Investing In Real Estate Through All Cycles

Alrighty. Well, thanks again everyone for joining. We're excited to share. We're talking today about investing in real estate through all cycles and we'll talk a little bit about our track record and how that's looked for us over the years. Really excited to have Tim join. Many of you have heard from me before, but to get to hear from Tim, he has a wealth of knowledge to share, so looking forward to that. Just what we'll be hitting on today. We just gave a brief intro on Tim, but glad to have him on. We'll be hitting on our track record, how that's looked over the years and since we transitioned to the fund model. That was a more recent move in the last 12 years, but we've been doing deals for a lot longer than that. So we'll touch on that. We'll talk about our deal sourcing and review process. One of the most challenging parts of this business is continually finding unique opportunities and we believe we have a unique and a robust deal sourcing process that allows us to do that. So we'll go into that a little bit today. We'll talk about why investing in real estate in all cycles, it's important we believe in it. But we'll also talk about why invest in real estate today. There are unique opportunities in the marketplace today and we think we have the right strategy to uncover those opportunities and deliver value for our investors. And then lastly, we'll talk about Fund 6. That's our current offering that's available, will be open through the end of this year. Many white coat investors have already participated, which we'll hit on too. We have a special deal with the group once we exceed 5 million in total investment. We're at like 11.4 million today, which is amazing. But we'll, we'll give the full update on that. So first and foremost, you heard from Tim. Tim, anything else you want to say about yourself before we jump into the presentation here?

No, it. You keep on rolling, Nathan. Great.

Well, first thing we're going to hit on is our track record. You know, you hear this word throw it out a lot in the real estate world and many groups are, are throwing it out based on a few exits they've had over the course of the last five years since they started in the business. MLG was founded in 1987 and has realized over 95 exits in that time. We take a lot of deals, full cycles. We own today almost 6.7 billion in real estate and have had a lot of success over the years in managing and executing on Value add strategy. So we have a good track record. What we're particularly proud of is what we've delivered for our investors in terms of returns. One thing that's unique about MLG is for the first 25 years of the company's history, we were doing all individually syndicated deals. Many of you may be familiar with that model. Be well. Find one property that you'd like to invest in. Invite friends and family to participate in that one opportunity. That's great. You can certainly make money doing it that way. However, there's no inherent diversification that's achieved for investors. So beginning in 2012, we launched a fund model which used all the same fundamental principles of investing in real estate, but now got investors diversified across different geographies and different asset classes. What I'm showing on the screen here is the returns that each of our funds have produced. Now, each of them are at a little bit different stage of their life. Fund One, which began in 2012 is the only one that's gone full cycle. But we produce quarterly valuations and IRR estimates for each of our funds. This is the Latest as of 9:30. We're working on the Q4 numbers right now. But as you can see, each of our funds have produced very compelling returns above our targets. And these are net investor returns to their net returns to the investor from each of these funds. So we're very proud of this. We target in our funds 11 to 15%. We think we under promise and over deliver, but we also think we can deliver those within that parameter regardless of the cycle we find ourselves in now. One of the unique components about working at MLG and investing with MLG is we've been around since a lot longer than just 2012. We've actually been doing deals, like I mentioned, since 1987 for over the last 36 years on deals that we've taken full cycle. On average, every dollar we've invested we've turned into $2.77 and that's on an average hold of just under five years. That's really good math. That's math we're proud of. It backs into an average annual return of a really strong number. Now that's property level returns, it's not investor level. But regardless, you can see that we have been doing this for a long time and we have track record of delivering for our investors overall.

Yeah. Thanks, Nathan. So before I move on to kind of some of our secret sauce type stuff, I do want to manage your expectations in real estate. When we underwrite to buy something, we're targeting, as Nathan said, an 11 to 15% rate of return net to you. After all, any kind of fees that we get or any kind of promote structures because we generally get 30% of the upside over an 8% rate of return. And we think we can deliver on that 11 to 15% consistently through cycles. On occasion we do better. And we can do better by selling faster, hitting targets. Obviously the cycle we came out of, coming out of the Great Recession, that was win at our back. But I really think the real talent shows up when you can make money through cycles and having the disciplines that it takes to make money through cycles and a disciplined approach to making money. And we've done that again for 35 plus years. So anyways, it makes us unique. So let me talk about how we source our deals because this is critical because it is different than most of our industry and our fund structure. In our structures, most real estate companies that go find the deals, they get a commitment for whatever is, if it's a $400 million fund or $100 million fund or a billion dollar fund, they get a commitment from the investors to fund capital over a period of time and they go, they go spend the money, they go find deals. And the typical company might have two to five acquisition people to place, you know, $500 million billion dollars and just go buy stuff. And the reality is when you do it just that way, you end up buying the most of your deals. I call on market where you're competing with multiple other players. You know, you might be bidding against 20, 30 other companies trying to buy the same asset. And it's hard, it's hard to get the special deals with the better returns in, in that model. And frankly, we struggle with that. You know, prior to adding what we call as our dual sourcing strategy, you know, we go through cycles. So we just had a hard time buying stuff and it was just difficult because it was hard to pay the price that people were willing to pay because we couldn't justify some of the prices that were people were paying. So what we did is we added back in 2012 an additional sourcing strategy which was we call our JV equity strategy. And our JV equity strategy is a strategy where we identify other real estate operators all over the country. And for example, I'll use Minneapolis as an example. We have roughly 60 different real estate companies in Minneapolis. We talk about their deals and what we do is say, hey Joe, real estate guy in Minneapolis, I got 20 to 30 million dollars invest in your market right now. What do you got going on now, you guys know as investors, real estate guys call you and try to get you to invest in their stuff. So real estate guys take that call. We get to communicate with them. But we get all this deal flow from those real estate sponsors and across the country. We have nearly 2,000 relationships around the country and we're seeing roughly 100 opportunities a month from all these other operators. So we get all kinds of market data and we have all this deal flow. So we have this critical selection process that we can go through. So in addition to our team, and we have roughly, let's call it 18 acquisition people in the organization outsourcing deals. You know, we have long term relationships in upper Midwest, down in Texas and Florida where we buy find deals on our own. But we also have all these deals that we get from other real estate operators. And there's some stats here that I'm going to talk to in a second here. But what we've effectively done is taking the real estate model and flip it around. I almost kind of like the thing. Almost like we're like the Southwest Airlines of real estate and we just approach the space differently. So most real estate companies, they find deals, they go chase equity in our structure, we're organizing all the capital and then we go chase the real estate guy. So the real estate guy, rather than chasing us, we're chasing them for the best opportunities. So in my mind, we've effectively flipped the real estate model around and we do the hard work of traveling around the country. Nathan travels all over the country and other guys on the team trying to find the death best deals possible for you in a fund overall. So here's some stats that Nathan put on the screen. Last year we looked at 2500 opportunities, 2509. Okay, that's a lot of real estate to look at. It's a lot of market information that we get, we garner from all the different brokers and people in the industry. Now we actually underwrote 1079 of those. Okay, so this is where you peel back on it and you spend hours digging into the detail, figure out do I want to try to buy this deal or not. And of those,079, we wrote offers on 289. And then. And of those,089, 549 are off market, meaning deals that we didn't compete against the whole marketplace to buy. We were talking directly with the real estate sponsor owner to find that opportunity. But all that effort, what we do, we bought 19 deals, 19 deals out of 2500 that we had started with 19 deals out of 10, 79 that we underwrote. So it's a deep critical selection process and you can't underestimate, underestimate the value of that and the effort that goes into finding those opportunities overall. So deep critical selection process again, trying to find the best deals possible. Best opportunities possible. I like to talk about, you know, finding deals where you look at the assumption. You go, you know what? I like those assumptions. Those assumptions are believable. The assumptions are believable and we should go do that deal and be excited about it. So anyways, that's some of the hard mathematics behind, you know, what we did in 2023. So now flipping over to, you know, why do we say, buy real estate in all cycles? And you might say, hey, you guys just want to collect fees? I said, no, actually I want to make money. And in all cycles there's opportunity. And right in today's cycle, there's opportunity. But the beautiful thing about private real estate, it's a fractured, fragmented industry. There are many, many, many, many, many players in the space. There's many new guys that pop up and then they're organizing a deal and they're promoting their deal to the marketplace without much of a track record. You don't know if they really have the talent to execute. And the reality is human error is real in our business. And there are guys that are really good and the guys that are okay, and there's guys that are not so good and, and just to kind of run you through it. So when I talk about human error, it's people that have poor management. It's people that, that miss the opportunity to accept their asset or maybe somebody's selling off market. So I'll run you through some examples. A poor management. We bought a property called Westbrook. Nice gentleman that owned it. One he sold to a soft market. Very nice man, took good care of us. He should have taken that asset to the market. Should have hired a broker. He would have gotten 30, 40, 50 offers on it. Instead, we negotiated a deal with us. That asset had basically only $7 a month of other income. Typical multifamily asset has about 60, $100 a month of other income. The other thing you get this one, guys, they still did all their accounting work. This isn't coming from a bean counter. Guys did all their accounting work on by hand. There was no computers. It was all manual general ledger accounting, if you can imagine that. I know we're talking to a bunch of doctors here and a lot of my good friends are in the doctor world, but I think you guys know for sure that you should have a general ledger and have good accounting. But anyway, so we bought the property. Noi net operating income was $2 million a year. We bought it three years later. We're up to 3 million. A deal called Crossroads up in Minneapolis. This is we deal with roughly $42 million owned by a gentleman for 30 some years lived down in Naples. We got that deal off market. Imagine selling a $42 million deal and not asking a lot of people for an offer. But they did that. And a lot of times people you say why would they even do that? But it happens in our business. And part of it is they don't to know they might be selling because they're concerned their staff, you know, you know, might not get be hired by the next group. And there's some reasons to be concerned about that because you want to watch out for your staff. But the reality is, you know, tunes sold off market. And on top of it, that gentleman missed the opportunity to fix up those units. We took those units, we spent roughly 20,000 fixing it up. And we took the rents from $700 30, $730 a month, up to $1,200 per month. And again, that opportunity could have been done by the prior owner, but they chose not to do it. And again, the last point here is just selling off market, which both West Grove and Crossroads were. We're also doing a lot of equity recap deals anyways. Many folks in a space, institutional space, need capital to reallocate their asset allocation models back to bonds or whatever asset class. But so they're looking to the real estate sponsor, we're going to sell this asset. But the real estate sponsors right now in general don't want to sell because they understand valuations aren't that great right now. And so we got the opportunity, working with sponsors to buy out their institutional capital right now on equity recapitalization. We buy out the equity partner, the sponsor gets to stay in the deal. So they get to keep their property management fee income and other fee income. They get to stay in the deal. And we're getting some phenomenal opportunities in that space and some discounts. And we'll walk through some examples a little bit later in the, in the discussion overall. So as human errors real and, and it's a beautiful thing about real estate and it's not going away. As much as I love people, you know, I have a big family, I have eight kids, I have five grandkids Another one on the way. I got, I'm used to having a lot of people. I've got 900 employees, 900 employees in the company. Love people. But the reality is people make mistakes and creates opportunities in our business. So why, why are we buying real estate today and what are the one of the things that gets excited about the current market that we're in? I would say in real estate in general, most time you can handle recessions just fine. There was two major cycles back in the, in the late 80s when they had savings and loan crisis and the Great recession. So in 35 years seen two major cycles where it got really tough in the space generally caused by poor government policy overall. And again, we were able to manage through those cycles. But that can be tougher. But generally they create outrageous buying opportunities if you have the intestinal fortitude to buy through the cycle. But it creates incredible opportunities. The cycle in right now is phenomenal from a buy set opportunity right now from all other reasons. Not as extreme as the Great Recession, not as extreme as the saving loan crisis from the mid-80s, but certainly one of the most significant buying opportunities that I've seen in 35 years. And it really gets back to we just don't have the same competition right now on the buy side, the institutional players, if you understand allocation models for institutional players, they typically, they want to like 40% allocated to bonds, you know, 50% allocated to stocks and maybe 10% to alternative investments like private real estate. Private equity. And what happened in this cycle with interest rates going up as fast and furious as they did over the last two years, all the bond prices went down. I'm sure many of you invested in bonds and you saw your bond portfolios go down in price. Well, to get back to the asset allocation models, if they want 40% of the portfolio to be invested in bonds, they got to sell other stuff to get the bond portfolio back up to its allocation. Because private real estate did its job in the cycle. Private real estate, if it's managed well, held its values through the cycle despite the risk going up if you didn't, if you weren't playing the floating rate debt game. And we'll get into the details of all that. But the bottom line is real estate for the most part because we had great rent growth and great NOI growth, held its values and it didn't fall like bonds fell in value through the last two years. Again, there's exceptions to what I just said, but in general it did its job in this cycle. But right now we don't have the competition from the big institutions. So we're chasing a 70 or 80 and $90 million deal that we're requires, you know, 30, $40 million of equity. The institutional guys, there aren't many out there that are playing and competing against us. And then from the syndicator side, the smaller shops, they don't typically have the ability to do those bigger syndications. And a lot of them got hurt because a lot of syndicators did floating or debt structures and they're a little bit in trouble right now. So we have the least competition we've seen in a long, long time on the buy side. And the cap rates are the most attractive we've seen in decade and a half. And so it's really interesting on the cap rate side right now. And then from a strategy perspective, what are we focusing on? We're focusing on high quality, newer multifamily assets. We love stuff built in the last 10, 15 years. You know, we want stuff that's got, you know what we don't want to buy any functional obsolescence. So we want nine foot ceilings, we want washer and dryers in the units. And again, we want high quality assets and high quality locations. And we're very focused on doing that. And because we don't have so much competition on the buy side, we're getting some great buys. We're paying maybe five and a half six cap on institutional quality assets that just for selling for four caps, which for everybody, PE ratios are the inverse of cap rate. So a cap rate of 4% of 25 PE like the stocks and a 5 cap is a 20 PE, 6 cap is like a 16, 17 PE ratio like you hear in the stock market. But in any case, the multiple on earnings right now is much less than it is because we have less competition on the buy side. So we're looking, we're able to buy these high quality multifamily assets and again, a great valuation, great cap rates that we haven't seen in a long, long time. We're also interested in a lot of locations. There was a lot of multifamily delivered in 2022, 2023 and into 2024. And just because there was so much capital going into private real estate, because interest rates were so low and people were building stuff and they could sell them for very good multiples and earnings. So a lot of stuff got started and so their pockets for this, there's supply is ahead of demand, so there's softness. So too much man was built on a Sub market. And so there's softness that exists in certain submarkets. But we don't mind going to that heat if there's, if there's a great location and we can buy a great asset that was built in 2015 for 30% below replacement cost. I'm all in on that. Because the strong demand markets, they'll absorb that supply. And yes, the cash and cash yields won't be that good for a couple years. But fast forward five years from now, you're going to love the fact that you bought that asset for 30% below replacement cost. Was built just seven years, 70 years ago. So there's some real opportunities there. And we're really excited about, you know, the opportunity to buy high quality assets and high quality locations in the current fund and all that. We're in. One thing I should mention, just in for fund six, just give you a couple of quick examples. We bought a couple of deals in Savannah, Georgia. It was a large institution, it's a household name institution. I'm not going to mention it on air here, but big institution needs cash, they sell. The sponsor did not want to sell, so they call us up. Because remember, we have our dual sourcing strategy or JB Equity, we provide to other real estate guys and we talk to them and they go, hey, we got two deals in Savannah and we need 30 million of equity for one deal and, and 36 million of equity another deal. You know, can you guys help us out here? Well, we said sure, but we gave them numbers that were very attractive to us. And for example, one deal easily would have sold for 91 to 95 million on the street. We bought it for 85 million overall. And anyways, phenomenal opportunity that you would not have seen in the marketplace if, if you were, you know, just in the normal market conditions. So great opportunity. Equity recapitalization. Real estate guy got to keep the deal, real estate guy got to keep the fee income and got to keep the upside going forward. And we got a phenomenal deal because of the institution player, you know, wanting out overall. We just did. Tied up another one this week. Nathan, you give me a sneak peek. We can't give details on the deal, but why don't you tell them about that little deal and that we're doing in the Midwest, Another equity recap deal.

Yeah, very similar story in this case. The sponsor wants to stay in the deal, like to take some chips off the table with their current equity partners. We have an opportunity to come in, buy out 60% of the equity and they'll stay in the deal and it'll be a great partnership going forward. We feel like we're getting in at a really good price and we think there's long term appreciation potential in this, this location for this property. So more of that to come in Fund 6 and feel like we're going to be able to put together a really nice portfolio.

So Nathan, why don't you share about one of the more recent deals we did on the direct side where we found the deal ourselves and why don't you share about that story?

Yeah, so we just closed a deal called Meadows at River Run in December of 2020, or excuse me, December of 2023. This is a 2001 vintage property in Bolingbrook, Illinois. Great, great submarket. Median incomes over a hundred thousand schools are very good. A very desirable place to live. Overall. It was owned previously by an institution. It was under contract in 2022 for over $85 million. And we got the deal tied up and closed at $72.7 million. This is a prime example of the types of opportunities that we're seeing today. That purchase price represented a 6.7% cap rate going into. This property is built in 2001. It was owned by an out of state institutional owner. They weren't really focused on this property there. We believe that there's real operational upside. In addition to going in at that attractive yield, there's an opportunity to grow income with a light value add plan. One of the things that's particularly exciting about this vintage of property is when you buy a property that's built in 1970, 1980, oftentimes the value add execution that you have to perform is, is risky. There's a lot of construction, there's a lot that can go wrong. You're spending a lot of money in the interior of these units to make them look and feel as good as possible. But there's always a functional obsolescence that comes with eight foot ceilings. If you don't have washer dryers and units, no matter how nice your countertops or flooring are, you can't overcome that. By contrast, you look at a property that was built in 2001 or in the early 2000s, you'll find that you have nine foot ceilings, you have in unit, washer dryer. You have a lot of the elements that look and feel like new product, especially once they've been renovated. That's what we feel like the opportunity is here. Built in 2001. We're going to go in and renovate 22% of the units that are still classic with a $15,000 per unit renovation and grow the income from there. So we're excited about this deal. We think it's just a snippet of what's to come and what's already in Fund 6, but it's a great testament example of that type of opportunity that we're seeing in the marketplace today.

So that's the fifth equity recapitalization deal in Fund 6 already, where you bought an institution that needed cash and was looking to add the credit to cash by getting rid of real estate. The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only.

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