Core’s Underwriting Process and Property Management

Wally Smith:
Let talk through that a little bit. How do you guys underwrite a property?

Jeff Montgomery:
Sure. So, we start with market. Mentioned a couple times. If we’ve identified this market that we really want to enter, it’s more advantageous for us from a management side. So, stepping back, we’re vertically integrated company. Property management, investor relations, accounting, everybody is in-house. We don’t sub out property or asset management. So we’re in lockstep with both of those teams in reviewing the market from the start.
But once we’ve identified a property that we’d like to target, usually through either off-market or through broker channels, we will fly out there and go check out the property. We’ll initially do a desktop underwriting, including rent roll analysis, T12, do market research on pipeline. Is there a large development pipeline? Aspects of the property that are going to impact the long-term ownership. Ultimately, designing a business plan for the property. And this is all happening before we’ve ever bid on it. We will come up with a business plan. It’s going to be a core investment. What are the attributes there? Core plus, what attributes are there? Are buying this from a merchant build, where operations have been up and down, and going through lease-up? How can we utilize our in-house property management to come in and optimize income, expenses?

Wally Smith:
In-house property management, is that just the management of it? Or do you have your own improvement teams, your own…

Jeff Montgomery:
It’s, yeah, property and property management and asset management, all in-house. So starting at head of… or head of asset management and head of property management, filtering all the way down to the on-site staff. We have regionals throughout the country who manage multiple assets. And then, boiling up, to our head of property management sits in an office a couple doors away from me.

Wally Smith:
Sure. Let’s see. Well, one of the terms you threw out earlier was “big, scary patches of dirt…” I thought that was fun… “in the neighborhood.” Do you get in with the planning commissions? I mean, [inaudible] spend much time with them, with the local counties, what’s going to happen over the next five or 10 years?

Jeff Montgomery:
Yeah. So, earlier on in my career, you had to go to the planning commission and call a lot. Thankfully a lot of the data sources have now started taking that role of making the phone calls and building the pipeline. But there still is an aspect to that. Once we get further along in a diligence, we’ll call and verify who’s building what and where.
From that comment, “scary patches of dirt,” when you look at satellite views of real estate, and we start off looking at the satellite view of Google Earth and saying, “Hey, what’s that big chunk of dirt over there? What are the entitlements?” And you can, a lot of this research online. What’s it entitled for? Is somebody very close, or could be very close, to starting a project, and it’s not a deal-killer? We need to understand this. We need to underwrite this in the business plan, understanding if there is going to be a new project popping up nearby, what year is that going to deliver? How much type of concessionary environment could possibly exist for a short period of time? And what’s our game plan to be able to ride that? We want to make sure that we understand all that so there’s no surprises throughout the ownership.