Executing as a Team in Real Estate with Doug Andrews and Brenda Gammie  | Ep. 96

- Hi everybody, this is Darren Powderly welcome to this next edition of StreetBeats. Today I'm joined by Doug Andrews and Brenda Gammie with Avanti Residential in Denver, Colorado. Doug and I had a chance to meet each other gosh, it must've been six years ago it was when I first started CrowdStreet and I visited with him his office in downtown Denver, he and his partner, Jeff Fox and a number of the other team members. A couple of buddies of mine actually worked from there, Doug. So we got a little ways back and it's really a pleasure to have them on the show today. I absolutely love Colorado, I love Denver, I'm a CU Boulder graduate so a lot of conductivity there I lived there for about five years. Brenda, I'm really excited to have this conversation with you as well. Why don't you introduce yourselves and tell us a little bit about the firm please.

- Sure, I'll go ahead and start and introduce myself, Brenda Gammie, I'm senior vice president of operations and like you, I go way back with Doug as well. I worked with Doug on deals starting back in 1999 when I was an onsite manager and I currently oversee all the day-to-day operations. We have about 6,500 units of management that are in house, that Avanti runs. And I worked very closely with Doug and the acquisitions team on all of our new deals.

- And Darren I've been in the real estate business really since 1982 full-time. But in any case, starting in 1990 I went into the brokerage business as an apartment broker and with my partner, Jeff Harts, we worked together for 25 years and were the top brokers in Denver for 24 out of the 25 years so we had a really good run but we started buying properties in 2005 and grew very slowly from there because we were very careful not to ever compete with our own customers. So then we sold our brokerage company in 2015 and Jeff said to me, "Look, I know you're tired of brokerage. Why don't you work on our acquisition company full-time?" At that time, the name of the company was Capital Real Estate. And I said, "You're on." Then I hired our current acquisitions director Jason Wine at that time and we really focused on buying in Phoenix and were ultimately very successful after about a year of trying. I hired Brenda three years ago to really with the business plan of taking our property management in-house and Brenda's very highly qualified to do that. Then I hired our CEO, Chris Garner two years ago. So we have a really strong team in place. And I'm really proud to say that thanks to Brenda and in part Chris, but mostly Brenda's expertise, I consider our property management function to be our a real core strength of the company today. We also changed the name of the company two years ago to Avanti Residential, we were looking for a name that felt progressive that felt like moving forward and kind of gave that feel. The 10th mountain division was an army division that was headquartered up near Leadville Colorado to do their training in the mountains. And they were became very famous for being a very effective force I think mostly in Europe and during World War II and their motto was Semper Avanti which means always forward. And I really liked that historical connection to Colorado, I'm a Colorado native I've lived here most of my life and it really describes our attitude with respect to growth and the market. So that's how we came up with the name Avanti Residential.

- That is a very cool story. And I've been the Leadville and it's very high up in terms of altitude and it's very rough in terms of terrain and especially back then, nearly 70 years ago World War II 75 years ago. It must've been a lot colder then too so a very cool nod to history and recently very progressive name. I love that backstory there. So one of the questions that I have for you and Brenda is especially with both of you have worked for a variety of real estate companies in the past, Doug you've mostly worked for your own firm but you've serviced a lot of clients, some of the biggest and best commercial real estate especially multifamily owners, operators, developers in the nation. What differentiates Avanti today, knowing that it's a very competitive market, knowing that you have serviced some of the biggest and the best?

- That's a great question, Darren. My experience working with mostly institutional kind of investors over my career because Jeff and I only worked on deals that were 100 units or more really 200 units or more and a that's really where my bias comes from for larger properties. You can make money in small properties in this business but the management of those is inherently inefficient because there just isn't enough money on the table to make it profitable for a property manager. And it's difficult to staff small properties and do it effectively. So we only buy properties over 100 units. I think the other real key that I learned in the brokerage business is that when you buy properties, it's really important to be a reliable buyer because as long as I can remember almost it's been a sellers market at least in Colorado that dates back to about 1990. And if you don't do what you say you're going to do, if you don't bid aggressively, you won't win any deals. And there was a time in the brokerage business when to re-trade a deal was considered almost a badge of honor. And as a broker I'd never understood that because I always thought buyers were doing themselves much more harm than good by squeezing a few more pennies out of a seller because the real name of the game is acquiring properties when it's a good time to acquire them. And the difference between a good deal and a bad deal is never determined by the few dollars that pass back and forth in a retrade.

- Yeah, so you guys execute a very strong reputation for closing deals doing what you say you're going to do sellers know that you'll close and not retrade. A question that comes to mind for me today, because assets across the spectrum across the investment spectrum are are valued higher, right? Whether or not certain assets are in a bubble or overvalued other assets maybe less of dramatically overvalued but the globally things are expensive. How do you today, still look at it's a sellers market, how do you have the conviction to purchase a property in today's market?

- That's a great question, Darren. It is a very difficult time to buy in this market. As I said, it's a sellers market I think that's true nationwide so you have to be really careful. And our approach is that we have a team approach, if everybody isn't on board with a buying a deal, we don't buy it. And I think as a result, we've got some very talented professionals on the team and as a result we end up with, I think, very good deals. We also go through an awful lot of deals before we find one that we could buy and make sense of.

- To just expand on Doug's comment of that everyone needs to be on board with the deal so that's where I come into a play a bit on the operation side. So the acquisitions team will put together all of the underwriting and they'll present it to me and ask if I can execute it. And if I can't execute from the property management operation side on their underwriting, we either get to a place where I can execute on it or we won't move forward on the deal. So I have to be aligned with the underwriting team.

- Thank you, that's a brilliant point there because it doesn't matter what the acquisitions person really thinks if the operations and property management team can't execute on that business plan, drive the NOI or reduce expenses just overall execute and have that realization that the acquisitions person projects upon acquisition. Brenda, what are some of the things that you're looking at today moving forward with traditional assumptions being challenged? Just some of the things that you really think about when you're looking at going in at an acquisition right now.

- Yeah, sure. So of course, I always start with the rent growth, right? Where can we execute? What can we get on the rent growth? The other big piece on it is the renovation plan. How many units can we renovate a month? What kind of lift are we gonna get on it? Are we gonna be able to lease the apartments with those kind of renovation lifts? And then really just doing a full valuation on all of the expenses. So those are the three biggest things I initially look at. Right prior to transition you see a significant decline in the performance of the property because the property selling and the onsite team might or might not have a job. So one of our biggest areas of expertise is when we come in at transition, we're able to take those properties and have an immediate significant impact on the occupancy, on the availability, on the rent. What Doug mentioned earlier as a prime example is we recently expanded into the Kansas City market and purchased a beautiful 311 A plus property out there in Kansas City. And when we transitioned the day close, we transitioned at 84% occupancy with 22% available. So it took us about 75 days to get it stabilized back to that 94% occupancy, 8% available and during that time period we secured about 80 leases. So that's one of the challenges when you have properties that are transitioning ownership.

- Yeah, Brenda, that's fascinating the entry into the Kansas City market. And one of the things I wanna point out for the audience is that Avanti is what they call vertically integrated. So they have the acquisitions team and then they also have a property management team all under one roof, which many companies like Avanti believe that is the strategic advantage or it allows you to create the most value for investors. But you did business in Phoenix for a while because you thought that was a more opportunistic market yields are I suspect higher in other markets but what drove the decision to expand to Kansas City at this time?

- Well, Darren, we've always been opportunistic buyers. We bought heavily in Denver when we were confident that prices were really depressed. And what really drives that Colorado market, I think is quality of life more than anything. We're seeing a lot of companies move to Denver particularly high-tech companies because the people that they want to hire want to live here. And I always knew that would become a theme for Colorado at some point and it's really happening in states now. However, Colorado is also, particularly the Denver area is significantly overbuilt at this point. If you add in the vacancy from properties and lease up, it's about a 98 and a half percent vacancy rate which is not an occupancy that will drive rents. So we currently are looking at deals in Colorado, we would like to buy more deals here, but it's very difficult to find something that makes sense. So we started looking for other markets a year ago and we've developed a matrix of 32 variables that we use to evaluate new markets include things like the amount of growth, the level of education, barriers to entry, we like to have a vibrant urban center. Those are just some of the factors and we evaluated about a dozen markets around the country and Kansas City came out near the top. Next market after that for us is going to be Florida which will probably involve more in places like Tampa and Orlando. But our first acquisition is under contract is in Boynton Beach which is a really exciting location. It's only a few blocks from the ocean and a really good opportunity for us as a first deal in that market.

- Brenda, your job is about to get a little bit more complex, isn't it?

- It is, I'm heading on a plane tomorrow to Florida.

- Well, have a safe trip. And I understand there's a quite open and active down in Florida right now which is the way the rest of the country is setting. So yeah, it's certainly great markets. Love to hear the sort of less obvious one in Kansas City but your data-driven approach compelled you to go there and you're actively acquiring there. I think it's good to have that somewhat contrarian view. I don't think it's Kansas City's necessarily contrarian, it's just less sort of obvious maybe is one way to put it. So it's nice to see you moving in that direction. Brenda, I have a question for as you look at the driving rents, construction costs, and then reducing expenses, those three main factors that you mentioned, how does that change when you're looking at different markets?

- I would say the biggest challenge for me is knowing the market, having the connections in the market, and truly what makes me the most successful is hiring the right people. It's all about having the right people, the right people to manage the properties, the right people to oversee expenses. So when you go into a new market, you're not networked, you don't have connections, you most likely don't have people that have worked for you previously before. And that's probably the biggest challenge just going there and being able to get the people, whether it's the people that work directly for Avanti or whether it's the vendors that's doing the renovations and the work on the property. So that is the biggest challenge for us coming into a new market. Fortunately, Avanti has been fairly successful on hiring the right people and our biggest focus on the management side is our people, we consider ourselves a people person company and that's really a big priority for us and the culture of the company.

- Darren if I could add to that for one second. We have kind of a unique feature for our employees, particularly our salaried employees. We start out by paying top of the market salaries and bonuses, but then on top of that I'm taking a percentage of the ownership interest of the sponsor side ownership in each deal we do and contributing that into a pot for what we call the Avanti shares plan. And our salaried employees earn shares in that plan based on performance and 10 year in position, and then every time we have a capital event at one of our investments, everybody gets a check. And that is my way of making sure that everybody's goals are aligned with our investor's goals and I think it's a strong plan and I hope that will ensure that we always have the best people.

- That's a huge perk. Even 401k matching is nice but to give in a private company, every employee and then the ability for them to earn more shares to be able to participate in the profitability upon successful sale of the property, that is a perfect alignment of interests with you and your employees aligned with your investors. So thanks for sharing that, I did not know that that's awesome.

- Darren, I'd like to go back to the question you were asking about buying in this difficult market when prices are obviously very high. First of all, on the construction side, when construction prices go up, that's a good thing for us, that's what drives our rents up. I don't bemoan that. I do think lumber pricing will come back down the bed but I've never seen the overall pricing replacement costs of apartments go down except in a deep national recession and I don't see that coming so I think prices will continue going up. But we do have to be very careful in this environment because the margins are thin. And I think in most cases, in most locations, the value add play is overdone and the prices are too high. We believe that when the spread in cap rate between value add and core or core plus assets is as thin as it is today, the core assets by far the better value. And I think we will see in the next several years we'll see a lot of the value add underperform and the core product which is fundamentally lower risk, actually outperform.

- You said core and I just wanted us to define this a little bit more for the audience or core plus, and why you think at this time you shifted your business model from farther out on the risk spectrum value add and opportunistic to more core or core plus, if you can expand upon that I'd appreciate it.

- Sure Darren. The term core really generated by the institutional side of the business, core meaning where they want to have most of their money in the lowest risk as assets. And these institutions are not about trying to make profits, they're about preserving capital. And that's why they're so conservative, that's why they're so careful. I think the best measure of risk in our business is the debt service coverage. Rents can go up and down, markets go up and down, but the only way you lose money in this business is really when you default on your loan. So that's the most critical point.

- Well, excellent. Brenda and Doug, we've covered a lot of thesis and I know we could probably talk all day long about Colorado and what's going on there, where you both live and operate Avanti Residential but this has been a fascinating discussion and very educational and thanks for joining. Any parting words for the audience or we'll sign off.

- Yeah, thank you for the opportunity, Darren. I love talking about our business and I'm happy to do it anytime.