In BSW Blog, BSW Philosophy

The Bull is Loose in my Apartment!

The market for multi-family real estate investment has been on a charge since the depths of the recession only a few years ago, pushing the national apartment property price index above its pre-crash highs.  Portfolio manager Elias Bachmann attended Monarch Group’s annual meeting on March 8, where the discussion focused on this very topic and how it has impacted their acquisition and management strategy.


It is no secret that despite lower prices, buying a house has become less appealing for the average American. Increased risk aversion, limited access to credit, a desire for mobility and flexibility as well as higher down payment requirements have resulted in more and more potential homeowners opting to rent rather than buy.  Investors searching for income and finding little reward in bonds, recognize that apartment investing can offer higher levels of income with some protection against inflation.

While attractive market fundamentals and low financing costs make apartment investing very appealing, BSW believes active management can also unlock value to generate above average returns.  At 10,000 units, Monarch now has the scale to successfully negotiate national contracts with cable, electric and trash vendors.  According to Andy Miller, an analyst at Monarch, these new contracts can reduce expenses for the same services by as much as 30%.  Newell also discussed how Monarch is incorporating energy and water saving investments such as, solar, low flush toilets and energy efficient light bulbs.

With interest rates currently at all-time lows, some investors worry how higher rates might impact the ability to refinance properties in the portfolio.  Andy Newell, Monarch’s CFO, pointed to the debt coverage ratio of properties in the portfolio (This ratio measures the buffer of net income to mortgage payments.)  “Lenders generally require a coverage ratio of 1.3X, our portfolio has an average of 2X” said Newell.  Recently, Monarch has also used longer term debt (15 vs. 10 year loans), which when secured at today’s low rates, provides a long horizon of refinancing risk protection and an attractive bargaining chip for a potential sale (loans can be assumed by buyers).


Shoreline Landing, Norton Shores, MI

During the presentation one investor asked how it was possible that Monarch could increase occupancy while reducing marketing expenses.  As any landlord will tell you, the best way to increase occupancy is to renew satisfied residents.   Betsy Hoffman, a regional manager at Monarch, says that the organization as a whole is very data driven with “expenses linked to outcomes.”  Not surprisingly, the Internet has had a dramatic impact on reducing the cost to market available units.  “Craigslist is our new best friend” added Chuck Lavezzi , asset manager for the mid-west.

Monarch focuses on multi-family properties located in secondary and tertiary markets.  These markets have not seen the same level of transactions as primary markets like New York, Washington DC, the Bay area, southern California and Seattle, because they typically don’t have the same development constraints or pool of job-creating businesses.  Bob Nicolls, CEO of Monarch, calls the markets his team invests in, “institutional fly-over markets”.  But that is changing.  Significantly higher yields for properties in “fly-over markets” have begun to capture the attention of institutional buyers as properties in primary markets become “priced to perfection”.  Monarch continues to purchase properties at attractive yields and significant discounts to replacement value, underscoring our confidence that these markets still have room to run.

Attending the annual meeting is just one way BSW maintains its close working relationship with Monarch. We believe they will continue to identify attractive multi-family investments where there are opportunities to unlock value with high return potential. Most importantly, we have tremendous confidence that the team understands the forces which influence their market and has the talent and resource to navigate changing conditions.


Elias Bachmann, Portfolio Manager

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