getting tougher to do, as a lot more capital has entered the market. You could make exceptions in some certain submarkets, but it has really come down to fundamentals game—understanding supply and demand, understanding the rent roll, when terms are expiring, and who those tenants are. At the end of the day, we’re all core value investors; it’s all driven by value. … We’re active throughout Texas—everywhere but Houston. We are always looking for markets where there’s job and population growth. If we go outside the state, we’re latching on to great operating partners we know and with whom we have relationships. Several groups on the West Coast from California to Seattle all the way over to Boston. I think there will be opportunities in Phoenix and the Southeast—Atlanta and Charlotte. … In Houston, there should be some great opportunities on the multifamily side. If you look what’s going on, there’s a ton of free rent being given away, rent rolls getting really soft, NOIs are getting soft, and supply is shutting off. It’s a matter if sellers are able and willing to sell, in the next year or two. The office sector is [in trouble]. There’s so much sublease space and vacancy available in the market. I just don’t know how long that will take to get backfilled, and what does that do to rates. Lenders are basically cutting off Houston, equity sources as well—institutions in general. You have some local and regional groups still poking around, but for the most part, there’s a red line through it.
Rick Waggoner, MC Smith Realty: We made a shift in our strategy beginning the fourth quarter of 2014. Up until that time we had been 100 percent ground-up development, and we began to look for more opportunistic assets. It’s hard. With prices escalating—the cost of construction, the cost of land—it’s difficult to make the numbers work. And with the amount of cash chasing opportunistic assets, it’s hard to get in. Really good opportunities are going to disappear quickly, so you have to react. … We continue to look in Dallas. We’ve done several projects here in the last 12 months. We like San Antonio; it has been good to us. We focus mostly in the primary markets in Texas, although we recently went into Phoenix. The truth is, over the last five years, there’s really been no reason to go outside of Texas. … I lived in Houston for three years and understand a little bit about how their real estate works. There are going to be some great opportunities in Houston; I can’t tell you when it’s going to be. But it’s too dynamic of a city not to recover.
Jerry Wheeler, Mount Vernon Investments: We’re a quintessential familiy office. We manage the wealth of one family and do not have an operating company. For the most part, we’re regenerating investments from one asset class to another. In today’s environment, we’re a niche player looking for value-add opportunities. Core is not going to give us the returns we want. The opportunities could be anywhere in the country, including secondary and tertiary markets, as we compare real estate opportunities to every other asset class out in the investment world. … Our opinion is, if you have a stabilized asset that can be attractive in marketplace right now, it’s good time to sell. That doesn’t mean there aren’t opportunities to put out additional capital, but it’s going to be value-add from our perspective. We have a fair amount of concern about the job growth in Texas. We are really seeing a deceleration across the board, although Dallas still had a pretty good year last year. I think it was 100,000 jobs, which was about two-thirds of all jobs in Texas.
Vance Detwiler, Prescott Realty Group: We are a traditional real estate operating company, and we’ve started a debt company as well. Over the last year or two, we’ve been more of a net seller than a net buyer. On the debt side, we’re focused primarily on buying underperforming opportunities. That has been nice little niche market for us; it’s heavily regulated and tough to get in, with high barriers to entry. … We always ask, “Is there some type of value we can add?” Maybe it’s a relationship with a tenant. I firmly believe that tenants in the market create a lot of value. We’re all extremely thankful for the past two or three years that we’ve had. I would probably look at the next 12-18 months as a time to be a little more cautious, although there still certainly are opportunities.
Les Melcher, Woodbine Development Corp.: We’re a privately held development and investment company. For the last 10 years, we’ve focused on the hospitality market, and historically have done large resorts. Over the last five or six years, we migrated to the select service-side. Our run hasn’t been near as good as what some are seeing in multifamily, but we’re seeing good growth in hospitality market. We do work in the 48 states, and have been staying in the Sun Belt lately, focusing on the West Coast. … A lot of people don’t gravitate toward hospitality, because the leases are 24-hour leases and, as John Scoville says, our credit is Master Card. It’s really an operating business and a lot of investors aren’t willing to do that. … Over the last 2-3 years, we have been net sellers because the market has been so frothy, especially in hospitality. We’re still bullish on development; we try to be selective and do so in markets where there are barriers to entry.
Clint Haggard, Burgher Haggard: I’m speaking as one of nine owners, so you’re getting an owner-beneficiary perspective. My time is spent in Fort Worth with Burgher Haggard. We do a lot of work with families. About one-third of our investments are in real estate, funds and families that are doing development. We have more than $1.6 billion under construction with our clients right now, mostly in Texas. I’m seeing a lot of activity in multifamily and some in self-storage, coming online. … The fastest-growing part of our firm is the outsourcing to real estate funds. You have hunters and farmers. Hunters are IRR-focused; farmers are yield-focused. From the fund side, it’s multiples, it’s IRR, get in and out, it’s not long-term. It’s managing that spread, the cap rates. On the family side, we’re 100-year planning, we’re not investors, we’re stewards. … Going back the last 20 or 30 years, we’ve had the most success when we’ve partnered with people who are really good at what they do, whether it’s Woodbine or Hillwood or The Weitzman Group. We’ve done some of our own stuff before. But when we compare both of those track records, we’re always better with the operators.
Matt McMord, Corona Capital: We’re a single family office. The family has been in the oil and gas industry for many years now. That’s one side of our business. Corona Capital covers basically everything else. We do have some energy in our portfolio, but it is largely publicly traded securities. It includes energy, real estate, private equity, and private debt. It’s a highly liquid portfolio. … We’re trying to build up our real estate portfolio, and we’re looking to do that through partnerships. We like to find partners that are the best at what they do. We favor high barriers to entry markets, where it’s harder to build, from a development perspective, where it might take several years to get entitlements in place, where the competition is going to be years behind us. That tends to be on the East and West coasts, the Mid-Atlantic. We like Texas, too.
Matt Mildren, Tug Hill Real Estate Partners: We’re very similar—a family office invested in oil and gas. We started doing real estate for diversification. We invest mainly in Texas and we’re contrarian advisers. We buy pretty much all product types except hotels. We like to be spread out in terms of property types—industrial, retail, medical office, and multifamily. … The Dallas-Fort Worth market has been working out well. We have an office building in Houston. It’s not a problem child; we’re 80 percent leased. But there is zero leasing activity. There’s 10 million square feet of pure sublease space. We have two tenants rolling this year, and we’re doing whatever we can to keep them.
Note: The Industry Insights series continues with a look at the multifamily sector. The breakfast event will be held April 27 at the Dallas Country Club. Click here for additional details.