Comparing Apples to Apples

It probably goes without saying that investing in Flint, MI is not something that the average person, real estate investor, or even real estate investment company does. There’s a lot of reward out there for taking that risk, but what there isn’t a whole lot of is a basis for comparison. I could certainly, at once, be the most and least organized, most and least successful, shrewdest and most idiotic landlord in Flint because there really aren’t many others out there with reliable statistics to compare my performance to.

Which is precisely why this post is going to contain nothing about Flint, MI.

If you know me well enough to be reading this, you probably know that I’ve also partnered with a company that has started buying in Columbus, OH. There are a lot of similarities between Flint, MI and Columbus, OH; They are both major cities with populations of 100,000+, they both are home to major public universities, they both have seen some rough times during the economic downturn experienced by the majority of the midwest since 2008. There are also some major differences. Columbus is home to THE Ohio State University, a football and basketball powerhouse for as long as most people can remember, and also the largest public university in the country, which churns out not just linebackers, but also skilled undergrads, MBAs, and JDs at incredibly high rates. These folks often have strong ties to the community, and often stick around. Nationwide Insurance (Nationwide is on your side) has realized this and is headquartered in Columbus, and JP Morgan (you know who JP Morgan is) actually has more employees in Columbus, OH than it does in Manhattan. What’s more, the major corporations that have entrenched themselves into the community of Columbus have started a variety of non-profits that are focused on community development and revitalization. More specifically, knocking down abandoned houses and rebuilding them as brand new, green, energy efficient homes provided with subsidized financing to allow the community’s citizens to flourish. What’s more, the public sector is on board with this same gravy train, as Columbus is the state capital of one of the nation’s most powerful and influential states. The combination of private and public investment into a community is astounding, and I dare say, unparalleled.

All of that to say, really, that all kinds of people care about Columbus, and are working hard to turn it around. The same cannot be said for Flint, MI. So, while the cash flow in Flint certainly is nice (and better than in Columbus, at least in theory), there is at least an argument to be made for higher upside in Columbus. More importantly for the purposes of comparison though, there are other investors with not just the ability, but the obligation to publish meaningful statistics on their Columbus inventory. That’s where things get fun.

So, on to the fun.

You may recall a previous post where I delved into the Q1 Earnings for Silver Bay (SBY), the only publicly traded SFR REIT to have significant holdings in Columbus. As of their Q1 Earnings data, they had purchased 94 properties in Columbus for an average aggregated cost basis of $83,000/property and stabilized zero of them. Given that SBY changed their definition of “stabilized” suspiciously close to their earnings call to reflect properties that had been owned for six months or longer as opposed to properties that are actually leased and producing income, it is pretty easy to tell that their Columbus holdings had been owned for less than 6 months at the time of their Q1 data. So, that’s not overly meaningful on its own. What is interesting though is that Silver Bay also bought an additional 179 properties in Q2, while leasing out 66. Now, whether that means they leased 66 of their original 94 (a 70% stabilization in Q2) or bought some of the additional 179 with tenants in place is an unknown, but given that SBY is sitting at 65% occupancy for their entire portfolio, stabilizing 70% of their holdings in a single MSA in 1 quarter seems unlikely. Also, given that their management has shifted its focus from acquisitions to stabilization (this is both a stated and revealed preference, this shift is mentioned in the analyst Q&A of the earnings call and reflected in the dramatic 20% decrease in acquisitions in Q2), one would expect that a strategy of purchasing properties with leases in place would be implemented to help boost the stabilization process.

Of course, one would only expect that if management and operations were both intelligent and efficient… and after SBY’s performance so far, I’m not so sure I can make that statement. Their full Q2 is available here, but for our purposes I’m going to focus on just their Columbus holdings. They have actually managed to decrease their average aggregated cost basis (now down to $82K/property, down all of $1,000 from Q1), and they are collecting an average of $889/mo in rent. If we put that through the ringer of actual investment underwriting… it comes pretty close to not passing the smell test. I use an average of $1,000 per property in property taxes because that’s roughly what my company pays, but considering their aggregated cost basis is roughly 4 times ours, that might end up being a little generous for them. Here’s the breakdown:

Annual Gross Rent: $10,668

Annual Property Tax: ~$1,000

Annual Expenses: 45%

NOI: ($10,668-$1,000)*.55 = $5,317.40

$5,317.40/$82,000 = 6.48% Cap Rate.

That’s not terrible on its own, but it could likely be achieved by purchasing a much more stable asset class (Class A-/B+ office buildings would easily achieve this same yield in many markets).

But lets not forget that they are not operating in a vacuum where they only bought properties that are producing rent. They in fact have bought 273 properties in Columbus, OH, 66 of which are producing rent. Given that same average rent and aggregated cost basis, they are producing $350,948 in NOI over the entire MSA, but have spent $22,422,000 to get there, good for a 1.56% Cap Rate. You could do better with 10-year treasury yields… and that’s before we even bother to calculate the management fees!

Now, that’s not to say that their operations won’t improve, but SBY is operating at a snail’s pace, and has only leased 24% of their Columbus portfolio. What’s more, it is mentioned several times during the Q2 earning call that SBY is strategically scaled back acquisitions in Q2 not just to shift operations to leasing, but also to avoid having a glut of inventory during seasonally slow months of Nov-Jan. I call bullshit, for two reasons. First, having a period of 6 months from acquisition to leased is incredibly slow. I don’t think any of my properties in any state that eventually were leased out took longer than 60 days to lease, including renovations. 180 days is absolutely ridiculous. Second, they actually have shown a better ability to lease properties when their focus was on leasing, having gone from 47% to 53% leased in Q1 while the focus was on acquisition, and from 53% to 65% leased in Q2 when the focus was on leasing (or perhaps, acquiring more properties with leases in place). What’s a little bit scary about that, though, is that they acquired nearly 5,000 properties before realizing that they weren’t actually able to do both simultaneously. Whoops. All told, they have 1,961 properties that are still vacant, 207 of which (good for roughly 11%) are in Columbus, OH.

So how is my company doing in comparison to that?

Better. A lot better. But this has been a pretty grueling post as is… I’ll save the second half of the comparison for a future post.