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The nautical references abound at TruAmerica Multifamily. CFO Karen Millan tells Real Estate Forum that president, CEO and founder Bob Hart, a “super-avid boater,” is referred to as the “captain of this ship,” the “captain at the helm” and his staff of “TruAmericans” as his “crew on board; there are no seas we can't sail.” One thing is clear when speaking with several executives at the firm: they are all working there because they each have a high respect for their captain, who has led them to calm seas.

While the firm has only been existence for a little more than two years, its roots go back more than a century and a half. “The roots of this company are with an insurance company in New York called Guardian Life,” Hart tells Forum. “Guardian had been an investor with me when I was president of Kennedy Wilson Multifamily, and I had been working with them for almost eight years. The seeds for this firm were born at another place, but there was a relationship between us of trust, camaraderie and shared values. I was learning about them and vice versa. We started talking about what they wanted to achieve and what I wanted to achieve, and after 14 years with Kennedy Wilson, I decided I would leave and form a new venture with them. They are one of the most highly rated old-line insurance companies in the country, with an insurance platform that was built over the past 150 years. They've been in business a long time and take a very long-term view of what they do, including investments in real estate that really matched mine. It made investing with them very easy.”

Hart's goal was to create a new company in the multifamily space that was very dedicated to class-B multifamily product. “The tenants are renters by necessity,” he says. “Some call it affordable housing, but that niche is not what we do. We focus on what most people in multifamily live in—middle market or class B. We buy and reposition in all major cities in the Western US, and our mission is aligned well with what Guardian wanted to do. We're not developers of class-A, and we're not doing class-C—we have a strong commitment to class B.”

Hart shies away from using the term “workforce housing” because it “sounds like you're talking about Section 8 or affordable. I call it affordable because it's really what the $50,000-to-$70,000-a-year household-income bracket lives in. This income bracket applies more to the West Coast class-B renter—in the Midwest it might be a different number. I think calling it class-B is the best way to describe it.”

He explains that TruAmerica acts as a fiduciary with discretion for Guardian's and all of its investors'—including Allstate's—institutional capital. “In general, we bring in other capital partners, that's what we're doing. We're JV partners, but in my business, we act as fiduciaries, almost as an advisor would, over the capital.”

Chief administrative officer Mark Enfield adds that the proverbial double bottom line comes into play with this description of TruAmerica's role. “Obviously, we're a fiduciary first and foremost for our investors, but ultimately it makes you feel good to transform the living experience for these residents,” he tells Forum. “If you're thoughtful about what you're going to do in the renovation, which can be seen in the before-and-after pictures of the assets that we've acquired, it's pretty amazing what you can achieve. These renters by necessity can't afford class-A rents. You're significantly improving these properties that have often gone unrenovated for 10, 20 or 30 years. You're improving these residents' quality of life and making money for the investors, so it's a double bottom line.”

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In addition, Enfield points out, there's a huge supply- demand imbalance in this space across multifamily residential housing, with 85% of new multifamily inventory being built for only 15% of the population. And there's a year-over-year increasing demand for class-B product that isn't likely to be met. “Despite what is considered to be normalized household formation projected for 2015, most experts that you talk to think we're still going to have a 300,000-unit to 500,000-unit supply deficit, even with over one million units coming online this year.”

Hart adds that no one is building in the class-B space, “and frankly, no one's building enough in the affordable space as well, so you have this squeeze of demand. The trend in US rental housing as a whole has gone from about 30% of the population to almost 40%. Single-family ownership has gone from almost 70% of the population a decade ago toward 60%. The statistic is for every percentage point you're adding about 1,000,000 renter households; we've added well over five million rental households by the shift, coupled with the absorption of single-family homes into rentals and the trend toward living in or closer to cities and Millennials putting off buying homes, that demand in the affordable or workforce/class-B space is higher than it's ever been.”

During the recession and subsequent correction, little to nothing was built, and most of the multifamily development that's occurred since the recession has been class-A because of the high cost of land, and it's clear why there has been a tremendous shortage of class-B rental housing. “It's a perfect storm for the owner/operator,” says Hart.

The Western US is even hungrier for this product than other parts of the country, he adds. “If you look at L.A., the homeownership rate is in the low 50% range; whereas nationally it's in the low 60%. There's a much higher rentership rate, and it's similar in other areas of the west. There's a more critical demand for multifamily housing because of the low availability of land and entitlement challenges. This is also true in parts of the Northeast, but it's less true in Texas, Phoenix and Atlanta.”

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Industry research supports these findings. A recent National Multifamily Housing Council survey on consumer demand for rental apartments “provides solid evidence that despite the strong pickup in new apartment construction this year, demand for rental housing is even stronger,” according to Mark Obrinsky, NMHC's SVP of research and chief economist.

Aside from the above reasons for focusing on multifamily, the asset class makes sense for its investors because of the nature of multifamily tenancy—and institutional investors are catching on, TruAmerica's executives point out. “Multifamily isn't like an office building or retail center where, if a tenant moves out, you have to spend large amounts of money to rehab the unit,” says Hart. “You can turn it quickly without interruption. Occupancies are very high—in the 90% to 95% bracket—and cash flow is very durable as a result of that. You don't have long periods of downtime waiting to fill up vacancy. It's now widely accepted by pension funds and insurance companies—we're also seeing firms like Blackstone and Starwood and a lot of the big Wall Street guys getting into this.”

Despite its commitment to the class-B space, the firm is also open to opportunistic investments for diversification. This summer, the firm and Capri Capital Partners completed the year's largest multifamily purchase in California with the $283-million acquisition from a partnership between J.H. Snyder Co. and Washington Capital Management of the 464-unit Vermont mixed-use multifamily complex in the Koreatown neighborhood of Los Angeles. Hart says the purchase was a “presale where we bought the building and leased it up. It's a class-A signature building, and we're doing another presale purchase in Laguna Niguel. So we're doing some class-A and co-investment development to create a balance with all the class-B we do. This means reduced risk for the developer, since the risk is mitigated in class-B vs. class-A new construction, and it allows an additional type of investor to be in our space.”

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Hart points out that the firm's integrated platform is key to its strategy. “We're not just buying the properties and letting other people run them. We're doing all the hands-on things that makes an integrated company work. We're putting together a business plan to reposition and improve the property; doing unit interiors where we're putting in new fixtures, appliances and countertops; rehabbing the common areas with new gym facilities and dog parks; and providing new aesthetics for the building. We're what we call a value-add operator with in-house asset management; we're very hands on.”

Enfield says while you often hear the terms “capital allocators” vs. “owner/operators,” TruAmerica is very much an owner/operator. “We have investment management experience as well as real, hands-on property- and construction-management expertise.”  In fact, Hart's background is in asset management as well as owning and operating properties, and he says much of the firm's staff also has this experience. “We're not just number-crunchers—we're nuts and bolts people, and we like getting our hands in the clay.”

Also part of the firm's integrated strategy is its approach to renovations, which involves improving operational efficiencies while keeping rents affordable with room for rent growth—not relying on asset appreciation or cap-rate compression, Hart says. “We try not to over-improve. I like to make the analogy between a Prius and a Jaguar. They both get you to the same place, but there are different cost structures. We're not trying to build a Jaguar. We're trying to do rehabs and reposition the real estate for the markets we serve. We add features, finishes and amenities that are balanced and appropriate, and we try to do that in a manner whereby we don't have to charge a rent so high that it's not in line with the nature of the markets we serve.“

Hart points out that for the middle class, household incomes have grown, but individual incomes haven't grown that much. “People are allocating a lot of their income to pay rent, and there's only so far that can go. Some cities want to pass living-wage standards, and that's going to be a challenge going forward. It used to be that people tried to keep rents to within 30% of their income, but particularly in class-A, people want to live in a nice place downtown or close to work are spending 40% to 50% of their income. We're not there in the class-B space, but there's still a bit of a rent squeeze going on that affects the consumer.”

Lynn Owen, chief operations officer, tells Forum the integrated platform extends to her role as well. “We made the decision last December that the construction management team would roll up under me because the asset management team rolled up under me. The asset managers are really CEOs of their own portfolio and their sole responsibility is to make sure every piece of the business plan we presented to our investors is in place. We agree on the improvements we're going to make, and the expected rent premium. We've done market research to support the business plan and we've given the implementation responsibility to the asset managers. I'm going to be responsible for these two teams and have one accountable person, one business plan, and we'll work together as a team to make those decisions. These team members have great minds and years of experience working together.”

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One of the firm's accomplishments that has surprised even its founders is the pace at which it has grown in just two years. Millan says, “We were looking at doing $1 billion in acquisitions in three years, and we will be at over $2 billion by the end of this year. Our growth has far exceeded our business plan, thanks to Bob as our leader, with his vision and drive.”

The team was built through existing relationships, and Enfield says the firm did not use a headhunter or recruiter to hire a single person in two years. This may be why TruAmerica maintains an entrepreneurial, yet institutional culture. According to Owen, “We have grown so quickly, and some partners ask how we are managing this growth. We spent a great deal of time to strategize about how we were going to manage it so that we stayed ahead of all of these business plans.”

Key to the firm's growth, according to its team members, is the culture that Hart promotes as well as his own integrity. “One thing that's basic to Bob Hart is when he says things to an investor, it's not a sales pitch,” says Owen. “He's very thoughtful in what he says; his reputation and his word are everything. Whatever he tells them, he will do at least that or better.”

Millan echoes this sentiment. “Bob has a fantastic reputation; people love to do deals with him, and he's not intimidated by especially challenging deals. His leadership is huge, he's fun to be around and he has this enthusiasm for real estate and life that's very contagious.”

Enfield adds, “I truly believe Bob has no enemies in the industry. I never heard a bad word about him, and that's a big reason he's been so successful at crafting and building the team he has.”

TruAmerica's growth has led to some milestone investments including the Vermont, the JH Portfolio and Berkshire Portfolio, and the firm has become one of the top-10 most-active buyers of multifamily in the country. This year, it has expanded into new markets including Las Vegas, Salt Lake City, Portland, San Diego County and the Inland Empire, and it has responded to a significant appetite for investment from domestic and offshore investors as well as repeat investors.

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Hart attributes the firm's success to understanding trends in the marketplace—both macro and micro—as well as the tailwinds. In the Western US, those market drivers include the multifamily fundamentals mentioned earlier as well as the low interest rate environment.

But what's also interesting is the growing number of off-market transactions the firm has been attracting. “Getting off-market transactions is what everybody's looking for, and we've been strong at that,” says Enfield. “We've been shying away from fully marketed deals. Our debt relationships are great, but the equity sources we've been able to do deals with—or at least seriously discuss deals with—are really a who's who in the multifamily investment space. Bob's reputation and the amount of deal flow we see really gets us in the door to a lot of places including on the seller side. He's transacted with many of these sellers over the years, and his reputation for execution means a lot to them. He's a friendly guy, and they approach him and talk to him very early on in the process.”

Of course, the firm's programmatic capital with highly respected firms like Guardian and Allstate also attracts deals. “Not many individuals have the financial wherewithal to write co-investment checks that we have without these types of partnerships,” says Enfield.

According to Owen, having that kind of backing is important, but Hart is still clearly the driver of these deals. “On every deal we do, Bob has discretion to make decisions, but it's important to have the backing of these large, reputable companies. Guardian is an 80% owner of the TruAmerica platform, and it has been around since Lincoln was president—it's not going anywhere. It was grown on good, solid business decisions, and they saw something in Bob that made them want to invest long-term with him as a sponsor. “

The right opportunistic investments have also been key to the firm's growth. Greg Campbell, senior managing director of acquisitions for TruAmerica, tells Forum the firm is not afraid of these. “Sometimes you have to move very quickly and bring in the right partner. Because we have built a pretty good stable of partners, when something comes available, we can always think of the right partner to approach with it.”

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Noah Hochman, senior managing director of acquisitions and investor relations for the firm, tells Forum, “We're continuously looking for new partners that share in our vision here. We're continuing to build our capital relationships with strategic partners.”

As the firm enters its third year, Hart says it will continue to grow in Western markets that are coming of age including Salt Lake City, Las Vegas and Phoenix, while pursuing transactions in Seattle, the Bay Area and Southern California. “We're deepening our market share in those areas that are experiencing good growth and filling out our capabilities in those areas in asset and construction management. At some point, we'll start moving the company eastward, but over the next couple of years, we'll maintain our overall position in the West.”

Enfield says first and foremost, TruAmerica has to execute on the business plans it has crafted with its investors. “The firm is only two years old—we have to establish a track record. We have to prove to our investors that we can implement these renovation strategies, and we are well on our way to doing that. Across the board, our portfolio is performing extremely well, but that can change. We have to balance the continued growth of our firm while remaining focused on managing our existing portfolio.”

Enfield adds that the firm just closed on a five-property, off-market portfolio in Seattle and Portland and has two other portfolios under contract set to close in the fourth quarter of 2015, predominantly in the Pacific Northwest. Potential diversification of product type and geographical footprint could be in the plans, and the firm is looking to develop new capitalization structures and investment vehicles, which could include discretionary capital, a separate account and a co-mingled fund.

Owen says she doesn't see the firm's momentum stopping any time soon, but Campbell says that continued growth requires discipline. “Some of the best deals are the ones you didn't do.”