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Annual Letter from Capital Square Founder & Co-CEO Louis Rogers: January 2024

Louis Rogers

At Capital Square, we now have three pillars within our business: Invest, Build and Manage.

At the time of the firm’s founding in 2012, Capital Square focused almost exclusively on the “invest” strategy by sponsoring DSTs for 1031 exchange investors. That business was extremely successful and profitable. Capital Square became a top-tier sponsor with a national footprint, and the DST investment business provided the funding and presence for company growth, hiring exceptional talent and building needed infrastructure for the next phases of expansion (“build” and “manage”). However, understanding a down year like 2023 was possible, we prepared for the future, knowing it was not prudent to rely so heavily on a single line of business.

Developing three synergistic pillars of operation – Invest, Build, Manage – has allowed Capital Square to be far more than a “one trick pony.”

DST sales numbers did decline during 2023, but Capital Square now operates successfully and profitably regardless of fundraising or the outcome of any single line of business. We are confident Capital Square is going to excel as the real estate market emerges from the challenging economic environment of the past year.

“Developing three synergistic pillars of operation – Invest, Build, Manage – has allowed Capital Square to be far more than a ‘one trick pony.'”

Several factors contributed to our decline in market share, which we will address; however, as our team foresaw a shift in the economic headwinds, much of the past twelve months has been dedicated to hiring and building infrastructure to establish our position in the national real estate industry:

  • By elevating our footprint as a vertically integrated company, two thirds of our business pillars are now unrelated to transactional sales. Capital Square is a real estate investment firm at our core, but we also now develop best-in-class real estate and manage our own properties to maximize revenue, increase operating efficiency and reduce costs, while delivering best-in-class service. We converted from a transactional fee business into a sustainable real estate firm with tremendous growth potential.
  • By expanding our offered product lines to also include qualified opportunity zone (OZ) funds and development funds, Capital Square seized the impact of our recently formed development team in profound capacities. Highlighting this success, our 2023 OZ fund sales were up 14% year over year, despite a decline in the industry of 37.6%, as noted by the Stanger Market Pulse in December 2023. And OZ fundraising has remained solid to date. Our development team actively oversees a $2.3 billion pipeline to build the next great opportunities with local and government partners. The dramatic outcomes of our work can be discovered in our newly published economic impact reports on Richmond, Virginia and Charleston, South Carolina, where our efforts have led to a combined $11+ million projected annual state and local tax revenue generated during construction and over 1,700 jobs.
  • By expanding our private equity group and our acquisitions of build-for-rent (BFR) communities, Capital Square is not only actively taking on the national housing shortage in single-family rentals but also diversifying our investment offerings for both individual and institutional investors.
  • By strategically timing our first UPREIT, which saw 85% DST investor participation and a 161% total return in mid-2023, we utilized a different process than select other firms’ strategies of forced participation in UPREITs, which can tend to skew industry-wide DST sales numbers. Through this first UPREIT, we began to leverage the growth potential of the Capital Square Apartment REIT, a REIT positioned to further diversify our firm’s line of investment programs and to absorb Capital Square’s vast portfolio of multifamily properties.
  • By rapidly developing our own property management team, Capital Square went from just over 100 team members to over 200 in 2023, elevating the excellence we can deliver across all divisions, driving growth and improving efficiency by controlling all aspects of property operations. Capital Square Living, our property management division, now serves 29 multifamily communities with over 7,200 units, with a plan in place to manage 44 communities with over 11,000 units across six states and 25 cities in the Southeast by the end of 2024.
  • By hiring key leaders with decades of industry experience and respect, we have further situated ourselves to not only navigate present industry headwinds but to meet the future with grit, gumption and data-driven real estate strategies on our side.

Thus, while our DST sales numbers are down, we have faith that they will not remain so. The timing of when certain deals hit the marketplace, combined with the rapidly shifting desires of investors, created an extremely challenging environment. With forethought, we shifted our strategy and focused our resources into bolstering the company, controlling the controllable with new developments and in-house management. By seizing this opportunity in a slower time period, we did not acquire weaker product to sell. We expanded the ways we could create our own exceptional product, including OZs, DSTs and the Capital Square Apartment REIT. 

Factoring in the lead time to bring new programs to market, the increase in real estate sponsor volume and the state of real estate over the past twelve months, especially the significant interest rate increases, the decline in our numbers is a reality we faced. We are addressing distribution rates and similar shifts to close certain deals, as well as other pivots as needed.

Furthermore, it is important to emphasize that the missing sales in 2023-2024 are not lost; they are deferred. Most exchangers are older real estate investors, who are tired of the tenants, toilets and trash and instead want a more passive ownership (a DST). Many had their sales postponed due to the rapid rise in interest rates harming their buyer’s ability to purchase with debt. However, this 82-year-old prospective DST investor (on average) will be even more motivated to sell in the future, once interest rates stabilize and economic conditions improve, permitting a profitable sale. Accordingly, we forecast that Capital Square’s DST sales will skyrocket back to 2022 levels and exceed our expectations when this large number of prospective sellers, presently locked into properties they no longer want, are able to sell and transform their investment real estate portfolio.

“Our experience and resilience in both rough and robust markets have prepared us to weather the current headwinds and emerge stronger in the future.”

The bright future for the Capital Square DST business was, once again, recently highlighted by a DST program on a BFR property that was fully subscribed in days and was fully funded in less than a month. 2024 sales are already increasing from elevations in distribution rates being paid on many offerings. Despite challenges, we are executing our plans effectively and are optimistic about what is ahead.

Our experience and resilience in both rough and robust markets have prepared us to weather the current headwinds and emerge stronger in the future. We look forward to sharing more about our 2024 plans and what’s next for Capital Square as we develop and manage the future, one property at a time.

Regards,

Louis J. Rogers

Capital Square Founder & Co-CEO


Disclosure: Securities offered through WealthForge Securities, LLC, Member FINRA/SIPC. Capital Square and WealthForge Securities, LLC are separate entities. There are material risks associated with investing in DST properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results. Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to see any securities. Please read the Private Placement Memorandum (PPM) in its entirety, paying careful attention to the risk section prior to investing. Private placements are speculative. Diversification does not guarantee profits or protect against losses.

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