Investing in Affordable Housing

Fred Scott:

Thanks for having me, Alana.

EMS:

Absolutely. Fred. So to kick off the conversation, tell us a little about the firm and how you got to where you are today.

FS:

Yeah, sure. I'm Director of Impact Investing at Redstone Equity Partners and Redstone Equity Partners is an institutional real estate manager that provides tax credit equity to facilitate the development of affordable housing. These across the country, founded in 2007, so we're coming on 16 or so years, firm is raised about over $9 billion of tax credit equity for the development and rehabilitation of about 55,000 units in 45 states. We have about a hundred employees spread out over six offices across the us and my responsibilities are pretty much overseeing the investment platform utilizing on tax oriented capital that's going to be invested in underserved markets.

EMS:

So given your focus on investing in affordable housing, wanted you to share your overall outlook for the space.

FS:

I'm cautiously optimistic, but I'm optimistic. Obviously, we are in a difficult capital market environment, but our North Star is and remains preservation and creation of affordable housing. But obviously this market is difficult for everyone, particularly for those who are in need of housing. As we've built out our business over the past year to 15 months, certainly there's been interest rate increases, inflation, political inactivity that has both exacerbated the need for affordable housing, but also has brought that to light to a lot more people. It tends to be in a block of news programs or certainly on the front page of newspapers. And so between the capital markets and these sort of inequalities, it's a complex market, but we believe at Redstone that certainly finding solutions in a complex environment is sort of where we thrive as a business. I think that our pipeline of over 2.1 billion transactions has yielded a strong sort of active pipeline of about a hundred million of transactions, and then hopefully we close some from there.

EMS:

Fred, more specifically, what are some of the greatest opportunities you see in this space and why?

FS:

Well, the opportunity is unfortunately that we have affordable housing needs and certainly I think the economic conditions over the past couple of years has not helped, and that is also both the challenge and the opportunity, and I think we look for areas where there is good demand generation and demographic support. We like story investments, whether it be nurses who need to work closer to the hospital to even ski operators who need to work closer to ski resorts. There is a definite need across the country. We also see some opportunities going forward in public-private partnerships. We feel like our relationships across the country enable us to team up with nonprofits and housing agencies to provide affordable housing. And I think the last thing I would say in terms of opportunities are that we really feel that there is going to be a need to build affordable housing to get us out of this 7 million unit, and I think as soon as capital markets settled down, there will be opportunities for new construction.

EMS:

Fred, on the other hand, what are some of the greatest challenges you face when it comes to looking at affordable housing?

FS:

I was talking to a friend, it costs the same and in a lot of cases to build and then you're not able to charge the same sort of rent. You also think that, as I've spoken, inflation has started to erode margins as well as interest rates and debt financing, but I would point to insurance costs is something that we sort of focus on across our portfolio and looking at those rising rates and also carriers who are getting out of the market, and I think that to us is a significant risk going forward.

EMS:

Fred, to shift gears a little bit, obviously your investment strategy, you touch on ESG, love to hear more overall big picture, how your firm is integrating both ESG and DEI into its remit.

FS:

It is. Redstone is a mission impacted company. Affordable housing affects everybody, red states, blue states. I tend to think that DEI and ESG tends to be a red flag someplace, but affordable housing is something that is certainly our DNA and we certainly want to have a diverse workforce that reflects the people that we serve. We have a hundred employees across the country. I think that in some talented individuals that bring a unique perspective to this mission of creating and preserving affordable housing. And we firmly believe that different perspectives provide more creative and innovative investments for our investors. As far as ESG goes, I do believe in terms of environmental, our portfolio will take advantage of the technology that we can utilize to reduce our carbon footprint. We also are looking at working with the Multifamily Impact Council to really devise good data points with which we can monitor and track our impact in our communities that we invest with. And certainly on the governance we've always focused on risk management and transparency and plan to continue to do that going forward.

EMS:

Fred, we've covered a lot of ground today and wanted to see any final thoughts you have or future plans for the firm?

FS:

Yeah, certainly. I think we hope to continue to be a leader in Litech syndication. That is our main business. That's what we've done for 16 years and that's what we'll continue to do. Our focus remains continued conversations with our operating partners, our investors, and our other stakeholders to continually learn what's going on in the market. We're excited about the data that we get from our 55,000 units and we continue to mine that data as well as external data that we pull in to really find and unearth these opportunities. And I think for us in this new business, our focus is just growing a UM by doing thoughtful risk adjusted investments. I think that, again, preserve and create affordable housing. I think in the future, I think that this is something that we'd love to be able to expand. One must walk before they run, but certainly I think five to 10 years out, we'd love to be beyond the lower 48 and work on this issue.

EMS:

Fred, I wanted to thank you so much for sharing your perspective with our listeners and thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

^{Transcribed by Rev.com}