During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, Kagan, and Bennett discussed Real Estate Distress Cycle: A Buying Opportunity for Investors. Here’s an excerpt from the episode:
Moses: Yeah, exactly. It’s this very weird situation where you’re trying– The whole business exists because the LPs trust you to invest their capital. You’ve got this really screwed up incentive structure where you’re doing stuff because you got to pay your analysts and your asset managers. It’s a crazy model. I think a lot of people having experienced that at other firms are like, “Hey, we are interested in another way of doing this business.”
Tobias: It seems fragile, and it seems to me that at the end of every business cycle, there’s always a whole lot of real estate developers who go bust just at the very beginning. That marks the start of guys who are over levered and they just on that margin start going bust and then everything else seems to follow from that.
Rhett: Yeah, and I think we’re starting to see that now. Unfortunately, obviously, people are suffering, but it’s a classic start of what we think at least distress, maybe a distress cycle where you have people that are undercapitalized, probably didn’t have the operational experience, and they paid a price that really looking back on it just didn’t make any sense. And so, we’re starting to see loan sales and assets start to trade below the debt basis, which is something we haven’t seen a long time.
Moses: Yeah, I want to add to that too. So, the prices paid were not good and the operations were not good, but fundamentally, the assets selected were also not good. [crosstalk]
Jake: Other than that though, it was full.[laughter]
Moses: If you own a 1960s or 1970s apartment complex in Phoenix that has not been re-piped, you are in for a world of pain, if you own that. You will have leaks. If you actually have to eat that cash flow and that’s the source of your returns, you are not going to like the meal that you’re eating. And for so long, that was obscured because you had just lease it up, paint it, release it, send along to the next guy before the repairs and maintenance really started to hurt you. And now people are having to eat.
Tobias: It must be good though if you’ve got a full cycle view and you can see– As some of the weaker hands get shaken out, then clearly, they’re going to be some better prices at some point through this and anybody who’s liquid will be able to make some good deals.
Rhett: Yeah, I think that’s a big part of our thesis. We started this firm March 1st, and we raised an evergreen vehicle to take advantage of some of what you’ve talked about, and then we also have additional investors as well. We haven’t actually purchased an asset in this entity. Obviously, Moses and I have purchased a lot of real estate through the years. But when we were first thinking about this, I had real anxiety about, was this the right time?
And so we were going pretty slow, and then all of a sudden, you started to see the signs of stress. And so now the anxiety flipped from, “Okay, are we going too slow? I mean, are we going slow enough to like, ‘Oh, we really need to get the infrastructure in place,’” because you never know if it’s going to be the opportunity of a lifetime. But it’s very clear there’s enough stress in the market that you should be able to find good assets that you want to own for a very long period of time.
Moses: It’s certainly a better buying environment than it has been over the last couple of years. I haven’t bought one of those rehab deals in probably two and a half years. We bought some core stuff because we could lock in really long-term, very cheap debt like prior to the rates spiking. But yeah, we’ve been really bored around here and inactive because the numbers just didn’t make sense. We’re starting to see stuff where you’re like, “Yeah, that actually might be interesting.”
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