S2 Capital’s Founder on Multifamily Sector’s “Extreme Year”

By leveraging its custom, proprietary business intelligence platform and an internal team of acquisitions experts, S2 Capital has become one of the most active multifamily buyers and sellers in the United States.

The Dallas-based firm has ranked as the “Fastest-Growing Real Estate Company in the U.S.” by Inc. Magazine two years in a row—a significant accomplishment for the investment firm’s founder and CEO, Scott Everett, who first dreamed of investing in real estate when he was a 17-year-old high school student languishing in detention. A year later, he was a teenage father and a community college dropout on food stamps.

But that didn’t stop Everett from launching S2 Capital just a few years later. If anything, it provided the motivation to do so.

Since its founding in 2012, S2 Capital has acquired close to 40,000 apartment units in 105 deals totaling $4.5 billion in portfolio value throughout Texas, Florida, North Carolina and Arizona. Over the past decade, the firm has evolved into a vertically-integrated investor, owner and manager, with a team of roughly 600 people. Today, its portfolio consists of about 50 properties totaling 22,000 apartment units in nine markets across the Sunbelt. The total value is $3.5 billion.

Since June 2020, S2 Capital has acquired nearly 14,000 units totaling more than $2.5 billion. And during the same period, the firm has taken advantage of the red-hot demand for workforce housing and emerged as an active seller as well—disposing of more than 30 apartment communities totaling close to $2.5 billion.

Earlier this month, S2 closed on the acquisition of four multifamily properties totaling 1,893 units in Texas. The deal expanded the firm’s footprint in the Lone Star State to 16,000 units and established it as the most active buyer in the state over the past 24 months.

WMRE recently spoke with Everett about the firm’s investment philosophy, its equity-raising efforts and its plans for 2022.

This Q&A has been edited for length, style and clarity.

WMRE: What is S2’s investment strategy?

Scott Everett: We stick to what we know: multifamily, primarily in Sunbelt markets. We don’t buy core and hold. It’s all value-add. Our current investment strategy is changing somewhat since cap rates and rents have moved so rapidly over the past 24 to 36 months. We felt workforce housing rents were starting to outpace the growth and compress the spread between A, B and C rents, so we pivoted into class-B and lower A quality assets. We think the opportunity now is to buy nicer, newer assets. This year, we’ll sell about 33 deals worth about $2 billion. We’ve redeployed capital into assets that have more room to run on rents and NOI growth. We want to make sure what we’re buying can withstand a recession.

WMRE: What was S2’s original vision and mission? Has that changed over time?

Scott Everett: When I started the company, the focus was on value-add and workforce housing—properties that rented $400 to $500 below market rate. We were heavy renovators. We’d go in and spend a ton of money per door and bring C properties to B properties. But that’s changed over the past two years or so because the flood of capital into workforce housing has made cap rates agnostic to newer deals.

WMRE: How has the pandemic impacted S2 Capital’s investment strategy?

Scott Everett: When COVID hit, we paused our acquisition activity, just like everyone else. Then 10-year Treasuries dropped below 1 percent. By June 2020, we felt comfortable that our assets were going to perform through the pandemic, and we were able to buy assets at 5.25 to 5.5 percent cap rates. That was a really healthy spread over Treasuries. We also thought all the trends we witnessed pre-COVID in the Sunbelt were going to accelerate, so we started getting very aggressive with our acquisitions and buying up as many 1980s and 1990s assets as we could. We’re fortunate that it played out better than we ever imagined.

WMRE: What type of investors does S2 target? Do you anticipate your investor base will change in the near future?

Scott Everett: We have an investor database of 800 to 1,000 investors, ranging from high-net worth investors and family offices to institutional partners, including state pension funds and college endowments. Almost all of them are domestic. For our non-institutional level investors, our minimum investment is $100,000, and we max out at $2 million per deal.

WMRE: How does S2 raise equity and attract new investors?

Scott Everett: We have a full IR team that is responsible for sourcing capital for each deal. More than 90 percent of our investors are repeat or return investors, and any growth we’ve experienced with our investor base has been organic. Investors bring their friends in and so on. It’s always been word of mouth. We go out to our high-net-worth investors and family offices when we’re raising less than $30 million. We tend to go to our institutions for anything more than $30 million.

WMRE: How does S2 Capital work with institutional investors?

Scott Everett: We’ve partnered with institutional capital to acquire multiple deals. It’s not a fund structure or a separate account. It’s discretionary capital.

WMRE: What have been the biggest challenges you’ve faced in terms of raising equity and sourcing deals?

Scott Everett: From 2011 to 2013, it was extremely challenging to raise funds. We were just looking for $3 million at the time, and it took a very long time to find the right investors. We were focused on value-add properties built from the 1960s through the ‘80s, and we could only attract high-net-worth opportunistic investors. Institutional investors weren’t interested at all. They kind of laughed at us. They had absolutely no desire for workforce housing and were only interested in nicer and newer stuff—development in particular. That’s obviously changed dramatically.

Today, with our relationships and partners, it’s pretty easy to raise money. It’s much more challenging to find the right deals than it is to find investment capital. That’s when it’s hard to stay disciplined—when the money is chasing you. It’s tough, but it’s what separates a lot of people. That’s why we want to make sure that we feel really good about what we buy through multiple cycles.

WMRE: What kind of investor outreach/communications do you conduct?

Scott Everett: Through our in-house IR team, we have a communication channel that allows us to talk to our investors daily. They can ping us anytime with questions. We pride ourselves on providing institutional-level reporting, and we carry that same reporting over to our high-net-worth investors. We use an investor portal, Juniper Square, which houses our quarterly updates and other reporting.

WMRE: What is the range of returns that you expect on your investments?

Scott Everett: Our target returns are net 16 percent to net 20 percent. That’s pretty much been our target since we started. We’ve had about 60 exists over the past 10 years with a gross return of 58 percent. Over that period, the blended IRR was net 42 percent to investors on 51 deals.

WMRE: What is your average hold period?

Scott Everett: It ranges from deal to deal. On average, it’s a little more than three years, though we underwrite to a five-year hold. We have a two-year business plan execution. We evaluate our investments monthly and do a deep dive every quarter, and because we’re so active in the market and know real-time market dynamics, if we’re ahead of schedule with the business plan, we’ll start the exit process ahead of schedule and get out quickly. It’s a lot more art than science.

In October 2020, we started fielding an insane number of calls from huge investors that had never invested in Sunbelt markets. We saw that capital start to enter our markets in late first quarter of this year, and we decided it was a great time for us to maximize value and exit some investments and to start buying as much as we could before things got expensive.

WMRE: What markets does S2 Capital find the most compelling?

Scott Everett: We’re in the best state for investment right now. Texas has been a beneficiary of relocations, both people and companies, especially from the West Coast. We’re in all the major Texas markets. Phoenix has been absolutely insane on the growth side. We’re signing 20 percent rent bumps. I’ve never seen anything like it. Denver and Salt Lake City are very interesting markets, and so is Atlanta and Nashville. And we like the growth markets in the Carolinas and Florida.

Because we’re vertically integrated and manage everything ourselves, we have to build out our infrastructure when we enter new markets or expand in existing markets. We like to study the markets and make big bets where we know we can deliver rather than make a bunch a little bets in different spots. We want to focus on eight to 12 markets instead of 25 markets.

WMRE: What role does technology play at S2 Capital?

Scott Everett: We’ve built on our own data analytics platform on top of Domo [a cloud-based business intelligence software]. We’ve worked with several third parties to customize the software. We put the data in, and the platform allows us to quickly look at everything across the portfolio. It helps us track where we are in our business plan execution for each property, where cash flows are falling short, and debt maturities, among other things. Most companies just use Excel, but our platform monitors everything in real time and helps tell the story in a concise manner. Our entire team uses it. It’s a large investment—$500,000 to $1 million—and it’s worth 100-fold once you’ve got it up and running.

WMRE: What differentiates S2 Capital from other investment firms?

Scott Everett: The way we analyze data and put it to use is definitely a differentiator. Our vertical integration is another big differentiator. We have a general contracting license and do all that work internally. We have our own digital marketing team and property management team too. It’s about quality control. We learned early on that no one cares about your stuff like you do. And that’s been one of the reasons we’ve been able to outperform and deliver returns to our investors.

WMRE: The multifamily sector is one of the hottest and most competitive asset classes today. How is S2 facing competing buyers and coming out on top?

Scott Everett: A lot of it is making sure that we can swing as big a stick as possible because we’re competing with [mega-funds]. Our stick is having one decision maker: me. We don’t have to go to an investment committee. We offer certainty of close as well. We never re-trade, and we’ve never not been able to close on a deal. The deals we acquire usually have a more unique storyline, so we tend to buy off-market. We have good relationships with brokers too and tend to sell on-market.

WMRE: What plans do you have for S2 Capital in 2022?

Scott Everett: Coming into this business right at the peak of the Great Recession, I saw how horrible things can get and how fast people can go down in flames. You have to stay humble and stay focused. If you don’t, you can get in the position where you start having great returns and great deals. Everyone starts telling you how great you’re doing, and you believe it and obsess over it. That’s when you really get into trouble because you start to think that everything you touch turns to gold.

At S2 Capital, we’re going to continue to focus on what we’re good at and make sure we’re not getting out over our skis. This year has been a little extreme—over $2 billion in acquisitions—because we felt really bullish on making big bets in multifamily in the Sunbelt. Next year will probably be more of a standard deal year: our goal is around $1 billion in acquisitions per year. We’ll continue to focus on Sunbelt markets and monitor demand for newer, nicer assets.

WMRE: What is the biggest success that S2 Capital has experienced? What is the biggest failure?

Scott Everett: We have profit participation for our employees. We allow them to buy into the carried interest and promotes on our deals. Seeing the life-changing cash that comes out of those deals for our employees when we exit—that’s the biggest success. That and being able to offer incredible career opportunities.

Our biggest failure(s) is a couple of deals that didn’t meet expectations. We never lost money, but they could have been better. That was three or four years ago, and we were running fast and hard, and everything had always gone very well, and we just took our eye off the ball. Those failures taught us a lot—what to look for early on and making sure that we don’t let things drag out—so they were kind of a blessing in disguise.

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