Real Estate Investment Opportunities Series - MLG Capital

Foreign.

Welcome to this White Coat Investor real estate webinar. I'm here with the team from MLG Capital. We have Nathan Claiborne, the senior vice president of business development. We have Steve Kelly, the vice president of national accounts. And we have Lindsay Collings, the vice president of national accounts and as well. Thank you everybody for being with us for this webinar.

Thanks, Jim. Excited to be here.

Thank you.

Okay, so as with most of our webinars, we're going to follow the same format. We're going to start with presentation and then we're going to move into a Q and A section. And so let's go ahead and pull up the slides and we'll start with the presentation.

All right. Well, thanks for joining us today, everyone. We're excited to share with you. We really appreciate our relationship that we have with the White Coat Investor Group. And we're going to talk a little bit about MLG Capital, some of the exciting things that we have going on corporately here. And then we're going to jump into Fund 7, which is our current offering, give you some details on what's available to invest in today. And then lastly, and potentially even most importantly, we're going to just do some education on what we're seeing in the broader real estate market. There's a lot of interesting dynamics at play today, and so we are going to jump in and share a little bit about our interpretation of all that's going on. First, I'm going to kick it. My name is Nathan Kleberg. Like Jim mentioned, I'm a senior vice president leading our sales team and business development here. I'll kick it over to Steve and Lindsey to introduce themselves and kick off the presentation today.

Yeah, nice to meet you guys. I'm Steve Kelly. Been with the group eight years and nowadays spend my time working a lot with our investors, particularly what we call national accounts, which is different strategic relationships like the White Coat Investor, as well as others across the country.

Hi, everyone. I'm Lindsey Collings. I'm also a vice president at mlg. Focused on national accounts, just like Steve, so very much focused on investment groups, just like the White Coat Investor Group.

So a couple things we want to talk about here today. We'll give you kind of an overview quick on MLG for anyone who's not familiar. A couple corporate updates since the last time we've done a webinar like this. We'll review just how much investment activity the Wyeco Group has had with us recently. Fund 7 is what's open now so we'll get into that in terms of product details, different things we're trying to accomplish within the fund. And then towards the end, Nathan will.

Give an overview of just our view on the multifamily market. That's our preferred asset class. So lots going on like you said, and then we'll have some time for, for some questions.

So just to give the background on MLG Capital, we started as a firm.

In 1987, based in metro Milwaukee, Wisconsin, but offices in Dallas, Sarasota and Denver. So large scale group with about 7.68 billion in assets under management and have done about 43,000 multifamily units that we've owned all time. So just want to give some context as to the scale of our group. And then one other fact that goes along with that is not only are we an owner of real estate, we also are the manager of a lot of our real estate. So we're vertically integrated with different property management affiliates in other areas of the country.

Let me stop you there for just a minute, Steve, and point out how remarkable this is in the private real estate investing world. This long of a track record is almost unheard of, right? I mean, we have a number of sponsors we work with. Your track record is at least twice the length of everybody else we work with. This is really a strong point about MLG. You've been doing this for a long time. 43,000 units, apartments, whatever you want to call them, you know that that's a lot of real estate that has been transacted over the years. And I think it's important to emphasize that track record is not something that, you know, can be built in a short time period with very little effort. It takes a long time to, to build something like this. So congratulations on not only your success, but just staying in business, you know, for five decades is impressive.

Yeah, thanks, Jim. There's no question you don't get to be in business for that long and not face challenges. And so we think we're a well qualified group to fight through whatever the market throws at us. And we think we have the right investment structures to do it. So appreciate you saying that. We definitely think that's an important consideration whenever you're evaluating a sponsor.

Going to our next slide here, we just wanted to share a couple corporate updates and announcements. So you may have heard that MLG named five principles of those. One of those was named a president, and one of those is a Chief Investment officer. So Billy Fox is a CPA and has been with the firm for over 10 years. Was named a principal and president of MLG. Dan Price, been with the firm for over four years and has long been in the real estate industry. Was named Principal Chief Investment officer. Brian Miller, 11 years with MLG, principal SVP, focused on overseeing our asset management division. Mike Jaganinsky has been with the firm for over 20 years and he's our principal and CFO. And then Rick Reuter, who's a CPA, been with MLG for over 10 years. Is a principal and also our head controller and wanted to bring this up as a group because it's important to know that these are long investments with MLG. Our funds are 10 to 12 year life cycles and we want our investors to have confidence that we have the right team in place to exist into perpetuity. So we're elevating that next level of leadership by naming these new principals. A president and Chief Investment officer.

One thing I would add on that is our current CEO, Tim Wallen is definitely still active with the firm and we expect him to be involved for the next, I don't know exactly how long, seven to 10 years. But it was, I think, great foresight by Tim to start elevating the next level of leadership. Now it definitely is going to be what takes shape for the next generation of our long track record and we want to make sure that our investor partners feel really comfortable with who they're partnering with. So I think this is an exciting move and hopefully be an opportunity for the White Coat investor group to meet a lot of these guys here in the near future.

Other corporate announcements that I wanted to hit on. MLG is partnered with a managing broker dealer that oversees the sales and marketing of MLG offerings. And this is really to ensure compliance with finra. So I wanted to bring that up and then this just let you know this does not impact the process or how we manage real estate or anything like that. It really just ensures that we're adhering to the latest securities regulations which are ultimately designed to protect our investors. So with that there's going to be minimal changes to your investor overall experience. We will need investors to complete just a brief suitability questionnaire when they sign subscription documents and we will provide, you know, additional disclosures. But overall this is really a net positive for our investors, so you likely will not notice any difference. But just wanted to make everyone aware that we are continuing to make sure that we're compliant with all of the great regulatory bodies.

Yeah, I also wanted to talk about how much the group has invested with us recently. We had A couple investors in our Fund 5, which closed out spring of 2022 and then later in 2022 launched Fund 6, really started to work with the group a bit more and have 25 million in commitments from the group since then.

So really appreciative, really thankful for the partnership here. Want to continue to bring quality investments your guys way and produce content that is educational and informative and helps you make good investment decisions. And then in Fund 7, since we started a little bit earlier this year, a couple commitments that have come in so far as well.

I'll just reiterate what Steve said. We're so thankful for the partnership we have with the White Coat Investor Group and we take the responsibility of Stuart stewarding our investors capital very seriously. So it's a long term partnership. We do view it as a partnership. We're thankful and we're going to continue to steward that capital. Well.

So Fund 7 is the latest and greatest going on at MLG. We started this fund in February. So just getting started here, it's similar to other funds if you've experienced Fund six or prior with us. But just to go over some of.

The details on the framework of it, we're targeting to raise $400 million for this fund. We do have the ability to go up to 450 million if there's demand beyond that. That's similar to our most recent fund, Fund 6, which closed out at about 384 million. So a little bit higher target here with that 400 million. We're trying to get diversified across usually 25, 30 different investments. And we can talk in a little bit about just where and what that looks like. Continue to make quarterly distributions out of cash flow as well as later in the fund. There's value appreciation that can be realized in the European waterfall structure which is 8% cumulative preferred return, then a full return of capital and then a 70:30 split which means 70% of any additional proceeds to the investor, 30% to MLG. And through our partnership with White Coat we actually offer improved terms to that back end where members of the group get a 20 or 75% back end split which is a 5% increase and MLG at 25% if the group collectively invests 5 million or more. And then new in Fund 7 is an additional tier. So if the group gets to 30 million as they were close to in Fund 6, those terms will be further improved to 7,723. So happy to offer that and continue to show our support of the partnership with the group here. A couple other terms, the asset management fee point in a quarter, that's based on invested equity, which is also just important to note. Our debt strategy, try and be in kind of the low to moderate leverage point. So usually we're in the 60 to 65% range on a loan to cost basis. And then we're legally constrained to going above 70% as a fund. And then the last thing is the minimum investment is 50,000. That applies whether you're investing with a taxable account or a retirement account. We do have options. You'll see at the top of the screen here private fund and Dividend Fund 7. Really those are structured as different entry vehicles, depending if you're looking for passive losses and some of the tax benefits or you're investing with a retirement account. I think we have a slide on that in just a sec too.

Yeah. So just first focusing on what we buy. Many of you might be familiar with this already, but multifamily is really our bread and butter. And if you look over our historic funds, 90% of those assets have been multifamily. And that's what we're expecting for Fund 7 as well. We're targeting that 85, 90, 95% in multifamily. And there's a number of reasons for that. Nathan's going to go more in depth in a little bit here on what we're seeing in the multifamily market and why we're so bullish on it. But really we see it as just the most intact story from a supply and demand perspective is in multifamily. There's also some major tax benefits to investing in multifamily, which we look to pass through to our investors. We're a very tax focused group now, first and foremost looking to find the right real estate assets, but then wrapping that with some really nice tax planning as well. Industrial and flex, I would say, is our second favorite asset class. We really like this asset class really for a lot of the same reasons as multifamily. From a supply and demand fundamental perspective, this tends to be about 5 to 10% of our funds. We would love to see this grow even larger than that, but it's been challenging to find its scale. So these deals tend to be a little bit smaller in size, which is why it ends up being in that typically 5 to 10% mark. Now, retail and office, we will consider, but that has historically made up less than 3.5% of all of our funds. Right now we only own one office deal. It really is just dependent on the story. And we would have to be getting the properties at an absolute steal and an A plus location. So a really unique story in which we would pursue one of these asset classes. So all that to say, I'd say our main focus areas will continue to be multifamily and industrial, as it has been in the past as well. So that's a little bit about what we're buying in terms of, you know, what we're doing in deal profile and how we add value. There's a couple different ways. One of those is operator mistakes, or what we refer to as a mismanagement story. So this can really take a couple of different forms. Perhaps the current owner lacks sufficient capital or they're keeping rents below market in an effort to maintain occupancy. Whatever the specifics are, these situations present a really valuable opportunity for MLG to step in, implement our business plan and drive meaningful value creation. Another one listed here is off market opportunities. We really leverage our network to find deals where we're not competing against a massive buyer pool. So that is another way that we can look at different deal profiles. And then finally here, source through a joint venture strategy. We buy deals on both a direct and joint venture basis. We'll hit on that a little bit more in the next slide. But that is a way in which we can find off market deals and deals that we wouldn't have uncovered ordinarily. So now, once we find these deals, how do we add value to these deals? There's a couple different ways we can do that. Unit renovations is one way. Maybe the interiors of the units are a bit dated and we can drive value by, you know, increasing rents as a result of, you know, new countertops or cabinets or what have you. Another way is expense management. In some instances, the prior owner is, you know, unnecessarily large expenses when you could be managing a lot more efficiently and cost effectively. One other way is increasing occupancy and bringing the occupancy up to market. Maybe, maybe they've been slipping on the leasing and we could increase that occupancy to where the market occupancy is. One other way would be adding amenities. That could be renovating a clubhouse, adding a clubhouse, adding bocce courts or a playground area for kids. So there's a number of different ways where we can drive value for the properties and ultimately for investors. Hitting on the next slide. I touched on this briefly, but this is really a critical differentiator to mlg. Instead of just sourcing deals on a direct basis or a joint venture basis, we're doing both. So from a direct perspective, we will look across the country, leverage our 38 years of experience and relationships, we'll call on brokers and owners and MLG brings 100% of the equity to these deals. Oftentimes we'll manage in house, if it's in our home states or surrounding states and we'll bring that property management expertise. As Steve noted earlier, we're managing about 40,000 apartment units across the country. Then on the joint venture side of things, we will call on local regional sponsors that have a similar track record to NLG in they will bring to us opportunities and we'll bring the majority of the equity have all major control rights, but our sponsors will manage the day to day. And we've also seen a lot of opportunities like equity recapitalizations where the existing joint venture partner wants to exit and we can come in and replace that equity. So we've found a lot of off market deals that way. But really this joint venture strategy just allows us to review an immense amount of deals. So if you see on the screen here, 2200 deals were sourced in 2024. We closed on 15 of those. So this sourcing funnel is really a result of the direct acquisition and joint venture strategy that we have. And also it takes our 15 person acquisition team in our home markets to hundreds and thousands across the country through our joint venture strategy where people are reaching out to us with deals they have and are excited about and looking to partner with MLG on. So definitely a critical differentiator in a way in which we can be incredibly selective with the deals we pursue. Diversification is definitely a priority for us. We look to diversify our investors geographically. We're typically in about 10 to 15 states on average per fund. We're also looking to diversify by asset class. Now I did mention most of the asset class tends to be multifamily for a number of reasons, but we do have a little bit of diversification that way as well and then also by state. So looking across the country, as I mentioned, in different regions.

We mentioned a couple of the differentiators of MLG so far. Jim mentioned our track record. Lindsey mentioned sourcing strategy. Another key differentiator for us is our value that we add.

On the tax side of things, we're a very tax focused group. Of the 10 principals or owners of MLG, five of them are CPAs. So everything we do is with a unique tax lens and how we can create great after tax returns for investors as well. So a couple ways we do that and could certainly have a webinar on tax benefits of real estate on its own. But some of the things we try and do is cost segregation studies where we're allocating our purchase price to different parts of a building so we can depreciate them faster and create nice passive losses for investors. Bonus depreciation. Another way we can get investors passive losses early on in their investment period. And then being willing to sell properties and trigger long term capital gains, so you can release the passive losses you may be accrued earlier on in the fund. There's some really nice things you can do tax rate wise, when you're able to do that. But really the punchline here is the funds that we structure are very tax efficient. You can realize some pretty substantial passive losses early on and then utilize those against other sources of passive income in your portfolio or carry them forward for gains you might have in our fund later on.

Yeah, let me put some specifics on that just to give people a real life idea of what that can look like. I'm invested in fund four with MLG. This was a $250,000 investment, and basically the next year I got a loss in box two on my K1 of $157,000. So about 60% of my investment came back to me as a loss in that first year, tax wise. Obviously the money wasn't lost, but through bonus depreciation and cost segregation studies, et cetera. So if you have a need or a use for a lot of tax losses relatively early in the investment, MLG can be a particularly good sponsor to work with that way. Otherwise they just get carried forward year to year.

All right, so one thing that's really important to know using Jim's example, is that if you're not able to use those losses that we produce right away from your investment, those just suspend and carry forward to future years. And one of the things that we have found for investors that continue to reinvest is year over year over year is every fresh investment that they make gets a new batch of passive losses. And eventually as we start to sell properties and older funds, we trigger passive capital gain. And then you have passive gain and passive loss. And the presence of that passive gain is the key that releases those losses into your tax picture. But they don't have to stick to that cap gain that's taxed at a lower rate. They can flow into your tax picture and offset whatever income you have. This tax at the highest rates, including your W2 income. And here's the punchline that's been really powerful as we've looked at people who have had this continued reinvestment over time. For those that are taxed at the highest rates and have continued to reinvest their after tax return from their investments with MLG has been greater than their pre tax return because they're continuing to, to grab that, that permanent tax saving difference between ordinary income rates and cap gain rates. It's really powerful stuff. Like Steve said, we could do a whole webinar just on this. But for this group especially who's highly compensated, highly taxed, the power of continued reinvestment and continuing to use those losses is really, really juicy when you, when you start to get into it.

Yeah, obviously the investments still have to make sense. They have to make money in the end. But the additional tax benefits are definitely icing on the cake.

Yeah, you have to have some profit tax plan around that is for sure.

And then just the last thing on that slide too is that it's important for, you know, delivery of tax documents on time. And we just wanted to say that we delivered all our K1s out to investors by March 31st so that people could file on time. I know that can be different across different sponsors, but we work really hard on that. We send out, I think several thousand K1s every year and that's important to investors. We talked about a little earlier, there's kind of two entry vehicles into Fund 7. We have Private Fund 7 and Dividend Fund 7.

From a high level, they're both invested in the same portfolio of properties, same targeted returns, same fee structure. The difference comes down to the tax treatment of the distributions. And really this came about and the reason we started the Dividend fund is we saw a demand for investors wanting to use their retirement accounts. Normally if you use a retirement account to invest in direct real estate, you could be subject to ubti. So we created a structure that kind of better accommodates that Distributions flow through a non traded reit. The income is treated as dividend income instead of rental income. And so that helped mitigate that risk for people investing with retirement accounts. Additionally, Private Fund 7, if you're really looking to capture some of those passive loss benefits that we were just talking about, that's going to be the structure you do that in. It's the pass through entity. So all that depreciation flows through to the end investors where you can use that to the most ability. That does not happen in the dividend fund. So that's just a consideration to have as well.

All right, next we're going to jump in on our market view. We think it's really important to continue to revisit this with investors because we want to invest in a thesis that has long term merit. And we really see a lot of things that we like in the long term. Fundamentals of multifamily. Some of this, if you've heard us talk or if you've read our updates, it's probably going to sound like a broken record, but we think it's really, really important to understand. And the conversation is really going to center around two concepts. One is the operating component of the business right now, the supply and demand of the actual real estate market, but then also the capital markets, right, the supply of debt and equity and how that impacts the opportunities that we're seeing today. So jumping in, the headline of what's gone on recently is there have been historic levels of new supply for really the last two and a half years. This is entirely a function of very low interest rates. In 2020 through 2020 22, everyone was able to make sense of doing development deals. And at the time, debt was cheap and that was really what fueled a lot of developers getting things done. And equity was cheap at the time. So we saw crazy inflation in 2021, and then suddenly thereafter in 2022, 3 and 4, we saw dramatic increase in new supply, particularly in the Sunbelt regions. And you can see the way that played out here. And this is a graph that shows occupancy and rent growth. This is a testament to the demand side relative to the ply, excuse me, to supply. So you can see in 2021, rent growth spiked. Vacancy was way down. And then over time, that flipped. As all these new apartments hit the market, rent growth went down and occupancies went down as well. Our vacancy went up. Now we're finally starting to see ourselves get on the other side of this huge influx of new supply. And rent growth is moderating more to its historic level of 3% and vacancy is settling back down towards 5%. So in a lot of ways, we're viewing the world as sort of returning to normal. But what we saw in 21 and 22 wasn't normal, and what we saw in 23 and 24 wasn't normal. That said, the demand drivers for multifamily have been incredibly powerful and continue to be. And we don't see that changing as we look forward. There are about 130 million households in the United States. We have averaged about 1.3% household formation over the last 10 years. And that's continued even in the recent years. So just playing that out, 130 million households, we need about 1.7 million new households per year in order to just keep up with demand. And the reason that household formation continues to grow, it's all listed on the left side of the screen here. There's an aging population, people are getting married later. There's unaffordability in single family homes. And the combination of that with student loans being more burdensome. People have to stay, they're still renting, and they're not moving into single family homes as much. And then you just have the kind of machine of population growth that we see in general. All of that's giving way to the 1.7 million households of new household formation per year. Generally speaking, about two thirds of that has been single family homes. About a third has been apartments. I think that's shifting more towards apartments as single family homes become more unaffordable. But that means you got to produce 5 to 600,000 new apartment units per year just to keep up with the demand. And so the demand side of the equation is incredibly strong and we expect that to continue on the supply side. We kind of talked about this already. You can see there was a long period of time following 0809 where the new supply was very low relative to historic averages. And just recently we finally seen that peak above historic, the long term historic average, that line across the middle is the historical average since the year 2000. Now, the reason that we felt some pain is because it was so much so fast. And it was very concentrated in high growth markets, particularly across the Sun Belt, where they saw historic levels of new supply. And in those particular markets, it was hard for demand to fully keep up. And that's where you see some pain in occupancy, some pain in rent growth overall. But here is where we think the story really starts to turn into today being an exciting buying opportunity. As a fundamental principle of investing, we believe you should invest through all cycles. But we think there's some unique tailwinds that are going to be behind us in the next couple years. And this slide really starts to get at that. You can see in recent years we have seen massive numbers of new construction starts. And that's what's shown here on the screen. You can see these years of historic levels of new supply. But as interest rates have gone up, as the availability of capital has gone down, and as costs have gone up, construction costs are significantly elevated and continue to trend. That Way talk about tariffs only throws gas on that fire, that things might get more expensive really quickly. Here we are seeing new unit starts dramatically down. And that's going to mean in two years from now when these the projects that are starting today would be delivering, there is going to be significantly less supply in the market. And we think there is an incredible opportunity because of that. We can buy today in a period of little bit excess supply. You're buying at higher cap rates on actually lower operating incomes because you have a little bit more vacancy, a little bit more concessions and over time we expect that to stabilize. And we think deals that we buy in today's environment are going to be really attractive. A couple other things on just the supply and demand equation factors that impact it. Home prices are up 135% since 2012 and rents are only up 81% over the same period. It is becoming harder and harder to buy a single family home and that's not going to change. The cost to build new homes is so astronomically high at this point that you can only really build new supply to cater to the very top echelon of home buyers that are in the market today. Another way to look at that same data point, cost of homeownership is 64% higher than the cost to rent. And that gap has really widened in the past few years as homeownership has gotten so much more expensive and in large part due to high interest rates. We're seeing that that gap is as wide as it's been in a long time. And we think that's going to push, you know, if those 1.7 million households that we talked about earlier, we think that's going to push a greater percentage of those into renting, which is bodes well for multifamily. This is a really important slide. We talk about this a lot internally. We think it's important to take a longer term view of rent growth and of the cost of construction. And if you look at all both of those metrics since the year 2000, over that time, construction growth has averaged about 3.7% while rent growth has been about 3.2%. This is speaking nationally kind of from a 30,000 foot view, but theoretically rent should at least keep pace with the cost of construction. Right. In order to justify building new apartments, you have to believe that you're going to get higher rents in the future than you can get today. Right now, as rents are trending down in so many markets, it is almost impossible to pencil new construction deals unless there's Some sort of dramatic extenuating circumstances that reduce your costs, like tax abatements or TIF or something like that. But what we're seeing is that construction has grown at 3.7%. We actually think that there's more room for rents to catch up because in theory, rents should always at least keep pace with the cost of construction. A couple other things to note. The gaps between asset classes are as wide as they've been. We think there's a lot of opportunity for value add strategies. And what does that look like for us today is we think there's an opportunity to buy nicer newer, call it early 2000s even to like 2015 vintage product where it is dramatically less expensive to rent those units than it would be the brand new stuff that's being delivered. And we can employ a lighter value add strategy to close the gap between the brand new and the pretty new. And at Post Renovated 2008, 2010 Vintage property looks and feels not that different than the brand new stuff, but it's still a meaningful gap that we can capture some of. So you can see the way that gap closes here. One other thing that we've noticed in the class C renter type demographic, that renter got hurt very badly by inflation. In theory. These are renters with just a little bit less cushion in their financial picture. Rents went up very quickly, as did everything else in life. And that asset class has really started to feel some pain as those renters just can't afford to pay for their life in this, in this new world that we're in. So we're generally staying away from the class C apartments and really more focused on that B to a conversion or a little bit nicer newer properties in great locations. Last thing to say here, rents have grown more than the median household income, especially in certain areas. And so you have to be very careful about where you're investing. You have to be aware of legislative risk if there's any rent control that's been proposed by municipalities. And then you also have to know that you're investing in the right locations within a market. It's very different investing in the best market or best sub market with the best school versus areas that are a little bit more workforce in nature. We're very sensitive to that. In fact, we go through and we buy a property and we read every single lease and we verify the income on each of those leases and we want to see that the year three projected income that we're projecting after we execute our business plan still is covered by the tenants Actually at that property by about 4x or greater. So that's an important part of the due diligence that we're doing. But it is something to be aware of as you look at multifamily. So that's all playing into supply and demand as it relates to the multifamily apartments themselves. But one thing that we think is just really important to consider is the supply and demand in the capital markets. Equity availability, the amount of investor demand has a tremendous workforce in nature. We're very sensitive to that. In fact, we go through and we buy a property and we read every single tremendous impact on valuations and cap rates. What we have seen is that equity flows into real estate are down dramatically from their peak in 2021 and 2022. There's a couple reasons for that. You've got a few different equity sources. There's the syndicators, the ones that pop up, you know, when things are good, that threw together some deals with ultra high leverage and now have largely felt some pain in recent years. They're not doing deals as much as they were. But more meaningfully, we're seeing the large asset allocators allocate meaningfully less to real estate than they were a few years ago. Their bond portfolio got crushed when rates ran in 2022 at least. And we verify the income on each of those leases, and we want to see that the year three projected income that we're projecting after we execute our business plan still is covered by the tenants, actually at that property by about 4x or greater. So that's an important part of the due diligence that we're doing. But it is something to be aware of as you look at multifamily. So that's all playing into supply and demand as it relates to the multifamily apartments themselves. But one thing that we think is just really important to consider is the supply and demand in the capital markets. Equity availability, the amount of investor demand has a trim. They had to reallocate to maintain their allocation away from real estate to their bond portfolio. And here's how that's played out. This, this shows it. Well, in 2021, the large private REITs allocated just over 34 billion to private real estate. That number was 33 billion in 2022. In 2024, that number was 6 billion. That's an 82% decline from these large allocators. When that amount of equity leaves the market one, it means there's incredibly less competition on the buy side that we have to face when we're bidding on deals. But two, it makes it a lot harder for a lot of people to capitalize their deals, both in development and on the acquisition side. We think there's a real opportunity to buy today because we're not facing as much competition. And let's go back and put it all together. If you think about buying today, tremendous impact on valuations and cap rates. What we have seen is that equity flows into real estate are down dramatically from their peak in 2021 and 2022. There's a couple reasons for that. You've got a few different equity sources. There's the syndicators, the ones that pop up, you know, when things are good, that threw together some deals with ultra high leverage and now have largely felt some pain in recent years. They're not doing deals as much as they were. But more meaningfully, we're at a higher cap rate because there's less competition, higher interest rates. So you have a higher cap rate going in, but you're capping an income that is depressed due to lower occupancy and lower economic occupancy, which means concessions or delinquent rent, things like that. You're actually paying a significantly lower price for that asset. And we think that the operational tailwinds in the next few years are going to be dramatic and think there actually could be a real snapback both in terms of occupancy and rent growth. So capping lower income at a higher cap rate today we think is going to bode really, really well. This shows the same data. But one thing we wanted to point out that the, the, the reduction is not a result of, of redemptions that, that dropped from $34 billion. We're seeing the large asset allocators allocate meaningfully less to real estate than they were a few years ago. Their bond portfolio got crushed when Rates ran in 2022 and they had to reallocate to maintain their allocation away from real estate to their bond portfolio. And here's how that's played out. This, this shows it well. In 2021, the large private REITs allocated just over 34 billion to private real estate. That number was 33 into 6 billion is not a factor of redemptions, even though there has been significant redemptions as investors within Those large private REITs are allocating away. So I kind of just hit on some of the punchlines here. But the, the, they're really interesting stories to evaluate in multifamily right now. Historic supply deliveries creating softness in occupancy, reduced rental rates and Lower noi. But we see a long term supply and demand picture that we want to invest into. We think it's a really compelling time to be investing. You're doing it with less competition. And we think that the pricing we're going to pay today is going to bode really well in the future. Specifically, we want to invest in assets that are going to be well positioned to capture the attention of the large institution. When that capital comes back. Maybe it doesn't go back to 34 billion, but even if it goes from 6 billion to 20 to 25 billion in the next few years, that capital is going to come back and they're going to be looking to invest and we want to have assets to sell to them when things start to get really hot again. So we're continuing to look for those types of opportunities. And as Lindsey mentioned before, we think real estate's always investable because there's human error. People are making mistakes and it's our job to go out there and find those mistakes and take advantage for the benefit of our investors. Billion in 2022. In 2024, that number was 6 billion. That's an 82% decline from these large allocators. When that amount of equity leaves the market, one, it means there's incredibly less competition on the buy side that we have to face when we're bidding on deals. But two, I think that's really all we have on our market view. What's available, what's going on with MLG today? Any questions that we can answer for you, Jim?

Yeah, let's, let's move into the Q A period. Nice job on the presentation, guys. I've been invested with MLG, I think since 2020 in Fund 4. And it has done well, it's performed well despite, you know, being invested across this period. One of the beautiful things as you know, when you're in something for 10 to 12 years, then there probably is a period that's not so awesome during those 10 years. And there probably is a period that's pretty awesome during those 10 years. And so that's the beautiful thing about a longer term investment. I think the biggest question people have is one of the benefits in investing with MLG is you have this option to invest in the dividend fund. You can get, for lack of a better term, a K1 fund and a 1099 fund. And I think a lot of people, it's a little bit hard for them to decide which way to go with that. I mean, with the K1, you've got the Benefit of, you know, getting all those losses to use, you have the downside of it comes a little later in the year and you know, it may involve filing in multiple states, etc.

It makes it a lot harder for a lot of people to capitalize their deals both in development and on the acquisition side. We think there's a real opportunity to buy today because we're not facing as much competition. And let's go back and put it all together. If you think about buying today at a higher cap rate because there's less competition, higher interest rates, so you have a higher cap rate going in, but.

Your cap, the 1099 fund, you don't get those upfront losses that you can.

Use.

But you don't have nearly as much tax preparation hassle, your tax preparation costs will definitely be less. How would you advise somebody that's trying to decide which one of these ways to go? Do you see it simply as are you investing in a retirement account or not? Or do you think there's more to it than that?

Yeah, that's a good question. I always encourage people to ask their advisor, their cpa, three questions as it relates to this decision. The first is simply what's it going to cost to do the multi state filings? Some CPAs will charge you a couple hundred dollars a state and then you add that up over eight to 10 states, paying an income that is depressed due to lower occupancy and lower economic occupancy, which means concessions or delinquent rent, things like that, you're actually paying a significantly lower price for that asset. And we think that the operational tailwinds in the next few years are going to be dramatic and think there actually could be a real snapback both in terms of occupancy and rent growth. So capping lower income at a higher cap rate today we think is going to bode really, really well. That can get pretty burdensome to your overall tax prep costs. Some people or some CPAs don't charge that much at all. So the first thing you need to know is what kind of costs am I looking at? The second thing you need to ask your CPA is how beneficial would passive losses be in my tax picture? And I'll talk through a couple examples. If you're a surgeon and let's say you make a million dollars a year, but you don't have any other passive income, you might not have an immediate use for these beneficial losses. And that is worth taking into consideration as you consider this question. By contrast, if you're making $50,000 a year of passive income and you invest $100,000 in our fund and get a $50,000 loss, you could have immediate $20,000 tax savings in that first year, 40% of that 50,000 right away, even with a $100,000 investment. So it really depends what's going on in your tax picture. And that's why you need to ask your CPA, how beneficial would these losses be to me? And then the final one that I think is worth thinking through is how much am I looking to invest? Both this shows the same data, but one thing we wanted to point out that the reduction is not a result of redemptions that dropped from 34 billion in this immediate moment, but also as I consider this strategy for the next few years, if you're going to do a one time 50 to $100,000 investment, we'd be very grateful to have you. But there is definitely a more punitive impact of that. You know, couple grand of additional tax prep costs to consider versus if you're going to get to a million dollars over the next three to four years, then the scale that you start to achieve on the, the tax benefit size starts to meaningfully outweigh the additional tax prep cost. And as I mentioned before, especially if you're going to be continuing to reinvest and make this just a part of your portfolio for the next 15 to 20 years, we think that's the best way to do it. Then you're really going to want to think hard about maybe potentially dealing with the tax prep costs in the early years because the savings down the road will be greater. So how much does it cost? What would these losses do for me and how much am I going to invest both now and in the near term?

Yeah, and the nice thing is in the early years when these losses exist, you often don't have to file in all those states. You know, it's one of the more complicated things about filing a return, but you have to actually have a certain amount of income in that state before you have to file in it. So oftentimes it's the later years of the fund that you end up having to file in those states, not so much the early ones. Let's talk a little bit about liquidity. Right. I mean, this is a positive and a negative.

You know, not to 6 billion is not a factor of redemptions, even though there has been significant redemptions as investors within Those large private REITs are allocating away. So I kind of just hit on some of the punchlines here. But they're really interesting stories to evaluate in multifamily right now. Historic supply deliveries, creating softness in occupancy, reduced rental rates and lower noi. But we see a long term supply and demand picture that we want to invest into.

Having the ability to just take money out of the fund willy nilly whenever you want allows the fund managers to do a little bit different things with that money, which may be beneficial to you in the long term.

I think it's a really compelling time to be investing. You're doing it with less competition. And we think that the pricing we're going to pay today is going to bode really well in the future. Specifically, we want to invest in assets that are going to be well positioned to capture the attention of the large institution when that capital comes back. Maybe it doesn't go back to 34 billion, but even if it goes from 6 billion to 20 to 25.

But let's talk about what you see as having, you know, a 10 to 12 year length of time with this money to do with it that you might not be able to do if it were a more liquid investment.

So it's helpful to kind of think about these funds from like the total timeline and there's a couple different checkpoints. We say 10 to 12 years overall.

The first two years is where we're actively raising and deploying capital. So we're getting commitments from investors, but then we're deploying those into the portfolio. So building the portfolio from years 0 through 2 or 3, then usually by about year, maybe 4 or 5 is when we start to see certain properties sell. So you might get some liquidity back. If we're selling assets and getting liquidity back, it'll start to kind of chip away usually from years about 4 through 8 until you've had all your capital returned. And then hopefully if we're performing well, there's plenty of properties in the portfolio even after you've been made whole on your investment. And that's where we can really start to increase the return profile of the fund is if there's a lot of equity still in the fund after we've made investors whole. So to the end investor, it's kind of staggered liquidity as different properties sell. Not every property is going to have a specific timeline that they're all going to follow. So you might experience the liquidity a little bit differently. But to your point, an investor can't just choose to redeem out of this fund. It's longer term in nature and we think there's a Premium to the liquidity as well.

One thing I'd add to that, sorry, who I just cut off, but real estate is a long term investment class and I think people got a little bit spoiled in the golden years of the late teens to the early 2000s where you could hold an asset for two years and see significant appreciation. But the truth is, taking a longer term view in real estate is a more prudent way to invest. And our fund life cycle allows us to do that. There are still deals, as Steve mentioned, where we can execute quickly and create value quickly, but as a whole fund, we need to make sure we have the right amount of time to deliver on whatever the business plan is for an asset.

Now, the black hole as far as real estate asset classes have gone, at least the last decade anyway, it seems to be office real estate. You know, everybody started working from home and having zoom meetings or whatever, especially during the pandemic years, but presumably the market will eventually react to that. What do you, you know, you talk about Office as being a possible inclusion in the fund, but not very positively. What expectations do people have for Office going forward? Is it going to continue to spiral for decades or at what point will Office ever make a comeback?

It's hard to completely predict, but it does feel like in some ways there's just been a massive shift in the way that people are working with a lot more people working from home. The struggle with office is just in general, it is such a capital intensive asset class. So even if you're absolutely stealing it, it can be challenging to predict how long the tenants will be there, what the term costs will be for tenant improvements. And those costs can be so significant and hard to create positive returns that makes it worth that additional risk. So for us, it's just a tricky asset class because if you are going to take on that additional level of risk, you need to feel like you're going to get really well compensated for it. And because of that, we just haven't felt like there's been a lot of opportunities where it's just been worth it. So it's not to say we'll never do one. I just think it needs to be a very specific fact pattern and maybe there plays out that there could be some opportunity in the future. We've seen a lot of plays where developers are trying to reimagine office into multifamily that I think has been proven to be a challenge just with the bones of office is, does not always lend itself to being multifamily units. So there Are some people out there trying to find ways to make money in the office space? But so far it seems to be a bit of a challenge. So we'll see where the market goes and we continue to keep an eye on things. But for right now, definitely not too bullish on it.

Yeah. Can we talk a little bit about capital calls with Fund 7? I know there was a pretty significant gap when I invested in fund four. I think of about seven months between when I put my first 10% into the fund of my commitment and the rest of my capital was called. What do you expect with Fund 7? Do you expect the capital to be called relatively quickly after a commitment is made or how long do you think that might take?

Yeah, if you came in in 2020, that was at the tail end of fund four.

And so usually what happens at the end of a fund is we get seven, several more commitments that come in. So the queue for us to invest, like the amount of money we have to invest is longer and so it can take a little bit longer for us to call capital. That typically only happens towards the end of a fund. Where we're at right now in fund seven though is we have our first closing coming up in mid July and we have commitments in queue to fund that first investment. So anybody who's making commitments today is likely going to be called in the next property that we acquire. So could be later this summer. Hard to tell. Just depends on what deals our team finds and when they might close. Usually it's about 60 to 90 days on average. It rarely gets up to that six, seven month time frame.

And when a state allows a consolidated return, does the fund file one?

No, we always do. We don't ever do the composite return. We always do that individual. Yeah, there are some benefits that you lose in the composite return along the way. And we think overall that we can produce better outcomes by doing the individual state filings. Again, it's a little more tax prep cost. It's worth considering as you consider the investment. But we think the net benefit is, is by doing the individual returns.

Let's talk about leverage. How much leverage do you expect to use in Fund 7 and what, what terms do you expect to have on that leverage?

We target 60 to 65% leverage. We generally stagger the maturity of that between five, seven and 10 years. So you know, on average, generally we're in that six to eight years of, of term on our debt and long term fixed rate debt just gives you a lot of time to figure things out. Sometimes you need a little bit more time than you think on the business plan. Somet you don't need as much, but you always are protected by having that additional term on your debt. In Fund 6, just using that as an example, we're sitting at about 59% loan to cost. So pretty modest in terms of the total leverage in the fund, with a weighted average interest rate about 5 and a half percent starts to meaningfully outweigh the additional tax prep cost. And as I mentioned before, especially if you're going to be continuing to reinvest and make this just a part of your portfolio for the next 15 to 20 years, we think that's the best way to do it. Then you're really going to want to think hard about maybe potentially dealing with the tax prep costs in the early years because the savings down the road will be greater. So how much does it cost? What would these losses do for me and how much am I going to invest both now and in the near term?

And the nice thing is in the early years when these losses exist, you often don't have to file in all those states. You know, it's one of the more complicated things about filing a return, but you have to actually have a certain amount of income in that state before you have to file it. So oftentimes it's the later years of the fund that you end up having to file in those states, not so much the early ones. Let's talk a little bit about liquidity, right? I mean, this is a positive and a negative, you know, not.