2021 is now in the history books and it should be a year worthy of study and reflection. We had to work through a full year of Covid and the huge collateral damage that it has done to people’s physical and mental health, the divisions it exacerbated in our increasingly fractious society, as well as the supply chain problems brought on by the global economy coming to a virtual stop only to see it come roaring back to life by a consumption boom by people who were armed with financial firepower from extraordinary fiscal stimulus and very loose monetary policy. Inflation reared its ugly head as demand has outstripped supply in many areas of the economy. With service expenditures depressed due to labor challenges, businesses shutting down, and people not wanting to congregate like they did pre-covid, the spending was directed massively towards manufactured goods as well as housing. And since housing is my business, I will spend a few minutes to convey how extraordinary 2021 was for that very important sector of our economy and society.
Housing Supply and Demand Imbalance
The following charts show the very acute supply and demand imbalance with demand for homes quite high and the inventory of available homes exceedingly low.
The demand for housing spilled over to apartments with apartment owners having tremendous pricing power in the second half of 2022. With apartments holding up quite well during the pandemic and now generating accelerating revenue growth, landlords have done quite well. CWS has had the added benefit of our interest expense has dropped significantly as well due to the material drop in 30-day LIBOR and SOFR (the indices our variable rate loans are tied to).
Favorable Events in 2021 for CWS
As a result of this favorable confluence of events, we were able to produce returns for our investors that have been very satisfactory. In addition to improved cash flow, we were also able to sell some properties to take advantage of very aggressive pricing for apartments and redeploy that capital into what we felt offered a better long-term risk-reward relationship by purchasing either higher-quality properties or ones in a better location or a combination of both.
Looking ahead to 2022 we are delighted that we are in a business that has such strong demand for not only today but for what should be many years to come given the essential nature of the product and service in people’s lives. This should be particularly true in 2022 as the strong demand for single-family homes, especially among all cash institutional buyers aggressively seeking single-family homes to rent out, will make it even more difficult for renters to purchase homes as this headline attests.
The benefits of owning apartments are now very well known and there has been a tremendous amount of capital attracted to the industry to buy apartments. This has pushed the multiple that buyers are willing to pay for one dollar of operating income to record levels. For this reason, we have been making more of a concerted effort to build new communities, particularly in Austin and Phoenix, where there is record demand for new units and the yield generated for a newly built, stabilized community is quite a bit higher than the prices being paid by purchasers of new apartment communities. Since we rarely build and sell, our goal is to create great properties in outstanding locations in dynamic metropolitan areas at a cost basis that should give us a very strong margin of safety for many years to come. Another focus of ours will be to continue to prudently redeploy the capital from properties we sell in 2022 via 1031 exchanges. It is imperative that we continue to remain vigilant about focusing on protecting our investors’ capital first and then ascertaining the upside potential. We do not want to make errors of optimism that often can occur when the competition for assets can be heated.
From a Personal Standpoint
From a personal standpoint, I want to continue improving my health. It’s been almost 11 months since my heart surgery and I am so fortunate to have recovered very well from it. I continue to play tennis at least three times per week and I work out with a trainer twice a week. Both are very healthy endeavors for me. After innumerable delays, the pool at my house was finally completed. It looks beautiful and hopefully, I will integrate swimming into my exercise regimen. If not, then shame on me because it couldn’t be more convenient. Plus, I might as well get a return on my investment via improved health on top of the overall enjoyment it will bring to others!
This next revelation can fall into the category of TMI. Each time I go to get my teeth cleaned they tell me afterward how much I would benefit from regular flossing. My gums and overall oral hygiene are not as good as they could be. If I would just take the time to do this regularly they could improve dramatically. Sadly, I have always disliked flossing because I struggle so much with getting to my molars, particularly my lower left ones, which, unsurprisingly, is where the most opportunity exists to improve my gum health. After my last visit, I made a commitment to creating a new habit to floss every night. If I could change my mindset from one of frustration and annoyance to one of the incredible opportunities only a few minutes a night of diligent focus could have on the quality of my life and longevity, then there would be no downside and huge upside. I have worked my whole life to find asymmetric risk-reward opportunities like this, so why wouldn’t I jump on it enthusiastically and aggressively? And while this doesn’t fall into the financial category, it does fall into the category of risk management and quality of life enhancement through problem avoidance.
The hygienist suggested that I purchase floss picks as she said that would make flossing easier. I ordered them from the chair I was sitting in after she completed my cleaning. I got them the next day and for the last couple of weeks, I have not missed a day of flossing. They have been very helpful, although I still use regular floss at times for areas that I feel need more attention.
I have written many times about habits and if you want to make a change in your life then you have to create a new habit or break one, which is infinitely more difficult. There is research that estimates that it takes on average 66 days to form and integrate a new habit into one’s life. So my goal in 2022 is to add this healthy habit to my daily cold shower, smoothie, tennis, and twice per week training sessions. I am already enjoying the challenge that this altered mindset has engendered, especially as I have done more research into the impact poor oral hygiene can have on other aspects of one’s life, particularly to one’s heart and, much to my surprise, one’s mental health.
I have found that when something gnaws at me that I will somehow, some way, and at some time take action to address it. As much as I disliked flossing, it bugged me that I never did it consistently because I knew that not doing so could be harmful and that it takes so little time in the whole scheme of things. Another thing that has been gnawing at me has been that if I pass away suddenly, which is something I, unfortunately, have had experience within the wake of Roneet’s passing, the continuity of my estate would be impacted. The reality is that I have a somewhat complicated financial picture, particularly because I own a number of homes that are rented out and those mini-businesses have to keep running without interruption. And, like most people, I have bank accounts, investment accounts, online accounts, passwords, memberships, etc. that need to be managed if I am gone or indisposed.
Evernote & Everplans – Setting up a System
I am a big user of Evernote and I have created a notebook on there that I have called “If I Move On”. My kids are aware of it and it has instructions on what to do if something happens to me. And while I am glad this has been established, it has felt a little haphazard to me and not as organized as I would like. I remember pre-internet days I made a goal to have my personal and financial information organized in a way that I could submit a complete loan application in the event I found a property that I wanted to buy and had to move quickly. I wanted the seller to know that I was on the ball and had loan approval from the outset.
I have felt an increasing sense of urgency to set up a similar system regarding my estate. Last year a financial planner I worked with to purchase life insurance sent me a free one-year subscription to Everplans. This was something I had never heard of. At first, I didn’t think much about it but as I started to see what it had to offer, I realized that this could be exactly what I needed.As it’s been said, “when the student is ready, the teacher will be found.” I think I found my teacher.Click To Tweet
When I saw how detailed it was and how much time it would take to populate it I started having the same negative feelings about starting it as I did with flossing. This was the equivalent of financial flossing for me, although if I want to be more true to the analogy, populating my Everplans was the equivalent of establishing my mouth, teeth, and gums while maintaining it is more akin to flossing. I digress. I knew it was something that I had to do as the gnawing feeling kept getting worse. I knew this was a loose end that could have catastrophic consequences and put my kids, loved ones, and renters in very difficult positions if I didn’t set up a scalable and durable system because I expect to accumulate more assets over my lifetime.
While some people knit or read books or play video games or do puzzles during their downtime, I have been working on my Everplans. I have made a lot of progress such that 2022 should be the year that I should have all of my pertinent information in one place and that my job going forward will be to maintain vigilantly, akin to my commitment to flossing because the consequences of not doing so will be unnecessarily high. And once this is complete and digitally downloaded, now I have to determine how to download my actual knowledge to others so that there is no unnecessary interruption in the event I move on unexpectedly.
We have to crawl before we can walk. By getting in the game and having all of my pertinent information stored in one system, I can now leverage off of this work and use it to train others so that the fruits of my labor will continue to benefit others after I’m gone.
I hope you have a wonderful 2022 and stay healthy and find deep meaning and joy in all of your endeavors.