The Investment Thesis Behind Capital Square Housing Trust
What makes a resilient real estate portfolio?
This behind-the-scenes discussion between Capital Square’s co-CEO and chief investment officer, Whitson Huffman, and Capital Square’s executive vice president of acquisitions, Jorge Figueiredo, explains how disciplined market selection, supply-and-demand fundamentals, portfolio diversification, and active management come together to build a durable housing portfolio designed to generate long-term income and growth.
Approximate Transcript:
Whit: Jorge, can you talk a little bit about the makeup of Capital Square Housing Trust’s portfolio?
Jorge: Absolutely. So, Capital Square Housing Trust today is comprised of ten multifamily properties located across three states: Georgia, Virginia, Tennessee. We have just under 2,000 units in total, weighted heavily towards Class A properties, with some value-add Class B assets mixed in as well.
Whit: Would you say that it’s a fair comment that the REIT is reflective of the broader Capital Square portfolio? Today it stands at plus or minus 7 million and growing every week, it seems. But do you think the REIT is representative of the market allocations of the broader platform?
Jorge: Absolutely. It’s a subsect of the broader portfolio. Our broader Capital Square portfolio is made up of again Class A, Class B multifamily assets, just a broader geography, including Virginia down to Florida and all the coastal states – Tennessee, Kentucky, and Texas as well, with a few other outliers, so while we don’t expand across all those markets today, our goal is to get there within the REIT as well.
Whit: Do you think that then there is a continuation from an investment perspective? The same thesis for the REIT is the same thesis for the development business, for the DST business, for our LLC single-member offering properties? That core macro thesis, can you give it to us in a nutshell? And then can you explain a little bit about, hey, if we’re looking through that same lens across the entire platform, how do you then choose which assets we sell third party, and then what goes into the REIT?
Jorge: Sure, in a nutshell, it’s supply and demand. We follow the macro trends, and we try to find micro locations that we think that dynamic is really strong.
Again, supply throughout the Southeast, there have been some pockets where we’ve seen some challenges, but we’re super focused on finding new opportunities where there’s little supply or not a ton of new supply coming online, where we can really benefit from that dynamic going forward.
And from a demand standpoint, we follow the jobs; we follow the population growth. Real estate is real estate, and in our case, residential real estate, whether it’s within the REIT or our broader DST portfolio, we’re following those supply and demand trends, trying to make good investment decisions across the entire platform.
Whit: Yeah, and I would add to that too. I think the REIT wants to be a durable all-weather vehicle, right? You can rely on that income; you get the benefits of diversification across geographies, across quality types – Class A, Class B, some value-add core plus – and I think the DST wants to be that as well. I think those two concepts are aligned: an all-weather, durable income generation vehicle.
And I think what’s really interesting in this moment in time, as we look at this K-shaped economy, I think that multifamily is poised to perform really, really well. You’ve got structural renters at the bottom of the K, who have seen inflation erode their disposable income, and it’s creating a “renter for longer,” or as we talk about oftentimes in Build to Rent (BTR), right, that structural renter who will likely never catch up and have the savings to buy a home. But then, what’s been interesting is at the top of the K, as well, especially the younger subset of the top of the K, who are asset heavy, maybe they work for a startup or a public company; they’ve got a lot of stock they’re benefiting from, right, with what’s going on in the stock market, but they’re still priced out of those tier one coastal cities. They’re that luxury renter segment.
So I think it’s been really interesting to see multifamily be the beneficiary of the current economic window and that divergence, because it’s really not been for the last three or four years. But what’s unique is multi gives you the opportunity to grow your way to a place where you always, in the end, feel good, right? Linneman loves to quote, so long as you weren’t over leveraged – which is a really big caveat – in multifamily, you always make money. Or you always at least get out at par, and I think about the last couple years of really stagnant rent growth, with expenses kind of going ahead of revenues, we’re starting to see that that trend flip. Could you just talk a little bit about, because you’ve been in the multifamily game for, I’m hesitant to say how long.
Jorge: 19 years, almost 20.
Whit: Almost 20. You look great.
Jorge: Thank you.
Whit: For almost 20 years, you’ve seen lots of different market conditions. Can you just talk a little bit about your experience and how multifamily, from your perspective as an acquisitions professional – somebody who’s run portfolio management, you’ve touched every part of the kitchen for Capital Square, and you’ve seen how the sausage gets made – what’s your perspective with that 20-year lens? Because I think it’s really important as we think about Housing Trust, because we’re offering diversification; we’re offering many things that are attractive to a 1031 investor that you often can’t get a DST investor; but you’re also with us for a long haul, and we all know that experience matters. Can you just provide a little bit of that perspective?
Jorge: Starting from the premise that, again, real estate’s a long-term play, which is why we like the REIT, and it’s a perpetual vehicle, over time, the market tends to correct itself. Dating back to the Great Financial Crisis (GFC), you know, post 2008, 2009 and early 2010, there were some choppy waters out there from a performance standpoint. Demand was down – a lot of people consolidated into one apartment, lots of roommate situations. We saw occupancy slip; we saw rent being flat to negative in certain places. But second half of 2010, things started to turn around, and you could see it. You know, the rebound is not equal across the board. You have to find those specific spots that are ahead of the trends, but broadly speaking, 2010 was kind of a demarcation point. So we’re looking for those signs in specific markets where occupancy is starting to creep up again, where concessions are coming down, where we think we’re poised and well positioned to capture rent growth again. That’s the micro location, and what we’re focused on day to day.
But broadly speaking, we’re focused on the macro trends as well, and we think we’re closer to the end of the current state than we’ve been over the last two to three years, where we’ve seen flat rents, occupancy slips, and that’s again a big function of the record-level supply that we’ve seen over the last two to three years.
Whit: It seems like in this world where everything’s so focused on AI, then let’s talk about the different laws of technology and computing, and how it advances, a law that has always held true in real estate is that supply and demand will drive the bus. We spend so much time on that equation, and you’ve seen a lot of REITs focus on tier one coastal cities. I’m thinking Boston, Los Angeles, D.C., New York. We’ve spent our time in different markets. Can you talk a little bit about why we like those markets and how we think those markets benefit investors – we would say in a better way, I would say in a different way than some of the other REITs? We can get at the things that we’re talking about, durable investments.
Jorge: Well, two main drivers come to mind. The first is yield. You’re not going to get the same yield in those kind of gateway markets that you will in these secondary markets that we’re in throughout the Southeast – places like Richmond, Virginia; Atlanta, Georgia. You get a little bit more yield there, but more importantly, you get a broader diversification of your demographic. You get folks that are renting earlier, choosing to rent now, or really precluded from buying in a lot of cases. But it’s not one sector. There’s a lot of diversification across manufacturing, healthcare, so you have a lot of employment drivers are not all impacted by AI or potential technology disruptors. So that employment diversification is key for us and a big driver of our decision making as well.
Whit: I think what’s interesting as we think about the context of somebody being in a DST investment effectuating an UPREIT and going into the REIT, this also changes on a quarter by quarter, year by year basis. We have more mobility in the United States, and probably at a global level as well, than at any other point in human history. You and I could jump in our cars tomorrow and sell our houses and move to a different town in the South, and by being inside of the REIT, we’re allowing those investors to get out of a single-asset concentration and to have exposure to an investment lens that looks to capitalize on those different trends. Where are folks moving to? Where are folks moving from? We can tailor the portfolio and their REITs in a manner in which we fundamentally can’t do in the DST. You can’t jib and jive and change the sails. The DST is a boat you jump in, and it is headed in one direction. You either get off early, or you get to the end of the long term, and you’re forced to get off, and you hope you’re not in the middle of the ocean.
And I think what’s interesting is with the REITs, we’re able to turn the boat. We’re able to put up a different sail. We’re able to see the storm ahead and go the other direction. And I think that flexibility is really, really important for somebody who’s already won by not paying the tax – they’ve already won the game, right? We don’t need to hit homeruns. We don’t need to hit grand slams. We’re not in the ninth inning. We’re trying to create durable investments that are going to produce dividends and stable income for folks that are most likely in retirement. And I think the REIT offers the best opportunity for those outcomes.
Jorge: And the size of the boat matters as well. If you’re in a small boat headed one direction, but all of a sudden you jump to a larger ship, you’re able to weather a lot more storms. And what I mean by that is the geographical and asset diversification within the REIT really gives those DST investors choosing to contribute their investments into the REIT the benefit of diversity that the REIT provides while continuing their tax deferral strategy, as well, and they benefit from the potential upside that remains within the portfolio, including the asset that they contributed and came out of their DST investment.
Whit: That’s a really good point.
Jorge: So, Whit, five years from now, what do you think investors will look back and say about their decision back in 2026 to invest in Capital Square Housing Trust.
Whit: When they look back in five years – I think first off five years seems really far away. I would say that I hope they think that Capital Square did a good job getting them to a speed boat on the DST side. We got them pointed in the right direction, and we were good stewards of that investment. We always want to lead in the DST first, but then as the boat came out of port and went over an ocean, that we were able to get them into a larger ship, a ship that is going to get them through the storms, that is going to get really fast when the skies are clear, but that got them into a ship that they were happy with, and happy to be on for a very long period of time.
We want to provide investments that are diversified, both geographically by product site, but that do what they’re supposed to do. We know that the best way to do that for our investors, regardless of how they come into the REIT – a common equity investor, preferred equity investor, or someone who’s doing a 721 investment, an UPREIT – we want them all to have the same outcome: consistent recurring dividends with growth.
Conclusion:
Capital Square’s competitive advantage exists not only in our top-tier team and award-winning service, nor only in our proven track record. Our competitive advantage also exists in the endless ways our vertically integrated real estate firm harnesses our vast in-house resources and numerous tax-advantaged investment vehicles for the benefit of our investors every day.
Questions? Connect with us today.
Disclosure: Securities offered through WealthForge Securities, LLC, Member FINRA/SIPC. Capital Square Housing Trust is a tradename of Capital Square Apartment REIT, Inc. Capital Square Apartment REIT, Inc. and WealthForge Securities are not affiliated. Capital Square Apartment REIT, Inc. and WealthForge Securities, LLC are separate entities. There are material risks associated with investing in private real estate investment trusts 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. This is not a solicitation or an offer to sell 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 and illiquid.
