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One thing I think about like a property that's built in 75, guess what?Five years from now, it was still built in 75.It's harder to rent.It's harder to manage all those things.And just the problems get bigger sometimes as the property ages.
So we like the newer stuff, the more we get into it.
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Best ever listeners.Welcome to the best ever CRE show.I'm your host, Slocum Reed.And today we are joined by Whitney Sewell.Whitney and I have gotten to know each other the last couple of best ever conferences in Salt Lake City.
He's based in Roanoke, Virginia.His companies are Lifebridge Capital and the Omna Foundation. Lifebridge Capital is a multi-family investing firm with currently over 1,500 units for 450 million in assets under management.
Whitney is a longtime friend of the podcast.He's been on a few times.His most recent episode was just about two years ago, November 16th, 2022, episode 2995, titled, Learning to Manage Rapid Business Growth, featuring Whitney Sewell.
Whitney, can you tell us a little bit about what's gone on the last couple of years?
Yes, the last couple of years have been very different, Slocum, than the two years say prior.Right.Very different.And they've been painfully slow.I'll say just so slow.
I would say the first number of months over the last two years, maybe even the first 12 months. I can remember just my business partner, Sam and I thinking often, what are we doing wrong?Why aren't we finding these deals?
Everybody else is finding deals.It seemed right.And, but we just weren't doing almost anything.And so there was just frustration and we're having to figure out how to keep our team motivated and, and it's really wracking our brain.
Like, are we being too strict on our assumptions or whatever it may be? And even as we got over the last 12 months, even further in, it's like, well, what are we doing wrong?
Obviously just thoughts about, well, how long can we survive not doing any more deals and things like that. But now, Slocum, I look back and I'm so thankful that there's so many deals that we passed on.
But I do believe that, that things are turning a little bit.Interest rates have dropped a little bit.I think they're going to drop a little bit more tomorrow.And I think there's going to be more transactions to be had.So we're pretty excited.
Whitney, you referenced a lot of things happening in the market right now, including interest rates.Your acquisitions team, what is the most important factor in the deals they're excited about?
Or what is the change in the market that you all are sensing that's leading to deals being more exciting for your team?
One of the biggest thing is interest rates are coming down.So it's making debt more affordable.And so we can afford the deals.The debt's not as expensive as it has been over the last 12 to 18 months or so.
And so it's allowing us to be more competitive than we have been able to be.
Thinking about the value-add business plan, lower cost of debt increases cash flows, which increases NOI and IRR.So naturally, it's easier to hit your numbers when you have lower cost of debt. What else is going on right now?
That's changing the way that not necessarily the way that you underwrite deals, but changing the way that your underwriting is penciling out on viability.
I think too, over the last 24 months, I think we have changed our buy box a little bit and not so much. The things that make or break a deal, you know, we want to deal, we want long-term fixed rate debt.We want something that's already cash flowing.
Those things that even Joe talks about in his book that makes a deal.It's kind of the non-negotiables.
However, where we were very much value-add focused, we've got a lot of properties that are mid to late seventies vintage, for example, that are heavy value adds, right?Heavy lifts there.
But what I have found or what I seem to have found over the last 12, 24 months is that those types of properties, investors love to see that high IRR projection.But they often don't like riding the cashflow ups and downs to get there.
And so value add may have a bigger projection and even a bigger payout at the end.But oftentimes the cashflow is a little lumpy through the middle, right?Or at least in the early days of those projects.
And what I find is that investors really just want steady.And I think we do as well.We want less risk and more steady businesses.And so we are really shifting more towards a newer asset and almost a majority of what we've purchased.
The last number of projects have been really new and even a number of directly from developers.
So while the IRR projection may be a little lower, it's just much less risks, obviously a ton less deferred maintenance, less unknowns, and just a business plan that's much more steady.
And I feel like that appeals to investors more so now, especially those that have been riding this wave with a number of operators over the last two, but even four or five years are figuring that out as well.
I feel like I personally, they just want something that's steady.They want to see that check and just be able to count on that check every month hitting their account.
The key return metric for LifeBridge is IRR, internal rate of return.
I don't know if it's the key.It wouldn't be the only thing we would look at.That's for sure.Whether it's an average rate of return or it's cash on cash. Obviously IRR is going to take into account the time, the length of the return.Right.
But I think it's not going to be one of those things I would say, and neither should it be for a passive investor investor either.
But even things like I mentioned, just the risk of the deal is going to play a big role in whether we're going to pursue it or not.And like I said, when we're moving towards a newer asset class or newer types of deals.
I just believe there's much less risk.And most of our investors are willing to have a lower projected return with much significantly less risk, I would say.
Whitney, whether it's IRR or other metrics, give us a comparison of the returns you're currently projecting for
the value add deals out there that you could go after, and the more class A stabilized deals that are more compelling to you and your investors right now.
I would say on average, the difference may be four to 5% of an IRR.Let's say the typical IRR on some of those value-add deals may have been 18, 20% over the life of the deal.
Yeah, for value-add, that's right.But for a newer asset that's just built business plans going, I'm going to say it's more like 13, 14%, somewhere in that range.
The lower returns come with lower risk and more consistent cashflow. That's right.Outside of the steadiness, the consistency of it, are there other reasons that you are preferring lower risk deals right now?
You know, things like better tenants, there's just less hassle factor. It's easier to manage.There's less calls on the weekends, right?Of course we have a management company, but it's just more predictable all the way around.
And it's not just the deferred maintenance, things like that, but it's just also the tenant class is a big factor in having just a better business plan, easier to manage those things. It's a hard time to raise capital as well.
So like I mentioned earlier, from what investors have been through over the last 12 to 18, 24 months, they're looking for less risk.So I feel like these deals are just something that they are more apt to invest in or just from our investor base.
That's what we have heard. and are trying to fulfill that need as well.And we want less risk as well.
So in an environment like this, where a lot of people, if they've been in investing in this space in the last few years, they've experienced more of the ups and downs over the last couple of years and maybe pause distributions or capital calls or whatever it may be.
So when you can show them a business plan, I think they're focusing less on the projected returns and more on the level of risk and the consistency.
Does the shift for you all have anything to do with. your economic outlook or your forecasting for what is to come in multifamily or in the U.S.economy in the next several years?
I'm sure some, but I think too, some of these assets, we may plan to hold longer.Maybe then we would have five years ago or even three years ago, where we may have said three to five year business plan on some of the older value add stuff.
There's things now we're right up front.We're going to say, Hey, we're going to hold this probably at least seven years or a fund that we had a while back may have been seven to 10 year fund in something that's going to be a longer hold like that.
I would prefer it was a newer asset as well.Why is that? Well, less deferred maintenance for one, less hassle factor all the way around.
Even five years into that asset, while there's going to be repairs, there's always going to be that needs to be done.It's still a nice property.One thing I think about like a property that's built in 75, guess what?
Five years from now, it was still built in 75.It's harder to rent.It's harder to manage all those things.And just the problems get bigger sometimes as a property ages.So we like the newer stuff, the more we get, we get into it.
Can I give a different answer to my question?
Let me give the answer I thought you were going to go with.
When your business plan is contingent upon significant value add in order to hit your returns and you have a lot of work, physical labor, but also energy, mental effort going into a property in the first couple of years, you're forcing all of your appreciation upfront and you find that your IRR and other time valued
Metrics for return are juiciest right around the time that you hit stabilization.So it makes sense to sell earlier.
If you're buying stuff that's already stabilized and cash flowing, you're putting yourself in a position to take advantage of your rent growth and NOI growth outpacing inflation for significantly longer.
You're not experiencing the volatility of the value add business plan, but also your returns are not driven by your forcing the performance of the asset to improve over the first couple of years.So it simply makes sense.It's steady, consistent.
The returns ought to improve.Taking us out of Q4 2024, not trying to predict what's going to happen next in the market cycle, but give it five to seven years and things should be better than they are now, generally speaking.
So it makes more sense to hold it longer.
I know within my own portfolio, I feel very similarly, not on class based on age.Cause I'm in an old city in the Midwest.
My nicest locations were all built in the 18 hundreds instead of the 19 hundreds, but man, the rents go up without me doing anything.Mechanically.They're all much more updated than 150 years, but.
I just don't have to do anything to increase my returns because the location is good enough that just the changes in the market and market appreciation are driving up my NOI on those properties.
Yeah, love that.That just speaks to the importance of the location in a massive way.
I'm still the guy who likes to get messy and force a bunch of appreciation in the first couple of years and then whether I keep it after that or sell it. I've gotten what my investors and I need done in the first couple of years.
Whitney, what's the biggest challenge you're facing right now?
I think for us it's raising money.And I think it's a challenge that doesn't go away, but we've always been pretty talented.
I think at raising money, we've always had a great investor base and maybe that's as business grows to, you know, our capital raising ability.We're just always pushing to grow that also, but definitely a challenge.
Tell us more about that challenge.Why is it particularly right now?So challenging to raise capital?
We've talked about it a little bit, I think just the unpredictability in the market and it just a number of investors that I speak to are just waiting.
They're waiting to see what happens on election day, but they're waiting to see if there's going to be some kind of major fallout, another bust that they're waiting to get past and not be the first one back in or start investing right now.
And so our investor base has been steady, but like I said, as we have grown Oh, and actually as we've grown, you're right.We need to raise more money.
But over the last couple of years from just not raising as much as we have, it's hard to know what you can raise as well.We've done a recent raise, which was successful, but still it's just something we're always trying to grow.
And it's difficult even with podcasts and whatnot.I think it's hard to consistently get in front of new investors.
Whitney, given that you were on the show just a couple years ago, I want to ask specifically about the last two years and the properties in your portfolio.
What is the biggest mistake that you've made and the best ever lesson that you learned from it?
Hmm. Flooding rate debt's the biggest mistake we've made.And you talk about lesson, oh my goodness, right?We have a couple of deals that have flooding rate debt.However, they're within a fund.Most of our funds have been single asset funds.
Thank the Lord these were in a large multi-asset fund.And there's some real winners in that fund that are on long-term fixed rate debt.So those haven't affected those investors in a major way.
And we're own path to refinancing those shortly, actually.So that's been a major lesson, no doubt.And I'm thankful that it's been in a large fund and that we were diversified with our types of debt within the fund pretty well.
And that helped us, saved us in a major way for that fund and those investors.
You mentioned multi-asset funds where inside each of those funds, you had a variety of. debt types.So some shorter term floating rate and others longer term fixed.Asking about the past to inform the future for our listeners here.
Whitney, what were the driving factors for those deals individually in deciding whether you were going to go with longer term or shorter term debt?
We'd prefer long-term all the time.However, when you're buying deep value add, if it's not stabilized, you're going to have to get some type of bridge type product.
And that was the plan is to get them stabilized and then refi those into some long-term fixed rate.And like I said, we're on path to doing that.But in the meantime, obviously interest rates went a lot higher than anyone expected.
So the path was to stabilize those, which we've done.And like I said, we'll be in a lot better place.That whole fund will be in a couple of months.Trying to remember your question.
The question when you were getting your debt, the debt that you're talking about being a struggle the last couple of years, how were you making the decision between long and short term debt?
We had to have a bridge debt type of product so we could buy the deals.Ultimately we knew there was value to be had, but we can't get agency debt or long-term fixed rate debt on something that's not stabilized from the beginning.
So we'd buy the bridge debt and then put long-term on it.Otherwise we would have gotten long-term fixed rate debt.No doubt about it.
Given the length of your experience. in multifamily and especially your experience the last couple of years.How has your perspective on multifamily investing changed?
I don't think my desire for multifamily has changed.Maybe the buy box, like we've talked about extensively has changed the types of deals we're looking for.We've talked about those reasons, but really the basics of buying multifamily.
I don't think it's changed for us.And I think that's actually what helped us to keep from buying. A lot more assets over the last two years that we could have that put us in worse shape.No doubt about it.
So I still think the basics of multifamily still hold true.I think apartments are still some of the most least risky investments that you can make.
We've spent a lot of this conversation talking about how to mitigate risk and keep things steady and consistent.I hope that's what is coming for your portfolio and your upcoming deals, Whitney.Where can people get in touch with you?
Whitneysoul.com or lifebridgecapital.com.
Nice.Those links are in the show notes, Whitney.Thank you.Best ever listeners.Thank you as well for tuning in.If you gained value from this episode, please do subscribe to our show.
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