Ernest Johnson is a Partner and an Executive Managing Director with ApexOne Investment Partners, a privately-held real estate investment firm and fund manager that identifies, acquires, enhances and operates multifamily real estate across the country. He focuses on capital markets, investment strategy, financial administration, and investor relations.
In this episode of Power Your Advice, Doug Heikkinen and Ernest discuss the multifamily asset space and the opportunities presented by investing in it.
- What is the multifamily asset space?
- How and why has it performed differently from commercial real estate and office space.
- What is the difference between distressed properties and distressed sellers, and why does it matter?
- What is the advantage to working with a smaller manager?
- Why the Fourth Fund launched by ApexOne Investment Partners has been so successful
Resources: ApexOne Investment Partners
Ernest Johnson, Douglas Heikkinen
Douglas Heikkinen 00:03
Hello and welcome to the power your advice podcast. The power advice podcast is designed to bring advisors new ideas, why those ideas should be considered and how to implement them into your business. This podcast is brought to you by Advisorpedia, the most helpful place advisors can come to to grow their minds and businesses. . .
Ernest Johnson 00:52
Thanks, Doug. It's good to be here today. And I look forward to speaking with you and your advisors out there.
Douglas Heikkinen 00:59
This is a super interesting topic, and I'm really excited to talk about it. Give us a quick overview of Apex One Investment Partners.
Ernest Johnson 01:07
Sure, thanks, Doug. So Apex one was founded by Jim Horne, myself, Tim burns, and Bill Saul, about 10 years ago, this is our 10th anniversary, we bring about 130 years of real estate experience primarily in the multifamily sector, to our clients. And we decided that the focus on multifamily going forward was just the right place to be because of some very interesting dynamics in the country. We've had a very successful run of three funds, we've acquired over 42 assets over the past 10 years. That's about $1.4 billion of of investment. On the Properties we've sold, I'm pleased to report that we've achieved about a 28% IRR at that property level. And we're very pleased with the performance of the company. And, you know, we'll continue to focus on the multifamily space primarily in workforce, little student housing, and other conventional multifamily sectors as well.
Douglas Heikkinen 02:10
So let's get a little more into describing what the multifamily asset space is, and why you and your firm decided to focus on it 10 years ago?
Ernest Johnson 02:19
Yeah, that's a great question. I think, you know, the landscape right now. And I think a lot of advisors are familiar with this, they may just not know the numbers, is finally getting talked about. But But there is a housing crisis in our country, there is a shortage of housing, and most people don't know the numbers. Right now there's a shortage of between two to two and a half million housing units in the country. That's That's a lot. And according to the National multifamily housing Council, which is the industry leader in our sector, they're projecting that if we develop at the highest pace we've developed historically, and continue that through 2025. The interesting news is it doesn't even begin to dent that housing shortage. In fact, it doubles, we need 5 million units of housing between now and 2025. And they're not getting built. So what we saw was an opportunity to get investors into this high demand, it is the oldest story in economics supply and demand, it was a chance to allow investors at lower levels to get into a sector that's been dominated by institutional players. And as I said, we've done very well, which is why we've had over 94% of our investors from our first fund come into all of our successive funds. So we just saw a real opportunity, not only to capitalize on the markets, but also I think, just as important to provide a really great place for people to live in an apartment communities. You know, it's, you know, sometimes we get caught up in the fact that we are advisors and financial managers, and we look at returns. And we forget what's really driving our industry. And what drives our industry are the men and women who and families who live in our apartments. One of our favorite sayings, and Apex One is we believe return to investors started our resonance front door. We believe if you take care of the residents give them a quality place to live, that's well managed. They're going to respond by not only renewing their leases, they're going to refer their friends there, which drives up demand, which allows us to increase rents. And what we found is that the residents don't mind paying a little more rent if they feel they're getting something in return. So we just saw a lot of dynamics in this sector that we didn't think were being addressed completely across our industry. And we saw an opportunity to come in and capitalize on the opportunity for our investors and to also provide a very good home for our residents
Douglas Heikkinen 05:00
You're especially in the space has done the complete opposite of commercial and office space. Seeing that trend doesn't take an expert, but being an expert in multifamily opportunities does what's allowing you to be so successful?
Ernest Johnson 05:15
Well, you know, again, I go back to these two factors taking care of our residents taking care of our investors. So in this sector, it is kind of interesting, Doug, kind of given. And I think this is good for advisors to understand, because, you know, they certainly want to share this information with clients as they talk with them. Because demand by residents has been so great in the multifamily sector, especially in the workforce housing sector, that is people making 40 to $80,000 a year, which is where we focus a lot of our investments. Landlords have seen that with high occupancy, 97 98% occupancy, they go, Well, I can raise Mr. And Mrs. residence rent, and I don't need to do anything to this apartment complex. So you know, again, we're about the same age, and we've grown up in the era of of taking care of your customer. And a lot of people in our industry have just forgotten that. And so what we've seen is that we can come in and buy these properties at a, at a fair price. And that we can turn around and the first thing we do in our permit communities is to really start getting our residents attentions by doing things that have been neglected or doing things that are very obvious to them that there's a new manager on the property in a new owner. And so what's allowed us to do is to, you know, maintain our occupancy and to keep those up. And especially during the pandemic, it's been a real challenge, because back in March, we had no idea we're gonna feel we're gonna move rent, paid rent, we know they're gonna move back in with their families, we didn't know what the landscape was going to look like. But we put together a plan to address our residence, we took in and we let our investors know this, and they all were in agreement. We said, we're not going to raise rent this year, we're just we're going to do our part we're going to pitch in, we are going to continue to give the high level of service to our residents, we're going to work with our residents on a one on one basis to make sure they're taken care of if they're having trouble paying rent, we'll put them on a payment plan will work with omeo will do whatever it takes. And the results were were absolutely surprising, I almost say shocking to us, we started immediately re budgeting to have our occupancy dropped to our revenues drop, you know, to really start planning for for difficult times, instead, we saw the exact opposite happen. We saw our occupancy go up, we actually saw our rents go up because our vacant units, we kept the pricing and market and people needed a place to live for whatever reasons and they moved into our units, maybe it's a relocation from some other markets. And so throughout this year, we were actually able to continue to pay our 8% preferred return to our investors, we were able to take care of our residents. And I think that type of of work and in how we do things gets out there. And so you know, that's, that's why I think we've had a successful year. And we're not the only ones doing this a lot of my, what I'd call competitors in our industry, they're good people for the most part, and we've all seen the same thing. So I think that's why our sector has been successful, especially compared to the other sectors. You know, it's basically boils down to Maslow's hierarchy of needs food and shelter. And I think a couple of things happened. I think one, the economists have way underestimated, maybe the savings and the side income that some families had to continue to pay rent. And at least in our markets, families made it a priority to pay their rent to keep that roof over their head and to protect their family.
Douglas Heikkinen 08:47
Let's talk a little bit more about your opportunity when you're looking at these these investments. There's a big difference between distressed distressed properties and distressed sellers. Can you can you talk about that?
Ernest Johnson 08:59
Yeah, that's a good question. That's a fine line. And essentially, that's that's the focus of our fourth fund that we've just started a couple of months ago, is that's how that's how we see capitalizing on the post pandemic opportunities that we think are out there. So a distressed seller is somebody that is running is, is up against a financial strain of some type. A distressed property is something that you need to make a major correction maybe in the physical structure itself, or maybe it's an obsolete location. Or maybe it has too many one bedrooms and a location that's becoming very family oriented, because there's great schools by there. We can't fix distressed properties without taking on additional risk. But you know, we can bring in if it just takes money to solve a problem, and it's in a very good market. Then we can bring it on the best example I'd give you Doug. Is that Again, a lot of advisors may not realize the way industry works. So this hopefully will be helpful to them. When developers build a new apartment complex, it can take you three to six years to get one of those launched and built, they take on a construction loan. And lenders require them to have some kind of personal guarantees on those construction loans. Because there's no real estate to back home. It's just an idea at this point. And there's a lot of variables during that construction period, such as rising construction costs, are maybe you run into a problem with the change in regulations within a community, and that can cost you money to fix. So what happens as a developer completes this project and starts leasing it up and meet certain income levels, the lenders release them from their personal liabilities and convert the loan to what's called a mini perm or a property financed leveraged loan. So what's happened over the last year because of the pandemic and then I mentioned are increasing occupancy. One reason Archie is has increased as people decided just not to move during a tough time, he just kind of stay Pat, you know, it's like a poker game I'm gonna hold, I'm just gonna stay here for now. And so there has not been as much movement in our industry. And so the developers that built properties, counting on people to move into them, last year found out they were not getting the number of leases they need, instead of 25 to 30 leases a month, maybe they were getting three to five. So they've now come to the end of their construction long period. They're 50 to 60%, occupied when they should be 85 to 90%. And the lenders coming to them and say, Mr. developer, if you want to extend this loan, you need to put up more equity, you need to expand your personal guarantee. Well, most developers don't have more equity to put up, they've got other loans that have covenants that may not allow them to increase their personal liability. So they need to sell these properties at a discount. Nothing wrong with the property, not a thing wrong with the property gets completed, there's no construction risk, they just need to get out of the deal. And so that's a distressed seller that needs to move that property before the personal guarantee, you know, take them on. And that's just one example. There's many more I could tell you about. But that's that's the one that usually comes to mind.
Douglas Heikkinen 12:16
I live in Boise, and in seeing more and more out of state license plates infiltrate us. Are there areas like this that are booming and their areas of focus for you?
Ernest Johnson 12:27
Yeah, and that's another good question. And by the way, I would tell you that about eight years ago, we looked at a property in Boise. And there's two properties that just the other day we were talking about, that we wish we would have bought. One was in Boise and one was in the Florida Panhandle, because both those areas have just boomed. So yeah, this has been sort of interesting, too. So except during the pandemic, we had a little free time on our hands like everybody else did. And one of the things we did was a research project where we looked at our properties. I mentioned before that we've been achieving about a 28% return on our investments. And we were trying to figure out why they were doing so well, besides just you know, our oversight of the properties and making good buys. But they weren't they were just outperforming significantly. And we weren't understand that. And so we took on a research project, where we just dive down into every demographic aspect that we could obtain. Again, these are hard numbers, they're not opinions, these are hard numbers from the Labor Department, the Census Bureau, all the different government entities that collect this kind of information. And we started tracking it for those markets. And we saw some trends emerging that explain why we did well in those markets. So then we said, well, let's take this a step further. And let's apply it to every market in the United States by counting. There's 3142 counties and parishes in the United States. So we have over 10 million data points in this database. And, you know, we all know numbers don't always tell the story. So we also turn to our economic advisors. We have three economists that we keep on retainer presented this project to them and said, What drivers, what filters Do we need to not only understand these markets today, but what are those filters and drivers in a post pandemic era? That's going to tell us what communities we should be investing in? And maybe they're not boomtowns like Boise has been. But towns that are going to have long term sustainable economic growth, what are the engines that are going to drive them and we looked at things like you know, was it a good market before? COVID-19? There's probably a good market after COVID-19 what are the economic drivers technology, research, big university towns, what are the things are the variables such as having a strong state unemployment fund to help keep people Through these downturns and so we we end up with eight factors that we looked at. And we broke this down on a county by county level. And if any of the advisors that are listening to this would like to see this research project, we have a presentation, I can even tell you how your county stacks out of the 3142 that we measured. So, you know, just a lot of digging down and trying to understand those markets. It's hard to predict the boomtowns. But we can certainly look and see an alien just to throw a little few outliers out there. We also looked at markets that we thought would recover very quickly within a year. And then markets I would take longer, you know, maybe two years and the one that jumps to mind is, is Orlando, Florida, they took a huge hit in the pandemic, because tourism just completely tanked. But we're not the ones figuring it out. But what I can tell you, if you look at Orlando, and look who the big economic drivers are their Disney Universal Studios, there are very smart people, Doug, they're smarter than me. And they are going to figure out a way to get those parks open, which they did, they're going to figure a way to expand and get people in those hotels, which they did. So they're helping us drive and understand that recovery. So that's the type of market that we like. But anyway, likes to defeat the advisors want to see this presentation, it takes about 12 to 15 minutes. And it's it's pretty amazing the information that came up.
Douglas Heikkinen 16:27
Your firm competes with some mammoths out there. What's the advantage to advisors of working with a smaller manager like you versus the big names?
Ernest Johnson 16:35
Well, that's Yeah, I would I would tell you is try to call up the president of Blackstone and get him on the phone. I think what you would say and again, I think this is the reason why some of our investors have continued to invest with us and refer their friends and families. You can pick up the phone and get hold of me. Jim Hearn, Tim burns, David Steele, bills, all our partners were very available, we come out and meet with the advisors. We're very available to their clients as well, I can't tell you the number of times and advisor says, Yeah, I've got one client, he has some questions, or she has some questions. They're not a big investor, you know, maybe 250,000, or maybe a little less. You know, can you give me some advice? All right, let's just get them on the phone. I'll be glad to talk with them. Let's get on a zoom call showing the mega you'll do that for it. Yeah, I mean, I, you know, I go back to like, I digress here. But my early days in real estate. I was working for a company and we had a property in Birmingham, Alabama was an office building. And this guy came in, in order to rent a couple 1000 square feet for a company he was starting. And my clients, my owner said, No, we don't want to take that risk. And that risk end up being healthsouth, which they had their problems later in life and end up being one of the biggest health care providers in the United States. And I thought we moved to that decision too quickly. Because I thought that, you know, I could put this guy in space that I don't have to spend a dime on. And if he goes out of business The next day, I mean, it's kind of no harm, no foul. And so I learned early on, you never know who's walking through that door. And I can't tell you the number of our investors that started out at maybe $100,000, that now are a couple of million dollars with us. In fact, we have one investor that started out with us at a relatively small level, and who's now our lead investor at $30 million in our fourth fund. So I just believe that no matter what size or amount you want to put in, you deserve to have the same amount of knowledge as the largest institutional investors out there. And so I think what you're going to find, if you talk to some of our clients and references, we're very transparent, our funds are fully audited. We communicate with our investors on a monthly basis. We're told we have some of the best quarterly reports out there. We're extremely transparent, we have we were put through a due diligence review by Mercer consulting, and we received their highest rating. And one of the things they raved about was our investor portal, they thought was one of the best ones they've seen. So we're extremely committed to give to our investors, whether it's them putting information on the portal, or them calling me trying to understand what box 23 A on their k one means. So I think that's how we run circles around, you know, nothing against the big companies. But I do not believe in the saying too big to fail, I believe small, nimble and very investor and resin focus is the way to be in this business.
Douglas Heikkinen 19:35
You mentioned the fourth fund you launched. Why has this thing been a rocket?
Ernest Johnson 19:41
Well, I think it's a combination of things. And it has been a rocket, our third fund, we raised $108 million, which was 8 million above our goal and it took us 18 months to do that. And so you're in the middle of a pandemic, we launched your fund and a lot of our competitors were laughing at us and we launched it. I think it was the last week in October. by Christmas, we had raised 60 days later, we had raised $100 million. And we're now at 120 million. So I think the idea of being able to capitalize in a post pandemic recovery is attractive to investors. I think our track record has showed them that we're very cautious and conduct great due diligence on the properties that we approach. And I think from the advisors, the reason so many don't have been attracted to us and to our funds in this fourth fund, is, you know, Doug, you know, the old saying that the chase for yield, this low interest rate environment has just destroyed fixed income. And, you know, the advisors are constantly trying to figure a way to generate yield for their, for their clients, and they want to do it with a limited risk. But you know, I think the smart ones are saying, okay, what's the flip side of a low end of a low interest rate environment? Where are the opportunities. And to give you an idea, we have, we have 10 loans right now, for our interest rate is under 2%. On our Freddie Mac portfolio, our average interest rate is less than 2.1%. Our average occupancy is 98%. You do the math, we're getting market rents. We're paying 2.1% interest rates. And that's how we were able to generate significant cash flow throughout the pandemic without taking advantage of our residents. So low interest rates, bad in some sense, but I think it presents a lot of opportunities when you couple that with the dynamics of the multifamily sectors, high occupancy, high construction costs, and ongoing shortage in the government's letting me borrow it 2.08%. You know, there's your opportunity to replace that fixed income, with yield that not only gives you good yield, but a chance to have a nice IRR for your clients. When we sell properties.
Douglas Heikkinen 22:03
I love you're focused on the renters, the investors, the advisors, are you having fun?
Ernest Johnson 22:11
I wake up every morning and can't wait to get to work. I you know. I mean, it's just hard to describe I, we have a great team here at Apex one, we have great friends that are advisors. Our annual investor meeting last year, we had over 300 people attend. You know, it is tough out there. It's a lot of people are struggling. But I do like to think that what our team is doing is we're part of a solution for a need that this nation has not just for our residence, but for our investors as well. And so yeah, I do feel good at the end of the day, that we're doing the right thing, and we're in the right place to do it and help people out.
Douglas Heikkinen 22:53
How can people reach out to you and learn more?
Ernest Johnson 22:56
Well, they can certainly reach out to me at my website, or my my email by E Johnson ej Oh, ah n s o n at Apex one ip.com. They can also go to apex One Investment Partners on the website and find my link there are if they want to call me 71323114 to one we take all calls anytime. And I'll be glad to show them anything we have and references or anything they need. But we'd love to talk to them.
Douglas Heikkinen 23:28
Ernest that was super interesting. We really appreciate you joining us. Thank you very much.
Ernest Johnson 23:34
Thank you and appreciate all y'all are doing and stay well and good luck and I think we still have a great future ahead of us.
Douglas Heikkinen 23:40
We do for everybody at Iris Media Works our producer Jakie Beard and the power your advice podcast team. This is Doug Heikkinen.
investors, advisors, markets, multifamily, pandemic, residents, fund, occupancy, sector, people, year, apex, rent, opportunity, property, properties, doug, distressed properties, clients, families