Why We Focus on Value-Add Investing
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Episode Transcript:
So we want to talk a little bit about why we think value add investing is the least risky type of investment strategy. We built our company on it for a, a host of reasons, but one of the best is a margin of safety. Mm-hmm. When you buy something core or core plus you, you are believing in what the last person told you.
This isn't about the value. This isn't what you feel confident that you can create. This is what, this is what already exists, or someone gave you. In, in many cases that might be a high rise office building in a secondary market. Great. How, how, how are those going? Mm-hmm. I guess you were convinced that that was a, a sure thing, but now it's struggling.
For us, we, we are more confident working our plan, something we know we can accomplish, and that happens through seeing where rents are below market and we believe we can bring rents to market. Mm-hmm. That happens in making your money when you're going in by buying at the right price. That happens with improving the asset the way we do by landscaping and paint and renovations and those sorts of things.
But our ability to add value to the asset gives us safety. 'cause it means we bought it at one price. We plan to sell it in another and we're gonna make a profit. By buying it here, spending some money to get it to there. But there's a whole lot of safety that happens in just our leadership.
There's a lot of value that happens in our leadership. Yeah. And in our execution. And if the market changes or things go wrong or something's different, yeah. We have that delta that's, that's really our time and our effort, but isn't actually the basis of the property that gives us us some safety. And we've got cash flow.
'cause our, our goal is building cash flow. Yeah. Because we build cash flow because that ultimately equates to value. And that cash flow becomes a margin of safety should as the market turns. As the market shifts. Yeah. And markets have cycles. Yeah. They will shift real estate famously as cycles. You know, it constantly moves in that sign curve of, you know, recessions and, and growth trajectories and then recessions.
And that's again, gives us comfort with investing in value add. When you're buying a core asset, you're buying it based on future appreciation. Yeah. That, that's the fundamental thesis. I'm buying it in a market, in a situation, a type of asset that I think will just fundamentally appreciate over time.
There's nothing wrong with that strategy. But it, for us, that's a risky strategy because there's nothing I can do. I'm simply watching something play out. And whenever we get assets to kind of that full stabilized, that's when we feel like, okay, it's time to sell. Because otherwise what, what we're really dealing with otherwise is kind of, you know, maybe not a ticking time bomb, but we're dealing with something that there's nothing we can do to build further margin of safety.
Yeah. Meanwhile, On the other end of the spectrum you know, ground up development, you know, everyone certainly perceives that as more risky. But over here you're dealing with market appreciation. Yeah. Over here you're dealing with market timing because development only makes sense at the right time in the market.
It absolutely does not make sense, and your land cost goes to negative. During the wrong times in the market. And so both, if you really look at both of these two ends of the spectrum, the core stabilized and opportunistic development, they're both dependent on market factors. Mm-hmm. Value add, it, it certainly can be influenced by market factors.
You know, when the market's good, all tides rise. It's great when the market's down it'll have a downward effect on values. But it's not dependent on that. There's a business plan that works. In any market cycle. And that's why we view value add. Even though the return profile is, you know, better than core stabilized, we actually view it as less risky because it's, it's a strategy we can execute.
You have more levers. Yeah. So you've got market, you've got strategy, and you've got execution. Mm-hmm. And core, you've just got market. Yep. Great. Let's, let's hope the market goes well. Yep. We bought what we bought. Yep. But in ours, we start with buying where we believe is a great market. Yeah. A market with some legs.
But then there's the strategy and that comes from doing a thing over and over and over again and developing a well honed strategy. Mm-hmm. And then you've got execution, which is we have great teams who are great at doing this business plan over and over again. Mm-hmm. And those are pieces of safety.
'cause if the market changes, okay, well we still have our strategy and we still have our execution. Okay, well maybe what if the strategy was a little bit off? Well, maybe the market's still going and we can execute Well, yeah. You, or, or, you know, vice versa. But we have different levers that provide pieces of safety in, in value add.
Meanwhile, on the opportunistic side, I think of some of our earlier deals with high level of vacancy. Great price. Yeah. Low vacancy. We tend to now pay a little bit more, but lead with higher vacancy. Higher occupancy, or higher occupancy. Yeah. That that, that de-risks some of that plan? Yeah. Yeah. So we we're, we're speaking from experience and meanwhile, I'd, I'd say on the other end you know, we have assets that we've owned where you know, we have leases that will be coming due five years down the road.
And then we would have that risk associated with, are these large tenants moving up? You can wait. You just sit there and wait and, and we would rather exit that asset and move on to an asset that we can control better. Yeah. It's also a reason we are almost always in multi-tenant buildings. Yeah. We don't want to have any asset where we're waiting for one lease and Yeah.
What are they gonna say? Did their corporate strategy change? We'd rather have lots of tenants. Mm-hmm. And and high demand. Those are, that's a beautiful thing.
Summary
We find the value-add investing strategy to be the least risky and so we’ve put a lot of energy into developing processes around this method. In this episode of Durable Value, Joe and Ryan share more detail around the firm’s approach and why we think it will be a strategy that has longevity.