Chicago-based JLL Income Property Trust Inc., whose parent is commercial real estate giant JLL, firmly believes in the multifamily sector.
The daily NAV REIT—advised by LaSalle Investment Management Inc., a member of the JLL group—splits its holdings among four property types: multifamily, industrial, retail and office. These days, it’s intensifying its focus on multifamily.
At the end of 2017, JLL Income Property Trust owned and managed $2.6 billion in assets—67 properties in its four core sectors, along with two parking garages.
“We have long-term aspirations of being a $5 billion to $10 billion program,” says Allan Swaringen, president and CEO of JLL Income Property Trust.
As it stands now, multifamily represents 26 percent of the non-traded REIT’s portfolio, with retail at 30 percent, industrial at 23 percent, office at 19 percent and parking at 2 percent. That mix is poised to shift, though, as retail, industrial and office take a back seat to multifamily.
In its pursuit of multifamily assets, JLL Income Property Trust searches for existing, stabilized properties with high occupancy rates. Swaringen says the REIT wants to rely on strong management and “light” upgrades of those properties to assure they’re solid long-term holds.
He notes the REIT has recently purchased a couple of newly built multifamily projects and assumed some of the lease-up risk, but it has no appetite for ground-up construction.
“We don’t do development, we don’t take entitlement risk and we don’t buy land,” Swaringen says.
In an interview with NREI, Swaringen laid out JLL Income Property Trust’s approach to diversification, explained why the REIT is dialing back its interest in industrial, revealed the company’s favorite category in retail real estate, divulged why the company is skittish about the office sector and discussed the REIT’s affinity for multifamily properties.
The Q&A has been edited for length, style and clarity.
NREI: What’s the strategy behind your REIT’s diversification?
Allan Swaringen: Our program is very focused on delivering durable, cash-flow-consistent, growing-over-time quarterly dividends to our stockholders. As such, there are certain property types that LaSalle has been tracking for 20-plus years—and certain geographic markets, too—that we find have exhibited a consistency of occupancy and a consistency of rent growth and an ability to generate cash flow. With that as a priority for us, that’s put us in an overweight position in industrial, an overweight position in grocery-anchored retail, a neutral weight, but growing allocation in apartments, and actually a significant underweight position in office properties because office buildings generate the least amount of free cash flow.
NREI: If you’re currently overweight in two sectors and either neutral or underweight in two sectors, what is your strategy going forward?
Allan Swaringen: We would like to add more industrial to the portfolio, but we’re going to be very selective because there’s so much capital chasing high-quality industrial warehouse markets around the country. We’re just going to probably be less active in that sector than maybe we were over the last two or three years.
We’re not buying every kind of retail. We’re not buying malls. We’re not buying power centers. We’re not buying lifestyle centers. We have avoided all kinds of retail, except for the neighborhood and community grocery-anchored shopping centers. We believe that sector has great resiliency. Outside of our grocery anchors, 90 percent of the retail tenancy is providing some sort of goods or services that cannot be bought online. So, whether it’s getting a Starbucks cup of coffee or a Jimmy John’s sandwich or getting your teeth whitened or getting your back massaged or getting your nails done or getting your hair cut, those are things that our tenants are providing to customers, and you can’t get those over the internet.
We’re going to stay underweight in office. That’s principally not so much about our outlook on office markets or even the office sector. That is a property type that takes a lot of capital. It’s a property type that as a landlord, you’re required to make significant reinvestments in the property every time you renew tenants. So, you can get nice returns from office properties, and our outlook for office markets is pretty strong, but you get more returns there on the IRR than you do on the cash flow. And we’re pretty cash-flow-driven in order to pay dividends to our stockholders.
The one thing that we’ve grown more over the last two years and we’re going to continue to focus on in 2018 and 2019 is our portfolio of apartments. The reason we like apartments is that the shorter duration of those leases allows you to grow your rents faster. We think we’re going to be in a period of rising inflation and increasing rent. We’ve got a lot of long duration leases in the portfolio already; we’re looking for some leases at the shorter end of the curve, and apartments are going to be able to do that for us.
NREI: Is there room for everyone to be chasing multifamily investments? Is there a risk of the sector being too crowded?
Allan Swaringen: I think there is a risk. But while the home ownership rate is increasing, it’s going to take many, many years for it to tick back up. The rising interest rates make single-family mortgages harder for “starter” families and millennials and folks coming out of college. So, we think people are going to be renting longer. That’s the macro perspective.
From the micro perspective, apartments continue to typically be the least accepted property type to develop in a community. There’s a NIMBYism that prevents and somewhat impedes development of new apartments. It’s really because apartments, especially larger multifamily communities, often can be drains on governmental services. They inject a lot people into school systems. They inject a lot of new cars and traffic. Most people want to live next to somebody else that’s in a nice home like their nice home; they don’t necessarily want to live next to apartment renters. That doesn’t mean there’s not new apartment development going on; it just takes longer and it’s harder. I think that’s a micro factor that you’re continuing to see, and that’s why we’re optimistic about strong rent growth and strong occupancy across the apartment sector.
NREI: Is everything on your acquisition radar in the class-A category?
Allan Swaringen: We’re principally focused on class-A property types. But that varies a lot across different property types. Most of the stuff we focus on is institutional-quality, so it’s generally been institutionally-owned. Our focus is more on the primary and strong secondary markets, and typically class-A properties. That’s because we’re long-term holders. We’re not really in the business of “Buy it, fix it and sell it.” We’re in the business of “Buy it, manage it very well, hold it for the long term, try to grow the income and get some modest appreciation.”
NREI: From a geographic standpoint, how do you figure out where you want to invest?
Allan Swaringen: Geography is important to us, but it’s second to property type. I’d say our primary objective around our geographic diversification is to be sure that we’re spread out across the country. Because we’re a relatively risk-averse investor, we really want to spread our holdings broadly across a lot of property types, a lot of markets, a lot of different tenants and a lot of different industries. We believe one of the best risk management strategies you can pursue is just to be very, very diversified. We don’t want to have a huge, concentrated position in a single market. Beyond that, we tend to focus on where we’re trying to move our portfolio weightings across the different property sectors.