Transcript
Dean Wehrli:
Welcome to New Home Insights, the John Burns Real Estate podcast about the US housing market. I’m your host Dean Wehrli. Today, we have a very, very, very special treat for you. It’s Melissa Abel, the executive vice president at Texas Capital Bank. She oversees their builder finance arm. She’s been working her magic since 2010 there, I think going nationwide in 2012. She’ll correct me if I’m wrong. And we’re talking big dollars here, by the way, as in a portfolio of over a billion dollars because everything is bigger in Texas, as we all know. Melissa, welcome to the show. Why don’t you start us off by give us a little bit about yourself and about the Texas Capital Bank?
Melissa Abel:
Sure. Thank you very much. I appreciate the opportunity to get to speak with you guys. So as it relates to me, I am, I guess on my 22nd year, specifically in the space on the finance side. And I guess last year I turned legal at 21. So in many of the clients, we’ve continued to finance during that entire period in the group we have together today, I guess, depending on who it is, been together over 17 years. So great spot to be, that’s for sure. I don’t know about the ’08 through ’10 and on, that period was a little challenging. However, we were able to take our product, our franchise, and move to Texas Capital to capitalize on where the cycle was to continue to help and fund our partners, our borrowers, be it our production builders or masterplan community developers.
Melissa Abel:
So it was fun being a one trick pony until then. That was for sure. And kind of back at it. Although the distress asset plays were fun, I think for all of us. So that is us. Texas Capital is approaching 40 billion in size. We were 7 billion when we started there in early 2010. So we’ve grown lock step with them. And actually on a commitment basis in the space, we’re running around 3 billion. It’s something we’re proud of. And we continuously have reinvented ourselves. So between the entrepreneurial spirit of Texas Capital coming in when they did, and our awesome partners on the client side, and then the depth of experience, we like to think we have something pretty special.
Dean Wehrli:
3 billion to 40 billion dollars worth of special.
Melissa Abel:
In commitments, yes.
Dean Wehrli:
That’s pretty special. What’s kind of your main role there for TCB?
Melissa Abel:
Right. We are a nationwide bank, despite the heavy emphasis, which we’re proud of clearly in Texas being Texas Capitol. We have five nationwide franchises of which we’re one of them I oversee, which we call our specialized residential real estate. And it is unique because it’s a three cycle franchise. So we’re not just a shop that does just one side of this industry. We do institutional finance, whereby we lever investment funds and/or other lenders in the space. We also do bond anticipation note in the space. We play selectively in the build to rent. And then of course our main bread and butter, which we’ve always relied on are these long-term relationships with clients who we consider like ourselves, that capitalize through all parts of the cycle.
Dean Wehrli:
You started though in 2010 or so when conditions in housing were not awesome, let’s say. So how and why, I guess, did you decide to get into the housing sector so big?
Melissa Abel:
Like why am I this crazy? Is that it?
Dean Wehrli:
That’s implied, but I wasn’t going to say it.
Melissa Abel:
That’s implied. Okay, so we were in the space at RBC, and I mean, our cost of capital was changing. I mean, I think a differentiator for us is our value is our client base. And we were worried that the bank RBC was going to continue to be active in this space due to obviously what was going on around us. But we knew we had a franchise that continued to have builders, developers, clients across the space that continue to profit. And our value is making sure that they have the capital they need.
Melissa Abel:
So we actually went out to the market, and at the time, everyone was doing a fund. And it was extremely sexy. And we were leaning that route. And then one night Jocelyn Ansley and I probably after one too many glasses of Chardonnay started backing into the email addresses of the five CEOs of the best banks based in Texas, knowing Texas was getting hit the least, right? If anyone was going to do it.
Melissa Abel:
And we would sit there and try the email till it went. So in this case, it was K.Cargill, Keith.Cargill, and finally our business plan went. And he called, and we sat down and we knew right away that there was a fit. They were entrepreneurial. They launched lines of business when other banks are running the other way because that way you’re able to get the best clients and retain them. So the need or the drive came from what we know our value is which to continue to finance this awesome group of partners we have in the space.
Dean Wehrli:
I’m going to just assume that you’re pretty high on the housing sector right now, correct?
Melissa Abel:
Yes, I am. Correct. I paused. I mean, I do have a few concerns, as I’m sure everyone does given some of what we’ve seen. I was a little bit higher about three months into COVID when I realized we were going to be top of this correction and really sail what it felt like through it, comparatively speaking, to the last time. So, yes. However, do have concerns on some things that we are seeing.
Dean Wehrli:
What’s your primary concern right now?
Melissa Abel:
Let me back up with saying, the portfolio we have, so we monitor all the clients and we do trend lines on leverage liquidity and profitability. It’s the healthiest right now today it’s ever been. I mean, average net margin we see is over 9%, leverage at one and a half times-ish. Liquidity, robust liquidity of unprecedented amounts. And so it looks really good. However, if you look at there are less and less land deals that are penciling out that we see. And so, without building an acceleration, it seems like that’s getting hot. The lumber prices appear to be a real challenge. And it’s odd because it’s the first time in history where in a correction, completed specs average 12% in a correction, they’re run sometimes up into the 20s. Right now across our book, our completed spec ratio is less than 4%. Developed lots are at all-time low.
Melissa Abel:
And so we have to feed the beast. And every CEO I talk to, it’s a real concern between, I mean, this accelerated demand, which you wonder is it because people are stuck together and they can’t stand it any more, they get divorced, they each buy a house. Or you look around your house, you don’t like it. You buy a house. Are we stealing forward demand? And then you say, okay, is it offset by natural population growth or immigration, especially, on a go forward under the new regime. And so it’s just we don’t know what we don’t know because there has not been one like this. Obviously interest rates are all time low, but we have to find a way to get lots on the ground and be able to build houses and do enough, even if we’re seeing a lot of raising prices in the houses without slowing down to the point that you can’t feed the beast. So I mean it’s a very interesting time, and I love debating about it because I wish I had someone that knew exactly where we’re going to be a year from now that could tell me.
Dean Wehrli:
No one does. And no one ever does, even when they think they do. That’s my take on projections. But so it sounds like your concerns are both a little bit from a fundamental, right? Are we stealing from the future? Will renewed immigration kind of offset this push, this extra demand we’ve had from people from low interest rates and from people seeking to move from the pandemic? But also you’re a little bit, some of it is just that the ability of this sector to keep up with this heightened demand. And that’s not a bad problem in most cases, right?
Melissa Abel:
It’s not until all of a sudden you’re running out of lot supply. Because whether you’re buying lots from third-party developer, or you develop your own, if you can’t make the numbers pencil on buying a piece of land to develop, and the only way you can do it is build in acceleration, then you could arguably be getting yourself into a situation that we saw in ’08, ’07, where people were making land deals work because of building in a huge acceleration that we can’t guarantee is going to happen. So I just think it’s going to be interesting to watch.
Melissa Abel:
One thing I do know though, we all know the last correction wiped out the vast majority of average operators. The operators we see today are off the charts amazing. And if I trust anybody to figure it out on how to get units on the ground, on how to manage costs, on how to continue to deliver these results and capitalize on whatever market we’re in, I’m very confident with the operator set, this sophistication the industry has, the types of finance. I mean, whether it’s the bond market, as we all see is pushing in and a very ugly competitor of ours. And it’s just unforeseen times. But yet again, if you look at the quality of the leadership we’re seeing in these companies, I’d put it against any other industry in the nation.
Dean Wehrli:
Yeah. The flavor of your answer here has kind of implied how you’re going to answer this next question, but I still want to ask it. How do you make your key decisions about where to invest or who to invest with? Are you a numbers person, are you’re a relationship person? Do you ever go with your gut?
Melissa Abel:
That’s a great question. I would say operator first. I do think it’s very entertaining when bankers say, “Oh, I know that market,” or, “I know this project is going to work.” And that’s not what we’re cut out to do, right? So we look to tier one operators that we can trust to navigate through any market and headwind. We want to sleep at night and not try to figure it out ourselves. And so I would say number one is relationship. Tier one operators, that no matter what markets they’re in, know how to navigate through it. They have discipline. They have strong leadership across the top level, not just one person leading the show.
Melissa Abel:
And of course having a robust balance sheet and results and history never hurts it. We do do startups that have the leadership that’s made it through corrections, which we like to see. Because it’s easy to do it when the market’s carrying all of us. But where it gets challenging is when it’s not. And so again, really, that gut people that can tell the truth, even when it’s hard, and we can have meaningful debate. I enjoy debates. That’s how I met Mr. Burns when he engaged in a debate with me over dinner.
Dean Wehrli:
You have to tell us that in a second, by the way.
Melissa Abel:
I thoroughly enjoy those. And also there’s so many CEOs or CFOs or C-level, or even upper management, people on the ground that we learn from and we ask every day, “How did you make this happen? How did you decide to pull out of this market?” Or, “Why did you decide to stop buying land?” And I love learning from the best of the best. And I feel like that’s who we finance and we continue to look for.
Dean Wehrli:
Do you still get those people who are blowing smoke, and is your smoke detector on for those folks?
Melissa Abel:
My bullshit detector is pretty damn good because I grew up in the horse industry as a kid. And you’ve heard plenty of jokes about horse traders. So it’s usually pretty spot on. We don’t claim to have expertise at the level that our clients do. And so again, we rely on them, but, oh yeah, of course there’s people that we have open, honest discussions with, and lying, or trying to avoid the truth. And for us to just put numbers up on the board, that’s not our M.O. Our M.O. is we run a business just like our clients do, and we try our very best to make the best decisions, and we’re proud of it. We’ve not incurred losses. We’ve actually probably missed on opportunities because we believe, like our clients do, that some of the best deals that you do are the ones you don’t do. But on occasion, you’re a little conservative and you miss maybe the one you should have done.
Dean Wehrli:
Housing is pretty hot right now as a sector. But how much of your interest in housing is because it’s relatively healthy versus other asset classes, as opposed as just housing as a really sector you want to be in long-term? I mean, do you gauge it against other potential investments on a regular basis?
Melissa Abel:
We do. I mean, again, looking at an operation of the bank size, and there’s about 27 different lines of business, we’re convicted to a set of metrics that we’ve agreed to deliver for this bank since day one, when we came over and launched back when we did. And as long as we deliver those metrics, which are top of the house and always have been, it will remain there. But bear in mind, even when everyone was running from housing, we had a portfolio in ’09 of clients that were brilliant operators that were continuing to make money. I mean, housing starts don’t go to zero. I mean, some areas, arguably they damn near dead, but they don’t go to flat zero. You just got to make sure you’re partnering with the people that are not only capturing the housing starts, but that are geographically diverse to offset the areas that may be experiencing more pain than others.
Dean Wehrli:
So you definitely are big on who your partner is, and I know you have metrics and look at markets. Do you also, within housing, do you look at different sectors? And I’m going to definitely ask you a question on build for rent in just a minute.
Melissa Abel:
Of course. And that was what I was trying to refer to with this three cycle franchise and the five verticals we have looking at all sides of it. I mean the one area, and Burns always makes fun of me, that we don’t understand well enough is straight project finance in California. We just don’t. In fact, one time I sent Burns a report, and I didn’t realize that it was a heat map of where we had exposure. And we had cut California off of the map of the United States in an attempt to show more granular exposure.
Dean Wehrli:
That’s not okay.
Melissa Abel:
And he’s like, “Melissa, that’s a little rough around the edges.” I mean, that said, we do finance parent level companies that build in California. It’s just straight project finance, we just don’t know it well enough. And we are believers that if you don’t know something you’re going to get yourself hurt.
Dean Wehrli:
Melissa, I know you guys have gone into the build for rent sector in a big way. It seems like it’s the hottest sector in housing right now. It’s certainly one of the stablest. I mean, can you sort of briefly walk us through the process of underwriting a BFR deal? Or maybe even tell us why you have not or would not do a new BFR deal right now?
Melissa Abel:
Yeah, absolutely. I think history helps. So we financed parent level companies who did the new single family construction levering off of their single family for sale production product back in, it started in ’09. So we’ve been in this space with two marquee clients for quite some time. And it was an ugly word because for the longest time banks confused it with the older home scattered type approach versus what we’re seeing today, the targeted community, so on and so forth. So as we continue to reinvent ourselves over the past five years, I mean, obviously we’ve been in Texas Capital Bank longer, but we knew it was going to cycle. We didn’t know how. So we were adding products and verticals. And we added, like I mentioned, the bands, the institutional finance.
Melissa Abel:
And then of course let’s expand, build to rent. It seeming hot. I believe paid you guys, or I know we did, to do an in-depth study in the space. It was a great study. I thought the bill was in pesos when I got it, but it was worth it, even though it wasn’t USD, to show us. And we were pretty bullish on this space. But then all of a sudden, we realize a lot of times you can’t distinguish in permitting between CRE and build to rent. One, so you can’t tell where supply’s coming down. Two, we were getting two to three calls, and this wasn’t solicited, a day from, when you say that the people who are not in this space that just want to invest.
Melissa Abel:
And got a little concerned because we just want to make sure there’s plenty of meat on the bone for everyone who’s doing it. We want to make sure there’s a proper management company, more than likely internal, but if not external, it makes sense. We want to make sure it’s not a, hey, we’re going to put a house on the ground, and hopefully it either rents or sells. So trying to find the shops that are integrated to the level that we want that have the capitalization in the event it does get over supplied has really been a lot more challenging than we thought. And we could do just one-off projects all day long, easily.
Melissa Abel:
And so just trying to really narrow it down to a focus of companies that this is what they do. They know it, they eat it, they sleep, but they breathe it. I think the risk is we’ve never seen it scale like this. And so none of us know what we don’t know on what could be the downfalls of it. And I think that’s the biggest risk. We love it. And the ones that are, at least to our underwriting standards, and not to say we’re right. I mean, and happy to debate it all day long. We could be completely wrong. Definitely wouldn’t be my first time.
Melissa Abel:
And trying to figure out what is the right number? You see an article today, it’s under supplied, you can’t find it, but then we’re seeing 60 opportunities a month come through. And I would love for you guys to produce a report, if you can get your hands around it, showing all of a sudden from a macro level view where all these new projects are going so we all understand what the supply is going to look like. Because I think it’s enough for us to try to figure out how deep the demand is. We know it’s there. We know it’s robust. But how deep is it? But then also the supply to ensure that we’re in proper balance as we go through the development of this awesome product, which we all agree.
Dean Wehrli:
When does BFR maybe start getting into higher priced metro areas, higher price markets? I know there are luxury BFR communities out there, but that’s not the norm. Do you see it evolving that way at all?
Melissa Abel:
We haven’t seen that materiality. It just doesn’t seem like there’s the land to support that infill type more than just one or two houses, if you’re talking really higher end. And then just kind of depends on geographically. I haven’t seen one come across, or I should say, a parent level company that’s doing this that says we’re going to focus on the higher end arguably. What does that mean, of course, by geography? And those are also the people that we’re seeing that are last to lose their jobs through this as well, that are buying the homes. And so I mean, that’s unknown. It’s an excellent question. And if someone knows the answer, I would love for them to reach out to me and tell me.
Dean Wehrli:
Yeah, it’s still so far. I mean, there are a few kind of “luxury” BFRs, but they’re few and far between, and they tend to be, like you mentioned, in those kind of infill areas. So it doesn’t seem like there are the mechanism there for it to be a big part of BFR. And also typically they can get a little more for their money doing for-sale or something like that in those higher price markets.
Melissa Abel.
Exactly.
Dean Wehrli:
How about product? I mean, do you think about product for BFR at all? there’s all the way from horizontal apartments, those really dense small unit kind of BFR projects, up through very, very traditional single family. Do you have any bias or any sense of where the sector goes in terms of product?
Melissa Abel:
The answer is no, I don’t. I do think proper management of the property is what really creates the difference. Is it maintained externally, and the units internally to create the feel of whatever market you’re going for, as long as you’re hitting the right area? I think either one are equally as viable. I mean, we have a commercial real estate division within the bank. And my peer on that side and I can debate all day long the difference between is multifamily better or the single family build to rent. I mean, I personally think people want a yard, especially if you can get the maintenance done at a monthly payment, let’s say, if that’s what you’re looking at, you can afford. So between those two, I can’t say I’m super-hot on one or the other. And then, again, to your point on the higher end, just don’t have enough depth to really make a comment and haven’t seen it enough to make any sense of anything that I would say.
Dean Wehrli:
Yeah. And in terms of the demand pool, it starts bleeding into folks who are more likely to be in the for sale world at the higher end, I imagine.
Melissa Abel:
Absolutely.
Dean Wehrli:
More serious question now, Melissa, what’s your favorite type of whiskey? And notice, I didn’t ask what your favorite type of booze was because you’re from Texas. So seriously, it has to be whiskey. I was shocked to hear about Chardonnay, by the way. That was Chardonnay.
Melissa Abel:
Actually it’s called Chardonnay, not Chardonnay.
Dean Wehrli:
Oh, sorry. That’s my bad. My bad.
Melissa Abel:
Chardonnay.
Dean Wehrli:
Chardonnay.
Melissa Abel:
Chardonnay from the gas station. You California boys do it high dollar, but in Texas we can buy it at the gas station.
Dean Wehrli:
In a box, I’m assuming.
Melissa Abel:
Actually, you can probably walk away with 16 ounces of cheap Chardonnay gas station for five or six bucks. So hence, why all the California people are moving here. Immigration is huge. It’s not because of housing and job creation and a lack of taxes, it’s our gas station Chardonnay. Make sure to tell John that please. And then-
Dean Wehrli:
I will. And we’ll teach you guys in Texas how to stop drinking it straight out of the spigot there, and how to open the bottle. Consider that a kind of just a favor.
Melissa Abel:
Are you suggesting that the straw is a bad idea?
Dean Wehrli:
You know what? Actually the sippy cup, maybe. The straw is fine.
Melissa Abel:
The sippy cup does work well for no spillage.
Dean Wehrli:
That’s true.
Melissa Abel:
Whiskey’s Pendleton. That’s a cowgirl whiskey is Pendleton. And for any of your clients that are whiskey connoisseurs that haven’t tried good old cowgirl Pendleton, I highly recommend it.
Dean Wehrli:
Is it a bourbon? I don’t know whiskey. My friend, David Jarvis, who you know there in Houston with us, he taught me that bourbon is a type of whiskey, which is confusing to me.
Melissa Abel:
Yeah. I’m not a whiskey expert. Again, I could talk gas station Chardonnay, and actually can talk a little upper level California winery. But as far as the Pendleton, I know it is whiskey. When it’s cold here, which is laughable to some folks, or when I travel to places that it really is… Well, we do have a large Canadian base that we finance. I mentioned we’re nationwide, and probably managed to offend them. So I should’ve added Canada and Australia, we finance. But yes, I will on occasion have a little toddy, or if I develop a terrible cough, I do believe that works very well.
Dean Wehrli:
If there’s a market downturn, does your choice of alcohol change? Like you go with the Boris Karloff daiquiri, orange juice and jet fuel. Is that an option in those days?
Melissa Abel:
I appreciate your deep thoughts. I’d rather get a second job and continue to drink my drink. If you’re hiring, if it gets really tough, could you please let me know so I can continue to get my gas station Chardonnay, and then on occasion, my shot of Pendleton?
Dean Wehrli:
We will. We will for sure. Now okay, now I’m asking for a friend, I mean that literally too, our friend, Rick Palacios, how is riding a horse like investing in housing?
Melissa Abel:
That’s such a good one. How is riding a horse like investing in housing? If you’re good at it, most of the time you get it right, and you make some good returns on it. However, when you get it wrong, it’s disastrous. And it becomes the equivalent, like a dog lot dog neighborhood. Next thing you know, especially in those areas that aren’t zoned, you end up with something next to you you don’t want. And so when you miss in horses, you miss pretty hard. But you end up in the hospital, and although financially you may end up in the hospital in real estate, generally, I haven’t seen people end up there in the actual physical hospital.
Dean Wehrli:
So housing is less dangerous than horseback riding, but just as thrilling-
Melissa Abel:
Physically.
Dean Wehrli:
… and keeps you on your toes. Yeah. Okay. Physically at least. You’re right. You’re right.
Melissa Abel:
I think housing financially could be… I don’t know, man. It’s another thing you could argue, just like build to rent. I do have horses for sale, and I’m more than happy to for the first time probably ever experience real financial success in the space if anyone is interested.
Dean Wehrli:
Now I mean, you’ve probably made some investments in the past that you weren’t super happy with. Has there ever been just an investment that you’d look back on and said, that was nuts. And please say armadillo farm, but go ahead.
Melissa Abel:
I’m going to go with my marriages.
Dean Wehrli:
I guess, okay, a type of investment.
Melissa Abel:
Those have not worked out well for me, investment-wise, especially when you take into account the lack of prenups. So that would be number one, followed by horses. Haven’t tried the armadillo farm. But this is a trip. So my business partner and I, Jocelyn, who we launched this gig, we decided that we were going to do a distressed asset fund at the same time we launched the gig in late ’09, early 2010. We’re bankers. So we have to have a lot of room for error. And so the first, it was couple million we did easy. And then it becomes like just it’s fun money. And for those people who do it professionally, I mean, those are great times because your yield is huge. But then you realize when everybody is starting to buy it up, and then you have that one bad decision, that hurts pretty good. Nothing like a divorce without a prenup. But it got us pretty good. When you’re living just on a banker salary, and no more distressed asset fund return, it definitely is eye opening.
Dean Wehrli:
So you’re going to complain about living on a banker’s salary. Okay, Melissa, if that’s what you want to say. That’s fine. That’ll go really-
Melissa Abel:
Why do you think I’m having to buy gas station Chardonnay, okay?
Dean Wehrli:
I think that’s taste more than the finances. That’s my gut. John Burns, occasionally he’ll ask us to list qualitative indicators that maybe the market is a bit overheated. We’re starting to hear some concerns in some sectors that that’s happening. Things like sales agents are driving the high end Mercedes or something like that. Are you seeing anything like that? Do you ever think about those kinds of indicators? Are you seeing any of those kinds of qualitative things?
Melissa Abel:
I still have that poster up in my office that he produced-
Dean Wehrli:
Do you really?
Melissa Abel:
… back when. I do. When sales sells agent buying Lamborghinis, and people who make minimum wage are buying four houses.
Dean Wehrli:
Yep. Flipping them. Yeah.
Melissa Abel:
But I think the difference is in this case, the supply’s so limited, right? It’s just such a different time so you don’t see quite that level in the way the mortgage industry, to some extent, arguably, corrected. And so I don’t think we’re seeing anywhere near the same concern that we saw back then. Again, my concern is you have to have enough volume to feed the demand, number one. And can you get it on the ground and get it pushed through the chain? And then two, are we going to look up and realize we stole demand from ourselves and then have reduced volume pushing through? Because you have those two things.
Melissa Abel:
But what helps me sleep at night is the supply. I mean, it’s like nothing that anyone I know has ever seen. And I have two people that work for me that have been in this industry, one’s 40 years and one’s 38 years, and no one’s ever seen it. So how do you answer that question? It’s night and day. I would say if there is any overheating, it would just be simply in the upcoming supply of the single family for rent space, which sounds probably stupid considering all the articles we see saying it’s under supplied, and that is the case today. But again, we can’t gauge what’s coming on because it’s smashed into the permitting many cases with CRE.
Dean Wehrli:
That’s a good point. I mean, it may be that single family build for rent in 10, 20 years, we’ll look back and go, why wasn’t it such a huge part of housing? It should have been long before 2010 or so, or 2013, ’14. Or it could be a temporary thing. I don’t think. I think it’s long-term, it’s here to stay, and here to stay in a big way. But you’re right, we don’t know that for certainty.
Melissa Abel:
Actually, I agree it’s here to stay. And I think it’s going to be a material part of housing for the rest of our foreseeable lives. It’s just, are we going to oversupply it on accident because we can’t count how much is coming? And again, you’ve got people who don’t know the industry pouring into this space. And there’s nothing more dangerous than that because you get a group of five investors, and they’ll support it and kind of throw it together. And there’s not enough meat on the bone, then they’ll fire sell it. And then that messes up everybody else who’s trying to get a normal return. And I mean, that’s the risk in it. But I’ve always believed in the space and will continue to do so. It’s just we have to ensure that people who do not have the ability to execute properly, price properly, and continue maintenance properly, aren’t enabled by banks to get product on the ground and mess the rest of us up.
Dean Wehrli:
And like you said a minute ago, or a little while ago, that the Great Recession kind of winnowed out those less serious actors in the for-sale space, and maybe that might need to happen in the build for rent space as well.
Melissa Abel:
Agreed. Because the folks we see now that are running in the traditional space are, I mean, brilliant folks. I mean our client base, I learned so much from every day. And I really do, all kidding aside, credit them for teaching me and my leadership team how to run a three cycle successful franchise. And one of my favorite quotes, I’d like to share this, is you have to remember when you’re running a business, you run it for the market as it is today, and to succeed in profit in the market as it is today. You don’t look at it as if you’re in a down compressed market or a challenging time. You run your business to succeed in the market as it is today. Reinvention. Continue to reinvent, be disciplined. Don’t get over-levered, have cash somewhere under the mattress. Don’t buy expensive wine from California, get it from the gas station.
Dean Wehrli:
Okay. That last one, I think, is probably the least important since I’m from California. Let’s wrap up with a little more serious question. The housing cycle, for a very long time, the housing cycle was boring, right? It was kind of reliable, consistent. You had these sort of modest, but pretty stable returns. These last two cycles, I’m going from 2008 to current, have been pretty wild rides. Do you see housing as more permanently kind of volatile sector, or have these last, 2008 forward, been a little more of an aberration?
Melissa Abel:
Great question. I’m going to go with, and again, not going to bet any money on this, but I don’t think we’re going to see the volatility that we had seen. I think there will be cycles. But given the diversity that we’re seeing in the product, the sophistication of the operations, the, I guess old school, I mean, when I started, a leverage of four to five times was normal. A net margin of 4% was a whopping success. And again, like I’ve been saying since the recovery, you’re seeing people run an average of one and a half times leverage. And just net margins eight, nine, 10 above percent, and just war-chesting liquidity. Because I don’t think any operator even if they, which there were many that did, stayed profitable through the correction that even we finance, want to feel that much pressure again.
Melissa Abel:
So their war-chesting liquidity. And not stupid where they’re just sitting in cash on the balance sheet. They’re investing it in their own whip. But it’s just not the model it used to be. Bob, the builder, those days, we just don’t see him like we did. It’s become an industry that the level again, of sophistication, private or public, or small regional, it’s just you’ve got different players that are running to run businesses. And like any industry that has cycles, it just to me, we didn’t have the discipline, the quality of operators necessarily in the past. And I think that’ll knock out some of the volatility. And again, I mean, I would love for anybody to call and debate that with me because I’m always trying to learn and see things through a different lens. All kidding aside.
Dean Wehrli:
I would love to, but I actually kind of agree. I think also just we have to remember, this wild rides these last kind of two cycles, it was a Great Recession, second only to the Great Depression, then it was that kind of delayed recovery. And then it’s a pandemic. Those are kind of historical aberrations. So it does make sense that some of that volatility, right? Does that make sense?
Melissa Abel:
Exactly. Absolutely.
Dean Wehrli:
Awesome. Well, Melissa, this podcast has been a wild ride, and as I knew it would it be. Thank you so much for joining us.
Melissa Abel:
My regards to you, your firm, John. And on a serious note, and this isn’t some silly infomercial, and anyone would tell you within the industry the analyst that we speak with, I mean, we rely on you guys. And again, I want to make it clear no one asked me to say anything, but I do mean this. I mean, you guys have been amazing in helping us steer. Our record of zero losses is attributable to you. You guys, your guidance, John. I mean, through the pandemic, we almost spoke every single day on how to steer, how to turn, how to navigate and reinvent. So you gave me a lot of runway to say great things I think about our success, but I want to push it back to you guys. And even though John and I easily can talk ourselves into a great depression over what’s going to happen sometimes, he is my mentor. And for that, I’m thankful.
Dean Wehrli:
Well, thank you. Those are very kind words. And thank you for John as well. Appreciate that.
Melissa Abel:
All right. Send gas station Chardonnay.
Dean Wehrli:
I will. Thank you so much, Melissa Abel-
Melissa Abel:
All right, gentlemen.
Dean Wehrli:
… from Texas Capital Bank. This has been New Home Insights podcast with Dean Wehrli. Thank you so much for listening.
