NAHB Power Hitters with Todd Sears

4385

Yield PRO TV presents NAHB Power Hitters. Host Linda Hoffman talks with Todd Sears, Executive Vice President of Kittle Property Group, Inc.

Pruitt-Igoe story


Transcript: NAHB Power Hitters interview. Linda Hoffman with Todd Sears, executive vice president, Kittle Property Group, recorded October 28, 2021

(music)

Linda Hoffman: Can society be designed? Can personal pain, dysfunction, even mental illness be solved simply through good building design, specifically well-designed apartments. Some twentieth century architects, engineers, analysts, and politicians thought so. In fact, there’s a story in Yield Pro’s October edition that talks about just this topic. See the link below for the story.

I was born and raised within a stone’s throw of the first such housing scheme that promised to change the world. Well, at least the public housing world. Pruitt Igoe made quite an impression on my life, and my city, in its brief 18 years before being razed to the ground in 1974. As these apartments were being developed under the post war New Deal, the government’s promise was clear and definitive: The apartments of Pruitt Igoe would be the first of many to solve poverty, crime and housing in America’s cities. Instead, the project became an indelible lesson on the dangerous, albeit, unintended consequences of what happens when city planners remove personal liberty and choice from the equation.

In the nearly five decades since Pruitt Igoe, I am delighted to report that apartment design and strategy has come a long way. Today we find out just how far.

Todd Sears, EVP of research, policy and strategy with the Kittle Property Group in Indiana, has given a lot of thought to this topic. Going as far back as 1948, KPG has developed apartment communities in 18 states. Developing and managing both affordable and market rate properties, Todd takes a systematic approach to housing affordability and investments with social impact. This is going to be fun. Todd, welcome to the show.

Todd Sears: Thanks. Appreciate the opportunity and look forward to our discussion.

Linda Hoffman: Let’s start with a bit about yourself and Kittle Property Group. What do we need to know?

Todd Sears: Well, my background’s mostly around finance investments, but my experiences touched on a variety of different topics. I started my career in commercial real estate working for a large bank in Chicago, and then, also in Chicago, in a large accounting consulting firm. And then, about the mid-90s I switched over, and came back to Indiana. Went to work for the Indiana Housing Finance Authority, working on affordable housing, and also the Indianapolis Neighborhood Housing Partnership—a local nonprofit. So, my backgrounds cover a combination of public, private and nonprofit entities.

About 16 years ago, I made the transition over to Kittle Property Group, and I’ve had various roles here, including finance, asset management, property management, design, and most recently, leading a new function for research, public policy, and strategy.

Kittle Property Group really has had three different iterations of owners, starting back in a 1948, as you mentioned. So, we focus primarily on affordable and workforce housing developments with approximately 17,000 units in about 16 states—most of them east of the Rockies.

Linda Hoffman: Kittle recently went through a rebranding, even moved their headquarters. Does this portend a new direction for the company?

Todd Sears: Well, yes and no. So, yes it does reflect the transition of the company from Tom Herman, who retired about a decade ago, to Jeff Kittle, who’s been with the company since the mid-1990s. But no, the fundamental game plan that we have for the company as a vertically integrated real estate company with a focus on affordable and workforce housing—that’s really remained the same.

The relocation of the headquarters is an interesting, but kind of coincidental issue that happened last year. Our lease was expiring in 2020, and we were looking at options, including just sitting where we were, right about the time that COVID took hold. And, a building in the office park where we were located came on the market, and it was a really good opportunity, so Jeff decided to purchase the building, rather than sign a new lease at our old location. And we’ve just moved in the last few months. It’s had terrific reviews from our staff members, and just recently won an award for interior design here in Indianapolis.

Linda Hoffman: You are EVP of research, policy and strategy, Todd. I don’t know of many companies your size with research departments. What advantage does dedicated research team give your company?

Todd Sears: Well, it’s a very perceptive question about the size of the company. You know, if you look at companies that have 25,000 units or more, this type of role’s really common. But, at 15,000 units, it’s a little bit ahead of its time, and a little bit unusual. But, we have a long history of kind of starting initiatives with some lead time. It gives us a chance to gain a first mover advantage, and really helps us kind of target our strategy to where we need to be, as opposed to where we currently sit.

You know, like many small to medium-size developers, we have grown piecemeal over the last few decades. If we needed a system to help us track our people, well, then we got an HR software system. And if we needed a system to help us to design, to handle our design or construction projects, well, we got a project management software system. And, if needed a compliance system, we got a compliance software system. All these different separate systems. But, if we want to get to the next level, to the next scale of where we’re headed, well, that requires a lot more integration and collaboration. And to do that, you’ve got to have the systems and the people, not just me, that can work together, and talk to each other through multiple datasets, multiple software systems, so that we can become more efficient as we become larger.

So, it’s this position, this role really is a little bit early in our company’s lifecycle, but it’s the step we needed to take in order to continue on the growth path that we’ve been on for the last couple of years.

Linda Hoffman: KPG is definitely vertically integrated with its own development, design, finance, construction and property management. How does this structure contribute to success?

Todd Sears: Yeah, that’s true. We have a really long history of vertical integration across a wide variety of functions. It doesn’t mean that vertical integration for us is an absolute, or it’s sacrosanct. We challenge vertical integration as a business model from time to time for all of our functions, but, generally what we find is it really provides the flexibility and allows us to be adaptable and take advantage of new opportunities and changing circumstances as market conditions, or the environment changes. I think the trick about vertical integration in real estate—maybe this is true in any business—but certainly real estate—is that it changes your emphasis from maximizing the margin on each transaction or each project, to maximizing the flow, or the speed of the work that you’re doing.

So, conceptually the fixed cost of a vertical integration company is bigger, and it requires you to build momentum and kind of keep that train rolling down the tracks. And, we often refer to that as our flywheel. Our flywheel has four components: employ great people; develop a standard product; generate short and long-term cash flow, so that you can reinvest to grow the portfolio, and the vertical integration model really sets us up to make that flywheel move.

Linda Hoffman: One KPG initiative is to standardized property designs in order to lower costs. That is a well-worn strategy pursued by others, like Humphreys and Partners architects and Katerra. How has it worked, especially with such a variety of site conditions?

Todd Sears: Yeah. Well, I guess I should say first of all, we’re still in the early process of standardizing our designs and are developments typically have a long 2 to 3-year cycle in the development phase. So, we’re just starting now to see some of the benefits of the standardized product coming through our system for projects that were really started a couple of years ago. In-house design has been a has been one of the components of our company since our original founder, and for many years, especially when we were building in more rural markets, we could use the same product multiple times. But to your point, yeah, it’s become more challenging as we’ve increased the volume of our activity, and we put more emphasis on suburban and urban models in particular markets, in particular.

I’m not familiar with the details of Humphreys or Katerra, beyond what’s in the general press or the information that I kind of pick up at conferences. But I do know for us, standardization was not just, or even really primarily about the lower costs. Yeah, hopefully that happens. I mean, that would be a great byproduct, but we’re standardizing in order to gain efficiency from a consistent product and repetition.

It goes back to that flywheel. It’s all about that flow, and making that fly wheel spin as fast as possible, and standardization is what really helps us gain that consistency, and get rid of as much friction as possible. So, hopefully, and you would expect that over time one of the results of that, one of the things you would see from that would be lower costs. But our real motivation going into it was to make that fly wheel spin so that we could get more repetition, and faster turn in the work that we’re doing.

The other part of your question had to do a site-specific situations, and these always come into play. And one of the things that I find as I talk to people about standardized products is everybody has a little bit different definition of what standardized means, at a different level of detail. So, for example, I don’t think we’ll ever be able to standardize, to the extent that we could pound the nail in the shingle in the home office and FedEx it to the site, and expect someone’s going to install it and make it work. That’s just not, we’re not at that level of detail.

But we are looking to standardize around things like the building footprint, the standard unit mixes, the standard finishes and amenities in the floor plans. Those are the kinds of things we can standardize, and, yet, still adopt, or adopt the model, so that it works in each location.

Linda Hoffman: KPG has moved up the ranks of affordable housing developers and owners. Why the focus on affordable?

Todd Sears: Yeah. KPG and its predecessors have a long history with affordable housing. I mean, currently we do a lot of tax-exempt bond deals, but previously, we did 9 percent tax credit deals, and before that, we did a lot of rural housing, before the tax credit program even came around. So, it’s always provided the company with a balance of three things that are really important to any company. It gives us some near-term or short-term fees that come to our development in our construction activities. It gives us some longer-term cash flow from operations, which is important. And, it helps us build a portfolio of properties that can achieve economies of scale as we grow and expand into new markets, so we’re not having to rebuild the team every time we do the next deal in a market where we’ve been before.

Linda Hoffman: You’re also active in workforce housing. What’s the secret to unsubsidized housing that’s affordable to low-income renters?

Todd Sears: Yeah. Hard work. Lots of risk. I don’t think we have any magic formula on this one. Workforce housing is tough, for sure. It does help, we have a great operating platform that we can start with and having development, design, and construction systems, all of those crossover really well into workforce housing and I think do give us some advantage on that front.

But, I think the biggest thing for us that makes a difference relative to workforce housing is that most of our affordable portfolio has a component to that’s unrestricted, and market rate already. And, so, when we went to do our first workforce housing deal, it was a shift in what we, but it wasn’t a big step or a big difference in what we do. It was a continuation, or a further shift in the component of the units and the incomes, and the residents that we typically serve. And, frankly, you know, in the Midwest in particular, where we grew most of our portfolio initially, the difference between the affordable market and the workforce market really wasn’t that significant. They were almost the same up until just the last couple of years. So, for us, we eased into this workforce housing and it’s really grown to become an important component of what we do year-in, year-out.

Linda Hoffman: Everyone knows about the exodus from the urban core. Some say there was a significant shift away from senior housing during COVID, as well. How did KPG’s senior housing properties fare over the last year and what’s your outlook?

Todd Sears: Yes. So, senior housing makes up about 10 percent of our portfolio—most of it is in the Midwest. And I think that the first thing to understand about senior housing, at least for us, is it’s mostly in the affordable component of our portfolio, as opposed to the market rate. And, similar to what I just said about workforce housing, most of our deals have a pretty significant component of that that is unrestricted, or the rental rates are not restricted. So, we’re not in the groups that really, I think, struggled with COVID, like assisted living, or memory care, or other components of the senior market that were hit really hard.

We’re really in that component where people are making the transition, that first transition, out of a homeownership situation, and moving into a seniors, into an age-restricted facility. You know, looking at our portfolio, I pulled a few stats, same-store sales, apple-to-apple comparison, our occupancy in January, 2020, for our senior portfolio was 94.8 percent. Our occupancy in October, 2020, so a year ago was 94.7 percent. And our occupancy today is 94.4 percent. So, almost identical across the board, and I think that really goes to the kind of characteristics of our senior portfolio and the folks that we serve.

It’s been a great addition and component of our portfolio, and I think it really comes down to our senior residents have very stable incomes—sometimes from Social Security, maybe from part-time work, maybe from a pension or savings account, but, they were all used to dealing with a pretty cost-conscious environment, and have weathered the current storm pretty well.

Linda Hoffman: So, Todd, now the question that only you can answer: can apartment design cure social woes?

Todd Sears: That’s a really good question. I don’t know about curing the social woes. But I do know that design can either help or hurt a community, and its residents. People recognize good design when they see it, even if they don’t have a technical background in design. When you see good design, you know it and so does the resident. So, I think for us, bringing design in-house, having that part of our vertical integration model—it’s a critical component to what we do, and it’s particularly important important for the affordable housing and the residents that we serve.

Linda Hoffman: Well, there’s no doubt that analytics will continue to play a greater part in the world of commercial real estate, especially in the way of opportunity. Thanks for joining us Todd.

Todd Sears: Thank you. Have a good day.

Linda Hoffman: You, too. We’ve come a long way from the social engineering of the last century. Forecasting, statistical analysis, especially AI will play an ever bigger part in outcomes and success. The one thing that remains the same… it always begins with housing.

Thanks for joining us. I’m Linda Hoffman. See you on our next exciting episode of NAHB power hitters.

(music, credits)