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Every Friday, join us as we dive into the latest in real estate multifamily with David Moghavem, Head of East Coast Acquisitions at Trion Properties. David invites top experts who know the ins, outs, and trends shaping the real estate multifamily market across the nation!
Whether you’re a seasoned investor or just curious about where the next big opportunity might be, Deal Flow Friday brings you the weekly inside scoop on what’s hot, what’s not, and what to watch for in today’s ever-evolving real estate scene.
David Moghavem (00:00)
All right, welcome to another episode of Deal Flow Friday. I'm your host, David Mogavum. Today we have Zach Haptenstall, the CEO and co-founder of Rise 48. Zach has founded Rise48 in 2019. They've accumulated over 12,000 units, two and a half billion AUM across Phoenix, DFW, and the Greater Carolinas in Charlotte. So they're vertically integrated just like we are at Trion
with over 300 employees, property management, construction, all fully in-house. they've also been super active despite the headwinds and turbulence that we've seen in the multifamily space. So it's gonna be great to pick your brain Zack on what we're seeing out there. So thanks for having you on.
Zach Haptonstall (00:46)
Yeah, thanks so much, David. Really appreciate you having us on and and looking forward to it.
David Moghavem (00:50)
Awesome, awesome. Well, first, I mean, to kick it off, we're in very interesting times on the macro side. Tenure hit five percent. We got a rate hike actually yesterday, 25 bips, which seemed to actually maybe tame the treasuries a little bit for now. But
Zach Haptonstall (01:07)
Right.
David Moghavem (01:07)
what do you make of all this? I mean, let's just kick it off from the macro.
Zach Haptonstall (01:12)
It's tough. Yeah. I mean, I don't think that I mean, I didn't see it coming in beginning of this year and I I don't think most people saw it. It's just been tough where you've had this, you know, persistent inflation the last few years. Looked like it was getting better. The Iran conflict, you know, just hasn't helped with that.
David Moghavem (01:30)
Right.
Zach Haptonstall (01:30)
I think that from our perspective, honestly, we've stopped trying to speculate on interest rates the last couple of years. we've kind of been stuck in purgatory
David Moghavem (01:39)
For sure.
Zach Haptonstall (01:40)
and
I mean, the biggest challenge that we see is just supply. You know what I mean? Like that's one of the things that we we feel like we have some type of pipeline that can be measured and and like a timeline of when things could get better w with the with the interest rates. I think if anything, David, what it's doing is just going to prolong compressed values, you know, right? That that's gonna be the biggest impact. But in all of our projections, you know, when we're talking to investors the next few years.
We haven't really been assuming interest rates would come down at all. We're mostly just looking at those supply deliveries and absorption fundamentals. And so it's definitely not a good thing, you know, for us in in this industry that, you know, we got that interest rate hike. But you know, in in a lot of the historical indicators, like where there's a correlation, like if this happens, then yields come down. Like those those things have just been out the window the last couple of years. Right. Like we don't like,
David Moghavem (02:37)
Hundred percent.
Zach Haptonstall (02:38)
we don't know what a correlation is.
so yeah, it'll be interesting to see what happens. I mean, overall, you know, I think that I think I I think the economy's in a in a good spot overall. I think that, you know, the new Fed Chairman Warsh is just really committed to getting that inflation down, which is important. And so we'll see kind of what happens going forward. But there's obviously a lot of uncertainty now. Now they're projecting potentially a few more interest rate hikes. This was the first one in three years, you know, since July of twenty three. So it's tough to say what'll happen.
going forward.
David Moghavem (03:11)
Yeah, there's two sides to the equation with value. There's cap rate compression, or and that comes from capital flows and and sometimes borrowing costs. And then there's the income side, which is rent growth where you gotta figure out supply. So I'm glad you're noting that because we're at a point where you cannot control or predict interest rates. There is no crystal ball. You kind of have to work under this assumption that it's here to stay, and this is the new environment. And so you can only control what you can.
control. And that's where you start picking markets. You start picking the supply side and demand fundamentals of some of these markets you're in. I would say before we kind of shift into that,
Zach Haptonstall (03:53)
Mm-hmm.
David Moghavem (03:54)
one one idea or thought on kind of where we're at on the macro side is because we're going to be operating in this maybe higher interest rate environment for a longer time, the question is also like
Do you think multi in general needs some sort of systemic
repricing? just based on maybe that the past decade or even from when you guys got founded in 2019 and and before that, even a decade before that, we've been operating in lower interest rate environment than we are now. And the the sentiment, besides the fact that the Treasury hit five percent, is that it's gonna maybe stay here for some time. So like,
What's I guess what's your take last on macro of do you think we're gonna be operating in this for a while? And do you think there needs to be some sort of even further repricing?
Zach Haptonstall (04:49)
Yeah, it's a great question, David. I I do not think there needs to be a repricing. I think that I think the repricing has already occurred the last couple of years. And I
David Moghavem (04:57)
Yeah. Right.
Zach Haptonstall (05:00)
think I think the difference is that most groups have not been selling unless they they have to sell, right? All the deals that we've been like, we haven't really seen cap rates change the last 18, 24 months on the and again, we we've been playing offense and defense. And I'm happy to go into both sides of that. But on the offense,
Meaning like new acquisitions the past few years, the deals that we've been buying are are pretty much deals where for the most part, there's two scenarios. One is that's most common is the seller has to sell. They either have a loan maturity, right? And they don't want to get foreclosed on. and so they have they have to sell the deal or the lender is forcing the sale. And so they're selling for a loss. And in order for the the deal to work economically at the higher rates, we have to be buying it.
at a much lower basis and a higher going in cap rate than we were, you know, pre interest rate hikes. And so you could the deals would work when you're buying at a lower interest rate, but you have a much you know, it's a higher basis, lower interest rate, you could make the economics work. And so that's flipped. And I so I don't think there's gonna be a big repricing. I think what this does is that there's been so many groups that are just trying to extend out their loan horizons until rates would come down.
You know, and we can c we can go into the supply side because that's a bigger driver, in my opinion, of values than than rates. but I think that what this does is that if this prolongs this you know, kind of purgatory that we're in for interest rates, then I think you're gonna see more lenders and more owners that are like, you know what, we need to just get this off our balance sheet. I mean, even in the last ninety days, we've been seeing big institutional lenders. I talked to a big one.
just a few weeks ago, like their managing director, and we're buying a deal from them. And they're basically like, you know what, we could hold on to this thing for a year or two more and wide out ride out the supply wave and we would do fine. But they're like, we're just trying to recycle this money at this point and and we've had enough. And so I think that this could, you know, this recent interest rate hike could open up more transactions. And I don't think values necessarily come down. I think that
It'll just basically unlock some of these deals that have just been sitting and waiting. So I don't think values will go down. I just think that maybe you'll see more transactions because people aren't gonna keep extending stuff out.
David Moghavem (07:16)
Yeah, I'm seeing that this was really the wet blanket over any type of optimism or ember there was of optimism down the line. The extend and pretend always was there because everyone thought tomorrow was going to be better than today. Everyone thought that the debt environment was going to be better, the selling environment was going to be better. That completely got negated and almost like the nail in the coffin or the dagger in someone's heart where the knife is twisted of.
Zach Haptonstall (07:44)
Yeah.
David Moghavem (07:45)
That actually getting
better. So what happens now? You're going to start seeing capitulation. You're going to start seeing foreclosures for sure. Will the lenders foreclose and then get it off their books? I think you will see that because you're already seeing some of that. We talked to a lender recently, too, that is on a distressed, you know, selling before the below the loan balance. They've already foreclosed on the asset and they're mandated to basically get this off their books to recycle that capital, as you were saying.
So they have pressure from their end as well. And I think with where the debt environment is now, you're actually gonna see reg as you said, the repricing may have already happened and now you're just gonna see buyers and sellers meet in the middle.
Zach Haptonstall (08:30)
Yeah, I think so. And and and obviously there's always nuance, right? It'll also depend on the lender and the borrower. I think I think for a lot of these deals and borrowers that were just kind of right on the fringe and they weren't capitalized, this could be the thing that makes them throw in the towel. Whereas on the contrary, I think that for lenders who have borrowers that have been good borrowers, keeping the debt service current, you know, keeping all the AP clean.
This could, you know, i incentivize a lender to do a longer term extension now because they might have been thinking, you know, things will turn here quickly. I mean, I've seen a lot of our lenders the last couple of years on our deals where when we first originated a loan, those loans were in CLOs. And a number of them have now put those loans on their balance sheets
and they've been willing to work, they've been willing to work with us. Like even in the
David Moghavem (09:23)
interesting. Right.
Zach Haptonstall (09:26)
last sixty days, I've had
A handful of different lenders who have literally told me, Hey,
we took this loan out of the CLO. You guys have been a good borrower. We want to keep doing new deals with you. We put this on our balance sheet and now we have more control and we're willing to extend you out. I mean, this was all, you know, literally in the last four to s eight weeks before this interest rate hike. But they were all expressing, you know, that they're willing to give us more time because it's on their balance sheet, they have control. So I think that
A lot of these l lenders have these big portfolios with a lot of troubled loans and they're trying to, you know, they're trying to work with their good borrowers who have kept them current, who they think they'll continue to do more business with. But then for some of these shakier borrowers who just don't have the capital, then this could trigger them to be like, Okay, we just need to cut bait, you know, and kind of move on. So it'll it'll be interesting to see what happens.
David Moghavem (10:19)
Yeah, the the conversations, listen, we have we all have trying defense as well as as offense as as we were saying. And working with lenders has been probably the biggest challenge. And the the carrot really here as an operator is as you know, both your group and our group, we self-manage and we pride ourselves on that. And we're showing not just putting capital where we can, but also putting sweat equity.
managing out of this. And as you know, it's very active management in some of our markets, not just with the supply, but also with bad debt and being able to, it's almost hand-to-hand combat with management on some of these deals. So these lenders can't do that on their own. They need good, savvy operators that understand where we're at in the cycle and understand that it's to their benefit to collaborate with their borrowers and work with them.
rather than the opposite and just being combative and trying to do it themselves.
Zach Haptonstall (11:22)
A hundred percent. I mean, these these lenders have foreclosed on so many deals over the the last few years and a lot of these deals tank right after they take back 'cause to your point, David, they don't have the infrastructure to manage these assets and a lot of them want to throw a third party manager company on there and there's no aligned incentives and these third party management companies don't do
David Moghavem (11:39)
Zero. The the third party
managers have no incentive to keep it going because they know that they're gonna get taken off eventually.
Zach Haptonstall (11:43)
They exactly. They they
don't care at all, right? And so I mean it actually is to our benefit when these lenders come out to properties and they kind of see the curb appeal, they see how we run it, you know, it it impresses them. So I think there is if you have a good vertically integrated management firm, it's a huge advantage. I mean, it's the reason we've survived, frankly. I mean, we're lucky we started ours in twenty one when the market was good. because to you you know, it just gives you control and the ability to pivot and change, you know.
different different processes, different staff, you know, and turn on a dime, which you have to do in this market.
David Moghavem (12:19)
Right. Let's go into some of the markets. I mean, you guys are in Phoenix, DFW, you're based in Phoenix, and then you're also in DFW and Charlotte. I mean, the three that that they all have in common is really supply.
Zach Haptonstall (12:33)
Mm-hmm.
David Moghavem (12:34)
that's been the biggest headwind as you mentioned. How are you navigating this supply cycle in general? And then we can maybe dive into maybe which markets you're bullish on from a supply demand standpoint.
Zach Haptonstall (12:47)
Yeah, great question, David. Yeah. So I mean, we love all the markets that we're in and we we love them all long term. And yeah, I mean, across the whole Sun Belt to your point, you have the challenges of supply where these class A luxury apartments are literally giving three months free rent because they can't lease these things up because there's not enough of a demographic to afford them. The trickle down effect is that our B class product that we own, a lot of our competitors are giving four to six weeks free, sometimes four to eight weeks free.
And it's kind of become a race to the bottom where everybody's trying to undercut each other, offer more aggressive concessions, lower rents in order to maintain occupancy. And so we've had to really become, I mean, I spend more time on any dimension of the company on operations than anything else. And so I'm constantly in operations meetings every week with our staff. And we've built out, I mean, it's honestly made us much stronger going through this period. And we've actually improved and created a bunch of new.
processes. I mean, I could go on for we could do a whole podcast on operations, but
David Moghavem (13:48)
Yeah.
Zach Haptonstall (13:48)
the biggest thing that we've focused on is like, okay, it's a challenging market, but everybody has to deal with the same challenges. And so how do we beat all of our competitors? And so we need to have a good pulse on exactly what our competitors are charging on a day to day basis for base rent and concessions. And how does our product compare to theirs? And so we've actually we used Claude Code and we've created our own little tool
Where basically we've pre-selected all the comps for every single one of our assets. And we currently own 58 assets, about 12,000 units across the country. And every single day, this tool is scraping the websites of our competitor properties for every every asset. And it's letting us know on a floor plan by floor plan basis what is their base rent, what is their special, what is their price per foot.
And we're linking our floor plans to all the competitor floor plans. So if have a 600 square foot one bedroom, then for the five or six comps in that area, what are all the six hundred square foot one bedrooms? And is their is their product renovated or is what are the finishes? And it's showing what is our net effective rent compared to all of our competitors. So that our regional directors are always tracking this and making sure that you know our base rents and our concessions are in line and competitive. because that's the biggest thing. One thing that we've done as well.
Is that we've increased our leasing criteria, David, where basically a lot of the competition has been doing like they've actually decreased their standards because they needed to boost occupancy. They've gone down Exactly.
David Moghavem (15:20)
Yeah, heads on beds. Yep.
Zach Haptonstall (15:22)
Yeah, exactly. So they they basically have decreased their income thresholds to requiring 2X the monthly income of the rent. Well, we were at two and a half, and we've actually increased it to three X, and we have less qualified traffic, but
We're getting higher credit profile residents that are applying.
David Moghavem (15:40)
Mm-hmm.
Zach Haptonstall (15:41)
And what it's done is it's reduced our turnover and reduced our delinquency. Cause the name of the game, to your point, is you gotta get heads beds. You wanna have higher occupancy, you wanna have higher collections. And the way you do that is with stronger retention. Because when you hire some or when you when you when you get a new resident in there, a new tenant and
You know, they can't pay the rent, whatever happens, you have to evict them. Well, you obviously get killed on vacancy loss, but then you get killed on there's a compounding effect where you have turnover costs. You have to you have to do new flooring, new paint, then I have to increase my marketing spend to find a new lead, then I have to pay a leasing bonus to fill that unit. So retention and collections is the name of the game. Now, when we look at the supply chart to answer your question, for the markets were in Phoenix, Dallas, North Carolina. In North Carolina, we're in Charlotte, Greensboro, and the Raleigh Durham Chapel Hill, you know, triangle area.
The data shows that the bulk of this supply should be getting absorbed near the end of this year going into Q one. And that going
David Moghavem (16:35)
Mm-hmm.
Zach Haptonstall (16:36)
into twenty twenty seven, you'll have concessions start to burn off and positive organic rent growth comes back. So we think that now is actually a great time to be buying assets at what we think is the bottom of the market from a value and cap rate perspective. because we should have tailwinds the next three to five years. As when when we look at U Haul data, David, which I like U Haul thing. You know what I'm talking about?
David Moghavem (16:57)
Love you I love looking at the UHAL data.
Zach Haptonstall (16:59)
Yeah, so yeah. So
David Moghavem (16:59)
Of course.
Zach Haptonstall (17:00)
you UHA has the growth, their UHAW growth index, right? Which actually
David Moghavem (17:03)
Yeah.
Zach Haptonstall (17:03)
tracks what is the net migration for people moving from one place to another. And so last year, and this is self-serving, I'll just admit, but this came out and I was like, great, we look smart. Their number one
David Moghavem (17:12)
Ha ha.
Zach Haptonstall (17:14)
market for U Haul growth index was Dallas. number two was Charlotte, and number three was Phoenix, right? So it tells us that there's people moving into our markets, there's population, they're f top five, top ten for population growth.
There's really strong job growth. So we believe in the fundamentals. It's just we're having to absorb all the supply, which has been the biggest challenge. I I tell people, David, the last few years, supply is a much bigger challenge than interest rates because we cannot Yeah, because it's just b basically when you have these concessions and you have negative organic rent growth, it deteriorates your net operating income and your revenue. And there's there's not a lot you can do besides weather the storm. And so you know, when that starts to get
Absorbed, it'll have a compounding positive impact where it burns off concessions, it increases occupancy, it'll increase revenue and NOI at the property level. And then, you know, one of our biggest expertise, which kind of made us unique in our advantage, was the fact that we had a lot of infrastructure where we could execute on value add business plans. And in 2023, we went all out. We renovated over 1900 units to a full-level platinum scope in calendar 2023.
And our average this was all in Phoenix. So we renovated almost 2,000 units, you know, to a full-blown like quartz, countertops, brand new cabinets, brand new flooring, stainless steel. And our average rental increase was $450 with zero concessions, right? There was no concessions in 23. So we were forcing appreciation. That put us in a really good position with our assets right on the heels of interest rates skyrocketing, right? That's what kind of got us through. But the last 18, 24 months, you as you know, you can't renovate anything in these markets.
David Moghavem (18:53)
No way.
Zach Haptonstall (18:54)
Because there's no premium. And so it kind of just, you know, it it handcuffs you, so to speak. So, anyways, I mean, our biggest thing is like we're looking at the pipeline of supply, deliveries, the construction pipeline. And, you know, once that gets absorbed, I think that will have a very positive impact, regardless of interest rates. Interest rates going up does not help us, but the values and the NOI will be more impacted by supply.
David Moghavem (19:19)
Yep. So a lot there. I think just to start with the supply and also the renovations. Like we're both with a very similar profile makeup of older vintage assets in general, right? what we found is that value add story of renovating and pushing rents has been dead for the past couple of years or so. And so how can you find value?
It's really tracking some of the supply and seeing where you're going to get some rent growth first and not banking on trying to renovate your way to a return on cost, but rather make money on the buy. Instead, look at return on cost from a gain to lease perspective, from a defensive deferred capital perspective. And if you can get to a yield that makes sense and you're getting great cash flow, you know, put away IRR for a second.
Just comfortable cash flow and distributions, day one, net of defensive capital, net of gain to lease, net of some of the headwinds, net of delinquency and and concessions, and you're still cash flowing there, then you you know, downside protected will will yield upside when when the time is right. And so that's kind of how we're looking at these and looking at what's supply constrained, what are the demand drivers still that are that of markets that are.
Creating demand. And you said it, Phoenix, Dallas, Charlotte has great demand fundamentals there too. we're we're not as much in those markets. I think one thing that we we're we're in some other great demand driving markets, but we are we do like supply constrained barriers to entry markets where maybe the demand isn't as sexy, maybe there aren't as many U-Halls that are that are moving and netting to there, but less supply, maybe
Zach Haptonstall (21:12)
Ply constraint,
right? Which is key, which you need. Yeah.
David Moghavem (21:13)
Yeah. Which is key,
which can be just as effective, right? It could be just as effective. so it it comes down to the same equation that you're kind of running as well.
Zach Haptonstall (21:22)
Yeah, yeah, you're exactly right, David. I so yeah, we've had to pivot our strategy the last 12 to 18 months where when we're trying to find new acquisitions, we can't model out that we're gonna go, you know, completely renovate an interior because we know we can't get a premium. There's no ROI or yield on cost there. So to your point, we've been focused on finding higher cap rate deals. You know, they're just higher entry cap rates at a lower basis. And then we've really been trying to find deals that have potential for what we call operational value ads.
Okay, we're trying to look at where can we increase rents or value without one having to meaningfully increase the rent that the tenants are paying because there's an affordability ceiling regardless of what you do, right? They're all flocking toward affordability, which is why the concessions are are so aggressive right now. And then two, how do you increase the revenue, the NOI and the value of the asset without having to put out significant capital expenditures, right? Because whatever you're spending, you need to get a yield on that. So
Couple things that we've been doing, David, is we've been focused really on doing like bulk internet contracts, right? So because we have large scale, we've negotiated pretty favorable contracts where let's just say I own a three hundred I have a three hundred apartment, three hundred unit apartment building, and there is an eight hundred pound gorilla internet company that all these tenants are going to engage anyways for their internet cable, right? For their streaming services. Well, we've gone to these companies in the major markets that we're in and said, Hey,
We'll we'll sign an exclusivity with you where all 300 of my units have to use you, even though they're gonna use you anyways, most likely. So
David Moghavem (22:56)
Yeah.
Zach Haptonstall (22:57)
instead of them independently engaging this internet company for their services, they're going through the property. And what the internet company is doing is they're actually giving the the resident a discount. So they're paying the resident is paying less than what they would have paid independently, and they're throwing in additional services they wouldn't have otherwise received for that price point, like Disney Plus, Hulu, et cetera.
And then we're doing a revenue share with what that resident is paying the internet company, the property, we are getting a significant share of that revenue. So what we've done is we've either kept their pricing the same that they were going to pay for those services anyways, or reduced it. They the resident has gotten additional services they wouldn't have otherwise received for paying the same or less. And then we're actually generating significant revenue. I'm talking hundreds of thousands of dollars of NOI a year on these deals.
David Moghavem (23:47)
Yeah, and that's real
value, right? You cap that. Yeah.
Zach Haptonstall (23:49)
It's millions of dollars of value. Yeah, it's
millions of dollars of value. And so that's been one big thing that we've done. We and and because we have, you know, we're not huge, but we've got 12,000 units. And so we like we're buying a deal. We're gonna close on a new acquisition in Dallas in a couple weeks. And they had signed a similar contract with the same internet provider a couple of years ago. And it's a big institution that we're buying it from. And we went to the seller and we said, Hey, we want they they gave them like a big upfront
cash and fusion for signing the contract. We said, well, we want a credit for that, basically. Like you're supposed to get money in the next few years. We want that. And then we went to the internet and we said, we want you to cut your price in half because the price we have with you guys of what these residents are supposed to pay each month is half of what you agreed with these guys. And they did they they didn't even blink. They said, okay, no problem because they're getting thousands of units that we're bringing online in our Phoenix market. So that gives us some pricing power and some leverage. And the other thing we do is a similar concept is
Something like valet trash, David. You know, valet trash is an amenity
David Moghavem (24:47)
Game changer. Yep.
Zach Haptonstall (24:48)
to the resident the game
changer, right?
So it's an amenity to them where this third party company picks up their trash, throws it out for them. The tenants paying about twenty five bucks per unit per month. We're getting about fifty percent of that. So we're getting like twelve to thirteen bucks a month. So it's an amenity for the resident that they're willing to pay. and then we're able to increase revenue. So it's it's things like that. Obviously, if you can find deals where you can install washers and dryers, you know, stuff like that.
then that helps too. So it's trying to find those deals where you have to really focus on operations and you can't just do like brute force renovations to increase the rents.
David Moghavem (25:22)
yeah. And you know, you've talked a lot on the other income and ancillary income side, but that operational value add also really comes too on some of the expense side. And we're seeing how on expenses throughout the board things are increasing. Insurance, taxes, payroll. So maybe
Let's talk a little bit there of how are you finding operational value add even on on the expense side?
Zach Haptonstall (25:48)
Yeah, no, it's a great question. So we're digging into expenses very deeply. So I can tell you that when the market was strong, what we were doing is we had like more of like a blanket marketing strategy, which, you know, when the market's strong, fine. But what we've had to do is we we recently hired a new marketing director and we have a targeted strategy asset by asset where we're looking at, I mean, we're already tracking every single month how many leads are we getting, what's our conversion rate, what is our spend.
per conversion, you know, and it's like if, you know, a pay-per-click campaign might be effective for this asset in this submarket, but for this other asset in this other submarket, you might have to do guerrilla warfare Facebook marketplace marketing
David Moghavem (26:32)
Right.
Zach Haptonstall (26:33)
your on-site staff, right?
And so it's like we're not gonna waste money on pay-per-click online advertising if it's not effective at this asset. So we've just basically on the marketing side, we're really looking at all the metrics of
You know, what are my conversion ratios? And I wanna maximize bang for the buck. on the insurance side, you know, we have a big blanket policy which gives us pretty good economies of scale and savings there, like a layer of growth. Yeah, that's a
David Moghavem (26:57)
Yeah. Master has been a game changer as well. And you only
really get that by having that scale and being vertically integrated where you can start allocating accordingly and savings across the board. And also again, being vertically integrated. Like if you have a third party manager, they're not gonna take that extra second to change their whole process of pay-per-click doesn't work, we have to go this traject. They're not as nimble.
to make those type of decisions like when you're vertically integrated in that regard.
Zach Haptonstall (27:28)
100%.
A hundred percent, David. You know how it goes. And then on the payroll side, you know, if I had a property that was like two hundred fifty, three hundred units, we would typically have a property manager, an assistant manager, a couple of leasing associates in the maintenance staff. What we did about six months ago, we were like, Hey, how can we still have the same results operationally, but run these things leaner and more efficiently? So what we did is, you know, obviously we have a regional director and they'll be overseeing approximately eight assets, but
What we did is on all these properties that were like 200 units plus that had a full-time property management and a full-time assistant manager is we basically removed the assistant manager and we created a junior regional, like we call them like an operations specialist, who has a portfolio of four to five assets. And so I we basically have taken one person to replace four to five people. They're a higher level person, so they'll report to the regional director. The regional director reports to our president of operations, but we've actually had better results.
And it's been much cheaper. We've saved about $800,000
David Moghavem (28:27)
Interesting.
Zach Haptonstall (28:28)
on payroll across all these assets at the property level just by doing that. And then most recently, we actually just created a new department called Centralized Operations. And so we just
David Moghavem (28:39)
Yeah.
Zach Haptonstall (28:40)
heard a director of centralized operations. And basically we have taken evictions in-house. So
David Moghavem (28:45)
Yep.
Zach Haptonstall (28:45)
we now have a team of two people. We have two more people starting sh soon because we're spending
Sick
it's crazy. We're spending six figures a month on evictions paying third party companies when all we can do all of it in-house. and we have one attorney that will help us. And so that's gonna actually save significant cost. We actually just brought in centralized leasing. So we're doing a pilot program right now. And the idea is that we have leasing people here at our corporate office every day who are basically taking in leads and scheduling tours and following up with tours so that they're basically just setting up tours so the on-site staff
is just trying to convert and close. Instead of the on-site staff spending time on the phone, admin following up on leads and trying to get tours scheduled, we can do all that stuff at the centralized location. We also just took collections in-house. We were using a third party collections agency. We got two full time guys that are just pounding the phones all day right now. and they're and it's it's like immediately profitable and making a lot of sense. Like this one guy just covered his whole salary in six weeks, his annual salary.
that we brought on. So like we're trying to really figure out how do you improve there.
David Moghavem (29:54)
Yeah, we're we've also done a very similar structure, removing the assistant and centralizing a lot of these processes. What I've learned with centralization is not only is it leaner on the payroll, but a lot of these markets, there's a certain process you have to follow on giving serving demands. Is it written in enough languages? Is it served on time with the right forms? And rather than leaving it to an assistant,
You have it centralized in one cr department that it can be overseen and done correctly. And so that also translates to more efficiency and and cost down the line by just doing it correctly instead of having to reserve demands just because they were done the wrong way. So the centralization, similar to what you were just saying, it's created savings, but it's also created more efficiencies and more accuracy in in doing the job the right way.
Zach Haptonstall (30:50)
That's exactly right. Cause there's there's leakage, right? When you have issues. I mean, when you start to scale, the goal is you want uniformity and you don't want to have the risk of variance at different properties. So we're trying to we're trying to pull as much responsibility and variance off of on site staff because it's hard to manage that, right? When you get a bunch of different
David Moghavem (31:11)
Right.
Zach Haptonstall (31:12)
properties. Like you can tell them what to do, train them, but they could mess it up. They might not listen.
And so if you can strip away as much of that responsibility from on site staff, so all they focus on is closing leads and then doing like Yeah, resident. Yeah, exactly.
David Moghavem (31:24)
Revenue generating work. Yeah.
Zach Haptonstall (31:27)
And and you can I mean, we centralize all the accounting and and you know on site AP. We have all our own centralized accounting team for that too. So it's like I agree, but that's what you have to do to become more efficient.
David Moghavem (31:40)
Yeah. Let's go a little bit into capital raising. I mean, as operators, it's been a tough capital raising environment in general. Money's not flowing like it was during the ZERP era. Retail investors that just got into the game in 2021 are like, why why did everyone say real estate was a good investment? It's tough. Like what we've found, you know, we've built over 1,600 active investors and
The ones that have invested with us pre-ZERP era, that have we've gone full cycle on those assets and then have invested with us during this time and have seen some losses, they understand the name of the game and they're continuing to invest with us, whether as the ones that we may have created the relationship in 2021, they're like, What the hell? What's going on? I'd love to hear your take on how capital raising has been for you.
despite the turbulent headwinds and how are you able to capitalize deals today?
Zach Haptonstall (32:44)
Yeah, and it's a great question, David. Yeah, mean, it's definitely been a challenge the last few years. And we've been fortunate to still be able to find good opportunities, keep acquiring new deals. I mean, we do have a lot of repeat investors that we made a lot of money for with all of our exits, you know, before interest rates skyrocketed. And then we have a lot of savvy investors who are in deals that we bought in 21 and 22, and they just understand where we're at in the market cycle. And they kind of see that, hey,
You know, if we can be buying deals right now at these at literally forty to fifty percent of the basis that, you know, what from peak pricing in the market. And then you look at the supply pipeline, that now is the time to be entering these deals. So we have a lot of savvy investors. We also work with a lot of like registered investment advisors who have ultra high net worth clients. We have a number of registered broker dealers, you know, who have high net worth clients. And so I think
You know, from when we started seven, eight years ago, our investor demographic has changed a lot where we have a lot of ultra high net worth people, much bigger checks, which has allowed us to scale. So instead of us going and chasing a bunch of 50K, 100K checks, you know, we get a lot of 500K million dollar checks. And instead of us going directly to a lot of these LPs, we are working with RIA's, you know, fund managers who are sophisticated.
registered broker dealers and they're doing their full due diligence on us, vetting us, and then, you know, basically bringing the capital to the deals. And so that's allowed us to, you know, be more effective. But even to this date, we have to be, we have a very tight box of deals that we look for because we can only raise so much money. Right. So like when I'm talking to brokers, I'm telling them, hey,
We are focused on twenty to forty million dollar purchase price because if it's twenty million, it's just too small for economies of scale. And if it gets much over forty, fifty million purchase price, we just can't raise the money. Yeah, like we feel confident
David Moghavem (34:48)
Tough raise. Mm-hmm.
Zach Haptonstall (34:50)
raising like right now we're raising like ten to twenty million dollars every like four to six weeks for new deals, you know, when we can find And so yeah, and it's
David Moghavem (34:58)
That's strong. Yeah.
Zach Haptonstall (35:00)
in like we we bought a deal at the beginning of the year in Mesa, Arizona. It was like
17 million dollar raise. That went well. Then we bought a deal in Raleigh, 18 million dollar raise. That went well. Then we bought a deal in Phoenix. It was a $10 million raise. And it was like the hardest raise we had done in like four years. And I think it was right around the Iran conflict. It was timing. You just never know different macro, you know, challenges. It was right around summer break happening too. and then we were like, man, that was a tough raise. We don't know about the next one. But then we did a Dallas deal, 18 million, and and that one filled up in a day. We're gonna, and we hadn't done a Dallas deal.
And like we had done one Dallas deal in like two years. We just couldn't find deals at work, right? So we're gonna close that soon. And so it it's just you just never know. It's tough. Like, it all
David Moghavem (35:44)
Do you think
that's part of it is the is property specific or market specific? I mean, is there any rhyme or reason?
Zach Haptonstall (35:48)
It it is. Yeah. It
it is. It is. It it because what we've found is it's definitely market specific and it's property specific as far as investors are definitely they want superior locations. So we are trying to be much more like there's a deal. I was just sent it a couple weeks ago. It's in it's in Phoenix. It's funny 'cause we had bid on this deal in twenty twenty one, so we know it well. And they are selling for a complete loss and it's gonna be below the loan amount.
We underwrote the deal. The deal pencils great returns. We own a number of assets, like, you know, five to ten miles away. we had our our two co-presidents of operations go tour the deal yesterday. They dug into the the broker doesn't even know this, like but they dug into the on-site manager, the demographic, et cetera. And then we had an investment committee meeting yesterday. And everything looks great on paper, but it's just like
It's not like an A plus location. It's not a bad location, but we just don't love the demographic. And we're like, you what? We're not going to chase deals unless we feel extremely good about demographics and location. So we just we're not even going to pursue it. And we have the equity. Like I could launch the deal, raise the equity easily, and we could close it 60 days from now. But we're just we're being more selective. So investors, I've noticed, are flocking to superior locations and then they wanna know the story. You know, they wanna understand, right?
David Moghavem (37:12)
Yeah. Every investor
wants a good story with with this market.
Zach Haptonstall (37:14)
They they all want a good s yeah, they all want
a good store. Yeah. So obviously they want it to be a good basis, a good cap rate. So d I mean, you know this, David, deal flow in general is just so slow. Like people aren't selling unless I talked earlier, they're distressed. Or the second thing is some of these groups have owned these deals for so long, they have such a low basis. We put a few of those recently where like they're willing to sell 'cause they'll still make a decent return. But yeah, I mean and and we've also seen that like if we launched three deals consecutively from the same market, we get
like diminishing demand because a lot of these investors want to be diversified. They don't want to be, you know, three, four straight deals in Phoenix or Dallas. They like to spread it out. And so that's one advantage is that we have different markets that we can kind of offer to investors. But you just never know, honestly, until you launch it, what that sentiment is going to be.
David Moghavem (38:02)
Yeah, and in general, do you think they're enjoying more of something that has day one yield or and they can get day one distributions or something that might look like a really good basis but has some sort of operational issues that you have to kind of get your hands dirty on?
Zach Haptonstall (38:19)
They
I think that they're more they're more prone to the day one yield deals. Like they don't want a heavy lift. Like the deals
David Moghavem (38:25)
Yeah.
Zach Haptonstall (38:26)
that we're trying to find is like, Hey, this is not a heavy lift. This is a low execution risk. Yeah.
David Moghavem (38:31)
They want distributions. Like I I that's what I've been finding is they want
they want that yield. For sure they want the story, they want the distressed angle, but more cap stack distress, not necessarily operational distress. I mean,
Zach Haptonstall (38:44)
Correct.
David Moghavem (38:44)
there's always cracks in in some of the operations in general, but not systemic, but just you know, low 90s instead of mid nineties, some concessions instead of no concessions. But if they can get day one.
distributions, I'm seeing that those are those deals are raising a lot better than something that is operationally really distressed and you have to get your hands dirty to get it to where it needs to be.
Zach Haptonstall (39:08)
And and to your point, David, we've we've seen dozens of deals the last two years that are an amazing basis. Like lenders foreclose, they'll sell it to us directly, but we don't pursue it and the deal doesn't even pencil in our model because it's too operationally distressed.
David Moghavem (39:24)
Yeah.
Zach Haptonstall (39:24)
It's like, okay, this is a great price per door. It feels like a steal, but if you're 80% occupied, 85% occupied, then it doesn't work in our model. There's no cash flow for investors. So to your point, it needs to be stabilized, like 90%.
Plus occupied, you know, no in in controllable delinquency, you know, AR reports, things like that. and maybe it has a cap stack distress. Like they have a loan maturity forcing them. I mean, we're buying a deal right now, you know, it's an institutional seller that's owned it for nearly 20 years, and it's the last deal in their fund, and they need to sell the deal to close out the fund because they have liquidity constraints elsewhere in their portfolio, right? And so
But the deal is like mid nineties A plus location, mid mid ninety mid nineties occupancy, you know, early 2000s vintage. So it's a great asset. and it's running extremely well, you know, at the at the operational level, but they need to sell the deal because they're selling in today's environment, you know, it's a high cap rate and a really low basis. So like those are the kind of deals you have to find. And it's it's not easy. They're like a needle in a haystack.
David Moghavem (40:33)
Yep. So going back to the pitch and fundraising with the risk free rate essentially in the fives to get to get
Zach Haptonstall (40:43)
It's
David Moghavem (40:44)
fives with where treasuries are at, how are you adjusting your pitch to investors based on kind of where yields are today risk free on why to invest in multifamily today?
Zach Haptonstall (40:59)
Yeah, I think that a lot of our investors are savvy and they're invested in different asset classes, right? Like real estate is just a way for them to diversify. So I mean
David Moghavem (41:08)
Mm-hmm.
Zach Haptonstall (41:08)
I talk I just talked to a guy yesterday. I mean, he's got almost 20 million with us over the years, very ultra high net worth guy. And he's like, Zach, I don't trust the stock market right now. Like, I just feel like it's too high. I don't want to put money in it. He's like, I don't know where to put my money.
But he likes the tax benefits and the depreciation of real estate, right? And he basically is just trying to he's just trying to put money somewhere where he feels like it's safe and it's a long-term investment. So he's not trying to like hit a home run in two or three years. And so I think it's just we're trying to educate investors. Like we even show them, like on our track record, we're like, hey, there was a period where we sold.
you know, almost a dozen deals and we were doubling the money in like 24 months. And I tell them that's not going to happen again. Like we didn't project it on the front end, by the way. It was like a five year horizon. It's
David Moghavem (42:01)
business model is different now. Yeah.
Zach Haptonstall (42:02)
different. We're different, different place in the cycle. So investors have to understand, have real estate expectations of like, okay, if you're investing in real estate, it's not liquid. So you need to understand that, right? You can consider tax benefits, but talk to your tax professional. you're looking at like a cash flow and like a long term
conservative growth type of play. And so it's just, it's just laying out the expectations to people so that they know what it is. And I think that you know, I I think one of the biggest competitors that you and I have, and especially now, if treasure yields are going up, is like money market accounts. If they can get four
David Moghavem (42:35)
Mm-hmm.
Zach Haptonstall (42:36)
or five percent now, you know, then it's tough to, you know, compare that to something that's illiquid, right? And so I think it's just having the right investor profile that understands this is a long term investment. You'll get that steady cash flow.
You you may get some tax benefits, but it's just that education.
David Moghavem (42:54)
Yeah. And deals are getting capitalized much differently now than they were, you know, pre-rate hike. there was a lot of bridge debt. You were flipping out of them. You were pushing rents. You were renovating. Now people are looking for cash flow. Day one, you're capitalizing it, usually with some sort of agency product. If there's a good amount of cash flow going in, maybe if there's a little bit less cash flow going in, it might just mean a little less leverage. Returns not screaming out the page.
But it's safe. It feels safer from just where the cap stack looks like. Does that mean you're going to hit the incredible IRRs like you're seeing on the track record? Maybe not, but you'll get great multiples and great cash flow and tax benefits. And I think that's the pitch we're making to investors too, is great discounts to replacement costs, great discounts to peak value. But putting that aside, you're also getting great stabilized yields.
great cash flow and tax benefits. And I think it's a generational time in the cycle to really be investing in multi, despite some of the headwinds you're seeing both on macro and on supply.
Zach Haptonstall (44:04)
Yeah, it's just it's a diversification play, right? Like people just I think there's a lot of volatility in a lot of other areas and you know, people just wanna have somewhere for part of their portfolio that they can have something, you know, a little more conservative.
David Moghavem (44:17)
Yeah. So Zach, tell me, I guess for Rise forty eight, next twelve to eighteen months, how do you see this all playing out in acquisitions, dispositions?
Zach Haptonstall (44:28)
Yeah, I mean, I've been telling our investors I don't we don't expect to sell any okay, so we haven't sold the deal since July of twenty two. Okay. We're over four years. And we sold five deals the first half of twenty two. They were all home runs. And now it's funny, because I mean it's not funny, it's kind of sad, but like most of the deals that we sold, those groups have now been foreclosed on, or they sold them for a loss. Right. And we had a few more deals on the market in twenty two and we pulled them off when interest rates were skyrocketing because values were compressing.
I've been telling investors we don't plan to sell anything until 2028 at the very earliest, right? Because we feel like you'll start to see some market recovery next year in terms of supply and market fundamental. I think by the second half of 27, I think that you'll start to see meaningful improvement in these sunbelt markets, meaning that concessions will start to reduce burnoff. You start to see some positive organic rent growth. But I think that you'll really start to see values improve.
in transaction activity pickup in 28, maybe 29, right? So we've been telling our investors like, hey, our whole plan here is that we're not in a rush. We want to have longer loan horizons so that we can absorb the supply, you know, have market fundamentals improve so that we don't feel like we're leaving money on the table. We don't want to sell a year, you know, early, prematurely, if we could get a much better value, you know, that following year. And so I mean that from like a disposition
perspective. We're thinking 28, 29 is when we would start selling deals again, assuming, you know, this supply pipeline, you know, actually happens the way it's projected. And then on an acquisitions front, I mean, we'll continue to be active. You know, we have equity demand. The bigger challenge is just finding deals that pencil, you know, and that makes sense. And so I mean my my CFO and I were just talking this week and we're like,
I mean, you know, maybe these interest rate hikes, maybe this increases some deal flow, where we start to see some some different people that are just done, you know, extending out but
David Moghavem (46:28)
Yeah, you might see
some capitulation out of this. You might see people actually kind of waving the white flag and moving rather than sticking in this purgatory.
Zach Haptonstall (46:37)
Yeah, exactly. So so we'll see. It's it's just tough to say 'cause it's like we've been saying this, it's like every year for three years, David, there's like
David Moghavem (46:43)
I know. It's we
Zach Haptonstall (46:45)
a w there's a wall of lone maturities. The cliff is coming and it's like not much happens, you know what I mean? So
David Moghavem (46:47)
Yeah. Yeah. Right.
Right. But you are you are definitely starting to see everyone kept talking wave of distress. You are definitely starting to see that wave of deals that are below the loan balance. And then it's a matter of whether the lender's actually foreclosing on them or doing a short sale or trying to do a workout. And so like
Zach Haptonstall (47:08)
Right.
David Moghavem (47:09)
the wave kind of gradually arrived. And now we're just at a point of is it gonna lead to exactly.
Zach Haptonstall (47:12)
Yeah, yeah. A lot of it happens quietly. A lot of it happens quietly, right?
So I don't think the general public undersees it. But we I mean, you and I we're getting deals sent to us all time, like it's it's a bloodbath out there. So
David Moghavem (47:24)
Yeah,
exactly. I mean the the wave the wave is here. I think the reason also that you and I see it is I'm noticing lenders are valuing the vertically integrated operators to show some of these deals to. They're not trying to do a fully w marketed process, but if they look at a few savvy operators who have management expertise, they might come up to you or myself in our markets that we're performing well in.
And they say, Hey, take a look at this deal. We could do a GP replacement or we can recast the loan for you. And we just need someone that can operate this better. And so I'm I'm noticing that in in general. Yep.
Zach Haptonstall (48:06)
I just got two of them last week. I got two of them last week.
A big institution that's we have fifteen lenders. This is one of our fifteen lenders and they just emailed us last week. Hey, we're foreclosing on these two deals in Phoenix. Do you guys want to buy them from us? And we could do some type of modified loan for you to get them off our books. And so yeah, it happens all the time.
David Moghavem (48:25)
Especially if you're a good if you're a good borrower and you've been performing, I mean, then they'll come to you no problem. But even lenders that we haven't borrowed with, they've seen maybe we have a comp next door or we have a relationship with them just talking and talking through our book and our portfolio. So it's actually one of the reasons we opened our third party management. We're now doing third party management, try on living, and targeting some of these assets that some of these owners and
For older vintage that can't seem to figure out how to manage it. And the 500-pound gorilla managers, the asset livings, the gray stars, they can't manage the C class properties either. And so we're coming in, we're helping with management. We've got a dozen in our account now. And we're also talking to lenders in that regard. And they appreciate our, you know, care and competence for being able to manage that type of product.
Zach Haptonstall (49:20)
Yeah, no, it makes sense. It gives you the inside track if you decide you want to buy it, right?
David Moghavem (49:24)
Exactly. You test drive the car before maybe even, you know, buying the car. So Zach, I mean, one one thing to wrap it up. I guess what's the one belief that you've kind of learned since going through, you know, opening the shop in 2019 and going through the peaks and troughs of this cycle? What's like the one belief that you've learned through all this?
Zach Haptonstall (49:51)
You
just gotta have a warrior mindset and never give up, honestly. Because a lot of our peers have just completely given up, put their head in the sand, and I don't blame them, it's been tough, but you gotta continue to grind through and you gotta show your team that you'll never quit, no matter what. And you gotta be a killer. I mean, I've been researching a lot of like famous entrepreneurs and I've read a bunch of biographies, and the funny thing is, is like all of them have almost gone bankrupt so many times. Like I just finished
Phil Knight, you know, shoe dog, the founder, right?
David Moghavem (50:21)
Yeah, that's a good one.
Zach Haptonstall (50:22)
It's like he's like ten, fifteen years and is like living month to month broke and people don't even
David Moghavem (50:26)
Right.
Zach Haptonstall (50:27)
know it. I mean, Elon, if you read his biography, he almost went bankrupt so many times.
David Moghavem (50:31)
Yeah, it was one there was one space launch that if that didn't happen it would have it would bankrupt his whole yeah.
Zach Haptonstall (50:38)
Yeah, exactly. He almost
didn't make payroll. He like a twenty million dollar investment on Christmas Eve. You know, Jensen Huan, the CEO of NVIDIA, I didn't even know this, but he started NVIDIA in nineteen ninety three and he almost went bankrupt so many times and he slowly
David Moghavem (50:49)
Right.
Zach Haptonstall (50:49)
really hit his stride like what the last six, seven years, and now that's the most so it's just like you start learning and you're like there are there's no such thing as an overnight success. And if you're gonna be an entrepreneur and you're gonna be a business, it's a war and it's like you're either built for it, you're not. But going through the challenges is what
makes you stronger. And it's honestly the fulfilling part because it's like, I kind of like this. You know what I mean? It's kind of it's kinda sick, but it's like the fulfilling beauty is the it's sadistic.
David Moghavem (51:16)
It's a distic. Yeah.
Zach Haptonstall (51:18)
Yeah. Cause it's like I try I sometimes try to imagine I'm like, man, what if I had like a really nice job with somebody? I would hate it. And then I even say, well, what about when the market recovers and we're making a bunch of money? I'm going to be like, what's the point? You know what mean? So
David Moghavem (51:31)
Right.
Zach Haptonstall (51:32)
I mean for me it's just like you got to keep battling
And then it's been fun because we've actually built the team, built the infrastructure, we've grown the company through the adversity. And now I've got like a core leadership team of like five or six people who have gone through all this and I've seen their growth. And it's just made us stronger. Like we're ready for the next big step. So I just feel like, you know, when this when the supply gets absorbed, I think we're gonna have exponential growth. And now we're trying to like build ourselves to be prepared for that. And so
Yeah, that's just kind of what I've what I've learned the last four or five years.
David Moghavem (52:06)
Yeah, I think the market's gonna reward the operators that have the battle scars to show. And we've both gone through and talked through these operational ways that we can improve the property. That didn't happen from want. It happened from need. And it was
Zach Haptonstall (52:23)
Hundred percent.
David Moghavem (52:24)
from back against the wall in desperation.
Zach Haptonstall (52:26)
Yeah.
David Moghavem (52:26)
And so it's nice to increase NOI, but it's different than when you have you have to increase NOI out of desperation. And so
Zach Haptonstall (52:35)
You're
for you're forged through fire. Yeah. And it'd be better. Yep.
David Moghavem (52:35)
I think that exactly. And so this cycle
really forged that for for operators. And God willing, when the market gets better and we're back to seeing some green shoots and supplies absorbed, I think you're gonna see operators get reward for that. So yeah.
Zach Haptonstall (52:53)
I agree. I totally agree. And
lenders already recognize it to your point, right? Lenders are working with the borrowers that they know have had staying power. and so it's it's it's valuable.
David Moghavem (53:03)
Yep. Well, Zach, it was awesome having you on. I always love having another operator on and trading notes, talking through operator to operator on capital raising, on markets, on macro and everything in between. So great having you on. Good luck out there. Good luck on your deals, defense and offense, and appreciate you hopping on the pod.
Zach Haptonstall (53:24)
Yeah, thanks so much, David. This was a lot of fun, man. Great job and good talking to you.
David Moghavem (53:27)
Awesome. Thanks.