Latest / Real Investor Radio Podcast / Ep 73 | Future of Home Building, Build to Rent Opportunities, Expectations for 2025 with Tony McGill
Transcript
- Craig Fuhr (00:00) Hey, welcome back to Real Investor Radio. I'm Craig Feuer joined again by Jack BeVier. Jack, how are you today, Jack BeVier (00:07) excellent getting ready for the holiday season coming up here. The year is basically over. So been doing a lot of 2025 planning, trying to bring in 2024 strong. So good to see you this morning. Craig Fuhr (00:12) It is. We have a esteemed guest today for really a great conversation about sort of where we've been in the market and hopefully an outlook on what we can expect in 2025 from, you know, several different data points. We've got Tony McGill today. He is the senior managing director and head of investment banking at Zelman and Associates. Love all of IB stuff, by the way, Tony. So it's such a pleasure to have you. Tony has led Zelman's origination and execution of public and private debt and equity capital raise and &A transactions totaling over $30 billion and has worked with really some of the largest home builders in the country over his career. And it's just a real pleasure to have you here today, Tony. We had a chance talk a little bit prior to hitting the pressing record and I think Jack and I are both really excited to get the conversation rolling. Tony McGill (01:18) Yeah, good morning. Looking forward to a good productive conversation. Hopefully we can cover some of the topics that we talked about beforehand. And I think there's a lot of good exciting things to look forward to, a lot of interesting dynamics going on around housing, home building, the rental market that will be fun to touch on. And appreciate the opportunity to join the conversation. Craig Fuhr (01:44) Jack, why don't you lead us off and we'll start the discussion. Jack BeVier (01:47) Yeah. So Tony, just to contextualize the conversation a little bit, can you explain just kind of usually what your role is in the ecosystem and just to give our listeners a sense of the perspective that you're coming from. So what are the typical deals that you're working on? Tony McGill (02:01) Yeah, maybe just at the highest level. We're a New York based boutique investment bank. We focus exclusively on housing. And by our definition of that, that's home builders who we do a lot of equity research writing on and who we do a lot of investment banking, &A, capital raising transactions with. They're really at the heart of the ecosystem. And if we really understand what those companies are doing, We understand, we have to also understand a lot of other things that help us gain perspective on the broader housing ecosystem. So for example, if we can understand when a home builder builds a home and sells it at that point of sale, we can look through and have something to interpret about the consumer in order for that consumer to be able to buy that home from a, From a confidence perspective, they have to be in position to have a good job. They have to be able to afford the house from a down payment perspective. There has to be mortgage availability for them to go through with the transaction. From the home builder perspective, lots of things go into that. It's the land market. It's the construction market itself, the materials from lumber and shingles and insulation, the installers doing those things, the builders have to capitalize themselves, meaning They need their own equity base or investors to them buy projects at the project level or invest with them at their entity. And then they have historically been very heavy users of credit, primarily in the form of bank debt for the public builders, more in the public markets. And so if we kind of add all of that up, we just touched on mortgage originators for residential mortgages. We talked about banks and their commercial real estate book as it relates to the the new home construction industry, we need to understand. And again, that has implications for title companies, the brokerage industry. write on the home centers because in the existing home sale market, which, you know, there's roughly five, five million homes turnover, existing homes turnover annually before they sell those homes, they're going to Home Depot and fixing stuff up. And then the new people move in, the new buyer moves in and goes back to Home Depot and Lowe's. and does stuff again. So housing focus, the way that we define that is builders building product companies. Realtors brokerages title single-family rental build for rent, which is an emerging thing. I know we're going to talk about the home centers and from a transaction perspective, what we focus on, you know, term it as very traditional investment banking. We're focused on and a providing good advice, good judgment to our clients about if they're trying to sell their company. good times to sell and how to go through that process to maximize their outcome as an entrepreneur, a proprietor, a principal of their business. We understand the markets and the timing. we try to provide market leading the best possible informed judgment we can to those clients for that reason. Sometimes we're on the buy side for companies that want to buy others. Again, applying the same skill set. And then we're very active in the public markets. For example, over the last post GFC, there's been, think, 11 or 12 home builder IPOs. They don't happen frequently, but when they happen, they happen a lot. And so there's 11 or 12 of those, and we've been involved in all except one. So we're very, very meaningful in the home builder IPO market. That's because we have a lot to say to the investment community about the investment opportunities in the industry, in this case, the next IPO. And then just public debt. get, do a lot of underwriting for public debt. There's a huge range of things we do on the private side and capital as well. And anyways, but just to very succinctly sum it up, housing focused, we write equity research for the investment community and industry executives are our research clients as well. And then we underwrite capital, we raise capital for the industry and advise on &A. Jack BeVier (06:00) Gotcha. So like not very much overlap with the stuff that I'm interested in. Sorry. It's a shame. Tony McGill (06:06) We can get you there. We'll get you educated. There's some good opportunities we can. Jack BeVier (06:09) Yeah, obviously I'm being very facetious. We could spend the next three hours unpacking all that. Let me so let's let's start. What's the so what is the perspective in the market right now? I mean, we've got 60 days ago, the tone was a little bit different with interest rates coming down. They've come back up the past, you know, 60 days now. The there's a question mark next to the consumer, I think, in a lot of suppliers, you know, side of things. So what is what is the thinking right now on from your perspective? How how this certain how this particular set of factors is going to affect the home building industry in 2025 and 2026? Tony McGill (06:50) Yeah, so maybe at least to kind of put some framing points around that right now, the industry from a fundamental perspective is very strong. And you could argue for the last 15 years post GFC, it's been the strongest 15 year period in documented history. It would go back 100 years or something. And I say that for a few reasons. Well, the reasons for that could be the starting point, the GFC really took so much capacity out of the system. The population growth and household growth and job growth didn't stop, but the industry capacity decreased materially. So there's a low starting base. And the other factor that it's difficult to quantify, but you know, is clearly important is the interest rate environment. And over that timeframe, it's been very accommodated. So if we were to look back, over the last 15 years and say and ask ourselves was that the most opportune time to be a home builder and to be around the industry? I think the answer could be yes and part of it culminates in the post-COVID period where today the public builder universe from a debt to cap perspective is about 15 to 20%. Today, public builders have on balance sheet about $40 billion of cash between cash and available bank lines. They're buying back multiple billions of dollars of stock every quarter, almost every company. And so from a capital capitalization perspective, they have really gone from one extreme to GFC to another today, extremely under lever, I believe. Couple of the biggest market cap companies in the space are effectively debt free if you net out the cash. So they're in a very, very strong position for the private builders across the country. Those that have in, in good markets, they've experienced, 15 years of consistent growth. Margins have been very strong recently. They've been able to pay down their debt. And so there's not good data on average. private builder debt to cap in 2008 relative to today. But I know, and we work with many builders, big and small around the country, that they have far less leverage today than they've had historically. That's because they've had top line growth, they've had margin expansion, and they've saved their cash and paid down debt. So the industry overall is an incredible footing from a single family rental perspective. The fundamentals there too, are incredibly strong. Occupancy is better than apartments, rent growth is higher than apartments, turnover is less than apartments, the stocks trade at higher multiples and tighter cap rates than apartments. So just the framing, where are we at right now? we're in a really good place fundamentally from a business perspective. And so where does that put us looking forward? Well, looking forward, we feel good because we're in a good spot. Does that mean that we can grow as an industry, let's say for the home builders, EPS 25 % next year? It's not possible. It's not possible because the pie today, if we're producing around 1.4 million new housing units annually now, I think that's our summer research estimate for 2024, then how do we go from, if we want to grow 25%, can we jump up to 1718? And if you look at every single piece of the supply chain, it's not possible for any, for most, maybe all to accommodate that type of movement. We're talking about the supply of land, the ability of municipalities to approve that land for its intended use, the land development industry to develop that land, the construction industry to have the trades and material supplies to produce those homes. So anything outside of whether it's a GDP two, 3 % plus double, you can grow faster than GDP in that mid single digit to maybe 10 % range as an industry. If the industry tries to do anything different than that, we kind of know what happens because we can look at the post COVID period where windows weren't available on the East coast and garage doors weren't available. Transformers weren't available in Texas as recently as earlier this year. so supply Deficits result in price spikes and supply chain elongation cycle times expand and things went crazy Now they're back in balance and we know so looking forward It's hard to leg up another 25 % from a growth perspective because the industry capacity is just not it can't do it It simply can't do it lumber spiking in the post covid era was you know? It's very dramatic So from a growth perspective, it has to be slow and steady on the top line, which our projection for public builders from a revenue perspective, some research is the public builders can grow top line revenue around 5 % next year. That's about the same number for closings with some maybe marginal pricing pressure and incentives remain pretty heavy. so we can't, know, the overall pie has some growth limitations and that's probably the case for the foreseeable future. The question is, does that mean that we can't grow earnings faster? Well, in the middle there's through competition because everybody is trying to grow more than the industry can allow. There's a lot of pricing competition right now. Incentives are high because of affordability. And so there's margin pressure. I Glenar just announced earnings last night. And if I read correctly, they projected next year's, I think sequentially this quarter's margins over prior were 300 basis points tighter. And looking forward, they project margins at the gross and operating lines to come in a little bit more than that. So top line, we have kind of an overall outlook where there will be growth, but it's not dramatic. We have margin pressure through competition and some cost pressures too, especially on the land side. On the EPS line, however, we think it can grow faster because these companies are buying back their stocks. So they're just kind of. they're reducing the denominator of the EPS. So overall, the overall conditions feel good. It's more a slow and steady blocking and tackling execution. Some groups will perform better than others. If you're an equity investor and you're looking forward, know what the sentiment today is, it's okay. The question that I think our research team talks about a lot when they're talking to investors is what's the catalyst to move know, pick a stock or some stocks and their valuation multiples. What's the catalyst to get them from, you know, up 15, 20, 25 % in the next year or next two years. And right now that catalyst would bump it up against affordability. So it doesn't feel like we can push price. I just mentioned some reasons why it's hard to grow the overall pie. And so that comes to &A, which I think we'll come to a little bit later in the conversation and taking that amounts to taking share from others. And the question is, how are they doing that at the sub-market project level or through &A? And then through kind of EPS management, what is the catalyst to surprise to the upside? Might have to rely more on the rate environment today than maybe historically if we were in 2015 and the industry is still only running at 70 % capacity, you can get jumps in demand, you can get jumps in margin unexpectedly. created more excitement for looking from an equity perspective. Jack BeVier (14:23) What is, mean, that's, hear you on the, can't grow top line as much because of really supply constraints, right? The, the getting land into the system, getting new developed land and then the cost of build, you know, to bring new product online. That's not what the politicians want to hear right now, right? With the affordability, getting as many headlines as it is. Do you think that And you're saying that the industry as just, you we're taking the inputs that the world gives us and processing them as fast as we can in the private sector. But, you know, we can't get the local municipalities to get us through the entitlements process faster. Do you think that there's, do you think that that environment may change as a result? You know, if, we're continuing to have increased demand for housing, but supply is just, Hey, here's how much we can build given the current inputs. Do you think that there's the possibility of that side of the equation changing on a going forward basis? is real estate too local and doesn't matter who's in Congress, who's in the White House, the locals are not going to allow this dynamic to change? Tony McGill (15:34) Yeah. Yeah. I think, I think our view is anything on the margin that is supportive of more housing production matters and whether it matters on the ground because there's things happening that actually produce more supply or whether it matters because of sentiment and looking forward, the optimism of the opportunity. very supportive and those are good things. The practical reality of just producing another X hundred thousand or million housing units over a defined timeframe, let's say a four year presidential cycle, it's hard to make the math work. It's hard to really pencil out getting from point A to point B. Now, one of the things that could happen from a demand perspective is, what's being talked about from an immigration perspective, is that gonna reduce demand for housing, just fewer people in this country? And if there's broad change coming from a government employment perspective, from a government spend perspective, there's follow throughs on consumer confidence. Do they have jobs or they decide they don't wanna go back to work? Is the government really gonna stop spending in some meaningful way where if take government spend goes down? 20 % from a GDP perspective, that's very material and has repercussions throughout the job market and ultimately household formation demand for more housing. So there's a lot of different moving pieces that are really difficult to quantify. so overall, all of the initiatives, any initiative that, you know, supports the creation of more housing does matter on the margin, both practically and from a sentiment and psychological perspective, but it's difficult to translate what's being discussed and what we read in the news headlines and what we hear from our sources, connecting that with the industry's ability to actually accommodate. Jack BeVier (17:37) It sounds to me that you therefore would not, are not that concerned about the idea of a decrease in home prices because of the supply constraint just keeping pricing up. Is that a fair statement? Tony McGill (17:51) Yeah, that's fair. And our internal house projection for new home price appreciation next year is this year it'll move up on a new home about a percent and then we expect about 2 % next year. Again, very difficult to try to defend the math on why home pricing will decline, especially materially given where we're at from a job and income perspective. So it's difficult to see what cracks pricing on the existing home side, inventory is now inflected up maybe two or three quarters ago, and we were turning over existing new supply, I'm sorry, supply about 80 basis points of 0.8 % of total housing stock was on the market about a year ago, that's moved up to about 1.2%. So it's moving in the right direction. Some of it was rates when rates came down earlier in the year, the lockout effect. improved on the margin. Anyway, so the existing home market, there is more supply coming online. And from a new home production perspective, there's been a big shift in the industry to having inventory available in the form of spec, one, to improve the operating efficiency of building that home, and two, to be closer to the point of sale to help consumers lock in mortgage rates quickly. So there is building spec supply in the industry now, which we think is, we'll see how it plays out over the course of the selling season coming up. But there's more new home supply also in process where it should help. manage pricing as more supply comes on, it will help keep pricing in check. Jack BeVier (19:34) So the environment that you described there make, you know, sounds like like decreasing margins potentially for home builders because they can't see the only way they can grow. Everyone wants to grow, but the only way they can grow is by eating somebody else's lunch. You know, the pie is not getting bigger. It's staying the same size in terms of total, total activity, total revenue. But the underlying, so it's, you know, what comes to my mind is that it sounds like the underlying. Assets, however, are going to continue to appreciate because if you believe in the US economy on a going forward basis. So what's your perspective on the sweet spot to be in in housing right now? Like home builders have, you know, they're traders, right? It's a manufacturing, you know, it's a manufacturing environment. They're selling it, whatever the market price is at the time that they produce that unit versus the long term hold. segment of the market. Maybe we can segue into the build to rent side of things. Do you more upside in terms of the long-term holders versus the quote unquote traders, the home builders? Tony McGill (20:39) You know, it really depends on what type of capital you have, what your LPs are looking for, their risk return tolerance, the spectrum, you know, your mandate, because there's a lot of opportunity, I think, across the spectrum. And I was meeting with a group, Build for Rent group a couple days ago, and we were talking about the availability of raising equity, a lot of equity. And everybody has... alternatives. And two simple alternatives in this conversation came up. Well, if I invest with you, what's the opportunity, the return I can expect to get on my capital relative to, think, pick one of the large cap builder stocks, they turn over $250 million of trading volume stock trades every single day. So a major private equity investment. Jack BeVier (21:07) Mm-hmm. Tony McGill (21:30) know, let's say $250 million into an opportunity in the space that's illiquid and requires, you know, lots of things happening for the returns on that money to actually be realized relative to why I can make that decision in one of these public securities and change my mind in a week. And I have perfect liquidity. so, you know, it's all about what type of capital you have and and what your mandate is, but I think there's opportunity across the board. I think it's interesting in the Built for Rent space, and we attended a conference a couple of weeks ago, the main single-family rental conference in Phoenix. And I think that there's a lot of optimism that looking back over the last two, three years, the environment has been very challenging to start new Built for Rent homes. And if you're the owner of a Built for Rent portfolio, you know that those fundamentals have been very strong. and you do have some control of the top line. Operating margins are generally pretty good, but the interest rate environment is different than what was underwritten. So you feel good to own the portfolio. In a perfect world, you don't have any gun to your head to move the portfolio unnecessarily, and you can wait for a more accommodative environment. I think we, I would love to be along those assets that 2021, even 2022 build vintage, build for rent. I want to belong that. Equally, there are public company stocks in single family rental, even in apartments and in home building, where the companies are performing really well. They have a great track record and they're outgrowing their competition in the form of either top line margins or ROE, where I'd love to belong some of those securities as well. So I'm not sure if that answers your question, but there's really a lot of opportunity out there for different types of capital. Jack BeVier (23:23) What is your perspective on the future of the build to rent space? Interest rates obviously being a big driver there and the sentiment is now a little less clear that rates are definitely coming down. Is it still, so are you seeing build to rent deals? happening now because of those long-term fundamentals and the capitals matching up with the rate operators or is it still a little bit of a wait and see and once the rate environment becomes more accommodative then we'll have an influx of capital into the built-to-rent space. Tony McGill (23:51) Yeah. I think the building blocks are there's two key building blocks to it. One, the fundamentals are undisputed. People want to rent the homes being produced, these new homes being produced in communities, period. That's true today. That's been true for scattered site SFR for the last 15 years in an institutional manner. And I think the before that individual mom and pop owners have always kind of known that they probably always could have managed themselves better for higher yield. But nevertheless, so that market has always been there. Now it's institutionalized. Now we can build new stuff. But so number one, that's a really important thing to hold true. And it very much does. And today, depending on the depending on the overall market, depending on the sub market, it's cheaper to rent anywhere from based on our numbers. And we write a lot of research on it. We think it's cheaper to rent anywhere from 10 to 20 percent picking the market. So we know that the pull through demand is there. The the broadly defined capital provider community sees it and wants to be involved. They want to be allocated. They want to be allocated a lot more today than they've been able to allocate over the last X years. More capital wants in the space and it wants to be involved. Some of it is just opportunistic. Some of it is a lot more of it is coming from is coming from the traditional commercial real estate capital providers who see it as a legitimate long-term segment. And so if I manage $100 and I need to rotate out of office and I need to rotate out a strip and I need to rotate into built for rent, there all of sudden overnight is an enormous measured in the tens of billions of dollars capital. There is a transaction that hopefully I don't change. It's going to be announced in a couple of days. where a major asset manager is acquiring what used to be a for sale home builder. They're gonna acquire that home builder specifically to build for rent. Some of the rental production will be kept in house and some of it will be sold to third parties. It's the first of its type. It will be the first of its type. And there are a lot of examples in multifamily where major asset managers have either. direct ownership, maybe completely, or a majority or minority investment in the platform of apartment developers. And they have many, you long list of active joint venture arrangements with that group. So I think in the build for rent space and the single family builder transaction that I just referenced is the first stepping stone in what I assume will be a lot more like that. So I think the opportunities in the build for rent space, we know that the pull through demand is there. And we did a transaction in Michigan a couple of years ago where a new home builder was a for sale builder doing for sale homes. they're a great group, a great client. They would keep for their house account a few homes of community, two, three homes. And they work everywhere in Michigan, Southern Michigan, except Detroit. So like everywhere else, all the way to basically Lake Michigan. And so now that's a housing stock that's primarily produced in that area. in the thirties, forties, fifties, sixties, seventies, it's an old housing stock. And so, but there's some new homes being built, not a lot, but there's new homes being built and some of them are for rent. If you just think about from a competitive, I can choose that 1970s house or a brand new one. Not only is that, there's not even a decision to it. I'm getting much better quality. I'm getting a better location. I'm getting it's really so, and that transaction. So they put all of those, bunch of what they kept into a portfolio, which we. which we sold for them at really good terms. And so just because it's a new house, anyways, the demand pull through is there, the capital availability is there, the dynamics are now starting to align where transactions, more transactions will be happening in 2025. And I think the structure and style of those transactions will, are to be defined, yet to be defined. It's gonna be all different, the full range, and it's gonna be I think it's gonna be an interesting year 2025 for that reason. A lot of things will begin to start happening and it will be, and with any luck, we'll have something to say about being involved in some of those things, but it'll be fun to participate and see what happens. Craig Fuhr (28:16) Tony, what's your take on, Jack and I have talked about this on previous episodes, some of the legislative headwinds that are coming up against the larger build to rent companies and frankly, even smaller landlords. We've talked about some states that are limiting the amount of rentals that any particular LLC or corporation can have. Do you have any take on that? you guys done any research on that? and sort of the validity of it if it's a worry or not. Tony McGill (28:44) It's something, it's one of the original sensitivity points of the industry of the major asset managers going back to 2010, 2011, 2012. The concern, well, the fear of adverse government perception and by that potential action, the headlines of what Wall Street is doing that may not align perfectly with Main Street. I mean, really, you I remember conversations, all of the major asset managers that grew into huge portfolios were concerned about that headline. And they mitigated it in a lot of different ways, none of them necessarily direct. You try to stay behind the scenes at least initially. There's a lot of good lobbying effort around it to make sure that the narrative is at least transparent and not imbalanced. You know, and you get negative articles about you know, somebody in, you know, Chicago had to get kicked out of their house. And it turns out that one of these big bad Wall Street people did it. Well, so I think the industry has, it's been an original sensitivity of the industry from the beginning. And the industry has done well to try to help inform the narrative as best they can. And every once in a while things pop up that, you know, catch people's attention, but overall the need at as suppliers of housing, as suppliers of good housing. for the institutional capital, especially doing these both rent communities where they're amenitized, maybe they have gates, they're in better schools, better school districts. So I think that there's a lot of positive that the industry is doing a pretty good job communicating to the media. But ultimately, I think it's an evolving thing. So there's generally... an awareness of the risk, but also not a pending fear of consequential action in the foreseeable future. Jack BeVier (30:37) this, it feels like a very like tough environment to do business, right? Like, I'm like, look, I'm like, where's the opportunity in that in that set of variables? Where's the opportunity? Where can you get it, you know, outsized returns? But when you're describing a situation where we can only, you know, mine so many houses, because we know it just is only so much land that we can get entitled in a certain period of time. And so we can't make, we can't expand the size of the industry. can't build more houses, you know, materially. and, but there's a lot of capital chasing and the risk profiles seems very low because, it's an inflation adjusted asset and the demand for, demand for that housing is there. and as a result, there's a lot of capital has come in. looking for it. So it seems like a very competitive, super mature market, both from the operator's perspective and from the capital deployment side of things. Do you have a sense of where you think entrepreneurial or nimble investors can find outsized returns in that kind of mature environment? Tony McGill (31:45) It's such a vast market and there's so many different ways to make good decisions teaming with the right people with a differentiated enough business strategy that you can reasonably go in expecting to out execute. And with the people with the right track record, Jack BeVier (31:45) Or is it just tough sledding for a little while, you know? Tony McGill (32:08) potentially get there. So I think if the industry fundamentals are as healthy as they are, then we're just talking about a return profile overall. If the fundamentals are there and it's generally understood and we can see it in a million different data points, then it's not it's about the return opportunity coming in because the risk of it has decreased. So, you know, it's just like, it's just the risk return continuum. Yeah, that's right. That's right. It's shifted and the places to get quick wins, quick outsized wins are probably in liquid securities because news headlines hit or interest rates jump or the Fed says something. And, but that's not a longer term. You know, you're talking about can eat IRR. You can get a great IRR over a week or a month or something. Jack BeVier (32:39) Yeah, the profile is different. Yeah. Tony McGill (33:02) But over five years, there's no food on the table. You can't get the multiple. But I think in the industry, and there was a lot of things happening. Lenard is spinning out their land development business. I think I read that there was a very large asset manager around the space that's going to be the manager, external manager, of that new spin company's development assets. So there's, you know, I think there's lots of opportunity out there with the right, talking to the right people, having the right mindset, choosing investment partners, both sides of the equation, sponsor and investor appropriately. Jack BeVier (33:40) Yeah, like I'm feeling a lot of parallels between what you're describing in the home building sector and what we're experiencing on the fix and flip side of things. Like there is not a lot of inventory, because many, many houses are locked up in 3 % mortgages. So folks aren't selling. there's just, there's only so many people getting, who are passing away and getting divorced and, know, and need and must sell their house. have like a constrained amount of supply on the flipping from, for, for as his inventory. into a market that has gotten much more talented. There's so many, you know, so many more great flippers, you talented renovators in the market today than there were 15 years ago. And there's plenty of capital that doesn't perceive a whole lot of risk deploying to talented operators. And so the returns on that side have really gotten really been driven down. And the only thing that like, you know, and the thing that like that might change that dynamic is if interest rates come down enough such that that spurs both a releasing of supply from these 3 % mortgages into a you maybe a 5 % refi or a new home buyer who's getting a reasonably similar rate or to spur new demand because affordability is much stronger because of the lowest and lower interest rate. So I feel like I feel like in both pair, there's a parallel here where like under both tracks, we're all just slogging it out, like being great operators or doing something else. if you're, be a great operator or try something else until, if and until interest rates come down and then maybe we might get a little shot of adrenaline, but until then it's just put your head down and operate. Tony McGill (35:19) Yeah, it kind of reminds me of there was a, remember in business school, there's a quad chart. It was one of the consultancies or McKinsey or somebody. it was, cashflow was on one axis and then growth. And you can't get a lot of growth and generate a lot of cash usually. they, they, that's the decision you have to make. And one of the quadrants is slower growth, but higher cashflow. And I think that is where That's where the for sale industry has gravitated towards. know, if you go back 10 years in 2014, no cashflow, heavy, heavy cash outflow, but very rapid growth. And, you know, now come around to where we're at right now. And, you know, so I think the industry has moved, moved quadrants. And so then that goes to what, what are you looking to accomplish with your capital? Because that's not a terrible box to be in. They're still growing faster than a utility and they're generating more cash than a utility. They're buying back more stock and add that up with the dividends. still a very, it still can be a great place to be, but you're not going to get a surprise 2X overnight or in the next couple of years probably. Jack BeVier (36:32) So what's your perspective on 2025? What are you expecting? What kind of deals do you expect to be working on in 2025? Tony McGill (36:40) Yeah. it's going, there's going to be a lot of deals out there at large. And I think it's going to have, it's going to be driven by the need to grow offset by the availability to do that organically. So by that, mean, and a, the and a market in, and I'm talking about home builders as it relates to for sale, but also as it relates to. rental opportunity because I think if we let's say in a couple years, is it conceivable to see an apartment company be in the single family rental space? You can't rule that out. No reason to rule that out. Could you see a single family rental company in the apartment space? I think that that maybe takes, needs a little bit more time to potentially develop because there seems to be more growth available in single family rental. We know that home builders are making apartments. We know that home builders are building rental portfolios, communities and stabilizing them and selling them. We know that one of the large public single family rental companies is making their own, whatever it is, 2000 new homes today. They're building that for themselves to get the development yield and keep. So all of these things are very much in the realm of possibility. in the coming year or two. And so I think 25 is when some of these things start to happen. It's, they have very strong balance sheets. They have mandates to grow and they have to figure out the best ways to achieve that growth. So I think scale matters. Scale is king. It's always king in this industry. The big production builders are call it 55 to 60 % of the market. And at the end of next year, they'll be more. They have more capital, they have more scale, they produce more efficiently. They will, and they'll do that through, there, no doubt in my mind, there will be a handful of public to public transactions. There'll be publics buying the private companies. Historically in the building space, there's a public to public transaction loosely once every other year. The transactions are usually motivated by concentrated shareholders who either want out if they're the direct owners and operators or if they have investors who are just looking for, but it's motivated by concentrated ownership. The transactions tend to happen when the buyer's multiples are higher than the target's multiples. And there's a variety of targets in the space that are under scaled. And so I think that that's pretty, look, I think we have good line of sight to those, you know, my expectations around that. And then I think going back to build for rent, these companies now are, you know, the ones, even the early movers, if they were in the SFR space before, they can go back a lot longer, but being a real dedicated BFR is a little bit, you know, called plus or minus five years. If you're now today, you're kind of an early mover. But now the organizations have grown to a place where they are real companies. They have staff, they have executive leadership, they have payroll, overhead, offices, et cetera. And now from an organizational perspective, they're big enough to where it's not just a project or two and you go away. So they're gonna be looking for alternatives, whether it's teaming with domestic capital, foreign capital. continues to be coming into the space, especially from the Pacific Rim. How are they going to team with that? Are they going to team with that capital? What's that capital going to look like at the entity, at the JV level, maybe a combination of both? Where the capital is coming from is going to dictate the cost in terms of that capital. For example, I referenced an asset manager buying a bill for rent company. And there's a certain cost of capital that domestic capital allocators generally are subject to. And then there's overseas capital that is priced differently and sees and underwrites to a return profile that can be different than domestic. So all of these things are really coming around right now to it's forcing the conversation to natural evolution of the conversation for these leadership teams. So I'm really excited about the transaction environment for &A in particular. In the public equity markets, I think there is a very defined need, want, demand. for more public SFRs. Right now, the two public companies are identical in lot of ways from a location perspective, from a renter profile credit quality perspective. And so, but maybe I'm, you know, one of the public investors and I want to play the Midwest. I think the Midwest SFR demand is going to be better over the next couple of years. I have no way to express that in a liquid security. I have no way to express through liquid security my potential expectation that the lower credit quality renter can give me better returns than the higher quality renter just because of where those businesses are. So I think that there needs to be more and there's a demand for more SFR public paper. also think that there's interest in dedicated. How do you, if you're a public group, how do you... play the BFR opportunity, there's no real way to do it. You can buy one these public builders who are doing some, but that's the tail wagging the dog. Again, going back to the demand and capital interest in the space, how do I play it? I would love a public opportunity. And there's lots of ways I can do a service provide me and there's business models to build for my business models. Some companies are just building the portfolio. They're effectively, you know, they're organized as a REIT, they're a REIT. They're going to maybe trade like the public REITs do. Others are service providers, maybe they're property managers, they're fee builders. So there's different business models out there, all again, that can give the public investor optionality on ways to play the space and try to participate in the growth. Now, just to complete your thought, deal activity for 2025, whether the industry is ready for that in 2025 or if that's more of a two, three year type development. I don't know about specific timing, but there's definitely a lot of conversation and thinking and interest in seeing what develops. And there's no question things will. Jack BeVier (43:17) Yeah, the... Yeah, like you mentioned the there's the three main publics that are all kind of Sunbelt newer, newer vintage higher rents. And then it's Vine book, right? Who's got the some Midwest exposure, but they're not they're not publicly traded. there's really nobody else, right? Like that's kind of like there's those four and then it falls off a cliff. Well, there's some private portfolios. Yeah, but but yeah, like you said, and I haven't seen I haven't seen any like roll up. Tony McGill (43:31) Right. There are some larger private ones, Jack BeVier (43:44) I haven't seen much roll up activity. There was definitely in 2021 early part of 2022, but then as rates increased, like that just that just disappeared. Do you see, do you see and I perceive that interest rates are a necessary precursor to a roll up strategy coming back into the market unless you aggregated that capital and wanted to come in in a very, you know, in a lower leverage, you know, more read style play, I guess you could have somebody just like from, from, from zero. raising a REIT and aggregating portfolios and not worrying as much about the interest rate environment because they're operating at much lower levels of debt on balance sheet. But do you think that capital is going to come? Do you think that's new capital coming to the space altogether? Or do you perceive it as its home builder capital coming to B2R because that's adjacent and multifamily capital coming to SFR because that's adjacent? Or is it new capital coming in because they perceive it as a new thing that fits their risk return profile? Tony McGill (44:51) Yeah, and in the context of, I'm thinking about it in the context of public capital, if that's how you're asking about it also. I mean, the way to answer it that way, the answer would be, if you think about any IPO order book, the demand in that book falls into two categories. Let's say, you know, GM goes public. Well, that money in the IPO order book is coming from two places. One, some groups will rotate out of Ford, Nissan, the other autos. They're along the space. They have an allocation to the space that they now have to include GM into. So they'll rotate out of those other securities. to, you know, and they'll end up in at the space, but now they're balanced with, so they have to be in the IPO order book. have to participate. Then the other bucket is new. So it's just, you know, new capital coming in and that can be, you know, can just be opportunistic, just looking for a quick run or it can be groups that have a position, a unique position on in this case, GM, right? So I don't know if it's necessarily that, you know, vastly different. profiles of investors own the public reads versus the public builders, right? The public reads are real estate groups. Primarily they can, they run the pack. They are looking for the dividend and they understand the real estate. That group is different than the builders who, although they are paying more dividend now, they're not, you know, you don't buy a builder cause you love the dividend usually. So very different investor clientele. And I think for the build for rent, it's a great question. Is it built for rent? Does the capital come from one or the other or a combination of both? For sure, it has to be a combination of both. I think the proportion of it is to be determined. It'll be interesting to see when these things start happening and you kind of start looking at the investor names in these order books. I think a lot of it certainly comes from the real estate universe, the public read universe. Jack BeVier (46:53) Gotcha. Well, Tony, it has been a real pleasure. I was super excited that we could grab some of your time and wanted to get your perspective. I missed you at this past IMN, but I know we've connected at ones previous. So are you going to be in Miami in May? Tony McGill (47:07) Most likely, most likely. Jack BeVier (47:09) Sounds good. Well, I'll buy you a drink. The rounds are on me. Tony McGill (47:12) Yeah. Craig Fuhr (47:13) He owes you a drink at Tony McGill (47:14) Yeah. Craig Fuhr (47:14) this point. yeah. Jack BeVier (47:15) Yep, for sure, for sure. Tony McGill (47:16) It's hot down there, you get thirsty. Well, look, guys, really enjoy, there's, hopefully this has been helpful and there's, you know, at least a few things there that your audience find interesting. It's great to appreciate the invitation and look forward to seeing if it's not in Miami in May, in person somewhere sometime soon. Jack BeVier (47:38) Sounds good. Craig Fuhr (47:39) Tony, you've been very gracious with your time, folks. We hope you enjoyed it. Tony McGill, Senior Managing Director with Zelman and Associates. Thank you so much and happy holidays to your family, Tony. Tony McGill (47:50) Thanks guys.