Build Magazine May 2016

Build Magazine 48 Wealth Preservation “The investment world all agrees that apartment properties are the ultimate in Wealth Preservation,” says McSheehy. Insurance companies and other institutional investors price out the risk in apartment property investment, as having the risk of a bond. But the distinction is that, it also brings good returns. “Housing is a core human need, becoming even more of a need in bad economic times when people cannot buy and must rent.” Triple Bottom Line – Virtue and Returns American invests with an eye on a triple bottom line: adding value to the lives of residents; adding value the lives of individuals in the neighbourhood around the property; and adding value to co-investors. These three goals and objectives strengthen and reinforce each other, in a circle. “Neighborhoods are always in a state of change, a state of flux. Nothing in life ever stands still,” says McSheehy. “Neighborhoods are either improving or getting worse. A lot of other groups just suck cash out of properties, which essentially means that they are sucking cash out of neighborhoods, and when they do so, a large anchor property has a huge effect on making the neighborhood around it a much worse place to live.” American, in the Value Add work that it does, differentiates itself by investing capital to positively transform neighborhoods and properties, which results in jobs returning to the neighborhood, and far increased quality of life for the individuals living in these neighborhoods. It also leads to higher returns for the co-investors who have invested in these Apartment Properties. McSheehy explains, “It is not Value Added by just buying at a low price or using unnecessary risk – rather, it is actual real, physical value which is added to the lives of residents and to the neighbourhood. This is more work than other groups care to do. But it is how we are able to generate significant returns while maintaining the bond-like, Wealth Preservation risk profile of the investment.” “To put it in perspective: we do Core, Core Plus, and Value Add. This applies just to our active Value Add: for some of our work, we look for properties where we can turn the property around and turn the community around. Generally, we see properties that fall into disrepair, and some crime, and it obviously has a huge destabilizing effect on the entire neighbourhood around it. The ownership there had been sucking cash out of the property and not investing into the property. They haven’t been doing background or crime checks on their residents. They let in some bad apples. Then all the good people live in fear, which is most of the people. And the property looks bad as well. What we do for our Value Add, is, we buy properties like this, generally 100 apartments to about 500 apartments, and we clean them up. We put in place a top quality property management company. We put in a renovations budget, we clean up the property, we make it a beautiful place to live, a place where the residents are proud to live. “That is just one example, we do all types of value add.” Significant Value Add Leadership in the Industry American and American’s partners have consistently delivered IRRs above those of the industry. McSheehy explains that it is due to the far higher amount of time, focus, and hard work that the group puts into each property value add renovation. “This is something that other groups are not able to do, even if they wanted to do, which they don’t want to,” McSheehy says. “We spend months negotiating materials prices down. We pay far less than market prices for materials, whereas the rest of the industry pays about 120% of the market prices for materials in their renovations because of markups from contractors.” American does not tie construction management fees to the cost of the renovation, as the rest of the industry does. “We are IRR driven, and when we invest with co-investors, we are compensated from the IRRs and from our portion of the good returns results for co-investors. This is a clear and transparent alignment of interest which is lacking in the rest of the industry. Our construction management fees are minimal and cover part of the staff cost for that renovation, and are not tied to renovation cost, but to how much we are actually able to increase returns for co- investors, and we don’t get paid anything significant until after the investor has received very good returns.” Ms. McSheehy explains how renovations influence the IRR of a property. “When you run a sensitivity analysis, you see that some things do not affect the IRRs very much – actually most things don’t. However, the things that affect the IRRs substantially are, first, the amount spent on that renovation and how far those dollars go – the selection of where those dollars go, and second and most importantly, the rents that residents pay after the renovation.” Throughout the rest of the industry, the real estate group is paid 5% of whatever they spend on a renovation, which is a direct conflict of interest with their investors. “No one will go out and spend an extra 200 hours searching for better or cheaper or higher quality materials for a renovation, or more innovative ways to make a property really beautiful and ‘breathtaking’ for prospective residents,