October 26, 2020

JT Capital - Multifamily Investment Thesis

To the supporters and stakeholders of JT Capital:

This is our first formally published Investment Thesis for JT Capital, where we discuss our outlook on the Multifamily asset class, our strategy, approach, markets, process, and business.

As of 2020, there are almost 40M renters in the United States. With the abundance of renters in the market, the partners of JT Capital  identified an opportunity where high-quality operators and investors can purchase and manage these apartment complexes.

Why Multifamily?

Multifamily is in demand and is a great asset class for two main reasons:

1. There is a shift in demographics in the U.S.

2., Housing costs are too high.

A Shift in Demographics

Millennials, Seniors, and Immigrants are renting now more than ever before.

Almost 70% of the 75M Millennials are currently renting. Millennials are renting because home prices are too high relative to their incomes, they have taken on a record $1.6T in student debt, and they’re delaying marriage and kids. Now this isn’t the worst thing — the apartments they are living in are nice. There are a variety of amenities they probably would not have in their house like a fitness center, pool, and cafe. Not to mention, if your toilet breaks, you just press a button on an app and a maintenance person at the apartment complex will come fix it.

Seniors are downsizing because they don’t need their big 5 bedroom houses anymore. Their kids have grown up and moved out. To maintain a house takes time and effort and maintenance costs. Renting an apartment is much more convenient because you don’t have to deal with the issues and upkeep. As this older demographic sell their homes, they begin renting due to the convenience and reduction in space.

Immigrants come to the US with a dream of building a better life. When they first enter the country, they are not yet qualified for home ownership because they don’t have credit scores and lack documented employment history in the US. Looking past the current political narratives, over 1M immigrants enter the US each year and they now make up almost 15% of US citizens. They turn to renting in apartment complexes as their first living space.

Housing Costs are too High

Construction costs are rising, the price of land has increased, and there are tighter lending standards. All of this leads to new construction limitations across the US. When demand outpaces supply, we see an increase in price. In this case, demand for housing is higher than supply, therefore housing costs rise which price people out of the housing market and these same people will rent instead of buy. This supports our assertion up above that housing prices are too far out of reach for Millennials and Immigrants.

Our Approach

Given these trends, we take  a laser-focused approach on a specific niche within multifamily. We  concentrate on two pillars:

● Pillar 1: Identify the right markets

● Pillar 2: Purchase the right properties.

Markets

We look for markets that have a sustainable, long-term growth outlook. The characteristics of these markets are locations that have strong and diverse job growth, economic and population growth, acceptable cost-of-living, and governments which are business & landlord friendly. When these factors come together, we have an environment where you have a growing population with well-paying jobs. Put simply, all of these people need a place to live, which positions multifamily real estate in a good position to house the growing population in these markets. Similarly, business and landlord friendly markets have put real estate investors and landlords in a position to run their properties and investments efficiently and effectively. Whereas certain cities have placed too high of a burden on landlords, and ironically renters, due to illogical and harmful renter protection rules.

These markets we target are known as "Tier-2 Markets". To put this in context, Primary markets would be defined as places like New York City, San Francisco, Los Angeles, and other similar cities. Tertiary markets would be emerging cities in places like Kansas City, St. Louis, and Cleveland. Primary markets provide investors with a lower cash-on-cash return given the perceived lower risk of purchasing in these locations. Conversely, tertiary markets will provide a higher cash-on-cash return given the perceived higher risk. We find that Tier-2 Markets provide us with the best risk-adjusted return.

With that as the backdrop, we are currently focused on purchasing assets in Austin and Dallas given that these markets offer the best of the characteristics we have defined above. We will dive deeper into why we like the Austin and Dallas markets later in this document.

Properties

We purchase properties where we are confident that we can increase value by undergoing interior and exterior renovations, adding amenities, and implementing high-quality management. This results in creating a beautiful community for people to live, and therefore a great investment opportunity. We focus on the following types of properties to purchase:

Asset Class: A & B

● Location: On major streets and throughways, in residential neighborhoods, in close proximity to colleges and campuses, hospitals and malls and other employment generators

● Pricing: $10MM – $150M+

Property Vintage: 1980 or newer

Investment Structure: All cash to seller. Loan assumption may be considered

● Preferred Markets: Major cities in Texas

Our Markets

In the previous section we mentioned that we invest in markets that have a sustainable, long-term growth outlook. With that as a backdrop, our current investment criteria for location focuses on two main cities within Texas - Austin and Dallas.

Austin and Dallas have strong underlying fundamentals which have led to resilient & diverse job growth, economic and population growth, and have governments that have created incentives for businesses and landlords. All of this has led to an attractive region for growth and investment.

Substantial Population Growth

Austin and Dallas metros have both seen a significant increase in population over the past decade.

The population In Austin and Dallas is roughly 2.3M people and 7.1M people, respectively. This has grown by 32% and 15% respectively over the past decade. To put that growth in context, Austin has grown at 4x and Dallas has grown at 2x relative to the population growth of the U.S. during that same time period. These cities have consistently ranked as the fastest growing for the past decade. This follows a broad trend that we have seen as people migrate to Texas due to many of the factors we discuss in this section.

Strong Job Growth

Austin and Dallas have both seen substantial job growth over the past few decades. As of the beginning of 2020, there are roughly 1.2M jobs1 and 6.7M jobs2.3 in these cities, respectively. Average unemployment rates historically trend lower than that of U.S. on average.

However, it is not just about the number of jobs that can drive the growth of an economy, but rather the quality and resiliency of these jobs. In Austin and Dallas, there has been a rise in established tech companies setting up HQs and hubs in these cities. These include Facebook, Amazon, Apple, Netflix, Google, Tesla, among others.

Low Cost of Living

One of the many reasons that Texas, and Austin and Dallas particularly, have been an attractive destination is the low cost of living. For the majority of Americans real wage growth has been stagnant and purchasing power has decreased since 1970. This is evidenced by the rise in cost for student debt, housing, and healthcare. As an example, total student debt today is $1.6T. Because of this dynamic, many of the people in our renter target demographic place a high importance on cost of living. And they have migrated to lower cost of living locations such as Austin and Dallas.

In 2020 specifically, COVID-19 was a catalyst for accelerating growth in lower cost of living states. As an example, in the first half of 2020 in San Francisco and New York, 80% more people left these cities than moved in. These are primary cities that have historically been  destinations for young, ambitious, and driven people. We believe that this is a sustainable trend of growth in Austin and Dallas given the social acceptance of remote work as it was forced upon us due to COVID-19 this year. It is not longer a requirement for young, ambitious, and driven people to only be located in coastal cities.

Business & Landlord Friendly

The Texas state government and local governments in Austin and Dallas have promoted an environment of making it easy for companies to create successful businesses, which has led to the job growth and population growth we’ve discussed.

The most simple and straightforward example of this is taxes. In Texas, the tax rate for franchise businesses is roughly 1% and qualifying businesses have taxes as low as 0.5%. There is 0% state income tax on employment income. In addition to a tax-friendly environment, there is also a favorable regulatory environment in Texas which reduces unnecessary hurdles for businesses to set up, create value, employ individuals, and thrive -- all resulting in a net positive impact on the state and local economy.

Overall, these factors have proven to be effective and successful in establishing a strong economic environment in Austin and Dallas which is why we specialize in investing in these regions.

Our Process

We look at deals every single day. We analyze numbers and financials, tour properties, and talk with our Real estate brokers to find great apartment complexes. We are frequently communicating with our team about prospective opportunities: brokers, lenders, and property management so when we are awarded a deal, we can hit the ground running.

When we find a great apartment complex, we move quickly. We provide a fair offer to the seller, negotiate terms, and strike a deal. From here, we have about 60 days to take over the property.

During these 60 days, we perform due diligence on the property to make sure we are not missing anything. We go into every single unit to inspect the condition, we get backup of all the financials, and we check the structural components of the property. If everything checks out, we are happy. If not, we do not pursue the deal.

During these 60 days, we raise any where from 25% - 40% of the money from investors -- also known as Limited Partners.This equity is for the down payment, renovation costs of the property, and any other fees. The remaining 60% - 75% of the money we get from Fannie Mae or Freddie Mac at a low interest rate and great terms because of our track record and success.

At the end of the 60 days, we finalize and close the deal. We take over the property and begin managing the asset. We provide quarterly distributions to our LP investors. On the 1st of every month, the residents pay rent. We use this rent to cover the costs of the property and to pay LP investors a quarterly distribution. You get paid quarterly the entire time we own the property.

We will increase the rent on the property by implementing upgrades to the property like a new clubhouse, gym, and renovating some of the units. This increases the amount of cash flow that the property generates. In addition, we minimize unnecessary expenses and ensure our spend is resulting in effective top-line growth.

After some period of time, usually 3-5years, we will sell the property at an increased price. We can sell for a higher price, because we have increased the value of the property by increasing the cash flow and by buying high-quality properties in great markets. After we sell, our LP investors receive a large portion of the sale from the property.

We find the next deal, and our LP investors have the opportunity to re-invest with us and compound their gains to build wealth.

Our Business Model

Our business model is very simple. On a monthly basis, we are collecting rent from our residents. This rent covers the property expenses such as Repairs & Maintenance, Property Payroll, Marketing, etc. This rent also covers the debt service cost for the mortgage payment we must pay monthly. After those expenses are paid, we have our remaining cash flows. A general rule of thumb is that cash flow is roughly 33%of the Rental Income. This cash flow is what gets paid to our investors. We generally distribute cash flow to our investors quarterly in the form of a preferred return in the range of 6% - 9%. For example, if an individual invests $1M on a deal and the preferred rate of return is 8%, then they can expect to receive $80K of cash flow every year.

One very important point to understand is that this $80K does not take into account the depreciation that we incur on the property. Every year we do a Cost Segregation study on the property. Cost Segregation is an analysis that is performed to calculate the total depreciation of your property as well as all the items on your property. You itemize, or segregate, all of the assets on the property and then calculate the individual useful life of each item. This allows you to have a significant amount of depreciation each year. This is especially impactful when coupled with our strategy of implementing unit renovations and upgrading the property because all of the money that we invest into the property for these purposes receives a large depreciation. To use our example of the investor who took home $80K in cash flow, a good rule of thumb is that they may be able to recognize up to 30% of depreciation. This means that for tax purposes they can recognize a loss, which helps reduce their tax liability.

JT Capital aims to have aligned interests with our investors. We target to invest up to 10% of the equity on each deal so we are in full alignment with our investors. In addition to investing alongside our investors, we also are compensated based on fees. Our fee structure includes an Acquisition Fee at time of purchase, an Asset Management Fee on an annual basis, and a Disposition Fee at time of sale.

Why JT Capital?

We are not the only real estate investors and owner-operators. However, we believe that we are the best at what we do if you are interested in investing in multifamily apartment complexes in the Austin or Dallas markets. Below are a few reasons why:

  1. Conservatism & Thoughtfulness: We run various risk scenarios when identifying properties to purchase. We like to be very conservative in our financial modeling & underwriting. As an example, we generally never underwrite growth in Year 1 of acquisition. We also spend a significant amount of time discussing "What's the worst that could happen?" By identifying worst-case scenarios and modeling for them, we put ourselves in a good position to determine our downside, which is more important than only focusing on the upside.
  2. Trust, Communication & Transparency: We pride ourselves on running an operation where our investors trust us to make the right decisions. We have built up this trust over time by consistently delivering high returns. In addition to this, we are transparent with our investors. We do this through consistent communication via monthly investor updates and providing quarterly financials on the performance of our assets.
  3. Puja, Rohun, and Sapan: Lastly, we have taken a bet on ourselves to succeed. The partners of JT Capital: Puja, Sapan, and Rohun deeply understand that by being trusted with an individual's investment they are placing deep trust in us. It is an honor and a privilege to be trusted with investing an individual's hard-earned money and we work very hard to make sure we respect this trust. We spend much of our “non-working time” increasing our knowledge, spending time on personal growth, and becoming better investors & operators. We do this all in an effort to better ourselves as people, improve our company, and ultimately serve our investors well.

We look forward to continued success.

Respectfully,

Rohun Jauhar, Puja Talati, and Sapan Talati

October 19, 2020

Sources

1: https://www.bls.gov/eag/eag.tx_austin_msa.htm

2: https://www.bls.gov/eag/eag.tx_dallas_msa.htm#eag_tx_dallas_msa.f.p

3: https://www.bls.gov/eag/eag.tx_dallas_md.htm

Disclosures

The opinions expressed in this presentation are current opinions of JT Capital as of October 19, 2020 only, and may change without notice as subsequent conditions vary. Although JT Capital believes that the expectations expressed in this presentation are accurate and reasonable, actual results could differ materially from those projected or assumed and such projections are subject to change, and are subject to inherent risks and uncertainties.

The information contained in this presentation should not be considered a recommendation to purchase or sell any particular security, and it should not be assumed that the securities identified in this presentation, or otherwise related to the information contained in this presentation, have been or will be profitable. In considering the prior performance information contained in this presentation, investors should bear in mind that past results are not necessarily indicative of future results. Recipients should not assume that securities identified in this presentation, or otherwise related to the information in this presentation, are, have been or will be, investments held by accounts managed by JT Capital. You should verify all claims and conduct your own due diligence prior to making any investments.

These materials do not purport to be all-inclusive or to contain all the information that an investor may desire. These materials are merely for discussion only and may not be relied upon for making any investment decision. The information provided herein may be modified or supplemented at any time.

Investors should not construe the contents of this presentation or any prior or subsequent communication from JT Capital or any of its representatives or affiliates, as legal, tax, or investment advice. Accordingly, this presentation is not an offer to sell or the solicitation of any offer to buy any securities or other investment products.

While all the information contained in this presentation is believed to be accurate, JT Capital makes no express warranty as to the completeness or accuracy nor can it accept responsibility for errors appearing in the presentation. In particular, certain factual information contained herein has been obtained from published sources prepared by other parties and JT Capital has not independently verified such information. Accordingly, neither JT Capital nor any of its affiliates, or employees will be liable to you or anyone else for any loss or damage from the use of the information contained in this presentation.

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