July 7, 2023
By: Evan Polaski, Investor Relations Managing Director
Evan Polaski:
Hi, I’m Evan Polaski, managing director of investor relations here at Ashcroft Capital. Today, I have Traci Wilhelm with me, Ashcroft’s director of asset management. Hi, Traci.
Traci Wilhelm:
Hi, Evan. How’s it going?
Evan Polaski:
It’s going well. How are you?
Traci Wilhelm:
I’m great. Thank you.
Evan Polaski:
Why don’t you remind our audience a little bit about your background and what you do here at Ashcroft?
Traci Wilhelm:
Sure. I’ve been with Ashcroft for almost two years now, and I’ve been in the asset management business for multifamily for 13 years. Before that, I practiced law on the real estate transaction side. So, I’ve been in the business too many years to tell in public.
Evan Polaski:
And in your asset management role, from a high level, what are some of the things that you’re doing day-to-day?
Traci Wilhelm:
We are working hand in hand with the property management team to make sure that all of the business plans that we’re underwriting are being implemented. We are also working with any of the new market trends that are happening—anything that’s happening at a certain property to help guide them through solutions and come up with the best one for the business plan of the property.
Evan Polaski:
I appreciate that insight—let’s dive into it. Just like we’ve done in prior quarters, I would love to get a recap as to how we were performing through Q2 and currently performing with the assets in terms of occupancy, collection, and those market trends you were just referencing that you’re looking into.
Traci Wilhelm:
First, we’ll talk about collections. Our collections have actually been really strong, stronger than we’ve seen in the past year or so. Collections were strong through COVID, as you may remember. But then, in Q2 of 2022, we started to see collections really taking a dip. That’s because a lot of the rental assistance programs were ending, and we started to see a larger number of evictions. Because of that larger number, we weren’t the only ones seeing this. The eviction process lengthened across the portfolio, so it took us some time to get a lot of these nonpaying residents off the properties. We’ve been pretty successful at that across the country, with the exception of Atlanta, which is still very, very slow. We’ve thus seen the collections increase over that one-year period. Now we’re up about 120 basis points a month on collections and about 96% collected across the portfolio.
Most of our properties are in the 98, 99% range. We’ve got a couple that have always been a little lagging in terms of collections that are still pulling that average down to about 96%, but the majority of our properties are collecting quite well. In terms of occupancy, we are seeing a softening in the market, and our properties are no exception. We have underperformed our budget. We’ve seen CoStar has gone down anywhere from 1 to 4% in occupancy, depending on a certain submarket, and we’ve seen our portfolio decrease about 2.5 to 3% in occupancy. Some of that’s strategic because we did roll on to revenue management across the portfolio. We still have a few properties to roll on later this summer. But some of that is a strategic decrease in occupancy so that we can push that revenue and push those rents as much as possible. With our benchmarking program, we’re watching our competitive properties within every submarket to make sure that our goals are in line with what the submarket is achieving.
We’re not trying to achieve, for example, 97% occupancy in a market that’s sitting at 92% because that means we’ll miss out on a lot of revenue. We’re monitoring a lot of different things. Our occupancies have dropped, but so have all of the others in the market.
Evan Polaski:
You’ve mentioned, as we’ve talked about in the past, this revenue management software. It’s really designed to maximize total revenue. For some of the properties sitting at 92%, this may be the actual maximum revenue generation, and hopefully, ultimately, NOI generation for that property where another market might be 95 or 96%, and rents are a little bit lower to keep that occupancy higher and in the grand scheme, maximize all of that. Correct?
Traci Wilhelm:
That’s right. At the bottom line, the goal of the system is to maximize revenue, like you said. What creates value on our property fees is that rent roll increasing. It’s really focused on increasing the rent roll or maintaining the rent roll in markets as much as possible in markets where it may be going backward. We’ve seen a lot of softening, particularly in Atlanta. We are still seeing positive trade-outs at a lot of our properties. We have a few that are seeing some negative trade-outs, particularly in those with a heavy amount of new supply. The system is really helping us not overreact to some of those pressures and keep our rents as high as we can achieve while still achieving a stabilized occupancy. It’s been really beneficial for us. We’re watching it every day, making sure that it’s not doing anything too crazy, and it has really helped us maintain discipline in terms of our rents throughout this downward pressure on our properties.
Evan Polaski:
Obviously, as you noted, it’s not just our properties. This is really fears of, if not fully, stepping into the early stages of a recession. So with that, we’re seeing some softening. How are we handling that? What kind of bigger trends are we planning for should we enter a deeper recession?
Traci Wilhelm:
A few things. I always say this: the beauty of multifamily is that everyone needs a place to live. You’re not going to have an office phenomenon or commercial real estate phenomenon where you’re going to have empty apartment buildings. There’s still a housing shortage in the United States. We know that we may not be seeing as much growth as we’ve seen in the past. We may even go backward a little bit in rents on a couple of properties, but we’re still going to be positive in terms of NOI. We have that really solid foundation. Then, what we’re doing is reassessing what is bringing people to our properties and how we can maximize the amount of people coming so that we can close them. We’ve also launched some really interesting technology tools to help us do that as well as improve collections and retain talent.
We’ve launched a couple of artificial intelligence technologies that help us follow up on our leads more routinely so that we can free up our team to have that in-person interaction. We’re working on improving our online reputation scores because we know that’s fundamental to retention. We’ve launched a lot of initiatives over the last three or four months in preparation for this downward movement of the market so that we can be set up for success even within that. I was working during the GFC, so I was seeing a much more tense situation than we’re seeing today. There are all sorts of moves you can look at, but we are starting to just measure and make sure that we’re monitoring how the markets are performing versus our portfolio to ensure that we’re not either missing out on opportunities or exceeding other market indicators too.
There are a couple of properties where the market may seem soft to us because that property’s been at 96% for the last two years, but it’s at 94% today. And the market’s at 92%, so we feel really good about where we are. Sometimes it’s just support for where we are, and other times it’s just understanding the bigger picture. I think, aside from those technologies to really bring people in, we’ve also really focused our efforts on stopping unqualified residents from getting onto our properties. I think we mentioned this last call, but we implemented a technology called Snappt, and that has been really successful. For our whole portfolio, we rolled it out in January of this year. Since inception, we’ve cut 375 fraudulent applications, which is about 10% of our applications. That means 10% of the people who’ve applied have done so fraudulently.
Without this technology, we may have only caught a certain amount of them—the ones that were very obvious. As a reminder, this is the software that detects digital alterations to your bank statements and pay stubs. It’s been really beneficial for us. So we’re implementing tools like that along the way to stop the bleeding of bad debt on the front end so that we are only getting truly qualified candidates in the door. I think that we’re going to continue to see that as a huge factor. As people are getting evicted, like we talked about, now they have an eviction on their records, so they are going out and purchasing fraudulent documentation to perhaps be accepted.
Evan Polaski:
And as you noted from prior conversations, this is more on the financial statement side, “Hey, I don’t actually earn as much as I’m telling you I earn so I can qualify.” But with increases in evictions and turnover, people might be using it on the background side as best as they can. We still run background checks on everybody ourselves, which hopefully, there’s no technology to amend those. Speaking of tenants and trying to ever improve that, what kind of trends are we seeing from those tenants?
Traci Wilhelm:
I would say a couple of things. I think we are starting to see residents be a little bit more price sensitive, which I think is understandable. Everybody’s a little unsure of what’s going to be happening. We are starting to see a moderation in renewal rates, although we’re still getting really great trade-outs on our renewals overall. We’re starting to see the need to be a little bit softer on those in order to maintain our occupancy. Gone are the days of the 16% to 40% rent increases on renewals. We’re still sending out some that are above 10%, but the majority of them are closer to that 7, 8% range that are bringing them up to market. I would say that the sensitivity is on both the front end of leasing as well as the renewals. Then I would also say that an interesting shift is that we’re starting to see and feel a lot of people are leaving for home purchases.
It seems kind of a little counterintuitive, but I think they’ve been waiting so long waiting for the prices to come down, and they’ve been waiting, waiting, waiting, waiting, and the prices haven’t come down as much as they wanted, but it’s their time, and they’ve just decided to go ahead and act. I think those are the two big trends that we’re seeing. We haven’t seen a lot of the big trends that were happening during the GFC. We haven’t seen a lot of people going from a one bedroom to a two bedroom and getting a roommate yet. We’re tracking that, and we’re starting to see some movement there, but it’s really going both ways right now. But we are tracking it. We’ll watch this because that was one of the big indicators in the GFC that our residents at the time were hurting.
Evan Polaski:
Obviously, a roommate helps you split the cost, so not knowing the data, that was one thing I was thinking about. Are we starting to see more demand for two bedrooms with a roommate or a shift in demand for those two bedrooms with a roommate? Where during the pandemic it was, “I want a two bedroom because I need a home office and I don’t want to be in my bedroom.”
Traci Wilhelm:
It’s to be determined. I think that price sensitivity will play into that. People will either say, “OK, it’s just me. I’m going to take the one bedroom.” Or they’re going to say, “OK, well, I still want the extra space, the bigger living room, and the bigger kitchen, but I need a roommate in order to afford it.” So we’re watching those trends, and I think we’ll see a little bit more and know a little bit more after the next quarter.
Evan Polaski:
Now, kind of shifting pace, because a lot of this seemed to be on the leasing/tenant side—on the operations side, how are we doing with expenses? That is a big part of the overall NOI.
Traci Wilhelm:
I’m not sure if we’ve talked about it on this call before, but I think the big impact that we’ve seen is in our insurance, and that’s an industry-wide issue. At a conference I was at recently, they said one of the big top four management companies or owners in the country said they’ve seen five years of double-digit increases. We did see a very large increase in our portfolio this year. However, last year, we had a 0% increase, so it feels bigger than it really is if you look at it over a two-year period. That is probably the biggest impact. What’s interesting about that, and I am not an insurance expert, is that there are a lot of people that have policies expiring now who are struggling to even get coverage, particularly in Florida, because there are so few people in this market.
One of the things that we’re really hoping for this year is a year without hurricanes—a year without any big-name storms and any major catastrophic losses for the insurance company—because what the prognosticators are saying is if we have that, a lot more people will come into the market, which should bring pricing down a little bit or at least keep it flat. That’s our optimistic hope for 2024. That’s a big piece of it. We actually have seen that payroll has been increasing. We budgeted appropriately, so we are within our 2023 budget right now, but we have seen payrolls pretty dramatically increase over the last couple of years. Part of that is because there’s so much supply delivering in our markets. Let’s take Atlanta, for example. You’ve got 30,000 units that are being supplied in Atlanta over the next year. That is, let’s just say, a hundred properties, with 300 units per property.
You’ve got a hundred properties now that need a staff of 10 people. And where are all those people coming from? They can’t be generated out of midair, so they’re starting to be plucked from other properties. In order to keep your really talented people, you have to match the pay. In a lease-up, they don’t care how much they pay someone, especially a merchant builder. So it’s been a challenge, and I think this year will be a challenge for us to retain people. We’re going to have to be willing to increase their pay a little bit to be competitive. Obviously, all of the cultural things that we do can provide a great benefit, but at the end of the day, a lot of times it comes down to the pay. We’re monitoring that and again, we have budgeted appropriately for this.
We budgeted for fairly large increases this year, even though we didn’t give that large of a raise because we knew that some of this would be coming. So like I said, we’re within budget. I will say, from an underwriting perspective, we are certainly over our underwriting expectations because we’ve seen an increase in the industry. I don’t know what the latest statistic is, but I looked at it about six months ago, and multifamily increases were like 14–15% versus 5–6% in the general economy. So I think we are starting to see that competition come through, but we planned and budgeted appropriately for it.
Evan Polaski:
As you noted, from an underwriting perspective, it probably had an outsized impact looking back at the deals we may have bought in 2018 and 2019, where now we can kind of control it. But thankfully, those 2018 and 2019 deals benefited from, as you mentioned, 16% to 18% to even 40% renewal increases that we never underwrote for. So again, that’s the joy of underwriting conservatively: you don’t have to hit the mark on everything. The net result tends to start balancing it out.
Traci Wilhelm:
The one other thing I would say is that we’re really watching taxes because you’re hearing a lot in the news about taxes, some of it positive. In Texas there’s some legislation that could actually positively impact us by really stopping the growth of taxes. It’s really meant for the single family, but it would impact us as well. I think that there are some positive things there, but we’re watching that as well as our tax consultant. Our initial assessments were quite high this year in Texas, but our consultant has been very successful at getting those down. We don’t expect anything different this year. In Georgia we are all frozen on our taxes for 2024, so we’re very protected in Georgia for the next year. We’ll be flat to this year in our taxes next year. We work hard on the taxes, and we’ve been successful at keeping those at moderate levels.
Evan Polaski:
I appreciate that information. I know last time we were talking about some of the efficiencies of other line items. The unit turns by us providing our maintenance staff with sprayers so that we don’t have to respray and hire an outside contractor to repaint an entire unit just to touch up a few spots. How are those types of expenses, what I call more of the controllable side? How are those tracking?
Traci Wilhelm:
Those are tracking well. We’ve rolled out a purchase order program. It’s a little bit of a manual process now while we implement the new technology, which is a big undertaking. Part of that technology is great because our maintenance teams will have a catalog to order from. We’ll know exactly what they’re paying for every part because that’s the only way they can buy them. All of our vendors that agree to be in this catalog agree to the pricing. It’s a great way to control those expenses. We’re in the process of getting that fully rolled out. In the meantime, we’re operating under a manual purchase order process, where the asset management team approves any expenses that will be over budget.
Then the SVP of operations from the Birchstone team approves anything that’s within 75% of the budget. Sometimes you have to go over budget on an individual line item, of course, but that way we’re at least monitoring it to make sure that the expense is warranted. We can ask questions. Is there another way to do this? All of these programs are intended to try to tighten that expense growth as much as they can, fighting the inflation that everyone is seeing.
Evan Polaski:
I appreciate that information. As you own roughly 13,000 units, give or take, and you have 400 employees, there are certain systems that used to work that need to be revised as we continue to scale. I love hearing some of those details. And finally, I would love to hear the changes and what we’re doing, whether it be the details of the leasing, the maintenance side, or even the asset management side, to continue to drive value in our portfolio in this uncertain economic time.
Traci Wilhelm:
I think that we’ve talked a lot about the things that we are doing and some of these steps. Technology’s going to play a huge role in this for us, not only in the purchase order sector that we were just talking about in controlling expenses but also on the leasing side as well. Like I mentioned, we also have the leasing AI tool and the collections AI tool that we’re rolling out and testing. The other big thing is we’ve always focused on customer service, but we’re really starting to hone in. We launched a system called J Turner Research, which has ORA scores or online reputation assessments. This is something that the industry really measures and uses. Now that we have this great tracking mechanism, we are able to come up with action plans and effectuate actions that will improve those scores because we know that going into a softer market, retention is very, very important.
We know that these customer service initiatives are even more important than we’ve always given them credence for. We’re really working on fine-tuning that and making sure that our residents feel a connection with our teams and with each other on each site. We’re evaluating lots of programs, but these customer service action plans that the teams are providing ask “how do we improve?” Even at the properties with some of the highest scores in the country industry-wide, how can we still improve that feeling? Even if the residents are really happy, how can we make it even that much better so that when we do give them a 5% renewal increase in a market where nobody else is getting increases they still want to stay? That’s ultimately the goal that will drive positive revenue at the end of the day.
Evan Polaski:
Yeah, we’re seeing it on the investor relations side. It’s always about keeping our current customers happy, whether those customers are our investors, clients, tenants, or residents. It just tends to be a win-win. I greatly appreciate all your time and insights as always, Traci, and thank you so much for joining me tonight.
Traci Wilhelm:
Absolutely. Thanks, Evan.
If you would like to learn more about investing in multifamily assets, visit https://info.ashcroftcapital.com/fund, or schedule a call with our Investor Relations Team at investorrelations@ashcroftcapital.com.
