Investor Meeting Q&A
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Episode Transcript:
Now I'm actually asked to Joe and Ryan to come up. Sorry, Ryan, come up, come down, come up, come down. We're gonna have a q and a section here. So hopefully you guys have thought out some questions along the way and you know, Dana has, who knows Dana.
You guys know who Dana is? Probably a lot of you talk to Dana on the phone, get emails from her. She's does a lot of our investor relations stuff, so Dana's out there with a wireless mic, and if you have a question, please raise your hand and we're gonna have some time of, of q and a. So I noticed that for your ownership in individual deals, you're anywhere from 10 to a hundred percent, sometimes spanned across the funds.
Who are the other investors that come alongside you and what is the role that they play? Great question. So The, our Fund and as you've seen with our history we, we are able to find opportunities thanks to Joe and his teams faster than we're able to raise capital. And so what we, our, our goal with each fund is to create a diversified portfolio of properties.
And so that means typically on the smaller deals, the fund is able to take down the entire property. So it'll be anywhere from a hundred percent to, you know, 80, 50%. And then typically on the larger properties we are bringing in co-investment dollars. And what, who are those co-investment dollars?
First? It's fund investors. So many of you in the room have co-invested additional amounts. These are the larger checks, million dollars and, and larger. And then if there is not additional interest from fund investors, then we do go out to market and essentially we have other co-invest partners.
That. And actually we have one here today who come in more on a deal by deal basis. And again, these are kind of like one to $7 million checks on the deals. But our goal ultimately is that we're constructing a portfolio that is diversified across assets. And so that's where it just, it, it depends on deal size, whether that's we're at a smaller percent or a larger percent.
Did that answer the question or? So, yep. Just capital for, for the, yes. Are, are they just capital before it or is there something else that they do? Yeah, no, so these are not these are not like cogs. So they, these aren't partners that are in any sort of a management capacity. They're just passive LPs.
So most of the morning we've talked about the successes and everything going hunky do which is great. But I find you, you learn more from your failures. So what's been your biggest cock up failure at here and what have you learned from it? Probably needing different ones here. Do you wanna go first or I'll, I'll go.
Sure. I, Joe, Joe alluded to it, but we could be more direct with it, which is this idea of as long as we buy cheap, we're okay. That's, that, that was that goes contrary to a Warren Buffet quote of, I'd rather buy a great asset for a fair price than a fair asset for a great price. No, the other way I read no, that was right.
Okay. Every time I say that. But anyway so we, we've learned from that, especially on office was our Time's up. We've learned, well, fuck, we've learned from that, especially on office assets because very CapEx intensive especially as we saw inflation grow the, the fund one portfolio, we will still ultimately net exit kind of in the mid-teens, i r r aggregate, but not where we would like to be for the work that we put into it.
But that's because we're chasing inflation. So, When you, when you buy these office assets that have a large tenant improvement cost and capital expenditures, and then you've got inflation, you're kind of running in sand. And so while we have have a great basis in those assets and they'll ultimately do well I would say that a, a learning lesson is definitely, and just a good example north Point, we've had no trouble leasing.
It's an office asset. It's a prime beautiful office asset. Shaw is definitely more of a Class B asset that we're, you know, dressing up as best as we can. And that one has more challenges on the leasing side. So what we've learned from that, which hopefully you've heard today, is de a preference for highly multi-tenant, a preference for multifamily and small bay industrial because those are very fungible and you're not dealing with large capital expenditures.
We, we spend a lot of time on the Office assets with larger tenants. We, we had a, in both cases, in two of the buildings North Point and then Shaw, we had a large tenant move out at such a drag because now you've gotta do new tis. You got to, you've gotta fight a new tenant who values that space in that market.
So you, you'll see, or you're seeing our learning processes. We go to fund two and fund three and fund four. As we move more to like readily scalable, the main thing is demand. Office vacancy in Modesto's about 5%. In Sacramento, it's about 10%. And sitting in Fresno it's 15, you know, then you go to apartment vacancy and it's 2%.
The industrial vacancy, it's 3%. Like, on the one hand, tenants are knocking on our door. On the other hand, we're sending flowers and banging them to, to come check out our building. It's like so we, we've moved towards more easy to execute business with, and I certainly covid, you know, I mean frankly, our, with the statistics that occurred on our office portfolio, since Covid is heroic, in fact, just a hundred thousand in spay Yeah.
Lose 50. Yeah. It's really about, but it is certainly is learning lessons for, you know, what we do going forward. As we know interest rate has dramatically been increased by the Fed, especially the people that are sitting here. It means thousands, maybe hundreds or millions of dollars increase that you were paying only six months ago.
If you're a high net worth client of a firm, they're offering almost 4% liquid return. What used to be 0.10? I know I can get 4%. What, what do you guys plan to offer? Your clients you've been offering eight, which was fantastic. Where versus making 0.10 interest rates are still gonna raise at least one or two more times.
I wouldn't be surprised. These firms offer five or 6%. We're talking about liquid money. Take it out tomorrow if you want. I've been offered that 4% right now. Why would someone invest and be only guaranteed 8% when you can get 6% if it gets to that, if these are so we had an advisory board meeting yesterday and one of our board members is a, a, a manager u b s and manages a, a very large portfolio, she pointed out earlier, 2 trillion.
Yep. But she pointed out that they're advising their clients that they should expect sort of high single digit returns in the stock market. And maybe lower teens returns in the sort of value add space or in the real estate space. I know that's contrary to what you're saying as well, but the, the product that the way we, the, the value add piece that we do we are comfortable delivering mid to high teens returns over time.
And maybe that value proposition. Weakens comparative to 4% or 5% that you're sure of that's a choice you'll have to make. But one thing about real estate is that it is it is physical. You can touch it, you can see it, you can walk on the roof and it has a replacement cost. It costs, well, this room would be 500 bucks a foot, maybe 600 bucks a foot to build.
And there is demand that exceeds supply and building new things, costs money, and So given that we buy things at 50 or 60% of replacement costs, we are confident that that the safety is there, that we'll be able to continue to hit mid, mid to high teens returns. I mine is maybe more an observation than a question, but I guess I'm just interested in how you see your company culture going forward.
Because clearly it's going to change. You know, the many of us who are early investors are. In the position to be million dollar investors, you know, so it's gonna change your investment group. So do you anticipate that's gonna change your company culture some? Or is that just a normal thing that happens with a startup company and as growth progresses?
Yeah. Our Number one, we're, we're never gonna shut the doors on you know, smaller investors that have, and certainly ones that have been with us for, for a long time with the institutional component that's actually raising the bar of our company. I mean, honestly, frankly, this meeting today is an out product, is a, is a byproduct of the fact that.
Larger institutional firms have annual investor meetings, and we, we want to start to get into that practice. We have audited financials on our funds. Not a requirement, but we do that because we know that that's, that's the direction that we're going. That's so many layers of capability in our firm that we have and that we're developing for that institutional audience.
So, number one, the. The caliber of our firm is only growing through that process to the culture question. We number one, we try to find investors that fit our culture, certainly. And, and I, I can think of numerous examples, whether it's on the, you know, high net worth, ultra high net worth, or institutional scale where we've said you know, how they go about business is not quite how we do.
That being said, they're also a passive LP in our fund, so they don't really have an ability to affect our culture. The last thing that I would say is that these large institutional groups, they are actually looking at us. The same reason that all of you in the room do, which is certainly strategy.
But it's who are these people that I'm gonna be putting millions or tens of millions of dollars with? So the culture piece is, and as important of a thing for them as it may be for you. I think over time as smaller investors will matter more in the near term. In scaling, it's important to have larger investors so you can execute on the overall business plan.
But with larger investors comes I don't know, more, more institutional pressure. And you've got more people who are very carefully involved over time to develop, you know, what might be called a retail or a smaller investor base, gives the firm more flexibility. I know that we talk a lot about how we're gonna continue to maintain that and how over time that becomes a more, a more important part of the strategy.
Yeah. And just as a side note, we have, and we've talked to some of you here in the group about a, a fund vehicle that is more designed for taxable investors. Typically it'll have a smaller minimum that's, that is absolutely something that we're tossing around and that we're looking at down the road.
Because the reality is that the institutional capital world, While it is scalable and it allows us to be able to deploy the strategy that we feel is compelling. It's also in some senses, if you're talking about pensions, it's a shrinking pool. Meanwhile the kind of high net worth wealth advisor that ca that capital world is actually a growing universe.
So we're, we're very cognizant of that. And, and there, there will never be a day where we. Frankly, with either of those groups where we just say, yeah, no, we're, we're not pursuing that. We're, we're very conscious about being, pursuing both of those avenues. Sorry, I, I actually just wanted to help answer the question from your existing lp.
So as a potential lp, the way I kinda see the the way the answer it is the two key keywords. One is term and the second is correlation, right? So, sure. Two days ago, I bought some one year. Treasury bonds at, they yield to maturity of 4.8%. Right? Pre-tax. They gross it up. I get more than 5%, but the term that I get is very short.
It's completely different from investing into a real estate private equity fund that has a term of seven plus one plus one that's seven potentially nine years of compounded return with a preferred, you know, return rate of 8%. That's huge. It's completely different, right? It's a lot easier. It's a lot harder to.
Return 8% a year, and then they compound that over a call a seven to nine year period. And the second reason why I, or any of you, any of us should seriously consider, if not actually write a check, right, for your new fund, is because of correlation or the lack of correlation among different asset classes.
Real estate is completely different from fixed income and you know, many of us here, Are part of a family office and what we want to do is actually diversify our risk among different asset classes, right? So real estate is a good risk and we should have a significant, if not a growing per percentage of our total assets into this sub-asset class.
We didn't pay 'em to save, I'd say get him a drink. Yeah. Well, appreciate. Thank you guys very much and we're, we're available. Yeah, as always, guys, if you think of something, ask him about lunch. If you think of it when you're driving home, reach out to us. We're we're, we're available anytime. So thank you guys.
Summary
We held a Q&A at our recent investor meeting with questions from current and prospective investors on a variety of topics.