JAG Capital Investor Newsletter
Edition 1 - Kick Off
Starting things off
If you’ve gotten this email it’s probably because you know me, and my company, and have expressed some level of interest in investing with us, learning more about us, or following me somewhere on the internet.
If you wish I hadn’t added you to this list, my apologies and feel free to unsubscribe at the bottom, no hard feelings.
If you’re still with me, I guess I’ll give you a quick update on what I plan for this going forward, what we’ve been up to, and what we’ve been experiencing in the world and the market.
Plan for the newsletter
The short; I’ve got no real clue.
The long; I have thoughts all the time, like anyone else, and maybe people would enjoy reading them.
Fair warning I plan on writing on how I think and talk, so don’t expect excellent grammar (although I do have Grammarly so that helps), expect some profanity, expect a little bit of rambling, and hopefully over time I get better at this.
Essentially I want to stay in touch with anyone that’s interested. And I haven’t felt like being as active in front of the camera as I used to, so I figured I’d give this a try for the time being and see how far it takes me.
I might never do a second one, or I might do this for the rest of my life.
If you have zero expectations of me, then I can promise you’ll be content or pleasantly surprised.
Also, if we haven’t spoken in a bit or at all, let’s schedule a call/zoom and chat.
What we’ve been up to
So Q1 2022 we closed on 2 properties totaling 32 units raising a combined $1.5m roughly (shoutout to all of our investors in those deals), and acquired a 2.55-acre piece of land we’re looking to develop.
Than Q2 2022 inflation went crazy, interest rates went crazy, and new deal flow dried up overnight. It’s been a solid 10-12 months of, not seeing any deals that make sense, but also just very few deals in general.
Similar to COVID in Mar 2020, no one really knew what was going on, and most people didn’t want to do anything for fear of making the wrong decision. Also, it’s tough to underwrite when rates jump 50 bps overnight, especially when sellers still wanted 3% cap rates and weren’t in a hurry to change expectations (nor do I blame them).
So with next to no deal flow, we focused on renovating our properties and refining our operations, refinanced our first-ever acquisition, and just held tight.
Luckily all of our deals have fixed-rate loans, and they all have 4+ years remaining on the terms as of today. It is 99% luck that the deals we bought in Q1 2022 were right before rates shot up. However, I will accept 1% of the credit. We decided to take bridge loans that had fixed rates, we didn’t take the max leverage offered, and we also went with a bank that gave us longer than the usual term for the debt, 5 years versus usually 2-3.
But it’s not that I saw this coming and locked it in, it’s just that I believe in being more conservative with leverage, I think short-term loans are very risky, and I’ve never been a big fan of floating rate debt. So it’s not anything so special, just that my personal preference worked out better than the alternatives in this situation.
For example, had I done fixed-rate debt in 2020 when rates went from 5+% to 1-3% for floating rate loans, I probably wouldn’t be feeling as high and mighty. So with a fixed rate loan, we would’ve kept paying higher than market payments instead of having a floating rate loan, where our mortgage payments could have dropped substantially and cash flow would have shot through the roof. So our investors would’ve missed out on a lot of potential profit.
But, honestly, in that scenario, I would still be feeling fine, because I prefer certainty and eliminating some unknown variables where I can; it’s one of the reasons I prefer loans with a prepayment structure over yield maintenance.
Anyway, I’ve rambled and gone slightly off-topic, a discussion for a future edition.
In Q2-Q3 we did try to re-zone our development site to go from its current zoning of 20 units to 30+ and got shot down hard. Not the most fun, experience, but I’ve learned from it and we only utilized personal capital to close on the land and some soft costs. We’re currently evaluating a bunch of different options and deciding where to go next.
Q1 2023 activity has definitely picked up, especially in the past 4 weeks and we’ve offered on a couple of deals, but nothing has stuck yet. I’m hopeful that we’ll have an opportunity in the first half of this year, but I don’t need to force anything, nor will I.
What we see happening currently
I’m no expert, nor have I had decades of experience to compare this to, so I just stating what I’m seeing and not trying to predict anything, so take everything I say and heap on the salt.
10-year treasury has been up and down for months, and from the quick reading from Powell’s last meeting, they don’t seem to love where the economy is still at. It would not surprise me for them to keep pushing the fed rate up until they see more of a drop in unemployment and CPI. What exactly that does for the economy, the market, and multifamily specifically, I’m not sure, but I don’t think it will be great.
I have been hearing more and more talk from my network in the multifamily industry of some potential distress. Deals that are close to being underwater, deals that would have to do a cash-in refinance if they have to replace their current debt, deals that are not hitting the projected NOI, etc.
If you’ve seen headlines in the news there’s now been a few big loans that have gone into default, I think Blackstone with their Finnish office CMBS portfolio is the most recent (Blackstone defaults on Nordic mortgage-backed bond). So deals are not performing, but it’s a very small percentage that I’ve seen so far of having actually gone into default.
I personally think rates will have to stay near current levels or higher for the rest of the year or longer, for there to be any significant amount of multifamily properties having serious issues where they have to do cash-in refinances, sell off, restructure with their current lender, or hand back the keys. And even then, there could be other things that don’t make it so bad, but there are also others that could speed it up or make it worse.
For example, insurance has been fucking with every deal we have, and every other owner as far as I know. Every owner I know is getting screwed on renewals, my family members’ homeowner’s insurance is doubling, and all my professional contacts who know other owners say they are having the same issue. We have experienced anywhere from a 20%-100% increase in our insurance premiums YOY, and I haven’t heard anything to suggest it’s going to slow down.
So, we’re now in a situation where some/many owners have short-term loans, with floating rate interest rates that have shot up substantially, where rent growth has now gone flat or dropped, with vacancy expanding from 3% to 5-6%, and expense line items are up in huge amounts. Oh and some of those deals were purchased for 3-4% cap rates.
That sounds promising.
But then, there is still a tremendous amount of dry powder waiting for deals. So what will actually happen is anyone’s guess.
This is why we will continue to look for longer-term opportunities (5-10 years), with fixed-rate debt, raise greater levels of cash reserves outside of any lender requirements, and look closely at how much leverage we feel comfortable taking.
So anyway that’s it for this newsletter, not even sure how to end it. Thanks for reading, feel free to give me any feedback. If you want to refer a friend to this newsletter or as a potential investor, we would greatly appreciate that.
Chris Grenzig
Owner
JAG Capital Partners | JAG Communities