IT'S DISTRIBUTION TIME! Our Biggest Distribution Yet: $5 Million Back to Investors This Quarter!

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Jan 12, 2025, 5:22 AM

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(0:09) What is up and welcome back to how to invest in commercial real estate. (0:12) Happy frickin new year. (0:14) It's been a minute.

(0:15) Got some snow today. (0:16) We did. (0:16) We did.

(0:17) Six inches of nice, beautiful, fluffy snow. (0:20) Oh yeah. (0:21) It's nice.

(0:22) I saw some dude snowboarding down the downtown streets of like Kansas City or something. (0:27) It was actually kind of nuts. (0:29) Yeah.

(0:29) That's funny. (0:30) Yeah. (0:30) Hopefully you guys already got your cold plunges in because I did.

(0:33) Yeah. (0:33) I did. (0:34) No liar.

(0:35) Liar. (0:36) No, I didn't. (0:37) I can't get my.

(0:38) Oh, that. (0:39) Oh, you can't get that wet. (0:40) Yeah.

(0:40) I can't get it wet. (0:41) Well, he doesn't. (0:41) He only gets down to here anyway.

(0:43) That's right. (0:45) So your arm's not going to get wet. (0:46) Anyway, the big news, guys.

(0:47) It's distribution time again. (0:55) It's bigger than ever. (0:57) More distributions going out to investors than we've ever done on any quarter since (1:01) we started this gig.

(1:03) Yeah. (1:03) What's the number, Brayden? (1:04) Do you know approximately? (1:05) No. (1:05) What we're sending out? (1:06) No.

(1:07) Good. (1:08) He doesn't know. (1:08) Did you do your research before the show? (1:10) I did, but obviously, all of these financials aren't ready yet, so we don't know exactly, (1:15) but.

(1:15) Next week, we'll have it. (1:17) Hundreds of thousands of dollars, if not. (1:19) Yeah.

(1:20) And then we had several sales recently, and so all of the money's going back to the investors (1:28) plus the returns. (1:30) And so I think we're going to be shipping back at some, on some level, $5 million in (1:34) this quarter. (1:34) Yeah.

(1:35) Yeah. (1:36) If you include Q4 distributions with all the return of capital from the sale and the (1:41) profit, easily $5 million, maybe more. (1:44) We've got a ton going on right now.

(1:46) There's a ton of deals in the pipeline. (1:47) We've got three or four shopping centers under contract, or we're negotiating the PSA on (1:51) them. (1:52) So yeah, we're optimistic that we can hopefully get a lot of that money back and place it (1:57) back into the market in a great cash-flowing shopping center.

(2:01) So okay, Brayden, Brian, question for you guys. (2:04) How is that translating into overall market conditions? (2:07) Obviously, you say you've got a ton in the pipeline. (2:10) Why is that? (2:11) What are we doing? (2:13) I mean, I'd say prices have finally reset, right? (2:17) For a long time, we didn't buy anything.

(2:20) Interest rates went up. (2:22) We had to borrow at higher rates, and the cap rates weren't going up. (2:28) Yeah.

(2:28) Yeah. (2:28) And then kind of started to climb out of that last year. (2:31) Right.

(2:31) End of last year, Q3, Q4, like Q3, for sure, you had to be a seller, in my opinion. (2:38) You had to put a realistic price out, because it just got so saturated. (2:42) Nothing was transacting for like a year, so the market kind of gets backlogged with (2:46) all of this inventory, and then prices have to go down, because buyers can be way more (2:50) picky and choosy on what they're buying.

(2:53) There may be 150 Starbucks on the market. (2:56) There may be 100 learning experiences or early childhood education centers on the market, (3:03) and so on and so forth. (3:04) I think that just continues.

(3:05) We had a lot of activity in 2024, because prices finally started to come down. (3:10) I think sellers right now realize, okay, interest rates aren't falling as much as everybody (3:14) thought. (3:15) We can't raise our price.

(3:17) Yeah. (3:17) We've got to continue to sell at reasonable cap rates, and I think that's good for us. (3:21) We did it in 2024.

(3:23) I don't know why we can't do it in 2025. (3:25) Yeah. (3:26) I mean, I think we all thought that interest rates are going to be working their way down.

(3:31) Faster. (3:31) I thought it was going to be faster. (3:33) Faster.

(3:33) We had one or two rate cuts, but the economy stayed resilient, and there's still some inflationary (3:41) pressure out there, and so if I had to redo my forecast for 2025 is I don't think rates (3:47) are going to be coming down that much in the next year. (3:51) Maybe two. (3:52) I don't know.

(3:53) It just depends. (3:54) As long as the market stays hot, they're going to stay higher, but that's okay for us, because (3:58) we're seeing sellers willing to sell at higher cap rates. (4:03) Before, it used to be really hard to get a nine cap on a good retail shopping center, (4:09) and now we're seeing nine, nine and a half, nine, seven, five, all over the place.

(4:14) That's why we have two or three that we're negotiating right now, and so you could say, (4:19) well, okay, you're buying nine, nine and a half cap, but you have to put the debt at (4:23) seven. (4:24) That's fine, guys, because we're still hitting our cash on cash return numbers. (4:27) We're still hitting our IRR projections, and I don't mind for the next 10 years if we load (4:32) up on deals at nine, nine and a half cap and at seven and seven and a half percent interest (4:38) rate, because we only need an event, a market crash, hopefully not a COVID type event, but (4:44) where interest rates come down, we can refinance all of it.

(4:46) Yeah. (4:47) Well, we don't really need it. (4:47) We'd like to see it happen, right? (4:49) We don't need it, because the numbers are hitting the numbers.

(4:53) But if it did happen- (4:55) We're going to be way in the money, and most, I would say 90% of our portfolio, we can pay (5:01) off and refinance any time, no prepay, and so that's going to be awesome. (5:07) Whenever those interest rates come down, the more assets we accumulate at higher cap rates (5:11) due to higher interest rates, the better it is for us when the rates come down. (5:14) Yeah, and it's a bit more of a different strategy where interest rates are lower and you're (5:20) buying more of a stabilized asset.

(5:22) It's really just a stabilized positive leverage play. (5:26) You know what I mean? (5:27) You don't have to do anything else. (5:30) It kind of works day one as it is, whereas now you have to do a bit more work to get (5:35) the cash flow you like, but in retail shopping centers where we're looking, you've got a (5:41) significant lack of supply because of those same high interest rates, right, and cost (5:46) of construction is insanely high since COVID.

(5:48) It hasn't really come down a lot. (5:50) So developers aren't building. (5:54) So we've got a ton of new businesses, like retail's thriving.

(5:58) We've got all of these retail stores that are continuing to open. (6:01) Yeah, they're not building new buildings. (6:03) They've got to move into open space, right? (6:06) Yeah.

(6:06) For example, I think Lowe's is opening 150 new stores this year, which is huge, and they're (6:12) going into smaller markets, and that's going to create a ton of retail demand next to them. (6:16) It's going to create out parcel demand. (6:17) So the retailers are doing really well, but the developers can't really afford to develop (6:22) the buildings right now.

(6:23) So you're seeing in a second or third generation retail deal, you may have tenants that are (6:28) at $9, $10, $11 a foot or lower, right? (6:31) We've seen a lot lower, and the market is completely full, right? (6:35) There's nowhere else for them to go. (6:37) Nobody's really building any new product, and the market rent for a new tenant is $16 (6:41) or $17 a foot. (6:42) So when you're looking at that from a renewal standpoint, you can underwrite a lot more (6:47) aggressive rent growth, right? (6:49) Well, yeah.

(6:49) You say $15 or $16. (6:51) I mean- (6:52) Could be higher. (6:53) That's for big box stuff, if it's brand new.

(6:55) Brand new, inline, 1,500 square foot retail, I don't know how you deliver it for less than (6:59) $35, $40 a foot. (7:01) Yeah. (7:01) And we, like I said, we're buying stuff that's half of that.

(7:06) I mean, I'll take our fluorescent deal outside of St. Louis, where we have the American Freight. (7:10) American Freight had an issue. (7:12) Well, that's fine.

(7:13) It's a big box space for us, but we're at $4 a foot in rent. (7:16) And so- (7:17) I think it's less. (7:17) Yeah.

(7:18) If anybody's in the market for a big box space, they're not going to have a vacant big box (7:23) space that they can get for less than $4 a foot. (7:26) So we can backfill that if we need to. (7:28) Yeah.

(7:29) So the rent growth, right? (7:31) You're going in. (7:32) It may be a little skinny, year one, but these leases are going to roll over and over the (7:36) first several years, you're going to be able to significantly increase your cash flow, (7:40) which we've seen in a lot of centers we bought over the past several years, that cash flows (7:44) continue to increase as we get these renewals. (7:47) County Line is a great example of one here in Broken Arrow, right? (7:50) The cash flow this year is going to be the best it's ever been, almost double last year, (7:55) because the renewals have been so successful because of that exact same thesis.

(7:59) There's nowhere else for these tenants to go. (8:01) Market rent is substantially higher, and they got into these leases 10, 20 years ago when (8:07) it was a lot more competitive for the retailer. (8:10) There was spaces for them to go.

(8:12) They could go deliver new products. (8:14) So it's kind of brewed up the perfect storm for a ton of opportunity, in my opinion. (8:20) I think it's less risky, guys, going forward.

(8:22) It's just less risky to be getting into deals that cash flow and that work at higher interest (8:27) rates, because you have the opportunity for them to go down, and you have less opportunity (8:32) for them to drastically go up. (8:33) Where we were getting loans in the 4% range, 4.5% range, that was awesome, making great (8:38) spread, but you have a built-in inherent risk to the interest rates rising and that negatively (8:44) affecting the value that you purchased to that. (8:46) So we're really, really optimistic about 2025 and the opportunities that we're seeing getting (8:52) into deals at high cap rates with higher interest rates, reducing that risk, and then trying (8:58) to drive rents up.

(8:59) Yeah, that, and overall, I think the market is picking up. (9:03) We're starting to see a lot of things transact. (9:05) I know we mentioned we had several sales right before the end of the year.

(9:07) All of our Petromax deals sold. (9:09) The Perfect Auto deal in Vegas, that deal sold. (9:14) Let's mention that just real quick, because that was a deal that did not go quite as good (9:20) as we wanted it to go.

(9:21) And I just think that's a good talking point real quick before we end the show. (9:25) Thought we were going to put it right on the market and sell for a lower cap. (9:30) That didn't happen.

(9:31) We had to adjust our cap rate up given interest rates, given the flood of all the retail deals (9:36) on the market last year. (9:37) And so we ended up having to take a price that was lower than expectations. (9:42) But even in a situation where we had to exit a property at a price we didn't want to exit, (9:47) we still managed to get double-digit returns for the investors.

(9:52) And so when you have deals that don't work and you're still getting above 10% returns, (9:57) didn't lose anybody's money, but also gave them a return, I think that's a win. (10:01) Not too bad. (10:03) Go ahead.

(10:03) Yeah, and I think a lot of sponsors let their pride get in the way and force themselves (10:08) to sell at that underwritten cap rate. (10:10) Instead of us, during the year, we were constantly adjusting that price down to what we thought (10:15) was the market rate to where we thought it would transact. (10:17) And a market rate is what a seller is willing to sell for and what a buyer is willing to pay.

(10:21) So we knew that needed to transact. (10:23) And I think a lot of sponsors, a lot of investors can get blinders on with price when there's (10:31) two levers and it's price and time. (10:33) So we knew that we were equally fighting time and the market isn't getting super less saturated.

(10:38) There's still a ton on the market. (10:40) So we knew that it was better to sell now as opposed to waiting potentially years to (10:46) maybe get a slightly better price. (10:49) And take that money and put it somewhere else because we don't have a lack of deal flow.

(10:53) Exactly. (10:53) Yeah, that's a great point. (10:54) I'm going to hit a little harder on that point is you've got the IRR you're trying to hit.

(10:59) That's a time-driven metric. (11:01) And so let's say these deals are that perfect auto, for example, it might've been cash flow (11:05) and 8%, but we were trying to get a high IRR by selling it at a higher price. (11:12) Didn't get it.

(11:13) So then we have to make the decision. (11:14) Okay, do we exit the deal and miss the returns? (11:17) And the answer is yes, because if I can get you a hundred percent of your capital back (11:22) plus 10, 11% return on that capital, and I can deliver you another property immediately (11:28) where you can get it invested at a 10 or 12% cash on cash with the potential of hitting (11:34) a 20, 22% IRR right in the same year. (11:38) So we're not hanging on to your money.

(11:40) We're giving it back to you, but we're saying, hey, let's double down on that and get it (11:44) invested in another deal and get that earning 20% instead of the 8% we were earning owning (11:48) that perfect auto indefinitely waiting on a purchase price that we may not have gotten. (11:54) So anyway, I think it's a huge win when sponsors can recognize that, get the money back to (11:59) the investors and then let them choose which additional investment they want to get into. (12:03) Yeah, overall, you know, I think it's not doom and gloom.

(12:06) Now is a great time to be buying real estate. (12:08) We're very optimistic. (12:10) I would say we're very busy.

(12:11) The investor appetite is there. (12:13) Sellers are selling, buyers are buying. (12:16) It's not extremely difficult to get a loan right now.

(12:18) I would say we haven't ran into any significant challenges. (12:22) If anything, it's getting easier than the past six, eight months because, you know, (12:28) the volatility freaks everyone out, including lenders. (12:30) People want to know what next month, next quarter, next year, the next five years is (12:34) going to look like.

(12:34) It's very important. (12:35) So the longer of this stable period of time we've been going through, the better. (12:40) Everyone's going to feel more natural like it's a normal course of doing business.

(12:45) So I think it's a great time to do business. (12:47) We're excited. (12:49) All right.

(12:49) If you have questions about commercial real estate, you want to get involved in investing, (12:52) hit us up and send us a message and we'll connect with you. (12:57) Sweet. (12:58) All right.

(12:58) Until next time.