2022 Year in Review
&
2023 Strategic Outlook

Todd Hanson:

Okay, looks like we’re at top of the hour and I know folks are still joining, but we’ll get started here. We’ve got a lot to cover. First off, thank you very much for joining. We welcome you. We’re grateful that you made time today to join us. I’m Todd Hanson, the managing director for RM Communities. With me today is Christian Popoff, our head of asset management for RM Communities. And as I say, we’re just grateful you’ve made time today. We’ve got a lot to cover, but before we can get to the dessert, I want us to eat our vegetables. So we’ve got a quick disclaimer for us to read through.

Today’s presentation is not an offer to sell or a solicitation or an offer to buy securities. Such an offer may only be made through the offering materials that are available on the realtymobile.com website. We are not attorneys, not CPAs, and not financial advisors. We encourage you to speak with your own advisors about any offering and the terms related to it. Anything you learn today is for informational purposes only. Information provided during this presentation including information regarding targeted returns and investment performance is provided by RM Communities and is subject to change. Forward looking statements, hypothetical information or calculations, financial estimates and targeted returns are inherently uncertain. None of the opinions expressed are the opinions of Realty Mogul.

For any liquid investment into real estate or real property, you should be prepared to hold onto the investment for the long term. There’s no liquidity or secondary market for investments sponsored by RM Communities. Direct and indirect purchases of real property involve significant risk including but not limited to market risk, property specific risks, environmental risks and loss with capital. Investments are not insured by the FDIC, not bank deposits, not guaranteed by Realty Mogul or RM Communities and may lose value. Okay, now that we’ve got that out of the way, let’s jump into the meat here.

Setting the agenda for today. Want to give a quick introduction to RM Communities. We’ll do a recap of 2022 and all the things we saw that are kind of shaping what we think will happen in 2023, an overview of how we’re approaching 2023, where we think the opportunities lie and then we want to save time for questions. This is really dedicated to you; the audience and we want to make sure you get a chance to ask any questions. We’ll try to address as many of those as possible at the end here. For those who joined us in 2020, you’ll recall I had predicted a global pandemic. In 2022, I predicted four consecutive 75 bit rate hikes from the Fed. So who knows what... No, I’m kidding. The reason I say that is we are very, very strong with humility coming at this. We know that probably by the end of this year when we look back at what happened this year, the things that shape 2023 will probably be things that none of us are thinking about right now.

So what we’re trying to do is really lay out how we see the lay of the land at present, how we’re approaching it with the caveat that we’re all being prepared for the unexpected. So with that, let’s jump into a quick overview of what the conclusions are and what we’ll hopefully present to you guys today. Next slide.

In our view, we did see some softness at the end of 2022 in the multifamily market, but we think the present challenges are more a function of the current Fed policies and really haven’t changed the attractive long-term fundamentals for multi-family investing. We focus a lot on investor psychology and investor sentiment, which really shapes a lot of the public markets as well as the private markets, private real estate as well, and investor psychology tends to overshoot both to the upside and to the downside during market cycles.

So when market sentiment is bearish, while fundamentals remain moderately bullish as we think they are right now in multifamily, it’s historically been a really good time to be a buyer. We anticipate during this year a more healthy, a more normal sort of rent growth, something that’s actually sustainable, which is more like 3% nationally. Certain markets will hold up a lot better than that. Some may not, and we foresee some softness in occupancy, particularly those markets that have a big supply pipeline coming of new construction. The good news is we’ve got a strong labor market, really favorable demographics. Those should be supportive to multi-family for the foreseeable future. But I do think market selection and asset selection will be increasingly important. We actually feel really positive about select Midwest and Rust Belt markets. In general, given some of the price run-ups, particularly in the Sunbelt, we think the Midwest may actually be the last bastion of affordability and may actually be well positioned in the next couple years for renters that can actually afford to live there.

No longer is as much as possible the answer to how much debt should you put on a deal. It’s going to be down to skilled operators with strong operating experience and a data-driven approach who are the ones that are going to be positioned to succeed in the next few years. So we see better value this year relative to what we saw at the beginning last year. So there are challenges, no doubt. We’ve got a very aggressive Fed. We’ve got inflation still out of hand and we’ve got some global things that are impacting the investment environment overall, but we think it’s a much better entry point now than it was even last year. So that’s all positive. So let’s get into why we think that. Next slide.

I just wanted to highlight Realty Mogul and RM Communities. We spend a lot of time talking about our core values. I think to understand the way we see the world and the way we approach investing; I think you’ve got to understand our core values. These are on our website. You’ve probably seen these before if you spend time with Realty Mogul or RM Communities. Number one’s kind of the one I think is most important. As a manager of a team, I want my team to be able to sleep well at night. I want them to feel good knowing that ethics drive all of our actions and that we take great care to always put our investors first. The other side of that sleep well at night is for our investors. I want you to feel really good about entrusting some of your capital with us to invest on your behalf. We work really hard to protect your principle and earn you the best risk adjusted returns we can. So we want you to be able to sleep at night with that portion of your portfolio that you’ve invested with us and we think that’s really important. Next slide.

At the end of the day, this is a people business and our culture is kind of what makes Realty Mogul and RM Communities special. I think all of that, the tone is set from our CEO and co-founder Jilliene Hellman. I think most of you on this call probably know Jilliene and have had the opportunity to hear her speak. If you haven’t, I’d encourage you to check the website, listen to her podcast, which is available where finer podcasts are sold. Ideally find one where she’s been interviewed. I think you get a good sense of who she is and the culture that she’s created at Realty Mogul and RM Communities. Just something I thought I’d highlight there because I think that our culture and our people is what makes us unique. Next slide.

Just going to brag a little bit about Realty Mogul, our parent company. Realty Mogul platform members have just crossed the billion dollar threshold, meaning the members have invested over a billion dollars in, 5.9 billion of real estate value nationwide, which includes over 28,000 apartment units. So why is that relevant? Well, it just means we’ve seen a tremendous amount of transactions. Tremendous amount of investors have trusted our platform and because of all that data, seeing all those transactions across the country in not just multi-family but other food groups. We have a tremendously deep bench and a tremendously robust infrastructure, everything from accounting to tax to legal to marketing to investor relations and all those things are things that RM Communities leverages to make the investor experience that much better. Next slide.

One more thing I’d just highlight about our parent company Realty Mogul. We’ve been investing now for 10 years. Of that billion dollars members have invested on the Realty Mogul platform, about 200 million of it has now gone full cycle. So across 221 investments, we told investors we’d get about a 14.9% target IR. We realized just under 21%. So a consistent theme here under promise and over deliver, I think that really goes to the approach we try to take and I think it’s very similar to what we’re doing here at RM Communities. So now with that, let me just slide to one quick slide on RM Communities. Just to recap, we talked about our parent company. I think much of it is similar, but what makes RM Communities special, we’re the direct acquisition arm for Realty Mogul. So we’re a real estate company built around a technology platform, the parent company Realty Mogul.

Realty Mogul has 10 plus years, a depth of experience dealing with real estate sponsors, really up and down the spectrum in terms of focus and in terms of size. They took those best practices and tried to create RM Communities about three years ago to be the best combination of some of those qualities. So I like to think that we’ve sort of stolen some of the best ideas from a lot of different sponsors and created our own direct acquisition arm and that’s what we’re doing today. Acquisition wise, we’re focused on middle market, multi-family opportunities and mixed use. We acquire A and B assets in strong secondary and tertiary markets and that’s really two strategies, value add and growth. Value add being a little bit...I’m sorry, value add and core plus. Value add being the more growth oriented strategy. Core plus being a little more income oriented. This allows us to be a little bit nimbler with those two strategies, very focused on multi-family and certain markets. But the two strategies allow us to take a bit of a barbell approach and go where the best opportunities lie. Next slide.

Next slide what I really want to do is give you just a very quick overview of asset management. Christian’s going to walk you through some of the strategies that we’re undertaking this year to maximize value in the portfolio, some of it to address specific concerns about the current environment, some of it to just continue executing on our business plans. Christian’s very modest, I’m sure he’ll probably undersell his experience, but let me just say he brings tremendous experience from an institutional background and really has taken our asset management team to another level. Really happy to have him on the team. Christian, if you would, I’d love if you could give us just a quick bio and then why don’t you walk us through a few slides in terms of strategic initiatives that we’re undertaking on the asset management side.

Christian Popoff:

Absolutely, Todd, thank you and good afternoon, good evening everybody that’ve joined us. Thank you for your time and it’s a pleasure to be able to present this to you. I guess in terms of myself, I’ve been in the industry for about 17 years, both on the institutional and family office side, basically running the gamut in terms of property types from multi-family, office, industrial, retail and hospitality. And I’ve been able to join a fantastic team headed by Todd here at RM Communities under Realty Mogul and really excited about the possibilities that the firm, the company and our investor base really have to be able to untap here in the coming year. So, with that, I would like to start the asset management segment. And I guess just to start as a primary focus, the asset management team, their goal is to carry out the respective property business plans. Key components include close collaboration with our property managers, lender relations, insurance policy administration, capital project oversight, and also maintain a close working relationship with our acquisitions team just to name a few areas of focus. So with that we’ll jump into the update and we’ll provide a summary of the portfolio here and the information along with the carriers of focus for 2023.

So in this slide right here we have a highlight of the portfolio itself, number of properties highlighted off to the left and then also a summary off to the right of some of the salient facts. Overall, the portfolio is comprised of 14 assets including 13 multi-family properties and one medical office building. We’ve successfully delivered on one asset full cycle. Property’s name is Terrace Hill Apartments. It’s located in El Paso. It achieved a 21 point or 23.1% IR at the deal level when the property sold in November 2021. As for the existing portfolio, which includes 12 multi-family properties, that comprises over 1600 units, two of which also have a mixed use component, which adds about 17,000 square feet of retail. And as I mentioned before, we do have the one medical office building, which is a three-story property in Lubbock that’s leased entirely to a single triple net user. So that’s a summary of the portfolio on a high level and let’s move into some of the performance metrics.

So this is a slide detailing out the inception to date financial performance for the portfolio. Since acquisition on these deals our multi-family portfolios performed largely in line with pro forma on aggregate basis. This has been due to an emphasis on really three overarching metrics which we have bullet pointed there, which is a focus on stable occupancy, identifying opportunities to enhance revenue growth and also a tight measure on controlling our expenses to protect our bottom line. As for the portfolio itself, revenue and expenses are largely on target with our projections as you could see there. And what this does is it translates to a net operating income that is in line with overall expectations along with our occupancy goals as well.

So in terms of the portfolio itself, one of the areas we wanted to focus on in the presentation is a financing update. It’s important to note that all but two of the properties in the portfolio are financed with long-term low rate fixed rate debt. There’s no debt maturities coming due in 2023 and by and large majority of them are from 2027 and beyond. For our two floating rate debt deals, which we see off to the right there, a pie chart showing the aggregate I guess split between fixed rate and the floating debt. We do see some challenges and we are feeling some pressures that we wanted to talk about today. To put that statement into perspective, over the course of 2022, we realized a 60% increase in our monthly debt service and that was since January of last year.

That being said, we do have rate cap agreements in place that extend past 2023, so we have the benefit of those through this year and those ultimately limit our exposure and have actively been paying monthly settlements to us since August of 2022 of last year. And in the meantime, we continue to keep our options open for our properties with floating rate debt, namely the two that we do have. This means that we’re keeping our ear to the ground on potential refinances that would be accretive to both properties and we’ve also implemented a backstop in the interim by preserving cash and have postponed quarterly distributions in anticipation of purchasing further future cap rates when current agreements expire on the back half of 2024 to continue to take advantage of those hedges.

So focusing on the efficiencies of property and asset management for a second here in this next slide. In terms of operations, we anticipate that this year in 2023 will offer its fair share of challenges, especially operationally. For this year our team will bring a strong emphasis on bringing back the property management basics. Now what does that actually mean? We got a couple of slide or bullet points here that we’ll touch on. And as an overarching comment, we strive to hold our properties to a position that’s managed strategically, thoughtfully, and passionately for lack of a better word. In challenging times, properties with a strong business plan and solid operations yield higher cash flow. They suffer less turnover. They retain onsite staff and there’s a better control of the bottom line. And really how is this best done? And I believe and we believe that we’ve highlighted a few essential items here that are going to be part of our focus for the year on how the property’s going to be best positioned for success.

And really going from the second bullet point down, we believe that one of the words that we’re going to speak on is stability and we believe that that’s twofold. The first is in unit inventory and that’s maximizing the amount of downtime that a unit is down. There’s an old adage where you hear that phrase, “You cannot sell from an empty wagon,” and this largely translates into having rent ready units available as vacancy allows to meet demand for prospective tenants. Having that availability for tenants to be able to walk through the front door to maximize and be able to occupy units is going to be key. Also, maintaining a strong resident base. That’s going to be key as well, which has numerous benefits including a foundation for a safe and attractive community. Retention is paramount, especially in this year. Building off of a strong resident based concept, a strong tenant profile leads to stability, which is vital when traffic from prospective residences is choppy or sporadic. It also cultivates a strong sense of community within the property, which is commonly a natural crime deterrent, which is a vital benefit.

Customer service is a key that we focus on as well, which is essential and a vital role to be able to stand out to prospective residents and current residents alike. It’s a key to resident retention and also allows us to put a shine against some of our competitive set when it comes to having a good sense of when people walk through the front door, they feel like they’re cared for. Turnover, although it’s expensive, in some cases it’s necessary. There’s healthy turnover and there’s poor turnover. Healthy turnover improves tenant profile and achieves rental increases. Poor tenant turnover is where you see good residents leave for competing properties or for other markets. This leads to higher vacancy fluctuation, a higher degree of unit costs, turn costs and a greater investment in marketing expense to source replacement residents. We also look to continue to evaluate implementing technology smartly to drive efficiencies. This could take various forms and we’ll touch on that in a few minutes with some of the initiatives that we’ll highlight for the year.

And finally what we’ll touch on with this slide is the regular communication and collaboration the RM asset management team does have with our property management partners. This is vital communication. Early and often is key and what we do and make sure it’s a point on our end is to make it a point to review the current trends, make sure that we have our finger on the pulse of operations, marketing strategy, and any capital projects that might be underway. And that gives us the ability to lead, especially through potential uncertain times. And what this does overall is if all this comes in line, our intent and really our role within the firm is to maximize cash flow on the bottom line in the portfolio.

And what this does is maximizing cash flow preserves a basis to provide a strong or a powerful ballast during a recession when property values can decline and fluctuate. As property valuations tend to slide, properties that maintain cash flow consistently retain higher values over the long run. It also allows us to understand and maintain market rents at prevailing rates on both new leases and renewals. And one of the things that is a common overlooked theme, especially when maximizing cash flow, is additional sources of income. And that’s one of our focuses here and that could take many different forms. Focusing on rents is a low hanging fruit in the collections, but really thinking outside the box to be able to source additional fees such as reserved or covered parking, fees related to amenities such as package locker storage services, pet friendly amenities such as pet rent and bark parks and things like that are key income drivers as well. And then also in the communities where it makes sense, offering services such as valet trash, which a lot of residents do benefit from as well.

And the bottom two points we wanted to touch on to also protect and maximize the bottom line is really being able to review and scrutinize our capital expenditure plans to ensure new dollars that are spent, are spent efficiently. But not only that, are they creating value to the properties and then what is that going to look like in the future? Not only to perspective residents, as demands for further amenities continue to evolve, but also if and when time comes for an exit, how is that going to appeal towards the market and a potential buyer pool?

And then obviously the last thing and certainly not the least on an annual basis, we look to evaluate and appeal respective assessor’s proposed property tax values. Depending on where you are in the country, property tax values from an assessor’s standpoint are a very strong income revenue driver to those counties and some assessors really, really try to drive values every year to enhance that revenue. That’s something that we keep our finger on the pulse on as well to make sure that we’re protecting our investments.

In terms of portfolio initiatives for 2023, we touched on this previously before. We’d like to go into a little bit more of a detail. The addition of technology and alternatives to achieve utility cost savings is a key component of ours. We’re looking to roll out enhanced uses of tech to reduce payroll costs to the property. This will include things such as self-guiding tours to prospective tenants, implementing further ways for residents, prospects, and the staff to communicate virtually or electronically, which would also eliminate certain needs for first staffing, and then also automation on the back of the house systems to bring efficiencies.

We also plan to test and roll out a pilot EV charging station program at select properties in 2023 as well. And then also one of the things that’s near and dear to us is being able to be as environmentally friendly as possible and that translates into conservation measures both from electrical and also a water standpoint. And that comes in the form of low flow water fixtures, faucet aerators, installing further insulation as needed, LED light fixture installation, and also smart thermostats, which all these things rolled up into one if you market it correctly, are actually a really big resident appeal because it also affects them in their bottom line utility costs as well.

In terms of the final two portfolio initiatives, one of the key things that I’m really excited about is consolidating our insurance policies into a master program. Right now they’re individually based. A consolidation is expected to reduce annual premiums and the economies of scale that come with it. This will bring not only uniformity to the policy coverages, it’ll standardize the claims process. And one of the other benefits to the RM team will also be is it’ll establish a single point of contact for our acquisitions team to obtain timely and accurate quotes on deals that they’re actually pursuing in their underwriting efforts.

And then as I touched on before, tax appeal programs are something that we’ve introduced over the last couple years. We’re actually formalizing into a national appeal program with one of the major firms that we’re going to be partnering with. And then what that’s going to do is it’s going to consolidate our annual efforts on a portfolio basis, both in evaluating the values and also carrying out appeal processes and in jurisdictions that allow it file lawsuits to be able to protect our interests as well. And that in and of itself covers the asset management component of the presentation. Todd, back over to you.

Todd Hanson:

Thanks Christian, really appreciate the in-depth review there. So now we wanted to jump into a review of 2022. Two questions that came up in the Q and A as I was looking, as Christian was speaking, I just want to address head on. The two properties that have floating rate debt in our portfolio are Sherwood Oaks and King’s Landing. As Christian mentioned, we have really favorable rate caps in place there that extend well into 2024. So not a near term concern but something we’re keeping an eye on. Nothing we’ve talked about in terms of distributions or anything have any bearing on our affiliate REITs. We have an income REIT and a growth REIT that are affiliates of RM Communities and to my knowledge there is no deviation from their continued ongoing distribution plans there. They continue to distribute at a really high rate. So those were unique to those specific properties. Nothing we’re talking about here is anything related to the distribution plans for our REITs and we expect those to continue to be strong. We’ll continue to look at questions and we’ll hit a bunch of them at the end.

Quickly through 2022, so more questions than answers. The Fed, can we get a soft landing? Is inflation transitory? Clearly not. A lot of uncertainty. One thing we do know is that monetary policy acts with a lag. So Fed’s been super aggressive. We haven’t even really seen the full effect in the economy of those rate hikes and it usually takes some period of time to see the impact. Obviously Fed rate hikes, rising interest rates, rising inflation all has impact on returns. So the cost of financing’s increased but for how long and what impact on things like cap rates and other acquisition metrics.

We have seen in the second half of 2022 some softness in rents and occupancy, but coming off a really high level. So we were performing sort of historically strong and we sort of regressed to something that feels a little bit like more like pre COVID type environment. So nothing to be concerned about, but we have seen softness relative to where we were at the start of 2022. So something to keep an eye on. The other thing is anytime you’re in an inflationary environment, you start to see input costs up. So that means construction costs become more expensive. It also impacts renovation plans. So on our value add renovation plans, everything we’re doing we have to keep an eye on inflation. Those materials are impacted by supply constraints but also by cost increases. At the same time, you have a really significant new construction supply pipeline of multi-family properties being delivered in the next couple years. At the end of 2022 you had almost a million units sort of in the pipeline, about half of that scheduled to be delivered in 2023.

So that’s a lot of supply. The interesting fact there is most of that’s heavily concentrated in just a handful of markets, but it’s something that we’re trying to really be cognizant of as we pick our spots and pick our markets because I think too much supply that’s difficult for a market to absorb can really impact an entire market. It has a ripple down effect as lease up programs use concessions and other things to get leased up. So we’re monitoring that carefully. Next slide and we’re one slide ahead if you would. Thanks.

So economic highlights, we saw negative GDP growth in the first half of the year, bounce back in the second half of the year. Very hawkish Fed, in fact fastest pace of rate hikes that we’ve really ever seen in 2022. US stock indices all were in bear market territory during the year. We had supply strain stress that impacted commodities and food. Labor markets held up really well. We’ve seen some waves of layoffs but really concentrated in the tech market. Housing prices falling in many metros after peaking basically right at the start of the summer. And then something we keep an eye on is sort of household balance sheets. So we’ve seen average credit card balances inching upward, starting to see some stretch balance sheets among households, but we’re coming from a really good level. At the start of 2022, households came in about as well positioned as you could possibly be for a recession. Some of that money’s starting to be spent, nothing alarming yet, but we are seeing some tick up in that sort of strain on household balance sheets. The key point is kind of it’s a tale of two halves. First half of the year, extremely strong, not sustainable type growth. Second half of the year sort of reversion to the mean, some softness and fundamentals sort of holding up pretty well.

The thing I would say is if you had members of the Fed listening to our investment committee calls, I think they’d be all high fiving each other because they’re worried about too much froth in the economy. We’re in our investment committee meetings talking about how to be more conservative, how we’re being impacted by the high cost of debt, ways that Christian touched on that we can mitigate high labor costs. All of those things are things that the Fed would want. If they were listening to our investment committee meetings, I think they’d all be pretty pleased and feel like the rate hikes they’ve implemented to date are starting to take effect. Next slide.

As I said, inflation’s proven to be anything but transitory. I think we’re probably in a different environment. The easy work was done getting back to the level we’re at. So at the end of the year we were at 6.5% inflation, with six to eight months of declining CPI. Don’t know that the next part, getting back to that kind of 2% target for the Fed is going to be as easy. I think there’s a lot of wood to chop there and I think this year we’re not going to get back to 2%. So we are starting to model in a little higher inflation on the cost side.

In fact, in the first 36 months of the 2020s we’ve seen 15.6% inflation. So in 36 months into the 2020s, 15.6. The entire 2010s decade, it only saw 18.8% inflation. I think that chart here kind of illustrates. We’re in a much higher inflation sort of regime. Don’t think we’re going to be anywhere near where we currently are on a sustainable level. There’s too many demographic factors in play, but I do think what’s going to be difficult to get back to and sustain that kind of 2% Fed target level. Next slide.

The other thing that goes with that is the major reversal in long-term trends of interest rates. So here you can see a chart of the 10-year treasury yield. I think what we’ve seen is a breakout of this sort of long-term trend downward that’s sort of lower for longer. This is a really dramatic change. If this is a permanent change where we’re sort of back into a slightly higher interest rate environment, it has implications for all kinds of investments. One that we’re trying to accommodate in our underwriting. I think there’s many young investors out there, people who aren’t students of history who have been conditioned to believe that rates only go down over time and inflation isn’t really a real thing. It’s just a thing that people talk about in economics books. This is something that probably is going to be with us for a while, not necessarily anything that looks like the late seventies or the early eighties, but I think we are going to have slightly higher inflation and we are probably in a world that has slightly higher rates than we’ve been conditioned to believe particularly in the last few years. Next slide.

2022 kind of ended with a whimper. As I said, second half of the year was softer. Multi-family rent growth declined for four consecutive months on a national basis. That’s really minor in the grand scheme of things. And for the year we had 6.2% rent growth. You’d jump for joy to get that any year. That’s absolutely amazing. But when you think about how much of that came in the first half of the year and the softness that we’ve seen in the last few months, some of that in the last couple months is normal seasonality, which we’d expect. Some of it is just general softness or sort of coming back to earth.

What’s interesting is the deepest rent declines that we’ve seen the last few months have been in the tech-heavy markets and also in cities that really benefited from the strong COVID net in migration trends. So I think what you had there was maybe you pulled forward a bunch of demand. You also started bumping up against some affordability issues as well as some new supply coming online. From a vacancy perspective on a national basis, still really healthy. I mean we hit a low during the year of 2.5%, which is just unbelievable. Almost hard to believe that was a national vacancy level. Right back at just below 5% at the end of the year in 2022. That’s normal. That’s really healthy. Not something to be concerned about, but something we’re keeping an eye on, particularly in those markets with a big new supply pipeline. Next slide.

So, with that slowing demand, what is happening? We are, as I said, we’re starting to see a tick down in demand. I think some of that is in that household formation. So in 2021 we saw a huge increase in household formation, largely due to COVID and stronger household balance sheets. Some of that was sort of, I think we pulled forward, but some of it was uncertainty. So 2022, one of the most Googled terms month after month in 2022 was recession, things like that. People get spooked. That impacts consumer confidence. And if you are scared, if you’re feeling uncertain human nature is that you stay put. You don’t move out of mom and dad’s basement. You don’t move out of your apartment with your roommate and get your own place. You sort of stay put. And that’s really what we saw. We saw low turnover in 2022 and we saw slow household formation.

Now those households are going to happen. Eventually, junior’s going to move out of mom and dad’s basement. Eventually, I no longer want to have a roommate, get my own place. That’s household formations, that should happen. It’s not like you use it or lose it. It just becomes a coiled spring. So a little bit of burning off what had been pulled forward in 2021. There’s going to be some pent-up demand. What we did see that I think supports this is consumer confidence index out of University of Michigan dropped pretty dramatically. We were up at 88.3% earlier in the year. We got down to a low of 50, which is a historically low reading. That was back in June of this year. That’s a lower reading than we saw in the GFC or even during the stagflation in the eighties.

So we’re back at a much more healthy level of 64 at the end of December. But I think some of this is consumer confidence. When they get a little more confidence that jobs are secure that we’re not going to be in this dramatic recession, I think you see some of that household information come back and that supports demand and supports occupancy. So you could probably take from my commentary that this isn’t a time to panic. There’s no massive wave of move-outs. In fact, renter turnover was at historically low levels, no big jump in unpaid rent. So collection’s really strong. It’s about 96% paid on time. No indication of doubling up. We’re not seeing it in what the REITs are talking about. We’re not seeing our own portfolio, we’re not seeing it anywhere.

And doubling up is sort of the opposite of forming a household. It’s losing households. We’re not seeing that yet. And no real flight to affordability. So there are markets where affordability is becoming an issue, but in general, renters really aren’t moving down to more affordable units or to more affordable markets. The drop in demand was really consistent across products and across markets. So not time to panic. And part of that reason is strength in the labor market. We’ve got still have over 1.7 job openings per unemployed worker. This supports wage growth and it means that if you want a job, there’s jobs out there which is really good. That supports wage growth. It supports consumer confidence, and if that continues, it should support demand for apartments and ability to pay. Next slide.

Again, we talked about 2022 is sort of a tale of two halves, the good and the bad. First half felt a little bit like a Lionel Messi. Second half felt a little bit in Sam Bankman-Fried. Interest rates matter, location matters, capital structure matters, all the more. Real estate is cyclical. Sometimes we need to be reminded of that. The economy’s cyclical. Now, multi-family is probably the least cyclical of the real estate food groups because you always need a place to live and it’s still a great place to invest. One lesson we did learn in 2022, we tried to own our mistakes.

We did have a failed transaction in 2022. So we had signed a purchase in an asset in a Pacific Northwest in the second half of the year, put up some significant hard money and actually did a webinar and put it out to our investors. And during our due diligence period, we actually discovered something that we felt changed the risk profile of the property. We went back to the seller to discuss it. They weren’t willing to give an appropriate price concession. And so we backed out of that transaction. Now we got our deposit back. We always structure our acquisitions that if something comes up in due diligence that wasn’t previously disclosed, we would get our deposit back. But we did end up spending a significant amount of money, well over six figures on deal pursuit costs. Now, not a single penny of our investors’ money was put at risk there. Not a single penny of our investor’s money was lost there. That all came out of RM Communities funds. So that was a painful experience, but we would gladly do that all day long than ever put your money at risk in a deal that we didn’t believe in. So, when the facts changed, we changed our approach there and we were happy to eat those dead deal or pursuit costs, rather than put a deal that we didn’t believe in or that wasn’t going to meet our investor’s expectations. So great lesson there, but I think we’d do the exact same thing again if the same thing came up. We spent a lot of money upfront on transactions doing our due diligence so that we’re not closing on deals and getting surprised or being not able to execute on the business plan we promised our investors. Next slide.

So, 2022 headwinds. We underwrote several hundred deals in 2022. We bid on roughly 100 properties. We closed on two transactions, both in the first half of the year. We believe that better opportunities would come this year and we’re already seeing that. So slow year for us last year, but I think our patience will pay off. Next slide.

I think that sets up a little bit of how we’re seeing 2022. So, let’s talk a little bit about our 2023 forecast. Obviously, we’re not naive enough to think we can truly predict the future so we can know where we are currently, and we can prepare as best we can. So that’s what we’re really trying to do here. We’re not trying to be prognosticators or make a bunch of big market calls. What we can really know is where we are in the cycle. I think we have a good sense of where we are in that cycle, well past the peak.

I think another thing is to focus on how much optimism or pessimism is being priced into assets. So, we can all agree that Florida’s a really good market. If you invested in Florida in the last 10 years, you probably did well. But when we go to look at assets in Florida, oftentimes all that good news and then some is already priced into the deal. So, there’s really not much left there, you’ve already paid for all the good news. And then I’m not so sure sometimes in a deal in Florida, and I don’t mean to pick on Florida, we love Florida, but right now pricing doesn’t always make sense. Look, we saw a hurricane in Florida last year. Insurance is becoming prohibitively expensive in certain markets in Florida. Sometimes that risk isn’t always priced into deals. And so, when you go to a deal and all of the upsides already priced in and some of the risks aren’t properly being priced in, that’s maybe second order thinking where you need to say, that’s not the right time or place for us to be investing.

So, if there’s too much optimism priced into a deal, you need to walk away. Even if we can all agree that Florida’s a great market and will continue to benefit from things like net migration and job growth. Again, not to pick on Florida, but just as a good example. Similarly, there’s some markets that have a lot of pessimism, maybe too much priced in, and those are the markets where we want to be investing in. At the end of the day, there’s no asset or no market so good that it can’t be overpriced. So, our micro-focus for 2023 is really on the Fed, local job markets, regulatory threats, things like rent control, affordability in the for-rent, and affordability in the for-sale housing markets. Next slide.

Looking ahead, I think action from the fed would be the key factor this year in determining how things play out. If they’re able to execute a soft landing, should be a great year for commercial real estate. If not, I still don’t think we’re going to have a deep and protracted recession, especially given the things we’ve talked about in the job market. But we could very well see a soft recession in the back half of the year. The labor market is going to be key for a multifamily, as is consumer confidence. So, getting some certainty, if the Fed could get to a place where they can pause, let the rate hikes play out, I think we get to a much better place and we probably get more certainty in the lending environment. Some of the bid ask spreads on purchases, start to narrow and probably a better transaction environment this year. That’s what we’re really focused on. Next slide.

Again, this is one of the places we’re hanging our hat that we feel good about 2023. Super strong job growth. We added 4.5 million jobs last year, which is great in a rate hiking environment. And even in December 223,000 jobs, higher than expected. That’s net jobs added. Very low unemployment. We’re at 3.5% unemployment. That’s the lowest rate since 1969. That’s just incredible. The one thing I’d say here is we do know unemployment is a lagging indicator. And historically unemployment tends to trough right before a recession. I think you can actually see that pretty well on the chart on the bottom right. So, by the time you’re in a recession, you’re just starting to see a little tick up in unemployment. And same with when Fed starts cutting rates. So, it is a lagging indicator. But at the current time, employment market’s super strong. Next slide.

Along with that strong employment, strong wage growth. We’ve seen that in this chart. Unfortunately for people who’d like to buy a first-time home, home prices have grown much faster over the last 20 years. So, when home pricing grows much faster than wage growth, it just prices more and more people out of the market. That helps support rental demand because you can’t go from renting to buying, it’s just too expensive. People are delaying that decision, particularly in some of the more desirable markets that have extremely high pricing in the for-sale home market. Next slide, please.

This slide basically says the same thing but in a slightly different way. I just think this is so important to understand, historically, for sale housing affordability, and multifamily vacancy are basically correlated. So, the more expensive it is to own, the more people rent, and vacancy drops. And the converse is also true there. So right now, we’re basically at the highest level of premium to own versus rent that we’ve seen in the last 20 years. And you can see that in this chart up and top. The blue section means it’s more expensive to own than it is to rent. The bottom section is the purple, is that those short periods of time when it’s been more expensive to rent than to own. Now, people will always pay a slight premium. So, in general, the trend is it’s a little more expensive to own. That’s part of the American dream, and we want that.

But in this environment, partly because home prices have gone up, partly because borrowing costs have gone up, it is prohibitively expensive to go become a first-time homeowner if you’re renting for many, many renters. So, I think that just further extends the runway for a lot of renters that will stay renters. It’s unfortunate, but it does benefit demand for apartments. Next slide.

Where are cap rates headed? I think the short answer is higher. We talked about that their interest rates have started to move up. We saw that breaking that long term downward trend. Cap rates, there’s some correlation, but it’s pretty weak between cap rates and the 10-year Treasury. They do move in the same direction, but over the short and medium term, it’s really not that highly correlated. On the next slide you’ll see what’s actually more correlated with cap rates is triple B bonds.

So triple B bonds is the credit rating assessment. That’s the lowest tier of investment grade bonds. So relatively safe fixed income security. Typically, historically its average, multifamily cap rates have a spread of about 150 BPS to triple B bonds. That spread was negative or really narrow for most of 2022, second half, let’s call it. And so, one of two things has to happen. Either cap rates have to go up or triple B bonds have to go down, or some combination of the two. But we think that some markets have really adjusted in terms of cap rates. Some markets really haven’t adjusted at all. And so, those markets, we do think there’ll be some expansion of cap rates and we’re biding our time in those particular markets that have been slow to recognize this change in regime.

I also think that higher cap rate markets can absorb an increase in rates and an increase in cap rate just from a denominator effect. If you’re a very low cap rate market, any change in cap rates can have a pretty dramatic impact on values. So again, further supports that thought of maybe right now is the time to be in some of those Midwest and Rust Belt markets that have materially higher going in cap rates. Next slide.

So, look, rent, growth and delinquency, really strong. I’m not going to spend too much time on here. But even though we’ve dropped off from the first half of the year, we’re coming into a market where we still saw, for the year, really great rent growth, and really no tick up in delinquency. On this chart at the top right, I just note that new leases are trending below renewals. And it’s one of the reasons Christian, in his strategic discussion, was emphasizing resident retention and renewals earlier. Next slide.

So, our 2023 game plan, how does all that impact us? Well, we start with our five Ps framework, which is something we like to focus on as we’re evaluating opportunities and thinking about our strategy. First P is price. Remember, price is what you pay, but value is what you get. So, we’re focused on value and price has to match value. Place, what are the qualities that make a particular location durable with longer term upside? Our partners, again, it’s a people business, capital partners, lenders, equity investors, as well as property managers, residents. Our partners are what make these things work. And we are fortunate enough to have wonderful partners, including many of you on this call who are our equity partners in some of our deals. Process, how do we minimize execution risk? So that’s part of the due diligence process. But also, once we close on a deal, how do we make sure we execute really efficiently on a business plan and stay nimble enough to adjust the business plan if market conditions dictate? And then product, how can we create something wonderful for residents?

So, I think if you keep that in mind, creating something that’s going to give somebody a pride of where they live, that they’re going to feel safe and comfortable, I think over the long run, you do really well. So, creating something wonderful for your residents is good business and good for returns. Next slide.

Target markets. I think the thing I really want to emphasize here is there is no one apartment market. A lot of this presentation, we’ve been talking about national trends, but each market really is different and there’s dramatic differences from market to market. And I think you always have to remember, really what we’re talking about is a collection of individual markets, but individual trends, individual drivers, and you really need to understand market by market. So, it’s really an oversight to just gloss over everything on a national basis. We look at a number of factors.

Our thought this year is I think many people on this call will be surprised to know that six Midwestern markets ranked in the top 10 for the fastest annual rent growth at the end of 2022. And those markets, if you sat in our investment committee meetings in the last year, I think you’d see that those markets are really some of the main markets we focused on in the last year in terms of our existing portfolio and in terms of where we were targeting acquisitions, which is pretty interesting. But those markets ended up in the top 10 for rent growth for the year, for 2022. Pretty interesting. Next slide.

This is something people don’t talk about enough and I think it’s really interesting, demographics is destiny. So, we all know millennials are a huge pig in the python in terms of demographics, the echo to baby boomers. Overall, millennials are aging into their home buying years. And that cohort behind them of younger people entering the workforce is smaller, so that smaller cohort is that typical renter profile, call it 20 to 29. As people get into the 30 to 39 ages, those are those first time home buyers. They’re putting down roots starting families. Those tend to be more first-time home buyers. Right now, because home ownership is so expensive, I think we’re prolonging some of those demographic trends. This isn’t some cliff demographic story, but it is something we try to monitor really closely. Keep in mind this is nationally. Each market has its own demographic story, so it’s really important to understand individual markets, the demographics in terms of age, in terms of income profile, all the different things.

But this is a really interesting slide when you think about where that millennial cohort is in their life cycle. And in certain markets, those millennials really have settled down. And some of them, either because it’s cost prohibitive or because they want the flexibility, they’re delaying that home ownership decision and so they’re still renters. And so, trying to find the right mix of that, taking into consideration the demographics here is pretty important. Next slide, please.

Just look. We obviously focus on risk, so we’re trying to find ways to mitigate that, keeping our capital safe. Debt right now is critical. With debt becoming more expensive it’s really important to focus on the details, and we’re trying to do that. We’re also trying to focus on really staying on top of our asset managers to get weekly feedback from what we’re seeing in our portfolio, incorporating that in the existing operations, but also incorporating in our underwrite.

We talked early in this call about how much data our parent company sees, Realty Mogul, the number of transactions. We have the ability to leverage a lot of that information. So, we’re able to see trends in real time and adapt our underwriting to where we see opportunities. And as importantly, in investing, oftentimes it’s about avoiding the big misstep, not finding the home run necessarily, but avoiding big missteps. And so, with more data, I think we’re able to be a little more efficient, and probably avoid more mistakes. Next slide.

So, all that comes to right now, I think we’re being pretty conservative in our underwriting. We’re trying to account for higher inflation, which we do believe is here for a while. We’re decreasing leverage. We’re targeting more flexible debt products. We’re not trying to trail blaze a new business plan in new sub-markets. I think we’re sticking to our knitting.

We’re not going to be the group that’s going to convert an office building to multifamily right now. This isn’t the time in the market, and we’re probably not that team today to be doing that. We’re trying to stick to the knitting. When things are a little bit more volatile, I think what you do is you keep to your core, and you keep to your core competencies. So that’s what we’re trying to do. Identifying the right assets in the right locations, using leverage responsibly. Adhering to a prudent investment approach, makes us well positioned to ride out any shorter-term volatility. And again, we still believe there are tremendous opportunities to invest this year. Last slide and then we’ll get into some Q&A.

Look, the fundamentals are great. We think that multifamily in particular is really well positioned. We think that there are some headwinds coming into the year, but as we get more certainty, the Fed stops hiking. I think it’ll just give everybody a little more confidence to transact.

Hopefully the labor market holds up. It’s extremely strong right now, and we feel good about that. That’s very helpful. One question we have, and we’re trying to keep our focus on is cap rates and borrowing costs. But they will normalize over time, we’ve seen volatility there. The question is whether we’re in a new normal. I think we are, not anything dramatic but slightly different. That’s going to feel a little more like pre-COVID levels. So, a lot of what we’re talking about is reverting back to a pre-COVID environment as opposed to what we’ve seen for the last 30 months, something like that. I think if you weather this storm, if you stay prudent, if you stick to your knitting, I think there are tremendous opportunities. You know, if all else fails, you revert back to that investor guru, Mr. Buffet. Of course, I’m talking about Jimmy Buffett. If life gives you limes, make margaritas. I think I can’t say it any better than that. So just one more slide I wanted to highlight, two forward, couple things for those of you that invested with us in the past are interested, a couple new things that we’re launching for 2023 then we’ll get into Q&A.

We will go over here, happy to stick around and continue to answer questions. We’re going to be doing some 1031 offerings this year for those interested in deferring some taxes and investing in 1031 opportunities. That’s something that RM Communities will be doing. Including in our existing offerings, we’re going to offer the ability, the option, not the requirement, that you could, at the end of an investment cycle, reinvest your investment and further defer capital gains. We are doing more work on cost segregation and allocating potentially additional depreciation to investors, so it’s really about not what you make but what you keep.

I think that’s a recurring theme we’re trying to shoot for this year. When returns become more difficult, taxes become all the more important. I think we do have an upcoming opportunity; we’ve tied it up, signed a PSA, it’s in the Pacific Northwest. We’re really excited about it. Should see that in the next month, it’s larger unit, town-home product. We’ve negotiated a significant price concession there. And we’ve got efficiencies in the market that this property’s located in that we think will bring just that much more value to our investors, and we look forward to talking to you more about that with that. Look, I want to thank you all for taking time today. We really appreciate that you sat through that. Hopefully you found some of that helpful. At least it’ll give you some insight to how we think about things. Looking forward to a really opportunistic year and now I’m going to turn to trying to hit as many Q&A questions as I can.

So let me just quickly go there. And thank you for those who turned in questions. This is really your call, so let’s hit as many of these we can.

So, a question here about development and whether development opportunities are right. Look, I think development’s a phenomenal way to create long-term value. Development, in my mind, is riskier than investing in stabilized assets. So, we don’t do development ourselves, right now. We have worked with developer partners who have built assets that we acquire, or we’ll co-invest with them, but our team is not in the business of developing. I think right now there is a tremendous amount of supply in certain markets. I’d be nervous about developing in certain urban core markets that have a huge supply pipeline. It’s not about the number of units so much it is as the amount of units relative to the existing stock. So, if I’m in New York City and I’m adding 1,000 units, not a problem. If I’m in Podunk, Iowa and I’m adding 1,000 units, that could be a real problem because there’s just not enough demand in that market, and it represents a huge portion of the existing stock. So, you got to be careful there. But look, development deals are really attractive. The key there is that you’re working with a really good operator and that you’re in a market, and you’ve done your homework. But a really good operator can create a tremendous amount of value. We like assets, that cash flow. Development obviously has a long period of time that it’s not cash flowing. And part of that is part of that risk profile when I say development generally is a higher risk investment than investing in stabilized assets.

How does one invest in RM Communities? So great question. I appreciate you asking that. So, we have individual offerings just like other sponsors on the platform, offerings that we think make sense for our platform investors to our members, we’ll put those out. We’ll do webinars, as I mentioned a moment ago, we’ll have one that should be hitting sometime during February. And you can reach out to your investor rep to ask more information, but any of our new offerings that come up, we will put them on the platform, and you’ll have an opportunity to do your due diligence, read the materials, see our webinar and invest with us. We’d love that. We really appreciate those of you who have already invested with us, and we would welcome more of you to take a look at us and see if we fit what you’re trying to achieve. We always say, what’s your why? And I like that answer to not be just a little more. Why, should be I want to create longevity, meaning I want to live a rich life or a legacy. What can I provide for future generations, my children, my future grandchildren, whatever it might be? Maybe it’s just, I want to work less and spend more time with my significant other. All those things are great whys. And then hopefully you heard some things today you can say, because what RM community stands for, are these the people that they would help me with my why, helping me live that rich life and achieve some of my objectives? We’d love to be that partner for you as part of your private real estate allocation. But you can take a look and hopefully learn something today.

Slide deck? I don’t believe we’re going to present it. This webinar is being recorded though, so it will be available for you to go back and listen to. I will check with our compliance if the deck can be shared. If it can, I’m happy to post it. But it’ll be up to our compliance team.

Couple other questions here. Thanks again for questions and thank you for staying on. “With a new wave of single-family homes to rent, how does this impact home affordability?” Are these products homes or apartments? So single family for rent is a rental unit. There are currently about 44 million rental households. About 35% of households rent, 125 million roughly households in the country, 44 million of them apartment. Single family rental’s been much more popular but renting out a home has been around for a long time. The only thing that’s changed is coming out of the GFC, some of the big aggregators created REITs and different portfolios to do it on a portfolio basis. But there’s always been mom and pops renting out 1, 2, 3 homes, that’s always been in existence. It’s a different business model. It doesn’t really compete directly with things like garden style multifamily. We like that product. It’s not so much what we do. How does it impact? Well, if you have more buyers buying single family homes to rent, so some big REIT is acquiring single family homes to rent, it does create more demand for that product. It does push up the price all else equal and so it does make it that much more difficult for entry level buyers. Single family rental is really big in certain markets. Atlanta, markets in Florida, markets in Texas. Less in some of the smaller markets, the price per door and the scalability just doesn’t work the same from a metric standpoint. So, some markets are really impacted by single family rentals, some are not. I think you really need to pay attention to that. The type of garden style product, the low-density product that we have, one of the things we think is differentiating is it has a lot of amenities. Some of the single-family rental stuff, particularly scattered site, doesn’t have those kinds of amenities, doesn’t have the high level of service, does obviously tend to be more expensive. But we’ll play on that spectrum in that we like larger floor plans, we like properties with private yards, places where people who are starting to nest or want something that feels more like a single-family home can still do that and get that in a rental community with all the amenities that come with being part of a traditional garden style multifamily rental product.

“Are there any types of specific deals we’re more likely to target in the case of a recession? In the worst case scenario where are the best opportunities?” So I think, look, if we do get a recession, my personal view is that it will not be deep or elongated. We could get that, and I think that’s certainly something everybody has to prepare for this year. If we don’t get one in 2023, there’s a good chance we’ll get one in 2024. I always think it’s funny when you hear somebody say, “I think there’s a good chance we’ll see a recession in the next two years.” Well, if you go back to World War II, we get a recession about every five years. So, at any point in time, historically on average, you’re either basically coming out of a recession or you’re heading towards a recession. Now, I think the Fed, everybody likes to pick on them, but I think they’ve done a pretty good job of moderating recessions. They’ve been much more tamed since World War II than we saw prior to World War II. But we’re still going to get recessions. The business cycle exists, we’re not going to get rid of the business cycle. There are recessions. The question is, is it a deep recession? Is it not, how well is the consumer positioned? And then your question specifically was, are there specific type of assets we would target? Well, I think if we are in a recession, and there’s dislocation, you’ve got weekend sellers and we would like to be opportunistic there to buy from weekend sellers who maybe didn’t prepare for a recession or didn’t properly capitalize their deal. But the other thing is, I think you go back to your core and focus on core product. If you get the chance, you move up in quality in terms of location, in terms of product. You want stability, I think in a recession is probably not the time you want to be doing a deep value add or something really risky. I think you can dial back your risk if you’re in the middle of a recession, but there’s opportunity. I think at any point in the business cycle there are always opportunities. The flip side of risk was opportunity. You just need to be careful, and I think where you get caught is where you don’t give yourself enough flexibility, where you don’t give yourself enough wiggle room, everything has to go just right and then your business plan fails because a recession happens to hit during your hold. If you’ve got wiggle room, if you’ve got cushion, I think you can ride that out. Because as I say about every four or five years, we do historically experience on average a recession, so you can’t assume on a 10-year hold that, well, there’s no way we’ll see a recession. You don’t necessarily model that, but you build in conservatism and cushion into your underwrite to accommodate that.

Climate change, great question. Really like that. Does it factor into our valuations? So, I think, look, regardless of how you feel about it, I think we could all agree that we’re seeing more extreme weather. And certain markets are probably more exposed to that than others. I think we talked about the Midwest and the Rust Belt. Climate, extreme weather, which to me really says insurance costs and risks. Part of the reason we like those markets is they are a little bit better prepared for extreme weather, a little bit better insulated from if we do have increased warming, if water becomes an issue. There are markets that, water long term is a real issue. If you’ve invested with people in Europe, I’ve done a lot of investing with capital from Europe. They are probably a decade at least ahead of us in terms of their focus on these types of factors. Less so in the U.S., but we’re seeing it among the institutions. I think that trend, moving forward it’ll be more reflected in valuation. What you don’t want to do is be buying a deal that has those risks in it and it’s not properly reflected in the price. If you’re doing that, then at some point the music stops and you’re the guy caught without a chair and that’s going to impact your ability to sell your property at the price you’re hoping for. So, I think you need to factor those things in. It’s a bit of a more subjective analysis, but I think there are certain markets that are more exposed than others. And one thing Christian would tell you is we are seeing really dramatic pressure on insurance costs in a lot of our markets, particularly those that are more impacted by more extreme weather and warming of the temperature that I think we’re seeing in a lot of markets.

Other questions, second half of 2023 for 1031s? Yes, absolutely. And our hope is to have 1031 opportunities launched first half of this year, but absolutely in the second half as well. Will we see more of that? Right now, there hasn’t been a lot of transactions last few months, so there’s probably less 1031 money chasing deals right now than there probably was in the first half of 2022 and that carries into 2023. The more transactions we see, the more 1031 capital there is. 1031 for those who aren’t as familiar is it’s a section of the tax code that allows real estate investors in particular to defer gains on real estate investments, and reinvest into other real property, and avoid paying the tax man. You don’t eliminate the taxes; you just defer paying the taxes. It’s a very effective real estate strategy for people who are long-term investors in real estate. And we want to create more opportunities for investors to take advantage of it through RM Communities.

Let’s see, a couple other questions. Solar at the properties? Yeah, absolutely. Christian talked a little bit about technology and some of the green things. We’ve explored it. I think in the last couple years the cost of solar has come down dramatically. There are also now subsidies and some of the legislation that’s been passed that’s available. So, we are looking for green opportunities, not for the sake of just doing green. We’re a for-profit business and we’re trying to maximize returns, but in a lot of cases we can do really well for the investors by doing good. So, by saving on a utilities costs, we can create value that passes through to investors, and solar is certainly one of them. Some markets’ obviously much more accommodative to solar than others. Pacific Northwest, solar, a little less viable, market like Phoenix or Vegas, solar makes a ton of sense. And we are looking at that, don’t have anything on the books to initiate, but we are doing reviews including evaluating some of the subsidies available in a number of markets where we can add that in. It’s a great point. It’s something we’re absolutely looking for.

No distribution suspended on any of the REITs. I touched on that, but I just wanted to reiterate that. Just trying to hit a couple more questions. I did hit the 1031. Hopefully that was helpful and coherent, my explanation of 1031. If you have questions, we do have a lot of information about 1031s on our website. Reach out to an investor rep, we’d be happy to walk you through it. It’s an important thing. If you’re investing in real estate, you really should be aware of 1031, but you need to talk with a tax advisor, you need a professional advising you because there’s traps for the unwary in a 1031. Minimum investment size? It really varies deal by deal. So, question here is, what are the minimum investment sizes? We do try to make them as available to as many people as possible at some point we would love to be as low as possible. There are very low or no minimums for some of our REITs. So I’d encourage you, if you’re just getting started and you want something with a minimum investment, that’s a great way to play it. Obviously do your homework there and read all the disclosures. But we do try to push as low as we can on the minimum investment size. Some of our deals are limited to the number of investors that can participate. So, because of that we do need to make a slightly higher minimum investment size. But our goal, look, we want as many people to participate in the benefits of private real estate as possible. So, our goal is to set those minimums so that as many people as possible can invest. That’s obviously our objective. We’re fully aligned on that front.

Maximizing portfolio, yes, we’re already doing those things. Many of them are specific initiatives that are in the business plan. So, the question was, on our maximizing value slide, are those things we’re talking about or things we’re actually doing? Things we’re actually doing. Those are initiatives that are in place and some of them are already taking place in 2022. Anything that wasn’t would be in the 2023 budgets and business plan.

RM Communities and investors, so somebody said, what’s the difference between RM Communities and an investor? So, RM Communities is the sponsor. We’re sourcing these deals, we’re underwriting these deals, we’re lining up the financing, we’re doing all of those things, including bringing capital to the deals. Then a part of our capital stack is often comprised with member investors that come on our platform. So many of the people in this audience have invested with us in the past. You would review the materials, if you think it makes sense for you, you would make a commitment or a pledge to invest in our deals, you’d become an investor. We’re the sponsor of that deal. So, what we’re doing is identifying the asset, making sure it closes, and then managing that asset to maximize the performance. Also, one of the great things about our infrastructure is we’re able to give you reporting. We’re going to handle all the tax reporting that you need in terms of K1s. All that stuff comes through us because we have great infrastructure, just makes it easy. So essentially you are a set it and forget it, passive investor. We’re getting our hands dirty day in, day out, finding the right deals, putting them out there, closing on them and taking them full cycle. So, difference between a sponsor and an investor. Investors are going to be largely you folks that are passive private real estate investors, and we do appreciate that, and we wouldn’t be here if it weren’t for you. You’re a big part of what we do, and everything we’re doing is trying to create more value for you.

Couple other questions. Oh, I think there’s a question about reinvesting the dividend or being paid in cash. So currently all of our deals for RM Communities, which is separate from the REITs, all of our deals are going to pay our distributions in cash. You’re going to receive an actual cash distribution. Note that because of the depreciation we’re able to allocate to you, you are not going to pay taxes on all of that. Oftentimes none of that ends up being taxable for the time being because of you’re also getting losses, but you would receive a cash distribution. Again, that theme of it’s more about what you keep and not just about what you make. The REITs, which are separate animal, those are private REITs and I’d encourage you to look into that on our website, they do have an option where you can do participate in the DRIP, dividend reinvestment program, which instead of taking your cash, if you’d rather reinvest it, you can have that distribution, just reinvested in more REIT shares.

And over time your ownership in the REIT will grow because you’re buying more shares with each distribution, which is a great way to invest. If you don’t need the cash now, dividend reinvestment, whether it’s in public equities or private real estate, is a great way to continue to grow your portfolio. So, something to think about, but obviously you need to assess for your personal situation if it’s best for you.

Let’s see. Just a couple more questions here. I apologize, I wish they were all just organized in one. EV charging as an amenity. Yeah, Christian mentioned that. EV charging absolutely is an amenity. Look, you look at some of the legislation that’s been passed recently, huge incentives to really transition to electric vehicles. California’s in a world where in the not distant future, we’re no longer going to allow the sale of new traditional combustion engines and it’s going to be all electric in terms of the new car market. I sit in California. So that is definitely where the puck’s going. Some markets are going to be a lot quicker to adopt that than others. So, you’re not going to bring EV charging stations to our workforce housing property in El Paso, Texas right now, maybe someday. But there are properties we have that absolutely make sense for EV charging. And we are implementing that as an amenity to residents, but also something that whether you pick it up in the rents because it’s an additional amenity or whether you’re charging residents to use it, ultimately we’re doing it because it’s a way to create more value for our residents, and in conjunction with that, create more value for our investors. So absolutely investing. We’ve got multiple properties, we’re doing some testing there this year, and hopefully rolling that out to more properties in the future, assuming things work. It’s become much more viable to do EV charging at properties now. And when you think about the number of EVs that are out there, and where the government projects that we will be in terms of the percentage of vehicles on the road that are electric, and you think that 35% of the households in the country are renters, a lot of apartment buildings are going to need EV charging stations because running an electrical cord from your kitchen out the front door to the parking garage is probably not viable. So we’re going to need electric charging stations if that’s where the puck’s going, and we certainly think it is, particularly in some markets in the near term.

Rust Belt cities, question there. We think that markets in Kentucky, Ohio, Michigan, Pittsburgh’s a great market, great university, anchored city, there are some huge things going on in a market like Columbus, in a market like Pittsburgh in terms of technology, in terms of benefiting from the CHIPS Act. We love markets that have a really strong research university anchor, like a Columbus, like a Pittsburgh. Those markets are really strong. You have a skilled workforce. With the university you have continually new highly educated students coming out looking for housing. Those people tend to be renters initially. We think those markets are really promising and you have much higher going in cap rates than you might in a market like Florida. We think some of those opportunities aren’t necessarily fully priced in a market like Columbus or Pittsburgh or Chicago. There’s challenges in Chicago, but anyone who’s spent any time in Chicago or even in the Midwest, you know what a Mecca for the Midwest Chicago is, and what a major industrial corridor it is, and with a major airport there and some phenomenal universities, Chicago’s a great market if you underwrite the right assumptions and you’re in the right sub-markets and you understand some of the things that are going on in Chicago from a property tech standpoint and otherwise. So hopefully that helps. Again, our theme on the Rust Belt is affordability, much more affordable than some of these Sun Belt markets that have really stretched there. And I think some of those markets are really strong, probably under-appreciatively so. So, there’s probably more opportunity there than some of those high flyer Sun Belt markets right now that, yes, everybody knows that Florida’s been a beneficiary of post-COVID migration and that there’s a lot of job creation in Florida. Or take a market like Austin, great market, love to live in Austin, nothing wrong with it at all, but has a ton of new supply in the pipeline. And so, we’re going to see some softness there in some of the sub-markets. Longer term, Austin’s going to be just fine, but I think in the short term it might not be the best market to be investing in because of the major supply pipeline, and it’s also oriented towards tech and we’re starting to see some tech layoffs. I think tech probably is the one industry that dramatically over-hired in the last couple years, so probably more layoffs to come particularly in tech. So a market like Austin might feel that more than a market like Pittsburgh, for example.

I think I’ve hit a lot of the questions. I apologize if I missed your question. I’m trying to hit as many as possible. Do we need to comply with ESG requirements? None of the specific SEC regulations, I think that’s what you’re referring to. The SEC has issued some requirements for public companies that’ll be phased in based on the size of the company that will require reporting on ESG factors. We take ESG into consideration and the way we underwrite. Being a good social citizen is great, environmental, I think you have to take that into consideration. If you ignore it, you’re probably being negligent in your underwriting. Governance, a little less so. I think we like to think that we have a pretty good structure in place in the way we operate the properties, in the way our investment committee operates. But ESG is a factor. It is not a specific requirement. None of our capital requires it, and it’s not something that we’re going to need to disclose. We’re doing it because it’s the right thing to do to maximize value, not just to be good guys. I love the fact that I can tell my kids that we’re doing green, we’re saving, helping preserve the environment, but I wouldn’t do it if I didn’t think it made sense economically for the property and for the residents. So again, that theme of doing well by doing good, that’s when it feels great. And I think that’s only going to become more important in the long term, but we aren’t bound by specific ESG requirements today.

Question there about, are some of our properties included in the REIT portfolios? Yes, they actually are. We’ve been lucky enough, keep in mind it’s an arm’s length relationship. We do have two affiliate REITs that are part of the Realty Mogul family. They separately underwrite deals. They separately review, do their due diligence. And for some of our deals that they thought made sense, they have invested in those deals. So absolutely, they are a partner on a number of deals in our portfolio. But that is arm’s length. It does give you a vote of confidence when the REIT reviews it and feels like it’s a great investment, but there’s no requirement there. There’s deals we would do that they wouldn’t like. We’d take different views on underwriting or the most desirable markets. But they’ve been a great partner for us, and they have invested in some of our deals, which has been a huge help to us, and great sanity check on our underwriting. When we like a deal, we show it to the REIT, and when they feel the same way, one of the REITs, that gives us confidence. But the thing I would highlight there is they’re investing in the same LP securities that we’re offering on the platform. So they’re going to be peri passu in all of the economics with the investors and all the deals they’ve participated to date. So they’re not getting a special treatment or some special deal. They’re heads up with the limited partner investors that are coming on the platform. Just something to keep in mind there so you’re getting the same investment that the REIT is.

Oh, somebody missed the first part. I think we’re recording this, assuming we didn’t script the technology, it would’ve been my fault. It’s going to be posted somewhere and you’ll be able to listen to it. And so that will be available. I’m not sure about the slides, but the presentation should be recorded and available.

I think I’ve hit all the questions. Look, we went over, but this was important. I wanted to hit as many of your questions as possible. Those of you who stayed with us, thank you for your time. Christian, obviously, thank you for participating, sharing your thoughts. I’m really glad that a lot of our investors got to see who you are and what you’re doing from an asset management standpoint. I think that helps people sleep well at night. It certainly helps me sleep well at night knowing you’re there.

Those of you who invested on our platform, thank you so much for placing your trust in us. Those of you who are still considering it or looking at, if you have questions, don’t hesitate to reach out, happy to answer that. We want to make sure that it’s the right fit if you are considering it. Thank you, everybody, for your time. We know everybody’s busy, especially this time of year, so we really value your time. Hopefully you found this helpful. If you have questions, don’t hesitate to reach out. And with that we’ll sign off. And hope everybody has a great year. Looking forward to more interactions with all of you. Thank you.