DST Acquisition Considerations | The 1031 Show™ | Episode 26 | Jeff Montgomery

00:00 – 00:13: Bumper

00:00 – 02:10: Spotlight: Jeff Montgomery and Core Pacific

02:10 – 05:33: Core’s Target Market For Acquisitions

05:33 – 07:57: Core Plus and Changes to the Industry

07:57 – 11:25: How Core Hedges Against Inflation and Rising Interest Rates

11:25 – 13:24: Core’s Performance During Recession

13:24 – 16:11: Core’s Leadership and What Makes Them Different

16:11 – 18:10: Core’s Underwriting Process and Property Management

18:10 – 20:20: How Core Hedges Against Inflation and Rising Interest Rates Continued

20:20 – 21:59: Core’s Underwriting Process and Property Management

21:59 – 24:36: Industry Basics and Core’s Use of Cap Rates

24:36 – 31:12: What’s a Master Lease and More About Core’s Lease Agreements

31:12 – 35:10: What Jeff Learned From His Family Office Background

35:10 – 37:14: Stability of the Market and How That Affects Core

37:14 – 38:38: Spotlight: Jeff Montgomery and Core Pacific Continued

38:38 – End: End & Disclosures

Show Transcript:

Wally Smith:
Welcome, Jeff Montgomery. How are you?

Jeff Montgomery:
Thank you. Great. Pleasure to be here.

Wally Smith:
And you’re vice president of acquisitions with CORE Pacific. How long have you been with them?

Jeff Montgomery:
Going on six weeks.

Wally Smith:
All right.

Jeff Montgomery:
Yeah.

Wally Smith:
All right. So-

Jeff Montgomery:
It’s been a fast-paced start with CORE and-

Wally Smith:
Yeah.

Jeff Montgomery:
Yeah. Came in from institutional investing side and brought that side of the experience onto them, and we were able to lock something up real quick right before the storm hit, so-

Wally Smith:
That is really good.

Jeff Montgomery:
… we’re excited about that.

Wally Smith:
Yeah. So six weeks. So you came from institutional. What was your previous life?

Jeff Montgomery:
Yeah, my experience has been institutional investing for a family office. They have family office funds and-

Wally Smith:
Single? Multifamily?

Jeff Montgomery:
All multifamily.

Wally Smith:
Okay.

Jeff Montgomery:
Well, actually, I take it back. I started in the GFC, coming out of the GFC, 2012, with single-family investing, buying foreclosure deals out the recession and-

Wally Smith:
Oh, that’s fun.

Jeff Montgomery:
… amassing portfolios on that side. So that was kind of the Wild West, before the latest build-for-rent round really took off, and that was a lot of fun.

Wally Smith:
Very good. And they hired you to be the head of acquisitions.

Jeff Montgomery:
That’s what they’re telling me, yeah. [inaudible 00:01:30].

Wally Smith:
So a lot of time on the road or what?

Jeff Montgomery:
Yeah, a lot of time on the road. We came into this understanding that the fundamentals of the industry are very strong. We like the multifamily space. The company’s in multifamily and industrial, has history in industrial, and then bringing me on to help grow the multifamily portfolio. At one point, the company had as much as 10,000 units.

Wally Smith:
Wow.

Jeff Montgomery:
We are down to around 3,600.

Wally Smith:
Oh, good doors?

Jeff Montgomery:
Yeah. So, going full-cycle on some of those deals, some of the legacy assets as well. So they brought me on to help grow the portfolio and work with the team and go find new markets and new opportunities.

Wally Smith:
Very good. Are there specific areas where you’re looking at?

Jeff Montgomery:
We are. So, we have a lot of history on DST side with Sunbelt, Midwest. We are bringing that. We’re continuing to search there and opening new markets as well.

Wally Smith:
Mm-hmm.

Jeff Montgomery:
What we’re primarily focused on when we’re identifying a new market is we want to know that this is going to be a stable market, a good, solid investment for the next 10 years. So we’re coming in with the investor’s eye on targeting a market. We first go in and identify a group of areas that are potential, and then we dig in. So we’re doing the work in advance of trying to find a deal. We’re identifying a market, sniper approach to that, doing our diligence, boots on the ground. For example, in Denver, before we entered this market and said, “This is a market that we have belief in,” we did all the research entering. I personally, it was down, boots on the ground, driving neighborhoods, meeting with local brokers and investors, and asking the questions of, “Where do we target? What’s the right side of the street? What’s the wrong side of the street?”
We want a real, deep understanding of the market so that we can really sell this to ourselves and to, ultimately, the investors, that we believe in this investment and this market.

Wally Smith:
Very good.

Jeff Montgomery:
That’s where we’re at now. We expanded into Denver. We’re looking at other markets, including some of the Texas markets, next on our list. We’ve been out in those markets, doing boots on the ground, driving the markets. Think in San Antonio I put 400 miles on the rental car. We’re out in the market, trying to get a real, detailed understanding.

Wally Smith:
Are there any specific areas or markets that you’re intentionally avoiding?

Jeff Montgomery:
Overheated markets.

Wally Smith:
Okay.

Jeff Montgomery:
We use data providers like Whitman Advisors and CoStar. What we’re-

Wally Smith:
You’re concerned about red, blue states, migration.

Jeff Montgomery:
That comes into play, but moreso we want to know that they’re pro-business.

Wally Smith:
Mm-hmm.

Jeff Montgomery:
So believe Denver just went blue, but Denver is a good example of this. We like the market because we understood that the leadership was focused on expanding the business, bringing new companies in. You had the whole Broomfield corridor, where you saw tremendous growth over the past five years. We target markets like that. So it’s not specifically a red-blue deal. It’s how pro-business are you, because that’s ultimately our client base.

Wally Smith:
Are you looking, generally, for markets that’ll mature so you’ll have an exit within that DST time line, within seven to 10 years? Or do you have longer horizon than that?

Jeff Montgomery:
No, our horizon, from the DST investor side, that underwritten business plan is seven to 10 years. We’re putting debt on it that is going to be stable throughout that whole period, also providing that optionality on the exit. We’re buying core, core plus. The takeout’s going to be family office, institutional, value-add players. We do target the markets with an eye on the horizon and trying to read our crystal ball as best as we can, understanding that these are going to be good markets today and through our hold period, and are going to sell well, ultimately, to that next investor.

Wally Smith:
Tell us about core plus. You mentioned that in our pre-meeting a little bit.

Jeff Montgomery:
So core, core plus, core asset, brand new, straight from the developer, primary markets. That’s one aspect. Core plus is take a 2014, 2012, or even just a few years old, where there’s institutional investors, it’s a primary market, and there’s new developments nearby. So you’ve got brand-new development within the area that shows a path towards, “Hey, if we improve this slightly, we improve this slightly dated product, we improve that, we’re going to see a lift to our NOI.”

Wally Smith:
Mm-hmm. Okay.

Jeff Montgomery:
And what core plus provides us the optionality of is, we’re not solely dependent on market movement. We’re not just underwriting rent growth. We’re underwriting rent growth. We’re looking for markets that have a solid rent growth. But the core plus gives us the optionality to look at a market that’s not the highest rent growth, but is going to be a stable rent growth, while also giving us that NOI lift, through a value add, through a improvement of the common area, ultimately making the tenants more desirable or having the tenants desire the product more and be willing to pay a slight increase on the rent for that.

Wally Smith:
How has that changed? I know we track a lot of the student housing and with other sponsors in the market, and gosh, back when I was in college, back in the Stone Age, it was the cinder block walls and a chow line. And now they’re like country clubs, with climbing walls and all of that.

Jeff Montgomery:
Yeah.

Wally Smith:
How have the amenities changed over just last decade?

Jeff Montgomery:
Oh, the amenities. That’s a fun game. So, on new development, luckily, we’re not the developer. So we don’t have to sit back at a blank canvas and say, “Okay, what are we going to do?” It’s fun, and we’ve done it, but it’s not where we’re at now. So, it’s an interesting trend to watch the new developers and the creative side and the designers, what they’re able to come up with. We’ll implement those trends so we can capture the trends on the multifamily, residential side of, “Hey, what are tenants ultimately demanding?”

Wally Smith:
I don’t think 10 years ago, you heard about many pickleball courts.

Jeff Montgomery:
No.

Wally Smith:
Right? [inaudible 00:07:54]-

Jeff Montgomery:
No, but now we’re looking at those.

Wally Smith:
Got to got to have your pickleball.

Jeff Montgomery:
Yeah.

Wally Smith:
All right. Tell me about full-cycle programs. Do you have full-cycle programs you’ve gone through?

Jeff Montgomery:
On the DST side, our first acquisition was 2016. So 10 year we’re coming up, 2026 is our full-cycle. None of those have gone full-cycle yet. We’ll anticipate those coming soon. But what we are seeing on those assets, we’re exceeding pro forma on every single one.

Wally Smith:
Okay.

Jeff Montgomery:
Our investors are happy. We’re meeting all the returns. We haven’t had any hiccups, really, on that side, which is great.

Wally Smith:
Okay. So you do generally hold them close to the full 10 year?

Jeff Montgomery:
We-

Wally Smith:
Or do you anticipate five to seven?

Jeff Montgomery:
No, we try and get out, get the full ownership of it. So seven, 10 years.

Wally Smith:
Okay. That’s good to know. And the investors did well. I think we were talking earlier about the kind of the 80-20 hitting the bonus-

Jeff Montgomery:
Bonus round.

Wally Smith:
… potential. Yeah.

Jeff Montgomery:
Yeah. So this is a new aspect to [inaudible 00:09:04]-

Wally Smith:
To interrupt, we’re trying today to keep things as general as we can. We’re not talking about a specific property or address or building, more conceptual. But I think that’s something that’s woven into a lot of your projects. Right?

Jeff Montgomery:
Yeah. We’ll try not to get the compliance officers too excited.

Wally Smith:
Absolutely.

Jeff Montgomery:
No. From a high-level aspect, one of the things we heard the DST investors, clients ultimately asking for was inflation… This was a couple months ago. It was inflation’s going to happen. It’s going to be an aspect. It’s not a short-term, transitory inflation deal. So what happens to our investment as inflation starts to increase? How do we hedge against any inflation impact to our equity in our investment? Our answer to that, and the market’s ask for this was, “Well, we’d like to participate on additional cash flow, over and above threshold.” So we worked with our attorneys and our compliance groups and everything, came up with this structure, where over a certain threshold, we’ll split. 80% of the additional profit goes to our investors.

Wally Smith:
That’s excellent.

Jeff Montgomery:
Yeah.

Wally Smith:
That’s a question that’s come up so much, just with the last $6 trillion dumped into the economy. Not that there’s anything wrong with that, of course. But folks are asking, well, just, “Gee, what about inflation? I can see the yield and the numbers they talk about on the TV about inflation are higher than the yields we’re talking about. Does that mean I’m going backwards?”

Jeff Montgomery:
Right.

Wally Smith:
We’re in a good position because we like to contrast projects that have a master lease, that have that pricing elasticity built into it, against a fixed-lease, triple net, that’s going to be there for… Maybe there are rent bumps of a couple percent a year, but they’re definitely not going to keep up with inflation. So I think you got a very competitive edge there.

Jeff Montgomery:
Yeah. I mean, our goal, at the end of the day, our pure focus is to the investors. So we’re buying these assets. We’re putting our own money in it from the start. Our investors are coming in and taking us out. We want to be sure that we’re structuring a deal that is attractive to that investment group and is going to be a safe investment, a good shelter of capital for that long-term hold period. So-

Wally Smith:
It strives to be the safe investment.

Jeff Montgomery:
Right.

Wally Smith:
Yeah. Oh, okay.

Jeff Montgomery:
Compliance.

Wally Smith:
That little guy right on my shoulder all the time. Has CORE ever missed a distribution payment?

Jeff Montgomery:
We have not.

Wally Smith:
Okay. How did you do during the lockdowns? How was all that?

Jeff Montgomery:
So, I mentioned I started in 2012, so I’ve seen some of these movements, and it’s been an interesting roller-coaster. So pandemic period for multifamily initially was scary, going into it, going, “Are we doing full recession? Or what’s going to happen from the lockdowns?” Ultimately, multifamily proved to be extremely resilient, going through this.

Wally Smith:
Is it agency debt that you have?

Jeff Montgomery:
We do agency.

Wally Smith:
Okay.

Jeff Montgomery:
Yeah. A lot of agency, some bank. But we’re targeting agency on most.

Wally Smith:
Sure.

Jeff Montgomery:
But yeah, multifamily was very resilient, going through the slowing of the pandemic and the pandemic years. But then, given the properties that we selected coming out, we saw tremendous NOI growth from increased demand and kind of pent-up demand on the tenant side as well.

Wally Smith:
Mm-hmm. Before you got there, I mean with CORE, have they been in a position to be opportunistic as other companies? You said the first deals they started doing was 2016, so most of the trouble had been soaked up by then.

Jeff Montgomery:
Sure.

Wally Smith:
But is that part of their model?

Jeff Montgomery:
CORE, as a company, has been around over 17 years. They’ve gone through multiple cycles and through the GFC then, and through that, yes, have been able to find opportunistic opportunities. And given the long horizon of the company, long-term view of investments, there are legacy assets we still own that were acquired pre-GFC. So we were able to ride through the GFC recession, ride through the ups of that, and are still operating those and exceeding our expectations of what those would do.

Wally Smith:
Tell us a little bit about the leadership at CORE. Who are the big dogs? I mean, besides yourself?

Jeff Montgomery:
Don’t consider myself that. Our leadership team is really top-notch. So, Justin Morehead is our CEO. He’s taken the lead of running the company. Younger professional, very anxious to grow, grow the portfolio. As I mentioned, we originally or at one point had over 10,000 units. We’re looking to bring it back to that. So the directive is coming from Justin to say, “Hey, we want to take this company. We believe we have all the resource and everything for this company to grow. We’re going to make sure that we do that in a smart way.” So from a leadership standpoint, that’s where the direction’s coming from, from the top down, and we’re taking it and running with it.

Wally Smith:
Excellent. Let’s see. It’s kind of another total softball question, but CORE is one of the top-selling DST sponsors. Right? Within your offerings, what are some of the key differences? I mean, you mentioned the bonus, 13th distribution [inaudible 00:14:39] kind of thing. That’s pretty cool.

Jeff Montgomery:
Yeah, so that’s a black-and-white difference between us or differentiator between us and our competitors on the market. And again, that stemmed from we’re listening to the market. We’re listening to our investors. And we’re asking them, “Hey, what do you need?” We’re constant contact with our deployment base. Our equity fundraisers and our investment advisors are talking to the market and feeling it out daily. So that’s one aspect that sets us apart.
What really sets us apart is we are a younger, growing company. From the DST side, we’re focused on, we want to buy the right deals. We’re doing this practice approach from the submarket side, making sure that we’re taking a sniper shot versus a shotgun. Where you look at some of the larger investors, larger investment companies, that are out on the DST, they need volume. So they’re pushing for more volume, pushing for more deals. We like volume too, but we’re taking a more practice approach to that and making sure we’re buying the right assets. So we’re making sure that we’re buying blue-chip properties and taking that real, detailed approach, where I personally am seeing every asset before we even bidding on them. So our investment committee is reviewing the deals in step with the acquisitions team. We’re making sure that we’re doing true, almost pre-due diligence before we even [inaudible 00:16:10]-

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:
Okay. Very good. Let’s see. Interest rates, I mean, that’s certainly been a hot button.

Jeff Montgomery:
[inaudible 00:18:19] a topic, huh?

Wally Smith:
Let’s talk about that. Turned on the TV the other day. They said inflation’s done.

Jeff Montgomery:
It’s done.

Wally Smith:
Talking to Art Laffer a couple of months ago at an event, got a couple of minutes with him, and he said that we’ve never brought inflation under control in the country without raising interest rates at least one point higher than the rate of inflation. And at the time, inflation was somewhere between 8 and 10, depending upon if you included those pesky things that keep going up or not. Right? So, how are you guys positioned, then, with inflation, with interest rates?

Jeff Montgomery:
Sure. On existing assets, we’re placing fixed debt. We have been fixing interest rates for the whole hold of the assets. So existing assets, we’re good there. From an acquisitions point of view, it’s probably echoed throughout the industry. It’s frustrating because you’re looking at a market that has good employment, good fundamentals. Property fundamentals are great. The market fundamentals are great in all of our markets. But you’re looking at a capital environment where you run into interest rates being quoted at higher rates than what cap rates are at. So how do you make that work? We are getting creative on the acquisition side of looking at doing interest rate swaps, potential caps. Or one of the things that we’ve started to chase heavily that I don’t know if this is a secret as much anymore, but was looking for debt assumption. So early on we had pivoted to start targeting, “Hey, is there a group that’s already placed debt [inaudible 00:20:01]?”

Wally Smith:
Are you finding much of it?

Jeff Montgomery:
We have, on a few markets, very market-specific.

Wally Smith:
Yeah. Don’t tell anybody.

Jeff Montgomery:
Yeah.

Wally Smith:
[inaudible 00:20:07].

Jeff Montgomery:
Can’t tell you which-

Wally Smith:
All right.

Jeff Montgomery:
… which opportunities we’ve been chasing right now. But no, we’ve been in discussion with some off-market groups and off-market properties to try and acquire one that has much lower interest rate than what you can get on the market today.

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 00:20:41] 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.

Wally Smith:
Okay. Here’s some basics, basics in the industry. Describe what is a cap rate?

Jeff Montgomery:
Oh, no. So, cap rate NOI, net operating income, divided by your purchase price. So easiest metrics, or one of the easier metrics in the industry. A lot more detailed metrics go into our analysis, but cap rate’s a good initial barometer of where deals are. And it’s also a way that we’re valuing properties. So it works both ways. So when we’re looking at a property, we’re looking at, “What’s the current income, in-place income? What are expenses? What changes can we make to that? When taxes reassess, what’s the impact of that?” Ultimately, down to a net income before debt, and dividing that by the purchase price gives us a good point of reference from other assets.

Wally Smith:
Where are they now in multifamily properties? Is there a band you’re looking for? Is it regional?

Jeff Montgomery:
Who are you asking? No. There’s a chasm right now between buyer and seller. So the buyers are coming from a… or the sellers are coming from a market where they were selling a deal six months ago that’s a 3.5 cap market.

Wally Smith:
Mm-hmm. It’s crazy.

Jeff Montgomery:
Yeah.

Wally Smith:
Yeah.

Jeff Montgomery:
But interest rates were in the 2s. You now have a market where interest rates are pushing 4, 5, 6, and you have a seller who’s gone from that 3.5 to now, “Hey, I’m giving you a hundred basis points increase. I’m at 4.5.” The problem is, and what’s creating the divide right now is, the buyer is looking at a 6% interest rate, high 5s interest rate and saying, “Well, that’s too much negative leverage. I really need to be pushing closer to a 5.” So that’s why you’ve seen a lot of the transaction activity of late really just take a pause. So a lot of our competitors, especially institutions right now, are sitting on the sidelines. They have buckets of money. They need to deploy it. But there’s this chasm between buyer and seller of where they view the cap rate value of their property.

Wally Smith:
Can you make up for it with the core plus?

Jeff Montgomery:
We can. That’s one of that aspects of looking at a core plus deal, is we’ll start out with potentially a little bit of negative leverage, but throughout the first year, through executing the business plan and not relying on rent growth, relying on just natural growth through the business plan, we’re able to make up for that negative leverage.

Wally Smith:
Here’s another basics question. Describe when you would have a master lease. What’s a master lease, and why do you have it in a DST structure?

Jeff Montgomery:
So, I mentioned my history wasn’t on the DST side, so I’m learning along with everybody else. But my rudimentary understanding, or layman’s understanding, of what a master lease is, is can be explained similar to a ground lease.

Wally Smith:
Okay.

Jeff Montgomery:
In that ground lease, you have a property owner. You have a landowner. When you’re buying the property, you’re buying the asset, not the land. Well, the DST investor owns the asset. So they own 100% of the asset. What the MT, the master lease, is paying at lease-on is the operating of the asset. The DST owns it. The DST investor owns it. Us as a sponsor are managing income, through expenses, through all the financial side of the deal to a net number. And then we’re returning back to the DST investor a lease or a payment for getting [inaudible 00:25:55].

Wally Smith:
Well, that makes it real clean for the DST sponsor and for the investor, to be able to get one payment. I think it’s also a part of the DST requirements themselves, is you can’t change leases, is you got to have a lease on that property. So what do you do when you’ve got storage units or apartments or college kids moving in and out? Right? So that way, you’ve got one master lease who’s taking care of all of that in-and-out stuff. But it satisfies that DST. One of the things I like about the master lease is, again, is that pricing elasticity. When somebody moves out, I mean, you see the rents can go up 5, 10% in a multifamily.

Jeff Montgomery:
Right. Yeah, so from the property management operating side of the asset, this is an advantage of multifamily.

Wally Smith:
Absolutely.

Jeff Montgomery:
You’re not locked in for a five-year lease. Our typical lease averages from 10 months to 12 months to 14 months, kind of dependent on the market. But a good average is 11, 12 months. And you’re able to reset, based off that. So whether the tenant moves out, you have a new lease coming in, it resets to the current market. Excuse me. It’ll reset to the current market. If you have a renewal, you don’t always get to the top of the market, but you get a lot closer to that. So by having the property management side, the owner, the asset side leases constantly turning, you don’t end up with a large loss to lease or a large discount to where the market is.

Wally Smith:
And so most of them are 10, 12, 14 months, in that range?

Jeff Montgomery:
Excuse me. Yeah, so our typical lease, multifamily is 11, 12 months.

Wally Smith:
Okay. Typical one-year sort of thing.

Jeff Montgomery:
We’ll lease anywhere down from six months to 12 or 14 months. Difference being, we’ll price different premiums based off that. And another aspect of having this flexible lease is we will schedule leases based off seasonality. So Denver is a seasonal market. Winter’s not the time you want to be doing most of your leases. We’ll anticipate that when we’re signing spring leases. We might shorten them up a little bit so that they expire in summer. Or-

Wally Smith:
[inaudible 00:28:06].

Jeff Montgomery:
… we may push a later lease in the year to expire later, so that we’re not hitting that winter window. So that-

Wally Smith:
Do you guys use that, I mean, that latest software that… My daughter went out and got an apartment. And it was her first apartment after she got out of college. And she checked. It was in the Denver Tech Center area. And so she looked at what the price was, and we’re talking about it, and she checked back four hours later, and the price had changed. And the next morning, the price had change. It was just the flexibility of that. I think it must be the, I don’t know, software systems that are constantly changing that.

Jeff Montgomery:
So, rent optimizers, LRO.

Wally Smith:
There you go.

Jeff Montgomery:
Yeah, LRO and YieldStar, I believe, are the two main players in that today. That’s really taken off. You used to have, years ago, an on-site staff would set the rents. They’d call around to the market. They’d say, “Hey, what are you leasing for?” And we’d play the game and try and set where the rent should be on every single lease. It’s inefficient, also allows human error and all that kind of stuff.
So what the lease optimizers do is put an algorithm together, where they say, “I know, based off the competitors,” who are also using the system anonymously, baking that in there and saying, “Hey, market rents should be around this. You have vacancy at 10% in your two-bedrooms, so that’s a higher vacancy. So we need to lower the rent a little bit to entice some more volume there. Your one-bedroom is full. You have one unit available. We can try and get a higher rent on that.” This is going into a algorithmic program that initially sounds like, “Does this really work?”

Wally Smith:
Oh, but it’s similar to the way the airlines price their seats. I think it got really strong with the storage units. They were doing a lot of that as well. That’s interesting. Multifamily with the DSTs had, well, until just a few months ago, it was kind of lagging as far as the yield is concerned. And there wasn’t much to drive it on the upside. But I think with the inflation and with what we’ve been talking about here, the elasticity of that really does make it one of the better inflation hedges.

Jeff Montgomery:
So kind of what we were discussing with the being able to schedule leases and reset leases as they turn over on an individual side, unlike an office tenant, unlike an industrial tenant, where it’s a longer-term lease with certain steps, we’re able to ride with that inflation. And that goes back to what the investors were asking for on doing a bonus rent profit-share program, was they were wanting to know that multifamily is a hedge against inflation. The reason for the hedge is because of the shorter-term leases and the more turnover. “Let’s participate in that.” And so yes, on the multifamily side, from trying to hedge inflation and preserve capital, it’s a better avenue than some of the other asset classes, especially going into the environment where it might be a little bit cooler for the next year or two.

Wally Smith:
Okay. Like to dive in a little bit to some of your background there. It’s interesting, with the family office background. When I think of family offices, I think of a lot of wealthier people, single family or even multifamily offices. And a lot of those people had to work really hard to inherit their money. So they’re very protective of it, but they’re not trying to shoot the moon. Layman walks in off the street, and they feel like they wish they could invest like the big guys because surely those rich guys, they’re making 20, 30% on their money. Right?

Jeff Montgomery:
Right.

Wally Smith:
I think it’s more of a reality that they don’t want to lose it. They want to get a good return. They want to keep ahead of inflation. What kind of lessons do you bring from the family office perspective?

Jeff Montgomery:
And it’s the name of the game of the DST almost, is wealth preservation and growth, stable growth. From the family office side, you’re right. They either started in a different avenue, were able to build a mass of wealth or started in real estate, a lot of them, and through time were able to grow their portfolio. So great way of doing that is through refinances and, ultimately, long-term ownership. So the guys who are really making wealth are long-term owners. The guys who might get a good year, might have some bad years, are the ones shooting for the moon.
So when you’re looking for the stable investment and the stable investors, which family office does, you are looking for that longer-term hold, longer-term investment period. Or even, shops that I was at before, it was a shorter term. It was more five years, but it was done under a umbrella structure, where the investment turns over. So we’re building a fund that will deploy. The property may be owned for five years, but its business plan will be shorter. It gets recapitalized, refunded into the fund and continues. So name of the game on the wealth preservation side really is the longer-term investment period.

Wally Smith:
Mm-hmm. Okay. Would you say that’s the main difference between family office and retail investors? Retail clients?

Jeff Montgomery:
Family office and the retail DST side, I guess it depends on which perspective. From the perspective of the company, acquisitions, family office is a simple LP, limited partnership, GP, general partnership-type structure, where your LP partner will be an outside investor potentially, or even inside investors. And they’ll be 70% of the equity on a certain deal, or more or less. The partnership, the sponsor in this case, GP in that case, operates the company, makes the decisions day-to-day, executes the business plan, and pays a percentage share of the revenue that comes off of that to an LP investor.
On putting in the perspective of DST, the DST acts like that LP investor, where it’s limited partner. It’s a kind of hands-off investment, where they’re not having to deal with the day-to-day, and the day-to-day dramas of leasing, multifamily and turnover and things like that. So us as the sponsor will handle that for them.

Wally Smith:
Okay. So even though they’re a family office, they still enjoy the DST structure.

Jeff Montgomery:
Similar. Yeah.

Wally Smith:
Yeah. Okay. Is CORE involved much with doing custom deals? Would a wealthy family come to CORE and say, “Go find me something?” or, “What have you seen out there?”

Jeff Montgomery:
No, our current focus is 100% on the DST raises right now.

Wally Smith:
Okay. Retail DST side.

Jeff Montgomery:
Retail DST side.

Wally Smith:
Okay.

Jeff Montgomery:
Yeah. We could go that direction in the future, but currently focused DST.

Wally Smith:
Okay. Who are the biggest lenders or the best lenders right now in this space?

Jeff Montgomery:
We mentioned Fanny, Freddie. Agency. They’re still active in the space right now. Bank’s been active. Life cos, there’s whispers, life companies. There’s whispers that they’ll be coming back in, Q1 next year.

Wally Smith:
Okay. And are the terms right now stable, or are they very much in flux?

Jeff Montgomery:
They’re in flux. We saw the 10-year go from, I believe, 4% into the 4s last week to this week… I looked today, and we’re at 3.77. The Treasury’s moving around. Spreads have been relatively stable. 150 to 170 basis point spread on that. But what’s hard on the acquisition side right now, with that instability from the Treasury side, is pegging. “I’m going to close this deal. I’m going to lock this deal up today. I’m going to close it in 60 days. Where’s my interest rate going to be? Where’s my interest rate going to be when I lock it?” So that’s actually what’s keeping a lot of the institutional investors on the sidelines right now, is yeah, “There’s too much turmoil on the market. We’re just going to wait.” So a lot of those groups have waited. And our most recent acquisition, that was the case, where it was the first time that interest rates started moving around. Institutions went to the sideline. We were able to capitalize on that and find a really good asset and not have to compete with a lot of the Blackstones of the world and larger institutions.

Wally Smith:
Yeah. How’s your LTV changing? Are you guys trying to have less debt in deals now? Or you considering doing any all-cash deals, or do you?

Jeff Montgomery:
Back on, we’re doing what the market’s asking for. So we have the flexibility as a company to go both ways. Lately, the DST market has been asking for higher LTVs, so we’re trying to target deals that have a higher LTV as needed. If the DST needed to go the other direction, we could go lower LTV. So it’s just more market-driven.

Wally Smith:
Very good. Well, let’s see. Talk about you little bit. You said you’re from Orange County?

Jeff Montgomery:
I am, yeah. Born and raised, California. This white stuff out here in Denver is a little scary, but-

Wally Smith:
They’ve been known to ski in California little bit. Do you ever-

Jeff Montgomery:
No. We-

Wally Smith:
… get up to the mountains?

Jeff Montgomery:
We do. I snowboard in the winter, get up to.

Wally Smith:
You’re supposed to snowboard in the morning and surf at night, something like that?

Jeff Montgomery:
That’s the deal. Surf in the morning, snowboard in the afternoon. Yeah.

Wally Smith:
Where’d you go to school?

Jeff Montgomery:
UC Santa Barbara.

Wally Smith:
Gee, that’s rough.

Jeff Montgomery:
Yeah, it was hard. My dorm room was fourth story on the edge of a cliff, overlooking the ocean. And I go, “Well, yeah, you better not get used to this because it could be a while until you can replicate it.”

Wally Smith:
Some of my family members went to Pepperdine and they were-

Jeff Montgomery:
Oh, that’s great.

Wally Smith:
… fond of that as well. So, yeah. Were you in sports at all? Or what’d you like to do in school?

Jeff Montgomery:
In school, it was more getting in, getting out, and getting to work. Sports, growing up, did the typical football. Football, baseball, things like that.

Wally Smith:
Yeah. You look like a middle infielder.

Jeff Montgomery:
Picking the days he’s in the back yard, right?

Wally Smith:
Absolutely. Something like that. Well, this has been good. And I know we really like working with CORE. I love the direction. You’ve got two or three real, solid, I think, leverageable points of difference with your approach to multifamily and being responsive to the market. So best of luck to that, and-

Jeff Montgomery:
Thank you.

Wally Smith:
… hope to see you back out in Denver again sometime soon. So-

Jeff Montgomery:
We will be. We’ve got the beach out here-

Wally Smith:
All right.

Jeff Montgomery:
… ready to go.

Wally Smith:
Very good.

Jeff Montgomery:
Pleasure.

Wally Smith:
Thanks, Jeff.

Jeff Montgomery:
Thank you.

Speaker 3:
Impact 1031 is a DBA of Ridgegate Financial LLC. Not an offer to buy nor a solicitation to sell securities. All investing involves risk. Past performance is not indicative of future results. Speak to your financing or tax professional prior to investing. Securities offered through Emerson Equity LLC, member FINRA/SIPC. Only available in states where Emerson Equity is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. Investment advisory services offered through AE Wealth Management. Emerson Equity, Ridgegate Financial, and AE Wealth Management are not affiliated entities.

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Impact 1031™ is a DBA of Ridgegate Financial, LLC.

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing.

Securities offered through Emerson Equity LLC Member: FINRA/SIPC. Only available in states where Emerson Equity LLC is registered. Emerson Equity LLC is not affiliated with any other entities identified in this communication. Investment advisory services offered through AE Wealth Management (AEWM).

Emerson Equity, Ridgegate Financial LLC and AEWM are not affiliated entities.