Navigating Real Estate Macrotrends with Ben Fraser || Ginny Bolling

Foreign.

Hi there. Welcome to Pivot to Prosperity. Today we have Ben Frazier as a guest, and I am going to read his bio first and welcome. Ben, thank you for joining us. Mr. Frazier is the Chief Investment Officer at Aspen funds. It's a 5000 company, an Inc. 5000 company, and is responsible for sourcing, vetting, and capital formation of investments. Mr. Fraser has prior experience as a commercial banker and underwriter, as well as working in boutique asset management. Ben is a contributor on the Forbes Finance Council. He's also a co host of the Invest Like a Billionaire podcast. And that's a really fun podcast. I appreciate you coming on, Ben. Thank you.

Yeah, thanks so much for having me.

Yes. Well, so we were talking a little before coming on, and you have an interesting journey. It's yours makes more sense than a lot of people's, but would you go ahead and just give us a little overview?

Yeah, sure. So I started out my career really working kind of boutique asset management and saw just kind of the inner workings of a very large, successful asset management firm that actually dealt in alternatives and worked with kind of large institutional investors like big endowments, pension funds, et cetera, and then kind of jumped over to commercial banking. So I was a commercial banker and underwriter for many years and learned a lot about how to underwrite investments, underwrite deals, and really kind of peel back the layers. And one of the really fascinating things that I saw from doing that as, you know, one of the benefits and one thing I loved about it is you're looking at these deals, you're actually getting to look at the personal financial statements of, you know, the wealthiest clients of the bank and can see right under the hood of what exactly are they doing? How do they make their money? And what really kind of stood out to me was there was a pretty common theme among most of these wealthy clients at the bank. And it was two things. One, they were either a business owner or had invested in real estate and were doing that actively. And so to me, it kind of put this light bulb moment, right, of wanting to grow my own wealth and wanted to follow the patterns of artists, successful people, and so decided to kind of go on to the equity side of things. So joined Aspen Funds about six years ago and really now lead the charge for all of our investment opportunities. Sourcing the deals, underwriting them, raising the capital, et cetera.

That's great.

And.

And now you have a brother as a partner, correct?

Actually, my father, so.

Oh, it's your father. Oh, okay. Right. And so he was already into that line of Work. Is that right?

Yeah. So he started the company with another partner 10 years ago. And so I joined them about five or six years ago and.

Yeah, yeah, yeah, that's nice. So you had it in your blood.

I did, yeah. It's interesting because I never necessarily planned on joining them, was having a successful career, but really the opportunities kind of just aligned and it made a lot of sense. And looking back, I'm very glad. And, and it's been a really, been a really fun ride and great, great experience.

And y' all have grown tremendously. I, I believe. Right. Over the last 10 years.

We have, yeah. We, we 10x the first year or the first five years. We've 10x the second five years and we're looking to 10x again. So it gets harder and harder the bigger, the bigger the numbers get. But it's, it's.

And, and your main assets. Why don't you go ahead into that?

Yeah. So Aspen funds. We, we started really 10 years ago as an opportunistic kind of investment firm. And really when my father and his partner started, it was not really thinking long term of building a legacy firm, but building just a unique opportunity around distressed mortgages, which at the time there was a lot of those. Right. Coming out of the 2008 crisis. And, you know, first did a friends and family fund that they raised for and had some great success with that and to continue to scale, continue to reinvest back into the business. And you know, fast forward 10 years, we've now, you know, we've raised about $150 million in equity from kind of accredited investors. We manage probably at least 10 different funds and continue to grow. We've expanded our assets that we invest in to a lot more than just distressed debt. We've invested in multifamily, self storage, industrial, retail, as well as oil and gas. And so our approach is a little bit different than a lot of, you know, syndication firms or firms that are raising equity in that we, we call ourselves kind of asset class agnostic. And what we mean by that is we're more opportunistic than focused on a single asset class. So a lot of syndicators will focus on just say multifamily, for example. And there's, there's some benefits to doing that. But what we found and what, what we really believe is that following kind of the macro trends is a more important strategy for successful investing than it is gaining marginal efficiencies from, say, vertical integration or focusing on a single asset class. We're seeing that right now, right, as interest rates are higher, commercial real estate has some headwinds. It's harder to find certain deals. And the deals that worked a couple years ago, those strategies are not working as well. And so, you know, really to hearken back to, you know, my father's prior experience, even before Aspen, he ran a tech company back in the late 90s and really learned this lesson the hard way where, you know, in the late 90s, anything with a dot com behind it just was a rocket ship. And so he had raised, you know, 44 million in venture capital, was one of the fastest growing firms in the Midwest. He won the Ernst and Young Entrepreneur of the Year award, and, you know, just headed for the stars. About to go ipo. And then the tech wreck happened, the tech bubble burst. And all of a sudden, anything with a dot com behind it, you know, was now not even worth thinking about or looking at. And so he, he ended up losing that business. And it really taught, taught the lesson of, you know, timing really matters, you know, because back then in 2001, you could buy, you could buy Amazon for Amazon shares for a couple bucks, right? And so it's. Timing's a big deal. And we've kind of used that approach into our strategies now for how we invest in finding what we call the economic tides. So the macroeconomic trends and positioning ourselves as investors in those, those trends creates a lot more tailwinds, a lot more margin, and ultimately we think a lot more success in investing.

Well, that's great. And it's funny, one of my guests next week is a professor that teaches and also works in a company I used to work at that tracks all the economic tides and does feasibility studies. It's a great thing. I have to ask you then, following the mega trends, what, what do you have as your trigger or fail safe for when the tide is turning? How do you, how do you see that coming?

Yeah, you know, so I think one of the things that's important to, to distinguish between, you know, tides and waves is kind of a metaphor that we use. So a lot of times it's difficult to predict the waves, right, or the kind of ups and downs, the roller coaster, say the, the stock market or other things that are going to be more sentiment driven. But the, the ties, you can generally have a good sense of directionally where things are going. And a lot of times we want to, we want to anchor ourselves to ties that we think have a long Runway. And for, you know, for example, like in multifamily, we're still bullish on multifamily as an asset class, there's still a lot of demand and need for housing. But a lot of the deals that were being done a couple years ago, they're just not working now because they were bought with aggressive cap rates with floating rate debt at very high leverage points. And a lot of those deals, we're starting to see the beginnings of potentially unravel, and I think that's going to put some pressure on the market. But we actually are still doing multifamily. We're actually shifting more to a development focus. And I can get into reasons why we like development right now. But again, the asset class as a whole we like, but the strategies within the asset class are kind of shifting, if that makes sense. And you know, to, to more specifically answer the question, as things shift, you know, we always underwrite to at least, you know, several different exit strategies and Plan B's, plan C's on every asset. So we know we have multiple exit strategies and abilities to hold assets for the long haul. And so a lot of that comes down to the debt that you have on a property. So I'm very, very, very focused on the debt side of the equation because especially right now with inflation where it's at and where I think it's going to continue to be at a higher rate, that's a very big boon to, you know, asset prices over the long haul because that's going to drive net operating income growth, which is going to drive value growth and pretty much all commercial real estate. So the biggest question and challenge then is are you able to hold onto the asset through the turbulence? Right. Are you able to manage through it? And that's what we're focused on right now. And all of our assets, thankfully are performing very well.

That's good. That is, and that goes into a couple other things we were touching on before connecting on the recording. And I think the meetings we go to and the people we track and spend so many hours following helps to know if the tides are starting to change. But the capital stack, like you say, the way you get into a property to begin with, is, is vital. So what kind of, like, what kind of capital stack are you doing usually?

Yeah, I mean, every deal is different and I think it has to depend on the strategy. I've never been a big proponent of bridge debt for commercial real estate. We've never done a deal with, with bridge financing. And for those that are maybe unfamiliar with, with what it is, you know, a lot, this was one of the largest kind of capital providers over the past several years to commercial real estate, especially multifamily. So what these lenders would do is they would, they would lend to, you know, say class B, class C value add deals at 80%, you know, loan to cost and then they would fund 100% of the renovations. So your effective leverage is going up to say 85% or more. And they're generally being bought with very aggressive cap rates, meaning very high prices and pretty big business plans that need to be achieved. And then the benefit and the reason why a lot of sponsors liked these types of, these types of capital was it was generally going to be non recourse, meaning the principals did not have to sign on the loan if it, if it went bad, they would not have recourse personally. But the, the trade off for that is they were generally going to be fixed rate loans. And so that was a risk that I was never willing to take on any of the deals that we've done over the past several years. And you know, that that's a bet that some sponsors made. And I think to their detriment right now as we're seeing interest rates going, going way higher, that creates a lot of challenges. And so I think that the capital stack you have to, coming from my banking background, what you really are trained to do is you look at every investment, every deal, and you break it down to its most simple form and ask the questions or what are the key risks and what are the risks that I'm taking? What's the probability of that risk to happen and what am I doing to mitigate it? Right? So it's, it's all the kind of downside scenario analysis, but it's very important and it's very important to quantify what types of risks are you taking any particular deal. So a development deal is going to have a different set of risks than maybe a value add rehab project, for example. And so differentiating between those types of investments and the risks will help inform the capital stack. But generally speaking, I don't like anything with floating rate debt. I don't think that's especially right now. I've been hearing some sponsors that are, you know, willing to take floating rate debt on their properties because they believe the, the, the probabilities that rates go back down from this point is higher than them going up. And while that may be true, that that's still again, something that personally I just am not comfortable with. And I would rather have a deal that I can sustain, you know, and, and make work at today's current interest Rates and, you know, maybe give up a little bit on the, on the back end of, you know, rates going down and refinancing into a better rate. But that, that's again, just not something I'm personally comfortable with. And I think is you have to understand as you're getting certain deals, so.

Do you have a certain target loan to value?

Yeah, again, every deal is different. Like on development, right now we're seeing leverage rates go down a decent amount. So we were at 70% on the latest deal that we did in January. Right now, the next deal we're looking at is probably about 64 to 65% loan to value. So equity is, you know, more equity is being required for every deal as the banks get a little bit more tightening in their, in their credit and the types of deals that they're doing. And so I think it's kind of what we're seeing on that. On existing asset purchases, you are probably in that 65 to 70% range.

So I don't, I don't think you probably know. I was an appraiser in the 80s during the savings and loan crisis. I was going in and looking at a lot of developments that went belly up, largely because the banks closed. They weren't all problematic. Infrastructure may be in some of the buildings, usually residential projects, not all, some others too, but so we'd have to estimate the value as is and then as complete. So I had PTSD from that for the longest time. And now after getting really having my eyes open to syndications and getting entrenched with the local national apartment association, I've been involved with legislators in pushing certain legislation in Florida. And I'm actually to a point where I will look at new construction. It's been a long, hard road. And so I've been talking to some of our people in our mastermind about that. But yeah, no, I'm with you. You know, that bridge, very tricky. I would stay. I wouldn't use it in most instances. And the 65, 70%, I think that's a good rule of thumb always, really, in many respects, it just gives better returns in the end, if you can do it. I know a lot of the people today never saw downturns. I've been through a few since I've been in real estate since 83. But yeah, no, I'm with you. And you seen it front the front row with being in underwriting. And so what, what kinds of assumptions? Okay, let's, let's build a little scenario a little bit for you. Let's Say, well, are, are you bullish on, on new construction or, or can we talk multi family maybe instead existing value add?

Yeah, yeah, absolutely. So you know what I'll make, I'll make one, one comment to what you just said because I think this is one of the challenges that we're seeing from investors and what the expectations are. And when you have lower leverage, your actual projected returns usually are lower. Right, because the more kind of leverage you have, it can be an amplifier to the equity returns, especially if your debt is cheaper. And I think what we're seeing right now is as leverage is coming down, the projector returns on deals are going down. But to your point, lower leverage generally means lower risk as well, especially as you're kind of going into maybe a little bit of a credit tightening cycle, you know. And so I think I just want to make a comment there because I do think investors do need to kind of readjust expectations on. Yeah, you're right. You know, what's, what's, what's the return I'm getting for the risk that I'm taking because there's still sponsors out there that are through a combination of getting debt and getting potentially pref equity or mez debt, they can get a much higher effective leverage but they're paying a lot for it and it makes the deal a lot more risky. So you can get to that 17, 18, 19% IRR. But I would say you're taking a lot more risk to achieve that, especially in a value add project is what I'm talking about than you were even a year or two ago. So what we're seeing on multifamily to kind of comment on that sector is what I've kind of called an inversion of the risk curve. Right, so you've heard of the inversion of the yield curve. And what I'm kind of seeing, and it feels kind of contrary to just intuition, but you know, in certain instances I actually think to development opportunities are taking on or are having less risk than a value add opportunity. And let me explain why I think that. And again, there's a lot of caveats, there's a lot of nuance to what type of product are you building? What's your basis? What's the market? What market are you in? What's the new construction starts, what are the new deliveries happening? So there's a lot of the market analysis and so this is assuming that there's a need for it, that there's demand for it, that there's strong occupancy and there's not about to be a ton of completions in your market, which we are finding right in several markets, especially in the Sunbelt, there's been a lot of development. I think that's going to create some softness of demand. But the point is I'm comparing a development project to a value add project. So it's, you're taking more risk anyway. And value add generally you're going to buy an older, older vintage property. You're assessing the market and is making the case for why these rents are below market. And if you can increase the, you know, the value of the unit by making it look nicer and increase the rents and you can increase the value of property. And that, that strategies been an age old strategy. It works well on a lot of asset classes. But what I saw, what we saw is kind of a broader market sentiment is that those deals got priced very aggressively. And so class C assets were trading at much, much lower cap rates than they historically have traded at class B assets the same. And whenever you're getting that kind of price appreciation, that price per door on these older vintage assets, you're now you're creating the kind of bear the bar to be much higher where you have to hit and you're taking on more risks to do so and generally have to purchase with higher debt. So as a comparison development, you know, you're generally, you're building in generally nicer areas. You're building a much newer product that's going to attract, you know, more, more tenants because of the amenities package, just it being new. And from a investor standpoint on value add projects, this is the ones we've done, we generally have done heavy value adds where there is no cash flow for like two years anyway on a development deal that's, that's usually kind of the time frame before you start seeing the lease up, at least on the first phase of a project. And so you kind of take away some of that kind of cash flow risk because it's pretty comparable to value add, then you look at development risk. So construction costs are a big concern. But right now, because the market has stabilized quite a bit, you can get like we're getting guaranteed max, max contracts from very reputable construction firms and developers in our market here in Kansas City because they have a high level of confidence of what they can build these for over the next 24 months or a higher level of confidence, I should say, than during COVID And so we're basically removing the construction cost risk from the equation. Right. And then what I found too is that in development projects because you are taking a little more risk. There's generally a lot more conservatism kind of built into a deal to make it work. And you want to be sure you have a lot more levers that you can pull if needed. And so there's, there's generally what I found to be a lot more potential upside in a development deal, you know, than, you know, value add deal. And then on the exit side of things, I think what we're still, what we're still seeing, we haven't seen a lot of reversion of cap rates. We haven't seen the prices of kind of class C, class B assets come down a whole lot. And so right now, if you can kind of compare apples to apples, I think the risk that you're taking based on the act, the returns that you could potentially hit development in my mind and again, certain instances and the big caveats in the market, but can be a potentially better risk adjusted return because you're going to require higher returns. Right? We don't underwrite anything less than a 20 IRR on a development deal. And so there's, there's a lot of, a lot of comparisons and reasons that we like, like that better right now.

Well, yeah, no, I hear you. And it's so location, location, location, it really, that's, that's, that's key. And the demographics, that's, those are the drivers, not just the population demographics, but the economic drivers, you know, that's huge. But I hear you and going back just for a moment though, on the multifamily thing, and I get what you're saying is with the lower leverage you get lower cash flow and returns, but that's until the end, you get a bigger pop at the end. Wouldn't you say that when you average it out because you ended up paying overall less debt out?

I mean, not necessarily because you know, it's all about your cost of capital. So equity is going to be always more expensive than debt. So if you have less debt, you know, you may have a bigger return or profit to the equity investors, but you had more, you had more equity in. So at the end of the day it's generally going to be a lower overall overall return, all things equal, but, but there's much less risk. So if the deal doesn't perform as well or you don't sell for the cap rate that you thought, or cap rates expand by 100 basis points or 200 basis points, a lot of these deals that are highly leveraged, that's actually a Complete equity wipe. Right. So if your deal was levered at 80 or 85% and the prices go down by 15 or 20%, that means all the equity in the deal is gone. Right. But if you're leveraged at 65, 70%, it goes down 15%. Well, in that scenario, you've only lost half of your equity versus 100% of your equity. So that's where it cuts both ways. So if everything goes well, then the higher leverage deal is going to perform better. But if everything doesn't go well, the higher leverage deal is going to get hit the hardest.

So that's a great segue into the macro trends in some respects because those all influence the overall environment and kind of where money runs in some respects perhaps too. So why don't you touch on the macro trends that, that you all are specifically really excited about right now. I've seen some of your newsletters and whatnot. I, I'd like to give a moment for that.

Yeah, thanks. I mean, yeah, we follow quite, quite a few trends. I'll kind of mention a couple of them. And you know, to be clear, these aren't exhaustive. These are just ones that we're paying ATT that we think are interesting and also present opportunities for investors. And so that's really what kind of we're looking for, is the intersection of a trend that's long term, that is presenting opportunity. So, I mean, first and foremost, you know, we have a lot of analysis on our podcast, the Investing Billionaire podcast that we've done on, on inflation. And you know, we, we are of the camp that believes inflation is going to be sticky, it's going to be here, going to be higher than likely. The Fed will prefer for a period of time. And I think there's a lot of reasons for that. The simplest ones are one, it's going to be labor shortage. We're still seeing a massive labor shortage. Even post Covid, it's only gotten more acute and there's been a lot of pressure on wage growth, wage inflation, we're seeing it slow down a little bit potentially. But it's still the numbers that just came out just recently from the Bureau of Labor are just shocking. The unemployment rates that we have right now, I don't think that's going to dramatically change anytime soon. We're looking at the other kind of core component of CPI is energy. And while energy prices have been a little bit lower over the past six months or so, one of our big here, which I'll get to, is that we think energy is going to be expensive for the next decade. That is fossil fuels and probably all energy. But that, that's a big driver of CPI and bringing back a lot of industry and warehousing to the U.S. and you know, for the past several decades, globalization has really been the key trend, but now we're kind of seeing a reversal of that since COVID Right. All the supply chain issues, all these companies that are kind of redoing the calculus and thinking, you know what, it's not worth the risk to not be able to sell our Ford trucks because we can't get a simple computer chip to put in and be able to sell this. And I think Ford, for example, has I think, $5 billion worth of inventory just sitting in parking lots they can't sell because they don't have all the chips they need and they can't get them fast enough. And so a lot of these companies are shifting kind of their approach and are planning on bringing manufacturing back to the US as well as bringing back more inventory to store in warehouses and to be able to have access to critical components and not rely on kind of the just in time inventory system. That was the key marker of the past few decades. So that's going to be inflationary. So all to say, we think inflation is going to be higher for longer. So how does that impact our investing? It's possible that interest rates are going to be higher for longer and it's possible that we don't. We may not see the same low interest rates that we saw past few years for, for a while, if ever. So I think things have changed a little bit regarding that. So that has to kind of impact the bets you're making as an investor on. Do you think your interest rates are going up or down? And if inflation stays high, I think unless they cause a massive recession, they're going to be pressed to keep interest rates higher. And then the kind of last trend that I kind of alluded to was energy and oil and gas. And so what we've been seeing, we've been investing this asset class for several years and are pretty bullish on oil prices over the next 10 years because what we're seeing is a really pretty simple supply and demand challenge going on here. So over the past really seven years, since 2015, there's been a 50%, 5 0% reduction of investment back into new production domestically for new oil and gas. And you say, okay, well, why is that a problem? Well, if you think about oil and gas, it's. It's the mother of all Commodities, it's in everything that we do in America. Right. It's not just for transportation or for fuel, but it's in plastics. It's for, for everything. And just because it's a depleting resource, right. It's different than real estate that generally appreciates oil. And gas is a depreciating resource because you're pulling it out of the ground and you're not replacing it. And so every year, 5 to 7% of the production that we have disappears. And so by nature of the asset, you have to be drilling into new production to replace that well. That's dropped by half. And part of it has been driven by the ESG narrative of trying to get to renewables faster. And so a lot of the politicians and the incentives have disincentivized investment into fossil fuels and they're trying to force the hand of the renewables to make it happen faster. But the challenge is just the time, as they've said, are just very unrealistic. So you have this kind of decreasing supply curve. It's very difficult to just turn on a lot more supply. And then demand is actually projected to increase over the next 10 years because of this, because we can't just flip a switch and convert to renewable energy overnight. And I think it's going to be a lot longer than 10 years that demand still stays high. And so you kind of have this simple, simple economics. If you have decreasing supply, you have increasing demand and it's inelastic supply, meaning you can't just turn on more supply. That's going to send prices one direction, which is up. So that's why we're excited about it. And then from the market itself, there's just been a lot of the, because of the lack of investment, a lot of these big private equity firms are getting heat for not investing in ESG type deals. And so there's a lot of money that's kind of left the market and creating a great opportunity for those that can go in these middle market kind of opportunities.

Yeah, yeah, I totally agree. We can't just switch midstream and oil and gas have to be around for a while. I like those as an asset class as well. But I do think I can change a lot of the, the labor picture potentially and some other things. That's kind of the wild card. And like we were also talking about before coming on, I'm wanting to bone up more on data centers. I think that there's going to be increasing, vastly increasing demand there. So I'll be looking at that. But I totally think that your newsletters and your trending is good. And I love that we're bringing back industry to America. I think that that's really a smart play. I always enjoyed appraising industrial warehouses for just that reason.