“Systemization is the key to execution” - CEO Steven DeFrancis on the immense growth of Cortland


As a top 50 apartment owner and operator, Cortland has a brand and reputation of success and customer service. On the latest Walker Webcast, CEO Steven DeFrancis joined us to discuss his strategic approach to systemization, his focus on building a stellar team, and his approach to growth.

In this episode of Driven by Insight, Willy interviews Steven DeFrancis, the founder and CEO of Cortland. Since its founding in 2005, Cortland has expanded into a global, vertically-integrated multifamily real estate investment, development, and asset management company. It is anchored in providing a beautiful yet affordable living environment and an enriched lifestyle to its residents. To this end, the company has developed a unique approach of internalizing the majority of its functions.

Steven and his team manage a portfolio of multifamily assets located in 11 states, primarily in the Southeast, Midwest, and Texas. Cortland is the largest owner and operator in the cities of Atlanta and Dallas, as well as in the entire state of Texas. The company employs more than 2,000 associates; it also owns and manages over 65,000 units, with a pipeline that will push this number to over 70,000 by the end of the year. Cortland is a National Multifamily Housing Council top 50 owner and manager, and was ranked as a top US brand by Reputation.com. Steven himself holds a BA in Real Estate from the University of Georgia’s Terry College of Business, and he is a member of the Buckhead Coalition, the board of the Atlanta Neighborhood Development PartnershipThe Real Estate Roundtable, the Urban Land Institute, and the National Multifamily Housing Council.

As the conversation gets underway, Willy looks back to the founding of Cortland as a small development firm focused locally on Atlanta, noting that the company shifted its approach during the financial crisis of the 2000s. What did Steven and his colleagues see, Willy wonders, that led to the shift? Steven explains Cortland’s decision to invest in research into where the market was going as the recession continued, and about the company’s pivot in terms of clientele and customer focus. Cortland turned to insourcing, too, to control all touchpoints with customers.

This long-term vision, in turn, drove all areas of the business, from hiring to design. Cortland developed an associate-first culture, which is needed for excellence in customer service. While the recruitment process is rigorous, it yields a workforce well suited to particular jobs. The vision also prompted a focus on brand. In part, the Cortland brand developed naturally through the company’s consistency of assets; however, the company has also intentionally worked on its brand in order to create passion among human capital and help with marketing.

Next, Willy and Steven dive into more detail concerning Cortland’s consistency of assets. Cortland has processes in place to provide a high level of standardization across its business; this allows, for instance, residents to count on a certain standard of fit and finish across properties, and property managers to easily transfer between locations. Much of the company’s systematizing is preventative maintenance, but Steven and his colleagues also realized years ago that, while not everyone can afford a very expensive home, nearly everyone has pride in where they live. So, Cortland decided to provide consistently high-quality living spaces at affordable costs.

In order to accomplish this goal, Cortland began to vertically integrate. By progressively cutting out middlemen, standardization became easier and costs lower. Over time, Cortland transitioned to having direct relationships with manufacturers in China; these relationships help Cortland to navigate any supply chain issues that may arise, including those that have arisen from the COVID-19 pandemic. Right now, as the pandemic has been waning, it is a very competitive market. Steven believes that Cortland’s model is only improving, and he explains that the team dynamic of the company allows for the underwriting of a lot of new opportunities.

There are, of course, opportunities that Cortland could take to move into other asset classes within multifamily housing, or even different commercial real estate classes. However, Steven hasn’t considered expanding beyond housing. He has looked at other product types within housing, and his main aim in each market is to achieve the desired asset base and scale. Brand and associated SEO realities in the market today drive traffic, and they tie into the customer-centrism of the business. After all, as Steven says, Cortland is at heart a consumer-facing operating business that happens to need capital, not the other way around. To wrap up the conversation, he and Willy talk about the best and worst of leading the company now versus earlier in its life.


Learn more about Steven DeFrancis and connect with him on Twitter and LinkedIn.
Learn more about Cortland.
Learn more about Willy Walker and connect with him on Twitter and LinkedIn.
Learn more about Walker & Dunlop and Driven by Insight.

Key Ideas: 

0:48 - Willy previews episodes to come.
2:33 - He introduces his guest, Steven DeFrancis, CEO of Cortland.
4:42 - What led Cortland to shift?
10:19 - What about the company’s change led to insourcing?
22:17 - Steven comments on Cortland’s approach to brand and recruitment.
28:46 - Cortland maintains a high level of standardization.
35:11 - Willy asks about the move to being vertically integrated.
42:08 - Willy and Steven talk about the market now and Cortland’s strategy.
51:39 - Will Cortland’s main focus going forward be service or capital?
54:41 - What is the best and worst leading today versus earlier in the company’s life?

Webcast Transcript: 

Willy Walker: Thank you Susan and good morning everyone and welcome to another Walker Webcast. I continue to receive emails and texts about my discussion with James Kerr author of Legacy from two weeks ago. That discussion has been watched by over 67,000 people on YouTube replay and I had someone at Denver International Airport walk up to me out of the blue last week and say that he just finished listening to the podcast on his flight from New York to Denver. While discussions, like the one I had last week with Matt Kelly of JBG Smith and with Steven today are primarily focused on the commercial real estate industry; the discussion with Kerr on culture and leadership is applicable across industries and contain lots of life lessons.

Speaking of life lessons, we have Bob Glazer renowned TED talk speaker and Acceleration Partner Founder joining us next week. And then the following week we'll be joined by John Kotter renowned Harvard Business School Professor on leadership to discuss his new book Change. It's going to be a real kick for me to have Dr. Kotter on the webcast as he was my leadership Professor back at HBS in 1994 which is dating both Dr. Kotter as well as myself. Hopefully, he won't be too critical of my leadership style during our discussion in a couple weeks. And then, in the middle of September I’m going to do my first live Walker Webcast interviewing with Eric Resnick CEO of KSL Partners to discuss the hospitality and leisure industries as KSL owns lots of hotels, resorts, and ski areas. After having done over 60 Walker webcasts all remote, it will be super fun to sit down with my guest one on one and have an engaging, interactive discussion.

So, talking about engaging interaction discussions it's a true pleasure for me to have my friend and amazing CEO Steven DeFrancis joining us today. Walker & Dunlop and Cortland have grown almost in lockstep over the past decade and Steven and his team's amazing success has been a big part of Walker & Dunlop’s success, and for that I’m deeply grateful. Before I introduce Steven and dive into our discussion, I want to thank Mike Altman, David Dixon, Brad Brown, Ned Stiker and the other members of the Cortland team for all they have done to make Cortland the amazing company and partner it is.

Steven DeFrancis is the founder and CEO of Cortland. Since its founding in 2005 Cortland has expanded into a global, vertically integrated, multifamily real estate investment, development, and asset management company. Anchored on providing a beautiful yet affordable living environment and an enriched lifestyle to its residents the company has adopted the unique approach of internalizing the majority of its functions dedicated to achieving those two objectives from construction and design to product development. Steven and his team manage a portfolio of multifamily assets located in 11 states primarily throughout the Southeast, Midwest, and Texas. Cortland is the largest owner operator in Atlanta and Dallas as well as all of the State of Texas. The company employs more than 2,000 associates and owns and manages over 65,000 units today with a current acquisition pipeline that will push that number over 70,000 by the end of the year. Cortland is a National Multifamily Housing Council top 50 owner and manager and is ranked as the top us brand by reputation.com. Steven earned his bachelor's degree in real estate from University of Georgia, Terry College of Business. He is a member of the Buckhead Coalition and serves on the board of the Atlanta Neighborhood Development Partnership. He is also a member of the Real Estate Roundtable, the Urban Land Institute, and the National Multifamily Housing Council.

So, Steven first of all welcome and thank you for joining me. Let's back up a little bit too when you founded Cortland in 2005 as a small development firm focused on in-town development in in Atlanta and then during the great financial crisis changing from being a local developer to focusing on acquiring and renovating communities across the country. What was it that you either saw as a macro market opportunity or something that you saw inside of Cortland that made you shift strategy?

Steven DeFrancis: Sure, well first thank you for having me, glad to be here. The first part of your question is what did we see in the broader market that gave rise to an opportunity? Like most other groups in our industry, we went into the downturn, the great financial crisis and late ‘07, and we thought it would be fairly short lived. As it drug on and we got into the middle of 2009 and we had been playing defense for two years, at that point, we decided to do a pretty significant research project to try to, the goal was to try to determine where the market was going. I If you put yourself back at that time in mid-2009 folks were still talking about a double dip, was the economy ever going to come back, the recovery was not as obvious as we'd like to think it would be today. So, we decided let's do this research and figure out where the markets going and that our significantly downsize point at that time, how might Cortland participate in whatever this recovery might look like? And so, we researched really all things related to multifamily whether it was you know supply and demand in the markets that we were in at the time, the demographics market wise and nationally as it related to propensity to rent? What was the impact, going to be from the meltdown of a single-family mortgage crisis? It was all these things moving around in the market or cross current in the market that we felt might have an impact on the multifamily industry. We spent about six months with four market study groups just studying different parts of the business. Anyway, two things came out of that; one was just the sheer volume of under supply that we were going to be met with when the economy recovered or began to recover. That part didn't take a lot to bite off on that it was largely just math. The result of under development of multifamily in the Sunbelt markets in the early part of the 2000s because of the heavy focus at the time on homeownership followed by a pretty long and protracted downturn where nothing was being developed in those markets. At that point coming out of the downturn, you are looking at between the ’01 recession, the focus on the single family and then the GFC you are looking at over a decade of under development of multifamily. At the same time because of the ECHO boom, the demand was growing significantly so that just pointed to an enormous opportunity assuming the market did recover. We sort of felt like we had to assume the market would recover, because if that didn't happen, we had a much bigger problem. The second thing that came out of that research which is really what led to the pivot that you're asking about was, you know, we felt we saw the beginning of the transition in our clientele, and historically the clientele in multifamily had been a very commoditized business. You had folks who lived in multifamily after college, the newly divorced, newly unemployed, newly moved to a new city, newly graduated, usually it was a short-term stint, it was a transitional period in most folks’ lives, and largely if you think about it most folks lived in an apartment until the very first point, they could afford not to. As a result as an industry we didn't have a lot of investment in doing it better, we had a product, system and people, etc., but we did see that that clientele was likely going to be changing coming out of the GFC. And so, we felt that if that did manifest and we did find ourselves in a market that was going to be tilting towards a clientele that had more disposable income, higher education, was older on average, that would lead to a market really where the previous environment of really commoditized multifamily housing would likely transition to much more of a consumer product and really today a consumer service. So, what we began to do is say okay let's take those learnings and really pivot the platform to focus on this new environment where the client or our customer needs to be at the center of everything we do. That was a bit of a change for us, and I think a lot of folks in multifamily over this cycle. Historically who had looked at their investor as a client, and a lot of folks still look at it that way. Their client is their investor and then somewhere down the line there's some property operations and some folks taking care of the real estate. But we felt that there was an enormous opportunity that we could capitalize on if we really pivoted the whole business to focus on our customer as the true client. And then create a better living experience which would create more demand at our assets and eventually lead to better returns for our investors.

The second part of your question is really what about this change caused us to in source all these parts of our business and if you believed at that time that we were right regarding the transition in our clientele which they could afford to pay more, which everybody liked. But the reality was they were going to demand a lot more from a level of service and experience that we had been used to providing in the multifamily industry. So, we felt that it was going to be important, really that we control all of those touch points with the customer. Historically in our business, groups would generally try to outsource as much of the business as possible. Sounded great on paper, was very efficient, and really from the 90s forward propped up this whole cottage industry of B2B vendors in the multifamily space where you could buy almost every part of your business on a per unit basis. Whether it was marketing or sales or pest control or landscaping all these services you could buy on a per unit basis, but at the end of the day it was really efficient from an execution standpoint, but it was really inefficient from a customer service standpoint, because now effectively, you were handing over that relationship with your customers to this whole cadre of third-party vendors, which inevitably, as you can imagine, just lead to really poor service and poor execution. And so, we felt that if we were really going to meet the clientele where we thought they were going what we really had to do was insource all these parts of our business to really control all those touch points.

Willy Walker: So, in hindsight, and now that you've got huge scale and a big brand and incredibly successful that all makes perfect sense. But I want to go back to 2010 when you owned, I think 1,200 units and had a whopping eight people inside of Cortland or just the next year when you'd actually grown dramatically from 1,200 units to 5,000 units. But a lot of people at that time may have seen the demographic shifts coming, thought that the demographics behind multifamily were really strong, but didn't take the component parts that you just talked about as it relates to a focus on the customer experience. A focus on stripping out costs to be vertically integrated to allow you to scale from 5,000 units up to today over 65,000 units. That to me, Steven, is sort of where the genius happened, and I just want to understand during that period of time what was it that you were seeing, what was the conviction that you had to invest in those two different areas? Because all of us can sit there and say airlines want to make the flying experience better but guess what they have a really tough time making the economics work to make the flying experience for all of us that much better, and so they don't make it materially better. But Cortland really focused on that. And part of being able to focus on that was stripping costs out and being vertically integrated. So those two things kind of had to come together to create that better client experience. Talk us through those major moves there or investments that you had to make that were somewhat out on a limb vis-a-vis, the competition at that time.

Steven DeFrancis: Sure, and you make a good point, especially back then. When we were starved for capital and so making investments in real estate made a lot of sense. Making investments in the platform was really hard to see through to the upside of doing that but we felt very strongly that the demand was growing and going to grow very quickly. We felt then if that was the case, then the next piece was how could you build a system or a machine that could create a lot of throughput? How could you grow the business in a way that you wouldn't fall victim of growing too fast and then, while also maintaining that ability to really be best in class from a customer experience standpoint? So, it's really two pieces; it's maintaining that ability to be the best to your customer, but also the ability to create the infrastructure to process a lot of throughput, and whether it's development or acquisitions or value add renovations, the whole process of creating product before you then manage and operate the product. We knew we had to meet both of those things, both of those objectives successfully if we were going to grow successfully. Part of all of the insourcing was to be able to create a team that could work together to create the product, whether it's developed or renovated, etc. 

If you think about the way most products or most developments are done or acquisitions or value add projects, they are really managed in a very bespoke basis with an internal acquisitions person or a developer and then external execution, whether it's design, architecture, construction, or construction management. You have all these vendors working on every project, and so, instead of having an assembly line of work, it's more like you're building each one on a bespoke basis with the project at the center and all of these vendors attached to it, like the petal to a flower. That's extremely inefficient, building buildings, renovating buildings, especially renovating buildings that are full of customers, it's fraught with peril. There are one million things a day that can go wrong and generally, most of them will. Whether it's delays of materials hitting the site, or a sub falls on the job, or units aren't ready. There are 10,000 things that can go wrong, and again they will, and so what we felt strongly was to systemize that process to allow us to be able to have a lot of throughput. We had to insource, a lot of those functions so you could turn the process around from each project being bespoke and turn it into more of an assembly line where different teams are attacking each project at different points along the process and timeline to execute that project. But also, to where all those teams now were working internally, that all know our expectations, our systems, our processes, and trust me we still made half the mistakes that the external groups would have made but at least we were doing it together. At least we were all one team. We all had one agenda. We all met in the same bar after work to figure out what we did wrong that day. We talked a lot about how we're going to make mistakes and that's okay, just try not to make them more than two or three times each. Those learnings really were helpful because there were times over the last 10 years where we would have 10 or 15 pretty major development or renovation projects and these renovations where 20, 30, 40 thousand dollars a unit. You have pretty major stuff going on where systemization is key to execution, and if you mess up any of those things it just goes sideways. We could have never done that if we had done each of those with a host of external vendor relationships as opposed to a team internally that worked on everything. It also made that team work together. 

One of the things we knew early on, if we were going to be best in class at creating a living experience and customer delight, what we had to do first was make this a best place to work. It's cliché everybody says it starts with the people, but it really does start with the people. We knew the first thing we needed to do was go build a team of really top-notch players that were passionate about working here, passionate about what we were doing here, felt like they were invested in and really enjoyed working together as a team every day. That took tons of friction out of the process of getting the projects done and executed, but then, even more importantly, when you moved operations, as long as you take care of the people, they'll take care of your customers. You have to set up the infrastructure and the culture of being an associate first organization if you're ever going to be best in class in customer service or customer experience.

Willy Walker: So, given the competitiveness for LP Investments and capital out there, in those early days when you were going and buying properties, you were obviously in a very competitive market, you're paying market prices for assets, you're investing in not only the asset but also all the infrastructure at Cortland. I’m assuming you had to get market returns for your LPs, but your GP return dragged as you were investing in the business. I find it to be very interesting because a lot of people who get in the acquisition rehab space, who raise money from third parties, they focus on their returns to their investors, and then there is also their own returns and they end up putting a lot of money into their own back pocket in those early days rather than reinvesting in the company. What you just talked through Steven was how you had this longer-term focus and continued to plow money back into creating the team and insourcing a lot of those activities that you could have bought from third party vendors at a much cheaper cost to the GP but at the same time, you had this long-term vision of creating the Cortland that you've actually created.

Steven DeFrancis: Well, we had a lot of learnings along the way. Back when we got started really doing this heavy value add, no investor wanted to do it. Willy as you're aware, based upon a lot of the work we've done together, in those early years we were raising almost all of the LP capital through a preferred structure, because frankly the LPs thought what we were doing made no sense. They thought it was nuts to spend that much money on a renovation of an existing project. There were a lot of nights where I thought maybe they’re right. So, we raised most of that capital in a preferred structure and we looked like geniuses at the end because the market went up so much, but we certainly didn't do it because we were smart. We did it because that was the capital that was available. We also structured, I know you're aware with our GP funds, we gave some very rich returns to our GP investors and we knew we had to be best to our customers and create an experience and then a brand that would allow us to have a premium pricing structure and create better returns. But we also knew those better returns we had to give up in the early days and pay more for the capital, most of the investors thought what we're doing in the early part of the cycle didn't make a lot of sense. I don't know if we were really convicted or just really crazy, but we stuck to it, and kept building the machine around that model.

Willy Walker: You talked about brand and the customer experience. I’ve seen the numbers as it relates to how you've been able to build the Cortland brand. There are plenty of people in the multifamily industry who say brands make a difference in hospitality. When you go stay at a Marriott versus a Hyatt or whatever else. But that because of the nature of multifamily someone doesn't arrive somewhere and say I’ve got to go find a Cortland asset to live in when they move from Atlanta to Dallas, and I think you've actually proved that wrong.

Steven DeFrancis: We felt the brand was very important. It took us a while to really start rolling out the brand. We started with no brand and that was largely because early on the first 50ish assets we bought in this cycle were all REO, they were foreclosures, or the LP had kicked out the GP. They were all broken in some manner, and so, as you can imagine, they were extremely inconsistent from a product and location standpoint, and so you could not build a brand around this hodgepodge of assets. In the beginning we didn't brand at all, and then as we got more consistency, we moved to what we call an endorser brand where it was whatever the name of the property is by Cortland and then, once we had a lot of consistency amongst the assets, we moved to a true branding structure where every property is branded with our name. We felt that was important because we did a lot of research before we did this and learned that our brand actually stood for high degree of service, customer living experience, a lot earlier in the cycle than we had anticipated. But it definitely has paid a lot of dividends in transfers within the system. We get an enormous amount of people who move from one city to the next and just call in straight through the office to find out what's available if they're moving from Atlanta to Dallas or Phoenix to Florida. So that definitely has paid dividends, the real value on the brand more than anything else is the passion that it creates amongst the human capital. When you're trying to hire, it's a war for good talent out there, and you really want to hire best in class folks. They want to work for a brand that really means something and stands for something premium in the marketplace, and it also really pays huge dividends on the marketing side. Our ability in markets where we have 20 or 30 assets in a given market, the way SEO and search works just having everything branded with a similar name really helps drive search straight to our website and straight to our product, our locations.

Willy Walker: You talk about the people at Cortland, and I’m privileged to know a lot of them, and I’ve been to Mercedes Benz field to watch your team compete in a karaoke band competition, and that was actually quite something to watch. But talk about two pieces of the equation as it relates to what it is to be on the team at Cortland. The first is the way you select talent. You go through a talent selection process that is, I would put forth, more rigorous and more focused than many companies that I interact with on a consistent basis. Then the second piece is once they get in you've created a culture at Cortland that is very unique. What is it other than to be honest your fantastic leadership that's allowed for the Cortland culture to build to be what it is?

Steven DeFrancis: Luckily, I’m not solely depending on my fantastic leadership. On the recruiting side we begin early in the cycle building a process around testing the applicants that we were hiring, such as, personality profiling, intellect testing to try to build a team of high performing individuals. As you know, Willy, from your business you've done a great job with this. It tends to grow on itself so once you start with a small nucleus of really high-quality people, they attract higher quality people who want to work with them. A lot of it also isn't just about intellect, there's a lot of great people who maybe want something different out of their career than a different set of people. It's about starting with a process through testing, we use an industrial psychologist to do all this work. So, part of it is the intellect testing, that's more of the straightforward part, and part of it is the personality and making sure that we're getting folks with the right personality to meet the job that they're going to do. It doesn't mean the right personality profile to work here or not work here, more typically it's the person that's going to be an interior design probably has a different set of personality profile than the person who's going to be an accountant in reporting. So much of it is about putting people in the right seat on the bus. 

A lot of effort on the front end around considering talent before bringing them in and then a lot of focus on supporting our talent once they're here. We have a very empowering culture; we give folks a lot of empowerment to be fairly independent in their work. A good example, we decided about five years or so ago we decided to let everybody know who worked on site, every community manager and service manager, that there is no amount of money that they are not licensed to spend to make a customer happy. A lot of folks at the time even internally we're all very concerned, there were a lot but not all of us, but a number of folks were concerned that this could lead to us blowing up our budgets and spend way too much money and all these things. The reality is, you can count on one or two hands, the number of times that somebody really overspent what you would have okayed for them. But the amount of value you created with your team by entrusting them with an unlimited checkbook to make people happy, you can't even put a value on that and that continues to this day. I can't even remember a single story where we were like “oh, my goodness, I can't believe we let them do that look and what they did.” I can think of many stories where they did the right thing for the right reason because they were empowered to go do it through decisions and checkbook.

Willy Walker: One of the things that you talked about standardization in the sense of the experience from a client standpoint. You've also standardized a lot as it relates to the if you will fit and finish of a Cortland property. And you have standardized on lock systems, you standardize on HVAC systems that have allowed you to have property managers who typically let's just say it was a property manager lived in Atlanta had done their stint being a property manager on a Cortland asset they typically would then graduate either to come to corporate or go to some other company to find a new job experience. Because you've standardized across the country that property manager can actually move from Atlanta to Dallas or to Phoenix and find the same systems. The training that you've given them is sort of applicable across the Cortland platform. Is that correct?

Steven DeFrancis: That is correct. I’m gonna start the second piece and then go to the fit and finish piece. We learned five or six years ago, we sort of realized that we weren't seeing the same passion, if you will, in our maintenance and facilities teams as we were seeing on the other, the leasing and operations side of the house. After digging into that a fair amount, we realized that there was really very little, you know as an industry, we pay very little respect to the folks who are turning wrenches if you will. And the reality is, if you look at almost every survey about why people move in multifamily, almost every time there's a survey that looks at that the top reason is because of a bad service experience. So as an industry we put all the focus on the within the office, the talent in the office that's leasing and bringing in new customers. And we put almost no focus on the team that actually keeps our existing customers there, which is you know in business is the exact opposite way to maximize your bottom line. So, we then realized that a lot of the reason was there was just not really a protocol of supporting the facilities team as its own function outside of the property, the leasing side of the house. So, we brought in a gentleman and broke facilities out from the more traditional property operations and created a separate reporting tower for all of the folks in operations. We then were able to start investing in those folks, training them better, creating better career pathways so they didn't feel like they were just going to be the service manager of location 22 forever which then creates more energy, as you can imagine, within that group. You can then attract higher quality folks. Once you got the team right was the first piece, and then the next piece we're starting to standardize training process. We're moving now into sensors and putting sensors in the equipment, so we can start to get proactive messaging when things are going to fail, instead of waiting until they fail. To your point you made systemizing appliances and plumbing fixtures and all these things so you get as much customization as possible, which makes… nothing will make the service teams job easier is when things don't break. So, if you start by spending a little more on the product itself, which is pennies, I mean literally pennies in the stuff we're talking about. Then you have a much lower failure rate and then a better system of maintaining that product so you know when you have something that's been repaired three times for the same problem you're probably going to have an issue. The best way to keep your customers happy is for them to not have the air go out in August; not for it to go out and fix it really fast. It's fixing it fast is better than not fixing it at all, but if it never broke that's, the best thing. So, a lot of the system and work we're doing around is preventative maintenance and systemizing all of that process to keep that stuff from happening.

As it relates to the first part of your question, the fit and finish side and for our customers. Not everybody can afford to move into a brand-new high-rise apartment. But I would argue that almost everybody has pride in where they live, and really wants to live in a nice place. It doesn't have to be brand new. It doesn't have to be perfect, but everybody wants to have pride in the place that they live. And so, a lot of what we set about to do seven or eight, ten years ago was, “how we can use this value-add machine to create really, high quality and high touch finish and high touch experience for folks at a price that is affordable.” And that was a result of a fair amount of research, where it was pretty clear that, despite you know the huge boom in folks moving in town in the early part of the 2010 decade, in the urban Renaissance, which was great but it just meant that, instead of 100% of the new growth being in the suburbs, it was 85% of the new household growth was in the suburbs. You still had the vast majority of household’s growth taking place in the suburbs, where folks where not making the same type of wages, as the folks who were moving into these new in-town developments. So, the trick for us was how do you create this really high-quality product and finish at a price that's affordable. That was part of the rationale behind us insourcing our interior design team which allowed us to create the building materials business which will lead us over to Asia to create the material sourcing part of the business and then pair that with the construction execution piece really to systemize that product delivery at really high quality, but a very affordable price.

Willy Walker: So, I remember walking into your offices, I want to say it was probably around 2015 maybe 2016 and there was a projection up on the wall in the analyst bullpen that had ships literally on the Pacific Ocean where you could track the ships that were bringing across them materials that were going to go into Cortland buildings that you were rehabbing. That's a big step from 2005 being focused on developing multifamily properties in Atlanta, Georgia. Talk about the move to vertically integrate and going and making partnerships with the OEMs over in China that allowed you to standardize product and cut your costs dramatically.

Steven DeFrancis: Well, I’ll tell you how it started. Again, we were trying to figure out how to build this machine to create really high-quality product, very affordable price, very little volatility in the delivery schedule, etc. Because of the challenge of getting really good design talent on a third-party basis early in the cycle and again that's because early in the cycle we were buying and renovating assets that were all foreclosures and many of those assets we paid sub $15,000 a unit. This was not the same type of profile we are working on today and, as you can imagine if you were an interior design professional getting the Cortland project to renovate a property that they had just paid $10,000 a unit to buy and we're going to spend $15,000 a year it wasn't the high glamour project. So after a while of fighting that battle, we finally decided to you know we hired Darla Dylan who was working for one of the companies that we had hired on third party basis and I’ll never forget; we were like okay Darla is coming in she's going to do all of our interior design hundred percent of it we're going to have it no problem. That team, by the way, is now about 40 people and we're still always struggling to stay current to keep up. Once we brought that in-house, we then realized that we could do a better job on the material side and so Darla partnered with Clay Landers who runs our construction group and they started working with an importer, to again, we were not going directly to Asia to source materials were working with an importer to cut out some of the middlemen on this side. And like a lot of things that worked great until it didn't. Work really well for a few jobs and then all of a sudden, the stuff was delivering more and more slowly and then that guy disappeared. So, clay and a wonderful gentleman on his team named Walter Hudson got on a plane and flew to China to find our missing cabinets and counters at the time. Neither one had ever been there, had no idea what they're getting into but we're going to go figure this out. And it literally was sort of that silly like they met with one group who then pointed him to the next group with them lead the next group and after a couple of visits they realized that if we can get Darla’s team to design these materials we just found the factories, we can go do this direct and cut out all the middlemen and a lot of the cost. The really important thing that was cut out was the volatility of delivery and timing and product quality. My controlling now the design of the materials, we’re talking everything inside the drywall in a unit. Cabinets, counters, tile, light fixtures, plumbing fixtures, flooring rob hooks, doorknobs, peep holes, you name it. By controlling that process, you now could control the quality of the product, and the difference in a really high-quality fixture versus the lowest builder grade stuff we were used to seeing it was literally single percent cost difference because you spent so much of the landed cost in the US went to logistics and shipping the amount of cost that went into the actual product is really pretty small. So, it barely moved the needle to go from really low grade to really high grade. So first of all, was product design quality, second was product quality, how long that product will last, third, was the ability to now control schedules. So to your point looking at all the ships on the board, we didn't make the ships move any faster, but at least we now had consistent information about when they were going to get to the port in LA or the port in Florida. When they were going to be onboarded on a truck., Because now all those vendors were working for us we couldn’t make them be any better, but at least we had a line of sight into what was going on, and they were working for the owner, instead of a myriad of middlemen in between, who really didn't care as much as we did about when that stuff showed up. So, we got a great price, we got great product, we got great finish. Most of all, we got great consistency so when we were promising delivery dates on these units, we had much lower volatility than what we had seen previously, doing a more traditional model.

Willy Walker: And is that, given the supply chain issues going on today are those relationships and controlling that process a competitive advantage right now at this time in the cycle, given the pandemic and how backed up supply chains are?

Steven DeFrancis: Yes, it's been extremely helpful, and, in fact, since the pandemic, started March last year, we have delivered about 7,500 units to date. So, it was a combination of having product on hand, rushing product into manufacturer soon as the plants reopened in Asia. Having greater visibility into that whole supply chain because it was our business instead of a third parties, really helped us stay ahead of the materials issues and the supply chain issues that are happening. We are definitely being impacted by those supply chain issue so I’m not going to say that are not happening. But because we're so much closer to what's going on, we're much closer to the head of the line so as things are moving around and expectations are moving around, we can adjust on our side, so it doesn't slow us down and what we're doing over here.

Willy Walker: So, your brand, your customer experience, and your cost of renovation, are all competitive advantages that allow Cortland to pay higher for an asset, lower your cost of rehab and then be able to make up for it in the rents, you can charge, because the combination of lower cost on the rehab and then also the brand on the rents allows you to have a unique competitive positioning as it relates to acquisitions. The market today is as white hot as we've ever seen it Steven you know that very well. My team is showing your team, your team has underwritten, I think Altman said to me in the last three years, the acquisitions team at Cortland is underwritten something over 2,500 assets. And so, it's a wildly competitive marketplace right now and you're seeing CAP rates continue to chink down and chink down. You just raised your fifth closed end fund. You've got a number of open-end funds so you're raising a lot of capital. What's your view on the overall market right now as it relates to sort of supply and demand and where pricing is and the ability to continue to get the returns that Cortland has been so successful at producing?

Steven DeFrancis: Well, obviously there is an enormous amount of capital looking to get into multifamily which is driving down the CAP rate environment. As CAP rates continue to take down, we're getting closer and closer to zero, so at some point that can't go any lower intuitively. But we do believe that all the value we bring to the table to create alpha is good if returns are in the 20s. They're better in the teens, they're really, really good when they hit single digit returns, because the alpha we're creating is somewhat consistent regardless. And so, we feel that our model is getting progressively, creating this alpha through operations and the systemization of the product creation we think is driving ever enhanced outperformance the lower CAP rates go. I’d like to think and Brad Brown, my acquisitions chief swears we've never paid more than somebody else for a property. But to your point about all the stuff we've underwritten, what we decided a number of years ago was to invest in a bigger team so we could put an investment team in each of the markets that we're in, so we weren't trying to do all this acquisition from a central location where we really didn't have the local market knowledge that we would like to have. 

We are probably a 50 some odd people on the investment team, and they are spread out across the markets where we are operating in the US. That allows us to underwrite a huge volume of potential opportunities, it's really inefficient. Over the last three years we've closed on 4% of the assets we've underwritten but, at the end of the day, if we take the learnings we're having through in our existing portfolio in each of these markets and the learnings we get from the 96% of the assets that we lose on, but we underwrote and got all the data from, and then maintain all of that in a dynamic database. And then, use a good strong local team that can take that data and take what they know about what's going on in every part of their market, every day, it just allows us to be better at choosing where to lean into what we're offering versus throwing a dart at a board and hoping that this deal works. It allows us to be so much smarter when we're underwriting new opportunities which, at the end of the day, works for the benefit of our investors. Because it gives us less volatility on the outcome of the return.

Willy Walker: If you're only successful, and by only, it's a very relative term, on 4% of the deals that you underwrite. Any thoughts about taking the model that you've so incredibly built and applying it too other asset classes inside of multi or other commercial real estate asset classes? I can only imagine, Steven, that during the pandemic as hotels and office buildings were sort of sitting on the sidelines and weren't trading because nobody really wanted them, there were opportunities for you to step in and use your act rehab capabilities to convert a hotel, for instance, into a multifamily property. Did you focus on that at all? And then on the broader question any thoughts about taking the model and expanding it out?

Steven DeFrancis: At this time, we haven't thought about expanding beyond housing. Most of the places where I’ve made mistakes are when I tried to do something that wasn't housing. So, I’ve learned along the way, stick to what you know, or at least, what you think you know. As it relates to other types of housing, we have looked at whether student housing or senior housing. As you know, Willy, we started a brand for 55 plus which we call the Tiva a number of years ago. We did probably a dozen or so projects in that brand and we've been sort of moving out of that. We had great success, but we think that was more a function of market timing and luck than it was that business model made sense for us. So, I won't say we won't ever do something different, but we're not looking at something today. We are looking at other product types within housing.

But thankfully there's so much opportunity, as you know, within multifamily in the markets we're in. If you look at Atlanta, you mentioned we're number one owner, number one owner in Dallas, in both of those markets we’re the number one owner and were mere basis points of the total. Like one or two percent of the total supply. So, lot of room to grow in the business that we're doing. Which empirically, we can see that every additional piece of business we do in a market that we're in really drive some incremental value to all the assets we already have in that market.

Willy Walker: And in most of your markets Steven, you are a top five owner. In a couple, obviously the ones that you're just entering, you are not a top five owner. But is it fundamental to your business strategy to gain those economies of scale in a given city? Or as you get bigger and bigger do you have the ability to sort of centrally manage everything and be able to have one or two assets in a given market and just be happy that you're in, I’ll just pick a market, Charlotte, North Carolina with one or two assets, even though you might not be a top five owner in Charlotte?

Steven DeFrancis: Well first, it's not about being top five or top 10, it's really about having the right asset base to operate with a scaled organization. It's less about buying them or renovating them, building them from that standpoint is really on the operation side. What we've learned is, the value you get out of being scaled in a market, you can't beat it in any other way, centralized services, etc. Because it just takes so many people to do it well. In a market like Dallas or Atlanta or any of the markets were in, we don't need to be top one or five, but we'd like to have line of site to 4000 or 5000 plus units because it allows us to first, invest in better top notch human capital, because we have the scale to support it. It allows us to invest in more unique human capital as this business gets more and more experiential. There’re expectations from our consumer and our customers that are more and more unique, so we need more specialized human capital.

It also allows us to systemize or centralize within a given market; things like maintenance and purchasing etc. We recently, by example rolled out a concept we call the Leasing Hub, which is instead of having leasing agents in every property who are fielding calls, inquiries from new customers, we centralize those folks. And then, all of those calls come into a central location. So, instead of calling in the more traditional model where if you're looking for an apartment in Denver and you call one of our locations in Denver, if they can't help you, which is fairly likely, because all the properties sit at 95% occupied. Then all the investment you put into that lead, your associate is like well, thank you very much for your interest, but we can’t help you and call us next year when you need an apartment again. Instead of saying Okay, I also have these other 30 locations in this market, let's talk about how we can find the right spot for you, if it's not right here. There's huge value in that and this is just one example where that scale just creates a ton of value. 

The other piece is just in SEO and online through branding as I mentioned earlier. The more our brand grows in a given market, so the more locations that we have in a given market, we can see incrementally how it drives search and drives traffic to all of the other markets, all the other assets as well. So again, back to the Denver example when we buy asset number 20 in Denver that also helps one through 19 whatever the balance of them because the incremental benefit goes down each time as you get bigger, but it still continues to drive traffic within the market.

Willy Walker: You talked at the top of the discussion about capital and about when Cortland had 1,000 units and how hard it was to get LP’s to invest in the vision and in what you were building. It must be really fun these days to sit down with LP’s who are basically throwing money at you. But one of the things that you did Steven, is you brought on amazing talent in Ned and in David and others to really create this capital formation function inside of Cortland. And as I look at Cortland now a decade after you really started hitting this growth trajectory, for all of the incredible brand you’ve built, customer experience you've built, vertically integrated sourcing you’ve built, and the actual App rehab process, you've also created a capital formation machine that is, there are parallels to it like a Blackstone. But there are few who've been able to create the capital formation capabilities that you have at Cortland. 

As you sit there and think about the next 10 years, what's more important to you; continuing to build on the capital formation side or continue to stick at, it's day-to-day operations and the blocking and tackling that actually brings the capital? Don't get too excited about AUM, it's more important that we're delivering that service every day, and obviously I know it takes both but I’m trying to get at a little bit of what's the focus?

Steven DeFrancis: We do have a great capital team, Ned, you mentioned Chris Lennon. I can thank Bruce Cohen for the time he spent advising us, putting that team together. That team actually started when Ned joined us a number of years ago, but then as we really wanted to grow in the fund business, we talked to a number of groups, number of placement agents and really how we ended up building an internal team is all the placement agents we talked to were in complete agreement that there was no need for another multifamily manager. So, talk about a kick to the pride; I couldn't even pay them to represent us.

Willy Walker: It makes two of us, it makes two of us.

Steven DeFrancis: But, sometimes it's good to have more ambition and brains. So, we just said okay, well we've done a lot of other things ourselves, we'll figure this one out too. And began to build that team, which has been a great add to the organization. But to your point about how we're going to grow, I’m a big believer in taking a step back. A lot of the things we talked about today and the differences between us and maybe some of our competitors is, we really look at the business as a consumer facing operating business that happens to need capital as opposed to a capital business that happens to somewhere down the hall have some property operations. Frankly, historically, most people in the C suite of these businesses deign to get that operational stuff on their shoe. It's just not something people want to deal with, but it's necessary.

I think if we're really going to outperform in the new environment of multifamily going forward, that's the part where you got to be best. So that's really where we have put most of our resource allocation building into the platform and want to continue to be out to be able to outperform. Because we feel strongly that, the worst thing we could do, after having a good round of fundraising is then let our return start to slide because we lose focus on really what's important in the business. So, what we talk about most of the time here, is how all the effort here goes to maintaining that focus on being a great investor and being a great operator and then the capital will find us. I have strong belief that if we continue to perform for the capital, they're going to find us. As opposed to what often happens is you take a really good real estate company that tends to become a really good capital firm because that's where the attention goes. So, as long as I’m here, that’s where the focus on the operations.

Willy Walker: As you think back over the last decade, take yourself back to 2010, the amount of scale that you've created, which is the along with scale success, the decisions you get to make today are very different decisions you made a decade ago. What's the best part of that? What's the worst part of that?

Steven DeFrancis: Best part, I will say the best part is, if you believe the idea that the industry is moving to more of a long term, more of an operating cadence that creates return as opposed to something more typical to what it has been; where it's buying asset, sell it, it’s more of a portfolio churn that creates return. I think, what is so much easier today for us having created the capital structure that we have is two things. We’ve created the capital structure and built the infrastructure to where now we're not relying on all these external parties for every project. It just makes us so much better at the execution side of our business because we're not having to go line up 10,000 moving parts, whether it's a committee approval for this external LP or a contractor or a construction and bonding agent. All these different things that you have to line up when you have no control over your capital. So, having built the capital infrastructure to get capital that we then have control over at the same time of building the execution infrastructure to perform for that capital. I loved it 10 years ago, it was fun every day. Today it's just a different type of fun because you can do more and do it better, because each thing is systemized so much better.

Willy Walker: And anything on the downside, as it relates to anything from the small company touch and feel that you miss or anything that sort of says man, I wish I could go back to doing that, but my job today just didn't, allow me to do it?

Steven DeFrancis: I will never say I’d rather leave here to go there, but I do miss the closeness. Five years ago, I knew every single person who worked here and could walk up and have a conversation and whatnot and knew them. I do miss that piece. Now I do try to get out as much as I can and meet all the folks across the system, but I do miss the that small family feel where you got to know everybody and that was a big part of the excitement of coming to work every day.

Willy Walker: Well, as I said at the top of our discussion, the partnership between W&D and Cortland has been a big part of our success over the last decade and I’m deeply appreciative of it and I’m also appreciative of you taking the time to join me today and talk about how you've made Cortland the success that it is today. So, thank you Steven, very much for taking the time. 

To everyone who listened in today, I hope you enjoyed our discussion and I look forward to seeing everyone back next Wednesday on another version of the Walker Webcast. Thanks, and have a great day. Thank you, Steven.

Steven DeFrancis: Thank you.

Willy Walker: Take care.

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