 Adena Hefets, CEO, Divvy Homes 
Ryan Williams, CEO, Cadre
Moderator: Alan Murray, FORTUNE


Brainstorm Tech 2022: Real Estate Realities

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Brainstorm Tech 2022: Real Estate Realities


okay, this is gonna be the best panel of the day, so glad you're all stuck around for it. We have to really great founders here that pretty much cover the waterfront in real estate. Adina Hess is the co founder and Ceo of Divvy Homes, which is really disrupting the housing market and Ryan Williams is the founder and now executive chairman of cadre, which is disrupting multi family commercial and office space. So we got the whole multi trillion dollar market in front of us there. They're both bringing and by the way, I think you're both 34 years old, I turned 35 oh you're getting old, I'm still 30 for 30 for your, which, which kind of freaks me out. Um uh, and both were on fortune's 40 under 40 list uh, and have been extremely successful. Why don't we start by just telling us how your company works you first? Sure. So Divvy creates homeowners, the way that we work is customers come to our web page, we underwrite them and give them a budget, will say you're approved for a $400,000 home in Dallas texas, go out shopping, they go and pick out any home they want that's listed for sale, We buy it then on their behalf, they move in as a technically a renter. Um, but we parse the payments into rent and equity, Equity builds up their ownership in the property the same way with the mortgage that you pay principal and interest, it works the exact same way and so you can continually build up equity in your rental property, get the benefit of appreciation and at any point in time, um either cash out and leave the home and you can take your equity and walk away or you can roll your equity onto a mortgage almost like a recent can you rent indefinitely. So we actually, historically, when we started um you know, originally I was like well how long should we make the DB program? And I was like, well five years feels too long. We were just founded, I don't even know if we're gonna exist in six months and I was like one year, feels too short. So we went with three years and that has been the product for a long time and we've actually just revamped it so you can continue to rent to own and definitely and it's a great model but I have to ask you, I mean brian referred to this as it sounds like a financial model, but brian referred to it as prop tech, where's the tech prepare yourself because I'm going to ask you the same question. Yeah, so it's it's interesting I think that the underlying tech platform that helps support our models will will be sort of the same drivers behind a lot of legacy industries that continue to innovate. And so for divvy the ability to buy thousands of homes at scale and do that with very few humans at a higher margin than what everyone else is able to do it because we have tech underlying it, we have tech that allows us to scale the operations and processes with text that allows us to make intelligent decisions. So today we're buying hundreds and hundreds of homes a month uh and we do that with an acquisitions team that's maybe, I don't know 10 people or so, whereas the largest single family rental company in the U. S. Invitation homes, $30 billion market cap has probably thousands of them. So you don't have to send someone out with the buyer, you do your due diligence with tech and they do the footwork. Not only do we do the due diligence with tech, we do all of the admin paperwork, everything is fully automated, which allows us to scale in a better manner. It sounds like you've learned the tech, we're going to tell ourselves that. Yeah, so I found the cadre about eight years ago, we are marketplace for commercial real estate investments basically. Uh The idea behind cadre was um I grew up renting never being able to own real estate. I ended up working at Blackstone right? When invitation homes was actually starting up, uh and I saw how much wealth was being created um by owning commercial real estate, multi family industrial office, these asset classes that seemed so inaccessible and I wanted more people to be able to share in the wealth. I wanted more people to be able to own their financial futures and um I felt like through technology which I'll get to on, you know, how we leverage that to scale. Um you know, I could bring commercial real estate to the masses and democratize access to the asset class and give people the ability to own their financial future. So follows investment that you'll take today is $25,000. It's spread across 15 properties. So we we build portfolios or let people pick and choose individual assets. Uh and we are in the process of working on a true retail products that will bring minimum down even lower, even lower so and the tech tech, so to Dana's point, it's all about scale and so um one of the things I was really focused on early on was build the premier brand for any individual looking to access real estate. So we have for our first, you know, 67 years focused on larger accredited investors. Um while we build the infrastructure so we can scale and reach the masses to Athena's point, we want to fully automate the end to end investing experience. We know that only through technology can we actually reach hopefully billions of people who can own real estate. And I'd say the second dimension is liquidity. So we've also built a secondary market which can only frankly scale through tech as well. It's very cool and I should point out Ryan successfully got his I. P. O. Out the door last year so has evaluation of of about three quarters of a billion. Uh Adina. Your your market values around two billion. Private still uh We'll get back to the I. P. O. Question but but I think what what I'd like to hear from you both because you both now have all this data about what's going on in the marketplace. You created, your company's in a rising market. We're now seeing interest rates go go going up we don't know how high they're gonna go up. What is the market? What what to each of your markets look like from where you sit Adina. So there's a couple of different ways that you can look at rising interest rates and the impact that it ultimately has on divvy homes. So there's from the perspective of of new customers coming in the door for D. V. It's it's actually quite positive. And the reason why is the higher that interest rates go, the higher it is to Or the more expensive it is to have a mortgage. So the average mortgage payment has gone from something like $900 A month up to something around call it $13 $1400 a month. And that's like a pretty large increase for individuals to be able to sustain. Um And so as a result of mortgages are number one competitor getting more expensive and more people actually end up turning to renting and they turn to divvy and so from the top of final perspective it's very helpful to be able to say that our competitor is now way more expensive. The mortgage and Debbie is actually way cheaper. Um And we also this other value proposition which is divvy the hedge you lock in a buyback rate that you get to buy the house. And so we give our customers certainty in an uncertain market now where the other side of that coin is, I have the cost of capital um and look early on, I think we, we took steps to make sure we're hedging our debt and so we have about 60% of our debt. That's something that we're looking to kind of expand over time. In your right, we will have interest rate increases. Um It'll, we'll see how much of that you can pass through rent increases to the consumer, but for sure that's definitely something that will impact our business. I'm a little bit older than the two of you. In fact, I think if you add your ages together, you get close to mind. Um But, and I was my, my first home, the first home I bought was that a 15% mortgage rate and inflation at the time was about what it is now, 8.5%. So we don't know where this is going, but at what point does it become unsustainable for divvy, what level of interest rates are are beyond what you can handle. Well, so mortgage interest rates are quite different than what, what companies are going to pay for collateralized assets, that's, that's a different pool of capital that's going to be serving, so you're not paying mortgage rates were not paying mortgage rates, we pay what a corporation would pay for an asset. Now, historically wasn't historically when the government made it, when the government subsidized mortgage rates, there are 2.5% it was a disadvantage because I paid more, but now it's actually flip now, it's actually an advantage for us. And so it's interesting, One of the things I like to focus on is you've got to be able to create a sustainable business absent when interest rates are absent, what inflation looks like absent what the macro is doing, you have to create a sustainable business through times when interest rates are low and when interest rates are high, and I think one of the biggest lessons I've seen as a founder has been how to navigate those waters. Um and thanks for creating long term sustainability. What do you like? I think, um we are definitely going to be in for a lot of pain um in the real estate market and I think the pain is actually gonna disproportionately hit uh communities, um who have already, frankly suffered a lot through the pandemic people who, you know, are not able to afford, you know, basic goods these days and um and I think that without platforms like ours, uh there's this real risk of a widening opportunity and um wealth gap happening. And so what we're focused on that cadre is actually getting down to the mass market as soon as humanly possible opening up access, because we know uh there are certain real estate sectors that have proved resilient. Um and that will be very resilient, you know, through this increase, multi family, multi family will be good. Yeah, we've seen um some pretty significant increases in rents because people are being priced out of being able to buy homes, but it can't be a good, we can't be looking at a good period for office space. No. Office office I think is definitely um going to be uh tale of winners and losers. I think the adaptable landlords who are able to basically, you know, um adjust their their space such that it's well monetized, more flexible. It's more conducive to people having open space and less density will will succeed. But there's a lot that aren't moving quickly enough, there's gonna be a lot of distress in office retail is already falling nice. Um and I think in hospitality, especially business oriented hotels, you see some stress as well, that actually presents opportunities if you're able to invest in some of those sectors and that's what we want to be able to do for the masses, so that more people can participate in the inevitable recovery that will happen. Can you both talk a little bit about what's happening in the geography of real estate investment because of the pandemic really changed quite a lot, the pandemic changed migration across the US for sure, and there's probably, I haven't, I don't know the net migration stats off the top of my head, but I imagine that there's a little bit more dispersion throughout the US from just being previously concentrated on the coastal areas. What I will say is that housing prices are highly local. Um And so when we're looking at uh where did he operates from a geographic perspective, there are some markets where they have seriously overbuilt homes Uh and they're going to get hit the hardest in the coming called 12-18 months. So Phoenix Austin are probably the two that come to the top of mind where we've overbuilt inventory um and are starting to see extreme inventory buildups in price, price declines in housing. Now, there are other markets that have been more stable, where inventory hasn't been overbuilt relative to demand, Atlanta is a good example of a market that we're seeing is holding up super well. And so I think what we're going to see from a housing market perspective is a tale of two cities, which is gonna be, some cities are going to do very well if they haven't been overbuilt and other cities are gonna are gonna struggle. I want to open it up the questions and comments in just a minute, if you if you if you have on raise your hand and we'll get the mic over to you. But but but Ryan same question, what are you seeing in the geography of of commercial and multi family? I mean, I think you've got commercial and particularly to overlay the geography, the market and the sector, because, you know, there's multi family and um new york and there's office in new york and frankly there's different picture based off, you know, which uh sort of combination of market and sector that you're focused on. But I think at a macro level, what we've seen is that um there are these emerging coastal markets that were overbuilt in a lot of ways um and that are no longer affordable. And so people are now reassessing, you know, do we want to move back to some of these, you know, large hubs um like new york and uh like Sf and like D. C. Um And I think it's gonna come down to affordability ultimately um from the residential perspective, an office perspective, I do think that um you know, the major cities um and the suburbs and the notes are going to continue to see a ton of deterioration and and rent and occupancy and um I could see a world again where remote is again the status quo and distributed uh kind of workforce is become the norm, not the exception. So in that sector gonna think you have to kind of look at the overarching macro picture. Um, but, you know, I think there's always gonna be opportunity. That's the beauty of real estate. Does cadre own many office buildings in big cities, we own none in big cities, bunch of office buildings, um, in life sciences, uh, life sciences sector, and then suburban office. So we actually took a contrarian view, pre covid, so, for instance, played out well for you really well, because we've seen a lot of people build home offices and get outside of the major cities. Um, and uh, and also landlords that are willing to be flexible and repurposed space. We have a couple of questions up here in the front, please. Yes. Hi, good morning tammy franklin with Marsh question on divvy homes. There's a good article in Fortune about Zillow, they did a postmortem Zillow and their attempted entrance into buying and selling homes. It talked a little bit about how they whatever algorithm they were using, they were paying over over market prices and in a market where there's already very limited inventory. In many markets, we have a housing shortage problem basically, are you taking a lot of homes out of the, out of the marketplace? Now, your financial model makes it affordable for what are the pros and cons of takes, how would you compare your model? Yeah. So I say institutional investors are not leaving the housing market, so they are going to be there. I think that in Atlanta. Um, what we're seeing is roughly almost 30-40% of the homes are being bought by institutions, which is, um, and it's definitely towards the high end of it. For sure. And so, um, what I would say is that's not going away. So you have to kind of learn how to play baseball within the rules, which is, we're going to take our customers, we're gonna put them on the same playing field as an invitation homes, as an eye buyer as everyone else. We put out all cash offers on their behalf. We close in on average 19 days. Um, and so what we're doing is we're taking consumers and we're letting them go head to head with a lot of these institutional buyers now do I think that uh, institutional buyers in some of those cases maybe drove up pricing for sure for sure. I think Zillow definitely got ahead of their skis and I think it was noticeable on the ground early on now these things are learning experiences, the most tremendous amount of respect for the yellow team. Um, but I do think it has an impact on communities. And our hope is that tv provides a counter to that, that we give an opportunity for our consumers stone a home. But I do think that it definitely institutions play a role in rising home prices. Nathan Ryan limited partnerships where you invest in a portfolio have to comply with investor rules if you create a portfolio for somebody who doesn't meet those requirements, how do you get around either state laws or federal regulations? It's a great question. So, um, we uh, were registered broker dealer. Um, so we can offer private placements through our platform to accredited investors and with the right rapper to retail investors, which we're working on. We also have an R. I. A. As well. So we actually last year launched our first sort of truly commingled portfolio product, um, and uh, you know, performed incredibly well to date in that product. Um, we have kind of investor count limits and we can create sort of separate vehicles alongside the vehicle of the main fund vehicle rather to accommodate more people. But you know, we brought, you know, a lot of the Finra and sec experts in house early on to ensure all the private placements were, um, you know, by, by all, you know, both state and federal regulations and uh, and also its quality because I think one of the important points is, you know, this is not an adversely selected platform. You know, we underwrite tons of homes, tons of properties. We only approve of, uh, 2 to 3%. We generate a little bit less than 30% net annualized returns for our customers to date. Uh, and I think it's a function as deena highlighted of both having the right real estate expertise, but then also having, you know, a technology team data platform to augment that underwriting. So we know when we're distributing the product, we're giving people good quality offerings as well. Let me ask you both, unless there's another question out there, I want to ask you both. Uh you're you're both very, you built very purpose driven companies very intentionally. Uh Ryan, you're focused on democratizing investment, you're focused on giving people access to homes by the way. We tried that once before, 13 years ago. It was the methodology didn't work out too well. So I hope but but but but tell me and I'm sorry, you have to do this very quickly. Why are you, why do you feel purpose comes first in your business? Homeowners have 75 times the net wells versus renters, there's mass wealth inequality in the US and you can ask people who are middle income to invest in Bitcoin and S and P 500 pick the right thoughts and that is not gonna work. Um The number one way to to take yourself from, from being, you know, to build family wealth over time is owning a home. And I fully believe that well put right, and how about you, For me, it's personal. Um you know, I grew up renting never owning. Um and uh and I've got to see through ownership of real estate, residential and commercial real estate, which has proven incredibly stable through periods of volatility with the right sectors that um you can give people the ability to democratize multi generational wealth creation. And that's what really drives me is I want any individual to be able to own their financial future, and Owning their fancy future comes from owning assets. And so we can level the playing field and, you know, not make this a global economy where it's, you know, the, the institutions were the only ones thriving. Um, I feel like we will have made our mark and I feel like our platforms are the right kinds, uh, to hopefully, uh, have that impact and legacy. Well, it's super impressive, both of you, uh, to hear your stories, you got a $40 trillion dollar market out there. You're both young, you have a lot of runway in front of you. Go get it, thank you.