2020 Annual Letter
A YEAR FOR THE RECORD BOOKS
2020 will be a year we’ll never forget.
While there has been a lot of pain and suffering caused by the COVID-19 pandemic, there have been bright spots along the way. What may be most exciting is what’s to come; America works because of our resiliency and pursuit of greatness. As we begin to distribute a vaccine, I think we will see the biggest explosion of human demand and potential that we’ve ever experienced.
What has transpired over the last nine months at Fort Capital since COVID hit has also held some of our best moments. As we sit today, we are exponentially a better company than we were pre-COVID. We are closer as a team, more focused, and have worked to create processes, technologies, and systems that will serve as a rock-solid foundation moving forward. I could not be prouder of the way our team has handled themselves and how they’ve continued to execute in the face of adversity.
In 2020, we acquired 815,323 SF in assets, sold a 606,889 SF portfolio of Class B industrial assets, raised $20.5M in capital, started a Property Management company, brought on five new employees bringing our team to a total of 20, and built our own propriety operating system.
I want to reiterate how unbelievably proud I am of the team and culture we’ve built. Without this team, there would be no Fort Capital. Our Core Values require our team to be Resilient, Agile, Accountable, and Driven. If you’re looking for someone at Fort Capital that doesn’t embody those values, good luck, because you won’t find them. What you will find are people that encourage each other, trust each other, are kind to one other, are curious and obsessive learners, and at the end of the day, leave it all on the field day in and day out.
REMAINING FOCUSED IN 2020
Before I dive into details, our business is fairly simple. We aim to acquire prime real estate, operate with excellence, and deliver exceptional returns to all stakeholders. We know that if we continue to accomplish this, good things will happen.
At our year-end retreat last year, we focused on understanding Fort Capital’s ‘Flywheel’. If you haven’t read Jim Collins’s book Good to Great, I can’t recommend it enough. He developed the concept of the Flywheel, which you can read more on here. This approach to goal setting has been successfully utilized by companies including Google and Amazon.
To get an insight into how we think about our business, check this out:
In a year that brought challenges no one could have ever anticipated, we remained focused on our mission to the best real estate operator in the world. We refused to be distracted, which is a huge reason why we were able to add even more momentum to our Flywheel during a global pandemic.
Last year, Jason Baxter, our COO, came to me with the idea to implement something into our culture that would create accountability across the entire team for the financial health of our company. We knew that things were good, but we also knew that wouldn’t last forever. It takes discipline to start cutting costs and controlling overhead management when things keep moving ‘up and to the right’.
So, we started a program that has now become ingrained into our culture called ‘C.O.R.’, which stands for Cost Reduction, Overhead Management, and Revenue Generation. Everyone on our team is responsible for C.O.R., and when everyone feels accountable, a new company is born. This year alone, our team identified $1,008,853 in cost savings.
We infused this ‘owner’s mentality’ when times were good and our market was up. We knew things weren’t going to be great forever, but setting up a process like this when things were good made it a lot easier when things got more challenging this year.
A FOCUS ON CLASS B INDUSTRIAL
In 2015, after years of being a jack-of-all-trades, master of none, we decided we needed to find a scalable strategy that we were deeply convicted in and could build a team around to execute. We listened to mentors and peers in the industry, and they echoed that to really build a great business, we had to focus. I spent the majority of that year looking at the world and trying to find where we could plant our flag. We settled on buying vintage Class B industrial properties around Texas.
As we sit here today, it seems more obvious why we buy industrial, but in late 2015, it wasn’t. I am proud of the conviction we’ve shown. I’m proud of the focus we’ve kept. I’m proud of our ability to ‘block out the noise’.
Here are the reasons why we are focused on buying and operating Class B industrial:
– The rise in e-commerce is driving industrial demand. For every $1B increase in online sales, 1.25M SF of industrial space is needed. Source: CBRE.
– This asset class offers true ‘last-mile’ locations. These buildings are located in mature areas that offer close ‘rooftops’ and necessary infrastructure (e.g., highways, rail) needed to store and move goods.
– Class B is a depleting and irreplaceable asset class. Due to cost and location, these assets are sought after for redevelopments of mixed-use properties (e.g., Uptown Dallas, W. 7th in Fort Worth).
– There is a growing tenant demand. In expanding cities, a lot of the contractors, engineers, and vendors needed to grow a city occupy Class B industrial buildings.
– No ‘signaling’ creates a sticky tenant base. Class B tenants tend to expand within the asset class, rather than leave it.
– Class B deal sizes mean less competition. Individual deal sizes fly under the institutional buyer radar on a per-deal basis but are often too big for small real estate investors.
– CapEx & Tenant Improvements are predictable and relatively cheap. The largest CapEx risks on these assets are the roof and foundation, but replacement is very predictable. Exterior improvements are minimal (e.g., paint, landscaping), and tenant improvements are also relatively affordable (e.g., small office spaces requiring new paint and carpet).
Our strategies for creating value across our investments include:
– Acquiring off-market deals. We do not participate in auctions or bid processes. Instead, we focus our energy on cold-calling owners of real estate and creating strategic broker relationships that allow us to have a ‘first look’. This ultimately allows Fort Capital to buy assets under market value. Want to sign up for our Broker Deal Incentive? Click here.
– Converting Mark to Market Rents. Very often we buy properties that have tenants paying well below sub-market rents. We increase rents as leases come up for renewal.
– Leasing up any vacancy. Our best-in-class asset management platform, leasing broker relationships, property management services, and marketing capabilities allow us to lease-up vacancies quicker than the competition.
– Completing CapEx improvements quickly and on-budget. Our in-house Construction Team manages any aesthetic and structural improvements (when needed) to enhance the appeal of our buildings.
– Adding Credit Tenants to Rent Roll. We actively seek to lease to credit tenants, which lowers risk across the board.
– Leveraging our scale. Our scale allows us to negotiate better terms with service providers, buy materials and supplies at a cheaper cost, and work with best-in-class leasing teams.
– Identifying opportunities to assemble assets. On an individual basis, our assets fall under institutional investor radar due to size. Our team is able to acquire and assemble these deals into a portfolio that is institutional quality—either as a sale or as a refinance.
To date, we have acquired 26 industrial deals totaling 4.8M+ SF across DFW and Houston.
This year, we also demonstrated our ability to aggregate a diversified portfolio to enter a staged disposition. By aggregating, we were able to drive interest from institutional buyers who can pay more because the return they need to make can be less than a private buyer.
In October, we closed the sale of an 18-building, 600,000+ SF Class B portfolio, which has also opened the door for future portfolio sale opportunities. The portfolio was 95% leased at the time of the sale. We achieved a 66.73% average levered return and a 2.62x average equity multiple for our investors.
If you’re interested in investing with us or would like to see our more detailed track record, please reach out to firstname.lastname@example.org or fill out the ‘I want to invest with Fort’ interest form here.
Real estate is expensive and requires GPs to raise a lot of capital. At Fort Capital, we have been fortunate to partner with amazing people over the last 16 years. Currently, we have a pool of 235 active investors eager to invest in upcoming deals, 160 of which have invested with us to-date. In 2020, we raised $20.5M in capital, and we are tracking to raise $50M+ in 2021.
At Fort Capital, we are obsessive over the experience we provide our investors. While providing exceptional returns is our ultimate goal, the on-going experience our investors get is a close second.
Would you like to know more about what it’s like to invest with us? Fill out the “I want to invest with Fort” survey here, and we’ll be in touch.
In September 2019, as part of our C.O.R. initiative, we realized in order to create a stronger financial bedrock for the company, we needed more predictable fixed revenue. On top of that, we needed better data and relationships with our tenants. It wasn’t hard to come to the conclusion that we needed to start doing our own property management.
For years we had discussed doing this but didn’t feel like it was time. We wanted to have a portfolio large enough to effectively start the business profitably, but more importantly, with the ability to hire a stellar team. All of these pieces had fallen into place at this time. Once agreed to in September, we set a target to launch the business on April 1, 2020. In hindsight, what a time to launch a new business… Two weeks into a global pandemic!
What has transpired since September 2019 is one of the biggest wins we’ve achieved in company history:
– We have a team of six extremely talented people running the property management arm of Fort Capital—FCP Management.
– We are now operating, profitably, a property management business with 3.65M SF under management, providing service to 278 tenants.
– Investors and allocators of capital are beginning to gravitate towards a vertically integrated GP and that is exactly what we are.
– We have also brought on our first two third-party clients to help manage their industrial portfolios (approximately 1.9M SF). We will continue to selectively work with other owners to provide them with first-class property management services. For Property Management inquiries, please contact Steve Bailey at email@example.com.
At Fort Capital, we aren’t just early adopters of technology. We are creating those technologies. When we couldn’t find a product in the marketplace that would answer our data and operating needs, we started to build our own propriety operating system.
Companies that are rooted in technology gain compounding momentum, which is an advantage that is hard for others to catch up with. It takes time to infuse technology into a company culture, which makes it hard for companies to catch up once they are behind. Technology is embedded in our culture ensuring we will remain on the leading edge.
Fort Operating System (F.O.S.) is the operating system/dashboard in which all internal business is conducted at Fort Capital. We do not utilize email internally, we communicate and track all projects, documents, notes, and more within the F.O.S. platform. All of our processes, checklists, and dashboards have been digitized and are housed within this application. The system is powered by Google and is designed to take advantage of machine learning and blockchain technology.
Here is what F.O.S. does for our company:
– Integrates all of our software systems and data sources into a single platform. Over 162,000,000 records are stored in our data warehouse and contribute to our comprehensive view of our business and markets.
– Combines our business’s internal data with publicly available data, which is accessible in real-time by our team via 42 dashboards that bring our company’s data front and center.
– Automates data collection, a traditionally manual process, by evaluating a massive amount of information simultaneously. F.O.S. is capable of completing up to 60,000+ data pipeline operations per day.
– Standardizes our processes through detailed checklists and automated reminders to ensure the highest level of accountability when inspecting a property, onboarding a tenant, identifying cost savings, and more. This ensures extreme accountability across our entire team.
Just a few of the advantages of F.O.S. include:
– Allowing us to move faster and make smarter decisions since all data points can be reviewed and considered within a single view.
– Increasing our accuracy since data collection is automated and not done manually.
– Driving best-practice monitoring, analytics, valuation, and reporting since all information is available in real-time.
– Ability to identify opportunities to optimize the performance of an asset by comparing it to other properties in our portfolio and within that market.
One of the most powerful ways we’re leveraging F.O.S. is to pinpoint assets of value based on historical data and machine learnings, which is leading us to top investment opportunities. Our system is able to automatically comb through property data, ownership records, entity structures, market data, demographic data, and more.
This year, we analyzed 13,000+ industrial properties for potential acquisition in the DFW region alone. When cross-referenced against our investment criteria, we were able to reliably identify $1.1B of highly qualified, industrial investment opportunities contained within 200 buildings in DFW. This data analysis is scalable to future markets we expand into as well.
COVID-19 has been, in many ways, the great accelerator of trends that were already happening. For the context of this letter, I’ll talk about the trends that have impacted our business:
– Industrial real estate is having its day in the sun. Industrial real estate (for all of the reasons mentioned earlier) has a lot of room to run. We really saw attention in Class B industrial start picking up in early 2018. As an analogy to baseball, if going into COVID we were in the 4th or 5th inning of its bull run, COVID likely set us back to the 2nd inning. There is room to run.
– It’s good to be in Texas. I recently read a survey that we are the 2nd most hated state in the U.S. I only have one question, “What do we have to do to be #1?”. Texas has averaged 400,000 people moving here annually over the last decade. Recent studies predict we could see that number accelerate to 1M+ a year for the coming decade.
– Capital markets, equity & debt, are stronger than ever for industrial real estate. We’ve seen these markets recover quicker than any asset class, other than multifamily. Interest rates have continued to decline, which is ultimately a net positive for real estate.
As we head into 2021, we look to continue growing our market share of owning Class B industrial assets across Texas’ major cities. We are planning to acquire $150M in new properties, which means we will need to raise between $50M to $60M from our investors.
I’m not an economist or a fortune teller, but I am an eternal optimist. I think 2021 will be another phenomenal year for our little niche of the market. Here are some of my thoughts and predictions for next year (we’ll see how this shakes in my 2021 letter!):
– Industrial’s tailwinds will continue to accelerate.
– Interest rates will stay low.
– The incoming administration will not remove the 1031 or raise the capital gains rate to ordinary tax.
– Texas will continue to see a massive influx of new residents. We have a business-friendly culture, oil & gas, port & border trade, great weather, room to spread out, and the list goes on. All roads lead to Texas as far as I’m concerned.
If you’re interested, I published a podcast episode recently with Spencer Levy, Chairman of Research Americas at CBRE. In this episode, he unloads a dense amount of information on how they see things shaking out in 2021. Take a listen here.
A SHAMELESS ASK
I’m going to be pretty blunt about this ask…
If you know anyone that might have an industrial property to sell, we’d love to meet them. Please get in touch with us here.
Our criteria is as follows:
– Asset Type: Class B Industrial
– Deal Size: $5M – $50M
– Strategies: Core Plus & Value-Add
– Use: Warehouse, Distribution, Light Manufacturing, Cold Storage, Flex
– Locations: Dallas/Fort Worth, Houston, Austin, San Antonio, and El Paso
GET IN TOUCH
If you know of someone who would like to invest in industrial real estate across Texas, we’d love to connect with them. They can email firstname.lastname@example.org or fill out the ‘I want to invest with Fort’ interest form here.
Interested in joining our team? We are always looking to grow our pool of talent. Fill out our two-question survey and submit your resume here.
To learn more about our team, check out our portfolio, or read more about how we think.
And lastly, be sure to connect with us on Social Media to stay in the loop on what we’re up to:
– Follow me on Twitter (@fortworthchris)
– Follow Fort Capital on LinkedIn
– Subscribe to The FORT Podcast
– Subscribe to our Quarterly Newsletter
As 2021 gets underway, our game plan is the same: stay curious, keep learning, focus on our Flywheel, and lift others around us up. If we get a little bit better each day across our teams and processes, our output will be more than anyone can anticipate; I’m confident in that.
Cheers to a new year!
Founder & CEO, Fort Capital