We spend considerable time understanding the macro landscape including GDP growth, employment-population ratio, population growth (Echo and Baby Boom), income growth, occupancy, inventory under construction, relative pricing by market and in relation to replacement costs, etc. We use the data in our algorithm to inform what markets we should target for investment. We are experienced and nimble as investors and invest in our targeted markets and property types, using capital structures to better position ourselves within a region, property sector, and investment, from a risk and return perspective. This is in stark contrast to other real estate investors who box themselves into investing in a handful of states, a couple of property types, and without flexibility to invest across the capital structure.
We are disciplined lower middle market real estate investors that focus on deals that we believe are too small for institutions and too large for individuals. This greatly increases deal flow and decreases competition. The lower middle market represents 80% of the market and only 20% of the capital. In contrast, the market above the lower middle market (where most real estate investors compete) encompasses 20% of transactions and 80% of the capital.
Margin of safety has long been ingrained in our culture. Our Founder Carl Chang was entrusted by his family and given the responsibility of managing the family’s wealth, with the goal of replicating a cash flow stream in perpetuity. His father told him “don’t lose your brother’s money” when they began to invest in real estate, and to this day capital preservation remains deeply ingrained in our Firm philosophy and investment process. We underwrite properties to deliver investors’ preferred rate of return under downside stressed scenarios. This is a higher level of safety compared to other real estate investors who may only require a 0% return in their downside risk analysis or only look at the upside. Additionally, we are an operator as well as an allocator, so we require control rights to remediate underperforming properties in joint ventures which we are equipped to handle directly. Other real estate investors don’t require these control rights and/or don’t have the expertise to execute them if something goes wrong.
Other real estate investors allocate capital to deal sponsors or, if investing direct, are highly reliant on property managers. Therefore, the success of these real estate investors relies heavily on the success of a third-party sponsor or property manager. Our experience and expertise as an owner-operator enables us to create our own success and not be reliant on third parties even if they are used to execute on a daily basis.