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Modular Build-To-Rent Housing, With Evergreen Property Partners
Evergreen Property Partners was a presenting partner at Alts Expo 2022, a one-day virtual event hosted by AltsDb on December 8, 2022. In this webinar, DJ Van Keuren presents a unique project in Texas with modular, affordable housing.
Interested In Learning More About This Opportunity?
Click here to visit the Evergreen Property Partners website to learn more about the company’s offerings.
- How rising interest rates and inflationary pressures are causing uncertainty and rippling throughout the U.S. economy.
- An overview of how enhanced economics in deal structures can boost bottom line returns to investors.
- What has caused the current shortage of workforce housing in the U.S., and how cost-efficient production of housing can benefit investors.
- A review of the Houston MSA, including a breakdown of employment by industry, and details on the favorable regulatory environment.
- Live Q&A with webinar attendees.
Connect With Evergreen Property Partners
- Evergreen Property Partners – Official Website
- A Deep Dive Into Family Office Research, With DJ Van Keuren (The Alternative Investment Podcast)
- Workforce Housing 101, With DJ Van Keuren (The Alternative Investment Podcast)
Jimmy: Evergreen Property Partners, Modular for Rent Housing Communities in Houston, Texas. And DJ, my attorney wanted me to read this disclosure before you get going. Everyone here should know that the partners of Kingsbury Media, LLC, which is the entity owner of AltsDb, we own an interest in Evergreen Modular Housing 1 GP LLC, which is the holding company of this offering. So, we are partners with DJ in this offering. And with that said, DJ, again, thanks for joining us, and I’ll turn it over to you. The stage is yours for the next 20 minutes.
DJ: All right, well, today we’re not going to be talking about opportunity zone, this is going to be talking about opportunity outside of that. So, if you do have some investment dollars that you’re looking for to allocate it outside of an OZ, then this is something that you want to look at. But the first thing that I want to do is let’s talk about today’s problem. I mean, it’s the elephant in the room, everything where we’re at, and what we’re hearing. So, you know, questions that are up is what’s going to happen in today’s real estate environment, right? We got rising interest rates. I mean, are they going to continue on? Are they going to come down? You know, worried about economy. You know, there are some…like you look at Facebook that let some people go and what’s going to happen, right, especially as we move through the holiday season.
Supply chain issues. In the past, there was a challenge in order to get supplies for building, you know, that’s still a problem. Higher cap rates, you know, what people were buying before the 4 cap, you know, now it’s going to be are these cap rates that were projected at a 4 sale or at a 5 cap to sell, is that going to hold true? Is it the right time to buy, right? And at the end of the day, it all comes down to fundamentals and what you’re investing into. And, you know, that’s extremely important when you’re looking at these opportunities. There’s always an opportunity to buy in any type of market cycle whatsoever but once again, it comes down to the fundamentals. And, you know, if you have any questions on that as we go through this, I’m happy to answer any of these because I do have answers for that. So, a little bit about us, we are a family office real estate consortium, I’ve worked for some major families in the past. If you’ve heard of Giorgio Perfume, Giorgio Beverly Hills, I worked on their portfolio, one of the owners of one of the professional baseball teams.
At Evergreen, we’ve also…another family you’ve probably heard of is the Marriott family with JW Marriott on the board himself, etc. So, we do invest on behalf of families. Because of our relationships with AltsDb like Jimmy was talking about, you do have an opportunity to invest in what we’re doing today. And we focus on co-GP opportunities, where there’s higher returns, as well as GP and LP investments. We will not do just LP, we want to be able to have some kind of controls. So, for the deal we’re talking about today, there is…we sit on the board of both the GP and LP. And we only invest if the opportunity is there, we will not invest if it’s not, we’re not just going to keep putting our money on behalf of our investors, it has to be a good opportunity. We were going into industrial cold storage to build, went from $200 a square foot up to $300, and we totally pulled back, we only invested in one deal, and that’s because they had locked in their debt and all of their supplies a year prior. So, we’re very specific on what we invest into.
So, today we’re going to talk about workforce housing, which is a huge problem within the U.S. So, first off, you know, why is there such a demand in that and that there’s an opportunity today, you know, why workforce housing is so hard to find, how it does provide an inflation hedge for today’s environment. And, you know, how we’re looking at high-growth locations and also how you as an investor can benefit from our structure. And the target return that we have is a 25.5% IRR, it’s a 2.5 times equity multiple over seven years. And Jimmy, what we just found out in the last two days actually is due to some tax benefits, we should be able to add another 400 to 500 basis points, which means that the target return will be closer to about 30% IRR over seven years and payback a capital in Year 5, so you’re basically playing with the house money over those numbers of years.
So, let’s go to the next one here. So, you’ll find workforce housing almost everywhere. That includes blue-collar workers, people that are paying…or getting paid 15 $25 an hour, or sometimes they’ll work multiple jobs. Service workers, so it’s your manager at a fast-food restaurant or a retail location. It could be like a medical assistant or a dental assistant that’s working. Typically, they do have subprime credit scores below 600. It is not subsidized housing, there is no Section 8, no government support. It’s just people that are hard-working people, families that are, you know, making it a day by day. So, currently, the advantage of a workforce housing is that there’s about 7 million homes that are needed and there’s a huge shortage. A lot of that has to do with politics and, you know, really coming up with a solution for that, but it is a $1.4 trillion market opportunity.
The workforce housing annual growth rate is continuing to come down, which means that there’s not enough supply for what the demand is and that’s creating the vacancy to be at a 30-year low and there’s very little to virtually no workforce housing, new affordable rental products. And that right there goes back to fundamentals, there’s just a demand, there’s not enough of these locations that are available for these type of tenants in order to stay in. So, what we’ve done is that we’ve partnered with a company out of Houston, Texas, to build modular for-rent communities in high-growth locations. So, the easiest way to think about this is actually a mobile home park type of structure, but with brand new homes that are being rented, and in a quiet, calm, clean, safe environment. And also having relationships in those local areas are extremely important and that’s what we have.
So, we’re projecting outsized returns, as we mentioned, 25.5 IRR prior to any tax benefits. We do have an experienced developer. Our model is to oversee local operators because we do have 50 years of experience, over $15 billion worth of transactions in multiple countries, so we’ve crossed multiple property types. So, we have that opportunity to help ensure, you know, that our investors are covered. We are only building about 2,000 homes over the next seven years. So, over five years when they’re being constructed, we’re only going to fill about 1% of what that demand is. Next, we do have favorable side terms, like we said, with a GP-LP investment. These are modular for rent on a weekly basis. Because of that, we’re able to mitigate inflation and interest rate risk because we can turn on a dime and increase the rents for anybody.
We do have tax benefits that we had mentioned. It’s extremely…we structured this extremely fee friendly, no acquisition, no disposition fee, no financing fee, and actually no markups on development fees, or property management. It’s all at costs. We’re also building these homes at cost at 33,000 apiece. Typically, they’re $60,000 to $80,000. We have a contractual agreement where they have to build at a cost. And so, that’s a savings of about $60 to $90 million passed over to you. And we’ve got pretty conservative underwriting that we look at as we’re doing our underwriting on that and there’s already been a pilot community to prove out this concept.
So, this is a solution for the 7 million deficit in workforce housing. The one thing that we do have is, you know, the demand in Houston alone, we said 7 million throughout the country, here it’s 200,000 home deficit. So, $40 billion market opportunity, and once again, we’re only fulfilling 1% of that. When you look at the Houston market, it’s only 19% of what is being filled, which means there’s an 81 supply versus demand gap, not subsidized but it’s those with credit or low credit as a whole. And Houston is not just oil and gas anymore, it’s actually extremely diversified, it’s number fourth largest city in the U.S. and also projected to be in the future as well. Houston, the reason why we’re in Houston and we’re able to combat this challenge is because they don’t have any zoning laws. So, we don’t have to worry about government like we do throughout the other countries…like the rest of the country.
So, our plan is to acquire three communities or the land for three communities. We’ve already done that. We’re on our fourth. Develop 8 to 10 of these communities over the next seven years. We have a $10 million allocation, we’re about 7 million already accounted for. We’re building these homes at 33,000, which is cost. We’re actually building to a cap rate. Unlike others that are buying at a 4.5 cap, 5 cap, we’re basically coming in at a 10 cap, just like buying it at a 10 cap. And so, that gives us a lot of flexibility in there. You know, one of my professors at Harvard said, “Look, you buy at a high cap, you sell at a low cap,” and that’s exactly what we’re doing here.
Our objective is to stabilize these projects for cash flow, and then sell these in communities, either as a portfolio or one by one in order to maximize the sales. And once again, we’ve talked about the targeted returns. So, a $100,000 investment shows you that you should get your money back…we’re expecting cash flow starting in Year 4, return of your capital in Year 5, which you can take and you can go invest somewhere else, and then you’re basically playing with the house money over the last two years. Jimmy, what do I have, 13 minutes left? Is that right? No, 10 minutes?
Jimmy: Yeah, we got about 10 to 12 minutes left, you got plenty of time, DJ.
DJ: Okay. So, this is old low-income housing, right? People think about trailer parks, police coming around. This is our modular for rent and these are our police. Quite different communities. As we mentioned, we’re building at cost and that’s contractually at cost. We can actually build three to four homes a day. And once again, we’re controlling the supply chain and the cost of materials, which is one of those areas that you have to watch out for. We also are building these just like any other home that you go into a community for. We’re talking about efficient HVAC systems, high pressure, low flow plumbing, new paneling, think of a brand-new home but we’re building at 400,000…or 400 square feet. So, right now, we’re on the outside of the Houston market, we’ve already purchased three of these locations, and we’re planning on starting development over the next 9 months to 12 months, and then we’re looking to have them fully stabilized going into Year 5.
This is the process. We go from raw land, we get the land in place ready to go, we put the roads in, we put the center component in. At the same time, we’re getting our pads all ready to put the houses on. At the same time, we’re building these in an environmentally controlled area. And so, we’re putting all of the houses up, doing the framing, doing the master bedroom. And this is like a Ford production line. It’s the same thing over and over again, which is why we can do three to four a day. Putting in the bathrooms, we’re putting in the kitchens, we’re putting in all the wiring and the insulation that needs to go in. We’re then going and putting on the front porches, the siding, the roofs, and we’re also looking to use solar on these roofs. We paint these, and then we put them out, put them on a truck so that they go to the community.
As I said, our partner did do a pilot community, they got it leased up within 15 months during COVID. They had an offer at a 5.5 cap a while back that they turned down, which would have produced about a 62% IRR. This shows about 292 days for the average length of stay, it’s actually over 370 and that’s increased that much over the last four months alone. So, it’s pretty significant. It was fully leased in 15 months with a 10-person paid waiting list. Today, there is a 28-person paid waiting list. We also look at this to say we came up with our own migration index and what that comes out to be is basically a 450. From a point perspective, the higher the point, the better. All the other communities are up into the 850 to 1,000 area. So, we have a paid waiting list and it doesn’t have the same demand as others.
This gives you an example of the interior of what they look like. Very, very nice, as you can tell, dedicated mailbox, and we’re looking to roll out these 8 to 10 communities, as we said. So, to give you an idea of what that, you know, looks like from a community as a whole perspective, each of these communities are actually quiet, clean, calm is what the focus is on, and they’re all paved. They have gated community throughout the whole community and all communities where there’s also cameras to help from a safety perspective, which is why so many families are…you know, love to live in this place. They also have walking areas where people can go and walk. Each community has a center area where there’s actually a pond, a lot of people like to live in those areas.
And once again, we’ve got playgrounds for kids. We have dog communities for dogs, which are very important for them to play. Also, they have laundromats. People can also pay their rent here, they do pay on a weekly basis, the average rent is $1,050. Annually, that’s about $14,000 against a $33,000 cost to build these homes. Each of these homes are 400 square feet, they have a porch on the front. And to give you an idea of what the inside looks like, these are actually built…sometimes one person will live in here, or families, a family of four, actually. There’s actually bunk beds behind the kitchen area. And so, a lot of people like to have their kids there. Our partner also goes through and reports their payments to help them with their credit as well. So, these communities are significant and allows an opportunity for people to have a quiet, clean, calm place in order to live.
So, just to finish up here, what’s happened in today’s real estate environment? Look at the fundamentals that are there regardless. For us, it’s the demand, 200,000 units are needed, we’re only fulfilling 1% of that. That’s not going to stop. And also, if there’s job issues, they’re gonna go to areas that’s more affordable. Rising interest rates, we have weekly rentals, which means we can increase that at any time. Last year, it was 14%. We project a 4%, we’re very conservative. Also, we’ve talked about the demand, we expected to buy land at $5 a square foot, we’re actually getting it right now at $1.5 because of the economy. Supply chain issues, we’re building at cost and controlling the factory. And is it the right time to buy? Well, it’s only going to increase with the demand for workforce housing.
And one of the things that we do that you should always ask for is a sensitivity analysis. So, what we do is we say, “What happens if we don’t sell at a five-and-three-quarters cap, but a seven-and-three-quarters cap? What happens if interest rates go up to 6.25%, 7%, 8%?” And we do that to look at that and we still fall into a projected return of about 20% for our investors even if we’re hitting higher cap rates, higher interest rates as a whole. So, Jimmy, if we have any questions, we can go into that right now. This is our experience with working with major credit…or major, you know, investors. My partner also invested 125 million on behalf as a fully integrated firm for American Realty Advisors and Apollo Global Management.
And we’ve got 50 years, $15 billion of experience, took a REIT from one property and helped the sale for 1.4 billion as a member of the investment committee, and our partner who’s very important has significant experience of doing this over and over and over again. So, 8 to 10 communities, focused 25.5%, you add in another 4% for tax benefits, you’re close to 30. Five to seven years, 100,000 million minimum, GP-LP fees are simply a 2% annual management fee, return of capital 7% IRR, then we just split 70/30, and we’ve cut out all the fees across the board. Okay, Jimmy, I’m done.
Jimmy: Okay, DJ, you did it. Great work.
DJ: I did do it. Sorry, I had to fly through this.
Jimmy: No, you did great. We got time for a handful of questions here. So, Richard asked the first question, we’ll start with him. He asks, “Where are the materials for the homes sourced? United States, Mexico, China, maybe somewhere else?”
DJ: The U.S.
Jimmy: The U.S.? All U.S. made?
DJ: Yeah, we’re looking to do everything as we can as much in the U.S. as a whole.
Jimmy: Very good. Rick asks, “How do you manage flood risks/storm risk? In the Houston area, is insurance for this housing type an issue?”
DJ: Not at all. And if we had more time, I would go through and actually show you what our partners did. They are so analytical, it’s great. We actually have graphs that show that we’re totally out of the floodplains. Historically, what’s happened with hurricanes and we are…and even winds, and so we are as far away as we can, and happy to share those analytics with you. It’s pretty impressive. And insurance is not an issue, we have that as well.
Jimmy: Very good. Let’s see, a few more questions here. We got two or three more minutes. This person asks, “If I’m doing the math correctly, it seems like each community would be about 200 units, which would equate to two to three months of production at three to four houses a day. Is the production local?”
DJ: Yeah, we’re within an hour and a half drive, so that we can do all the 8 to 10 communities. We’re looking at a property right now, ironically, Jimmy, I didn’t tell you this, but in an opportunity zone where the factory might be. And if that happens, we can do up to 10 houses a day. That means in a month, you fill the whole unit. But conservatively, three to four a day and we’ll also keep all of our materials in there as well. And it’s within two hours, like I said, an hour and a half, two hours of every community that we’re doing.
Jimmy: Very good. Let’s see, another question that came in asks, “Will this fund include the 8 to 10 communities or just the first three?”
DJ: No, 8 to 10 communities. You have diversification, which is really important for us to mitigate risk, and we’re going to start selling those as soon as they’re stabilized and we get the returns that we feel are going to maximize the investment for everybody, including ourselves.
Jimmy: Good. One more question that just came in and then I think I’ll cut you loose there, DJ. “What’s the square footage of the modular homes? How many floor plans are there?”
DJ: One floor plan, one size, 400 square feet. And it’s just like I said, it’s a Ford factory, we’re just replicating over and over again, and then we’re putting them out there. And, you know, they’ve got full wares, I mean, to do what they want with the houses internally, obviously, but they all are rented, they are not owned, but they’re brand-new homes.
Jimmy: And John just came in with a last-minute question here, he wants to know if he can get a copy of the presentation. Are you gonna make this presentation deck available?
DJ: Of course. If anybody wants to talk to us directly, talk with our partner as well, we can do that as well. Anything we can do to be of help to all of our investors or partners. And you have to build that relationship, so we’re here for anything that you need. And upon signing the NDA, they’ll also have full access to the data room. So, we provide not only the documents to look at, but all of the financial models, the floodplain information, the insurance documentation, everything from A to Z.
Jimmy: Very good. So, John, I’m going to be posting links to a lot of our presenters’ decks on our website later today and tomorrow, so I’ll have instructions on…we’ll get that all distributed to everybody within the next day here. So, sit tight, we’ll get you as many of these decks as we can. DJ, last question is from me, how do I get one of those hats? I need a “FORE Magazine” hat.
DJ: If you would like one, I will get you one.
Jimmy: I need one of those.
DJ: In fact, we’ll get you one of the Institute ones too, they have a logo on there. But yes, we’ll do that.
Jimmy: All right. Thanks, DJ. Pleasure seeing you today and thanks for participating on Alts Expo.
DJ: Great job as well. Anybody listening to this, these are amazing guys. Heard this on the OZ and also AltsDb, so make sure that you stay informed with these guys.
Jimmy: Thank you. DJ, do you mind if I put your email address in the chat?
DJ: Please do, [email protected].
Jimmy: All right. If anybody needs to reach out to DJ, they know how to get a hold of you. Thank you, DJ. Appreciate it.
DJ: Yep, cheers.