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- [00:00]
Moses
What you would ideally like as an owner is to be in an affluent developed area that, you know, people have wanted to live in for a long time and are going to want to continue to live in for a long time. Those sorts of neighborhoods, they push back on new supply. Right. Like they create supply barriers, however, you know, and we can have an argument from a public policy perspective about whether that's good for society or not, but that's what they do.
- [00:24]
Chris Powers
Yeah.
- [00:24]
Moses
And so forth. Frequently in those neighborhoods there are older, smaller assets that a big institution or institutional real estate firm is not going to be interested in looking at a $3 million deal, an $8 million deal. They're just not, that's just not going to move the dial for a big player. But the families that have owned those things have been able to generate very nice returns over very long periods of time because people want to live there. And so they don't really even need to put that much capital back into the buildings.
- [00:55]
Rhett
Right.
- [00:55]
Moses
They can still continue to push the rents. So I think a, if not the perfect greasy deal, a, a perfect greasy deal would be, would be that kind of deal going in, buying at a reasonable price, putting some capital in to refresh the building, and then just sitting there and letting the, the neighborhood do a lot of the work for us.
- [01:19]
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- [02:28]
Chris Powers
All right, y' all have heard me talk about better pitch for years on the podcast. I'm super proud of their founder Nico, who is a great friend of mine. He's one of the best young entrepreneurs I've come across and in just two years he's built an incredible company that is now rebranding as Collateral partners. And honestly, it makes perfect sense. From single family investment decks to complete brand overhauls, ongoing partnership support to market research, they deliver institutional grade work that actually moves capital. Think of them as the difference between looking like a startup and operating like an institution. They're really your entire institutional marketing department. The team you wish you had in house but can't justify hiring. Ex Goldman directors who understand your business, ex PE associates who craft your narrative, and world class designers who make it all look effortless. Go check out collateral.com and mention the Powers podcast and they'll give you a complimentary one pager. Enjoy the episode. Okay, so David Sinra tweeted something yesterday. He said the best conversations are the ones you're most excited about. And I'm freaking pumped about this. I have two of my best friends on here today. We haven't done this in three years. The last time we did was episode two 80 or two 78. So you can go listen to that if you want. And you guys were just launching this business. It was the Y combinator of real estate. It was going bananas. We're now three years in and I really wanted to spend time today going what's happened over the last three years? I think to do that, let's just start with what is reseed today and has it evolved or changed at all.
- [04:15]
Rhett
From where we were three years ago?
- [04:17]
Moses
Well, first of all, thank you for having us. The first episode that you did was incredibly helpful for us.
- [04:24]
Rhett
Great.
- [04:25]
Moses
It opened all kinds of doors and we appreciated it very much. And we appreciate you having us back here today.
- [04:31]
Chris Powers
Of course.
- [04:31]
Moses
This is great. What's reseed today? We have come a long way. We have invested in 13 operators, we have put out more than 100 million in equity, another hundred million or so in dry powder. We're working on raising some more now and we've built a great team. Mostly credit to rep there and some improving internal systems to handle the volume of both deal flow and also the asset management from the portfolio as it grows.
- [05:10]
Rhett
Yeah, one of the things we did before coming today was listen to the last episode and we did it independent of each other. And one of the things that was fascinating and frankly I think reaffirming was that the business model has largely tracked what we originally talked about, but looking back on that moment when we were talking about the business as if in some ways that it was further along. And what I mean by that is Moses had sent the tweet that went viral. We had 1300 people express interest in 12 hours. And we were in the middle of effectively turning into a college application process, trying to sift from 700, ultimately 700 applications down to eight. But we had, you know, at that time we had not bought a deal. We hadn't actually capitalized any, any of the operators. But we had this vision for the business and I think we've largely executed on it.
- [06:09]
Chris Powers
And can you just like, what was the original vision for the business? Like, why was different than what most people had seen before?
- [06:18]
Rhett
Yeah, I mean, the original vision was that there, the need was that there are a lot of people that either want to start a real estate operating business or already have started a real estate operating business. They know a lot about real estate, they know how to identify it, but maybe they don't know how to raise capital or they don't know how to go find long term capital or they need help in the, you know, the back office and thinking about how to scale that. I mean, you've built one of these businesses successfully. It's hard.
- [06:44]
Chris Powers
Yep.
- [06:46]
Rhett
And so the vision was that we could find great up and coming emerging operators, we could support them and in a lot of ways help them, you know, avoid some of the mistakes that maybe Moses and I have made along the way and really just kind of get them going and create momentum that would be hard to do on their own.
- [07:02]
Moses
And then from the other side, the idea was, look, there are a lot of taxpaying investors, family offices, just high net worth individuals who are not necessarily that well served by the traditional real estate private equity, IRR driven, high leverage type model who are looking for long duration, relatively stable cash flows that come with some tax benefits and also that there are opportunities available in the substitutional space that probably generate higher yields than in the institutional world. And so it was marrying those two things together, figuring out how to help these wealthy taxpaying investors build diversified portfolios of cash flowing substitutional real estate all over the country.
- [07:55]
Chris Powers
As I, as you say that, it's like years of tweets of just reading, talking about, I'm like, oh my gosh, this, this is like music to my ears. Before we move any further, I think it'd be important to also set the context. How did y' all get together? Like you were in a different world, you were in A different world. You're like more of an investor type that saw an opportunity. You've been doing this sub institutional for a long time. How did this come together?
- [08:20]
Rhett
Yeah, so at the time I was sitting in an investment seat where we were building a real estate portfolio for a, a family. It was a, it was a long duration taxable real estate portfolio. And so I was going out and trying to find local operating partners. And I'm not very active on Twitter, but you know, certainly a lurker. And so I was, you know, going through and reading content and I stumbled on some of Moses's writing. I said, oh, this. He thinks about the world in exactly the way that I think about the world from an investments perspective. And so I went down to LA to meet him. We looked and we talked about this on the first podcast. We tried to find deals together, but he didn't need the capital given the environment in la. He actually came out to Colorado to look at some deals where I, you know, I was living at the time. And then I ultimately ended up going to the first reconvene conference was maybe the first time that we met. Yeah, and the light bulb went off. I was like, oh, this is how we can recruit operating partners. His distribution as opposed to, you know, what you traditionally do is get on an airplane, go talk to brokers, you know, kiss a lot of frogs. This to me looked like a much better distribution mechanism and that kind of all came about.
- [09:40]
Moses
Yeah. And from my perspective, fundamentally what we were doing in LA was just a niche thing. I mean there's just, you know, we're, we're pretty quantitative about how we look at deals and you're either in a good buying, buying environment or you're not. And if you're not, from my perspective, I'm not going to do stuff. So we were kind of slowing down in LA at that point, but we had all this institutional knowledge about how to underwrite, how to do construction, how to manage, you name it. And so when Rhett came to me with this idea to basically get, to get on the ground floor of a bunch of these emerging operators and kind of implant the way of thinking that we had kind of developed by trial and error over the years into these other operations and by doing that have the ability to build a scaled business was pretty appealing.
- [10:32]
Chris Powers
One of the most impressive things about you is you have stuck to your guns. Like if you read the writing, you can go back as far from when we were like neophytes trying to get to a thousand followers on Twitter. The Writing and the, and the thought process has stayed the same. I know you're just now getting back into buying and sitting out for three or four years. I know Re Seed has been doing some deals, but to hear you've got some stuff, it's just, it's super impressive. Let's just go like a little bit deeper. And just the strategy. What's unique about you keep saying long duration, tax advantage, all these things. If you could spell out like the perfect subset of deals would look like this, our thought process would be like this. Why are you different than most?
- [11:12]
Rhett
Yeah, and I don't think any individual component is different. I think it's the, it's really the aggregation of how we have, we have done it. But if we go to the perfect deal, what are we trying to find? We're ultimately trying to find durable real estate. So great long term real estate that we can buy at a price that creates attractive returns for our long term investors and we want to hold those investments for a very long time. When I started in the real estate business, I was looking at much larger transactions originally. It just became obvious that as you go down the spectrum in terms of transaction size, it's much less efficient. In our first few deals we could tell you some stories that really outline like how inefficient it could be, including the first deal we bought, they didn't have any leases. So I mean it is like don't argue with me about whether it's inefficient at this point because we've got data, but that's really. We're trying to find great real estate. Oftentimes it's, they're, they're smaller assets that we know that we can run efficiently and generate great returns for investors and hopefully hold those for the very long term.
- [12:21]
Moses
Yeah, I think there's, there's sort of some tension. What you would ideally like as an owner is to be in an affluent developed area that, you know, people have wanted to live in for a long time and are going to want to continue to live in for a long time. Those sorts of neighborhoods, they push back on new supply. Really, they create supply barriers. However, you know, and we can have an argument from a public policy perspective about whether that's good for society or not. But that's what they do.
- [12:49]
Chris Powers
Yeah.
- [12:50]
Moses
And so frequently in those neighborhoods there are older, smaller assets that a big institutional, institutional real estate firm is not going to be interested in looking at a $3 million deal at $8 million deal. They're just not, that's Just not going to move the dial for a player. But the families that have owned those things have been able to generate very nice returns over very long periods of time because people want to live there. And so they don't really even need to put that much capital back into the buildings.
- [13:21]
Chris Powers
Right.
- [13:21]
Moses
They can still continue to push the rents. And so. So I think a. If not the perfect greasy deal, a perfect greasy deal would be. Would be that kind of deal going in, buying at a reasonable price, putting some capital in to refresh the building, and then just sitting there and letting the. The neighborhood do a lot of the work for us.
- [13:42]
Chris Powers
And when you say put some capital into the building, is this a lot? Is this like a gut to the stud? Start over? Is it deal by deal, seeing what you need? Like, are you trying to get back to a quality that is beating the market on, you know, how. How well constructed these units are?
- [13:59]
Rhett
It really depends on the deal. I mean, one of the things that we've certainly learned about our business because we're looking at multiple geographies, multiple strategies, is you have to try to find a way to. To compare those deals.
- [14:12]
Chris Powers
Right.
- [14:12]
Rhett
Like a gut renovation where you're taking everything down to the studs. Different risk profile than, you know, something we bought that there's really not a value add business plan. And we've done both of those.
- [14:23]
Chris Powers
Yep.
- [14:25]
Rhett
At this point. But it really differs depending on the business.
- [14:30]
Moses
Yeah, I think. I mean, it's just the nature of things, that new construction is going to take place in areas where new construction is allowed. And sometimes if we can buy it at a price that's attractive, and particularly if there's a mark to market play on the rents. Like the deal that we recently closed in suburban Detroit. Oh, yeah, Great building. Relatively recently constructed, being run in a less than optimal way, let's put it that way. We can talk about. How about some stories there. And that's just a pure, you know, mark to market.
- [15:06]
Chris Powers
Yep.
- [15:07]
Moses
The. The San Diego deal that Rhett was just referencing, I mean, that's a gut. I mean, it's an 80s building. Great bones. We walked in, I'll never forget, because our first Reed deal, I was nervous. 80s building.
- [15:19]
Rhett
Right.
- [15:20]
Moses
And you could see that the second floor had. The roof line was vaulted. So he was pretty confident that the upstairs units were going to be nice. But it was the downstairs ones we were worried about. And the strategy involved turning several of the garages into ADUs.
- [15:37]
Chris Powers
Okay.
- [15:38]
Moses
So basically adding units for the non Californians among us here. And so we're we want to open the door to the downstairs units to see what we're working with. And first of all, the owner was there with his huge bundle of keys, real mom and pop type operation. And he opens the door and it's nine foot ceilings. We're just like, we can make these into good units, you know what I mean? And that building, we gutted that thing to the studs and it's almost totally leased up now and just looks great. So both of those strategies will work.
- [16:18]
Rhett
Yeah. One thing I'll add is, I mean, if you think about markets and rents, I was driving around with a potential operator in Dallas yesterday and I was explaining to him what we had spent on a per door basis in San Diego and in San Francisco. And you could see it didn't compute. Right.
- [16:36]
Chris Powers
It's like that's more than the whole unit.
- [16:38]
Rhett
Yeah, oh yeah, exactly. So obviously you, you can't take that to suburban Detroit. So it's very market strategy specific how you execute.
- [16:46]
Moses
Yeah, you, I mean, just in San Francisco, where do we. Are we performing $5,000 for thousand square foot, you know, two bedroom plus office units or something like that? Maybe, maybe even more than 5,000. I mean, it is, it is that. That's another, another planet. And you can afford to spend a lot of money on construction if you're going to get those kind of rents there.
- [17:03]
Chris Powers
Okay, so the viral tweet goes out, you become quickly a, you know, you're going through 1300 applications, you narrow it down to 8. I kind of want to talk about the profile of the operator and how that's evolved. How many cohorts have you done now?
- [17:20]
Rhett
We've done two cohorts and we are recruiting for our third right now.
- [17:25]
Chris Powers
And will the model continue to be cohorts so far?
- [17:28]
Rhett
I mean, we've debated that internally, but you know, up to this point it's worked. We really believe there's value in the community and bringing people together and, you know, launching the business at the same time or oftentimes, you know, we're providing growth capital. And so that group coming together we think has value.
- [17:47]
Chris Powers
Okay, so we're going to spend some time on cohorts. I've got several questions. Okay. From Cohort 1 to Cohort 3, what have we learned? What gets in now? And this has to have evolved. There's no way. There's no way. There's not. Lessons learned along the way.
- [18:04]
Moses
Yeah, I think one thing to say, and we'll have a lot to say about this. One thing to say. This is an area where I think we were a little off when we met with you last time is we were expecting, or at least I was expecting to have to do a lot of teaching. I thought that we were going to end up with some brokers who knew their markets but maybe hadn't done deals before or people who had, maybe they had done one deal or something like that. It turned out even in the first cohort that we got people who are considerably more experienced than that. And then for cohort two, and now I think for cohort three as well, really experience, really people who know what they're doing.
- [18:46]
Chris Powers
Like, describe that.
- [18:47]
Moses
What's exciting, people coming out of like serious real estate, private equity firms, MBAs from the best MBA programs that you know, people who really know real estate.
- [18:57]
Chris Powers
Yep.
- [18:58]
Moses
And I think part of that evolution is that over time, you know, these, we, at the beginning we were very unproven. Like we didn't, we had never bought a deal before. We were asking people to sign up to effectively a permanent deal with us and we hadn't delivered capital. As we have now demonstrated, we can deliver the capital. Obviously people who have higher opportunity costs or maybe a little bit more risk averse about their careers look at that and say, okay, now it's validated and, and they're willing to get involved. So the, the profile of the operators has, has, has changed significantly from what I thought. And even, even, and Even from Cohort 1 until now, we're getting more and more experienced people.
- [19:40]
Chris Powers
So if, how big is a cohort?
- [19:42]
Rhett
That's one of the things that's changed. So we originally we had eight in the first cohort, we had five in the second. And then we're going to stay in that kind of 4 to 5 range.
- [19:53]
Chris Powers
Okay. 50 killers submit applications. They're all coming out of real estate, private equity. They're awesome. We got 50, we got to get it down to five. How are we getting to five?
- [20:06]
Rhett
We're in the middle of that right now. And the process has evolved a little bit, but it's largely stayed intact with a couple additions. So we start with. I'm the first. I read all the applications. So when they come in, Laura, one of our partners, set up the workflow in a way that's, it's really helpful.
- [20:28]
Chris Powers
May I enter my interrupt? One second. Also explain what's on the application.
- [20:33]
Rhett
Okay, yeah. So I mean it's, it's probably relatively intuitive. You're basically what we're trying to do when we get an application. I'll come back to what's actually on the application is get a sense of what is your work experience. Have you done a deal or led some deals that give us confidence that when you're out on your own or if you've, you've already started your business, you can actually execute the deals. We're trying to get a sense of, you know, track record. So how do you do that in the application? Obviously, there's a lot of personal information. We ask for a resume. You can attach a case study if you'd like. You're describing what markets you're interested in. You're describing the strategy that you want to implement in those markets. You, you're talking about transaction sizes, you're saying what yields you potentially would. Would want to try to target because it's different by market. And then we ask some very simple questions that occasionally create some pretty funny responses. I mean, you know, we asked people if they've ever been in trouble with the law. Right. I mean, and, and you know, to credit to applicants, people are truthful.
- [21:43]
Chris Powers
Yeah.
- [21:43]
Rhett
And so, you know, have you ever been through a bankruptcy? What is your real estate portfolio today? Do you have any upcoming maturities? Right. And so all of it is in an effort to give us clarity around how can we narrow that funnel very quickly.
- [21:59]
Chris Powers
Yep. Is there a wrong answer of any kind? Like, is there something. If somebody was listening to this, it's like an immediate no.
- [22:08]
Rhett
If you've never done a transaction.
- [22:10]
Chris Powers
Yeah.
- [22:11]
Rhett
You're trying a career switch. Yeah. You know, we, we're fiduciary. So if there's, if you've had legal trouble, it's probably going to be a pretty tough yes for us.
- [22:21]
Chris Powers
Okay.
- [22:22]
Moses
Yeah.
- [22:23]
Chris Powers
So now he's read. Now the gets kicked over to you.
- [22:26]
Moses
Well, I mean, I think there, there is, we're always trying to balance. Right. Because I mean, on the one hand the quality of the applicant matters and quality along all the axes that Rhett just explained. There also, though, is the market right there. And so there are markets that we are more or less interested in being in. And so there's trade offs where, like, do you take the perfect applicant in a market you don't love? Probably. Do you. You probably don't take a terrible applicant in a market you love. But where is, where is the, you know, where is the. And, and, and unfortunately it's not, you know, we've tried to quantify, quantify things to some extent, to the extent that you, that we reasonably can. But a lot of this stuff is feel. And I guess maybe the final thing I would Say is, you know, these are really, these are partnerships where we are, you know, we are. It's not, you know, write them a check and see it. Call us when you have a deal. We're meeting with them constantly. When they do have deals, we're spending a lot of time with them. After they buy it, we're spending a lot of time. So these have to be people that we get along with.
- [23:31]
Chris Powers
Yep.
- [23:32]
Moses
You know, it's, it's, it's actually a partnership.
- [23:34]
Rhett
Yeah. Maybe just finish kind of what we do, if that'd be helpful. So after that, and Doug really leads, kind of the next step in the process is Doug's the president of the firm and our partner. We, we call it a behavioral panel. And this is one of the things that we've added. And so it's really. We'll do an hour long, basically case study with them and say, okay, tell us times you failed. What did you learn from it? If I went and talked to your old bosses, which we might. Right. What would they say about you? Just kind of ask probing questions. Because we're at this point we've got a pretty clear sense of like who's technical and who can underwrite. Underwrite it. But then we're trying to get to some of the questions that Moses mentioned around, you know, do we want to be with these folks? Because we're going to be with them a lot. You know, what, how do we get a sense of the integrity, their fiduciary mindset. And then we go from there to we'll actually do a case study with, you know, they'll show us models, et cetera. And then we're, you know, in the market, driving the market we're looking for. Do you really. How passionate are you about real estate? Right. Like, if you don't know every block, every owner, every broker, then that's pretty good sign that's probably not your passion. And then it gets down to kind of the legal side. But that's, that's a short description of a long process.
- [24:58]
Chris Powers
Okay, so they've gone through. You've narrowed it down to five. I assume an offer letter or a call comes to them. What does an offer look like? What am I getting myself into if I'm one of the five? We've talked about a long term partnership capital to go buy deals. But like, what am I signing up for?
- [25:17]
Rhett
Yeah. So one of my favorite quotes, if.
- [25:18]
Chris Powers
You can't tell, I'm now becoming a re seed partner in real time.
- [25:22]
Rhett
You need to submit your application. Accepted. There's quite a difference between expectations and reality is disappointment. And so what we're trying to do is really make sure that the operating partner, potential operating partners, know exactly what they're signing up for.
- [25:40]
Chris Powers
Yeah.
- [25:41]
Rhett
So, you know, we'll, we'll send them the operating agreements, we ask them to review it, we ask their counselor review it, and then we set up a call to discuss it. And there's not a lot of flex in the operating agreements between the operators because we're, you know, we're trying to standardize the business, but we are, we're having multiple calls and multiple meetings where we're going through and line by line telling what the economics look like, what the governance structures look like, what the deal level economics, and just making sure that we're on the same page because the last thing we want is for them to get sit in the seat. And then all of a sudden their expectations are out of line and they're disappointed. And I'd say that that's kind of the partnership piece. The other piece is we, and this is a change from the first cohort. We established the buy box. So in the first cohort we had a sense of that. And then once they came on board, we really nailed it down. We've pulled that forward in the process to make sure that once again, that there's alignment on strategy and process and the types of assets we want to buy.
- [26:45]
Moses
I think just to kind of at a high level what the deal is, we're giving them some money into their operating company. In exchange, we're getting a small revenue share in the operating company. And more importantly, from our perspective, we're getting the right, but not the obligation to provide up to 100% of the GP and LP capital for their deals. Now, to give you a sense for what that has meant in real life, we've done 13 deals. Now, one, we just did the GP. It was a deal that was, it wasn't quite thick enough from an LP perspective for us. But we did the GP, all the other ones, we provided approximately 100% of the capital.
- [27:28]
Rhett
Okay.
- [27:29]
Moses
And every deal has been done, all cash. We haven't used debt on any of them. So this is capital that would be very hard to raise, I would say, as an emerging operator to go take down a $20 million deal, all cash.
- [27:44]
Chris Powers
You're going to give me money into an operating company which is going to allow me to live for a little bit. You said a percentage of rev share. I'm assuming that revenue is fees that might be generated by the Deal. Can you tell me how much of the revenue I'm sharing?
- [27:58]
Rhett
Yeah, for sure. But one thing I want to clarify is, as Moses mentioned, a lot of our operators already have businesses.
- [28:04]
Moses
Oh, really?
- [28:04]
Rhett
Yeah. So most of them. Most of them. At this point, it looks more like growth equity than a seed equity.
- [28:10]
Chris Powers
Yeah.
- [28:11]
Rhett
And obviously given the name, we thought it'd be a lot of seating, but that's one of the things that's changed. So they may not need the money to live on. They're trying to, you know, some of them do, but oftentimes it's really to accelerate the growth in the business.
- [28:24]
Chris Powers
Okay, so real quick, is it, is it usually a one man or one woman band, or is it usually a team of three or four people already hustling?
- [28:32]
Rhett
It differs. I mean, some people have much larger teams than that. Some, sometimes it's a one man band, I would say, are the ideal situation for us is that it's a partnership. So oftentimes two people with complimentary skill set. So we've got a couple examples of folks that, you know, were the CFO of a real estate private equity firm and they partnered with a director of acquisitions. Right. And so that we really like that setup, but we're not, we've had success with, with one man bands as well.
- [28:59]
Chris Powers
So let's just say it's more of an established company. Are y' all putting some kind of value on that and saying we're now coming in to be a partner, or is it kind of like we want a percentage? How do you think about something that's already kind of existing? Yeah.
- [29:13]
Rhett
So we, we're trying to keep it simple. And I don't want to be in the business of telling people what their current operating business is worth at this point in time. So the way that it works is everything they've done to date is theirs. All future revenue is theirs. We're starting effectively a new CO now. All future real estate revenue, whether it's consulting, transaction, et cetera, goes through that entity. And then to your question, we take a 10% revenue share and then they retain 90% of it. And it's structured that way because we want to capture this, the power of people running their own business and being entrepreneurs. And I don't want to be in the business of telling people, okay, no, I don't approve that hire. It is absolutely their business. They get to run with it. And we, we take a 10% revenue.
- [30:03]
Chris Powers
Share because I'm a podcast host that's been in this business. Like, my mind's already ticking. So, like, here's a real nuanced question. If I have payroll and insurance and office leases, all in the original entity before I met you, is that now moving to new entity over time? Like.
- [30:22]
Rhett
Okay, okay, it doesn't because it's all. We have a, you know, we have.
- [30:26]
Chris Powers
A revenue share, so it's just rev share. It's off the top.
- [30:28]
Rhett
Yeah.
- [30:29]
Chris Powers
Expenses are theirs. Got it.
- [30:30]
Rhett
Yeah.
- [30:31]
Chris Powers
God, I love that. Okay, then you said we're going to give you GP and LP capital. So I'm assuming a $20 million deal. Let's call it a $20 million check. The GP would have to put up a million to 2 million of that 5 to 10%. You're saying we'll, we'll help you be that million or 2 million, and we'll help you be the other 18 million.
- [30:53]
Rhett
We, we are. I mean, we go through a process that we call pursuit notice. So let's say that an operator finds a deal. We've probably talked about this deal because we're doing monthly pipeline calls and asset management calls. So we're interacting with the operators quite a bit. But they've probably talked about a deal and they say, all right, I'm going to submit a loi. And they're free to do that. At that point they get, you know, once they want to start spending money on that transaction, then they submit a pursuit notice. And part of the pursuit notice is a model and a memo and then also a due diligence schedule and a phase raising schedule. And so we're, we're approving that. And if we approve that, then we are on the hook for most of those pursued dollars. And then the whole time we're riding alongside of them, trying to verify that that deal meets, you know, our requirements and our buy box at the point in time. And then, yes, we're communicating like we think we can raise the capital here or we have the capital for it or this doesn't meet our buy box. Maybe you should go find an alternative provider.
- [31:58]
Chris Powers
What are the economics of GP Capital versus LP capital?
- [32:03]
Rhett
So the way that it works is I'll use rough math. You basically. And by the way, whenever we talk about GP carried interest coming back to us, what we mean is comes back to the fund that we raise. So re seed does not actually get the carried interest. Basically, 30% of the carried interest will go to the receipt fund.
- [32:24]
Chris Powers
Okay, but is there a different economics on the actual capital too? Is it unpromoted on the GP side, or is it flow through the capital Stack the same way?
- [32:32]
Rhett
L.P. does it flow through the same way?
- [32:34]
Chris Powers
Okay. Okay.
- [32:36]
Rhett
All right.
- [32:36]
Chris Powers
So I get my offer. I've signed my document. I'm on. If you said you guys will sometimes call their ex employers to see how they're doing. If I went and called cohort guys and said, what is receipt actually provide you once you've signed on the dotted line, what would they say? What do you hope they'd say?
- [32:54]
Rhett
We. No, they would say we. First of all, I think it's incredibly important for people considering Cohort 3 to do that.
- [33:04]
Chris Powers
Correct.
- [33:04]
Rhett
So we. We really encourage it.
- [33:06]
Chris Powers
Yep.
- [33:06]
Rhett
I think what they would say is, like, is that they. It's a very high. It's a. It's a highly analytical bunch.
- [33:12]
Chris Powers
Yep.
- [33:13]
Rhett
They stick to their discipline because we. We should talk about when we deployed capital. Yep. Because it's been pretty lumpy. They do what they can to support us, but they largely let us run the business. Yeah.
- [33:26]
Moses
Yeah. It's an interesting question, I would say. My guess is that they would say that we are all over them is the truth of it. And I think part of that is because they're entrepreneurial people and we've done this.
- [33:42]
Chris Powers
Right.
- [33:43]
Moses
It's like you're used to just making all the decisions and suddenly, I mean, it's their business. But like, you know, and I knew this intellectually, but now I really understand it viscerally. Like our reputations, and particularly Rhett's reputation is on the line from a capital raising perspective here. And so we're like raising money from these networks that are incredibly important to us, and we're giving it to people who we might not have met until somewhat recently. Right. We, as fiduciaries, we have to be all over them. And furthermore, and maybe we'll get into this a bit later in the conversation, one of the challenges from the reseed perspective is once you have a group of operators each doing their own deals, you very quickly run into issues of data standardization and formatting and et cetera. And so we just have to be in the weeds with them, particularly early on, to establish the procedures, the checks and balances, the formats. I mean, we have a standard underwriting model, for example, that we require they use. But it's not just that. We also have a standard set of assumptions that we would like them to use in underwriting the deals. And if they want to come to us and make an argument for why one or more of those assumptions doesn't apply in the particular case that we're talking about, they need to come Bring evidence. And we're happy to have a conversation about it. But like, you're not going to tell us that there's no bad debt. We just like we own a bunch of apartment buildings and there's bad debt and so we're going to account for it. And so I think for people who are used to totally acting just on their own, I do think that that actually can feel a little bit challenging. Now the flip side is, you know, when we say we're good for the money, we're good for the money. And I think, and particularly over the last couple of years, it has not been an easy fundraising environment for independent sponsors and, and even for the people who can raise money. The idea of being able to raise like long duration capital where you're not being forced to rip and run or anything, I mean, that is really hard money to raise.
- [35:48]
Rhett
Yep.
- [35:49]
Moses
So that, and I think part of what has been interesting and part of the, the change, I would say in the sort of experience level of the people who are applying and being selected for the cohorts is people have been in the business really value that in a way that maybe they wouldn't have three, four years ago.
- [36:05]
Rhett
Yeah. I mean, one thing I'd add is that it's not a one way street. What I mean by that is like, you know, if you think about Tom and DC or Coleman in San Diego, these are guys that have been, you know, CFOs at large businesses. And so yes, it's, you know, the information flow oftentimes goes one way. But like I'll pick up the phone all the time and say, hey, this is an issue that we have. How would you think about it? So in a lot of ways, I mean, it is a peer to peer kind of relationship as well. I don't want to sound like it's like, totally.
- [36:37]
Moses
Yeah. No, I mean, I literally have learned.
- [36:39]
Chris Powers
Part of.
- [36:40]
Moses
You were talking about the cohorts. Yeah, there's. We have an operator in Kansas City who, who is a spectacular property manager and I've just like picked up operating tips that we have for sure applied in Los Angeles.
- [36:54]
Chris Powers
Yep.
- [36:55]
Moses
From him. So, yeah, it's. It's definitely two ways.
- [36:57]
Chris Powers
That's actually the cool thing. Y' all are getting like all these different learning experiences from all over the country and. Okay, intermittently we can talk about how process has changed. Let's just take this one process. We don't. I know there's multiple things that have evolved in how you guys, the systems you've built and how you think about this stuff. But okay, what is the life cycle of a deal from. If I'm, if I'm now out looking for a deal and I think I found something and you kind of said we're all over it. So how am I getting that deal through the system? What approval checks are happening? Is there investment committees, multiple committees? Like, how do I know what's my pathway to success?
- [37:40]
Rhett
Yeah. So you know, I mentioned the pursuit notice earlier. That's where it starts, right? That's when it's like officially you're submitting the pursuit notice. And as part of that there's a diligence plan that you've laid out dollars and dates of how we get from here to closed transaction. Obviously a lot of that, the timing goes back to the PSA and each market has different timelines, etc. So we sit around as a group. I mean we have legal decision making. We have the reality. The reality is that we've all of our partners are very involved. And so I can't imagine that Moses and I would do a deal if Laura was really opposed to it. But. So we'll sit around, review the pursuit notice. We have to formally approve the pursuit notice. And then you're just kind of going down the list. And you know, we have some requirements like we're, we're at all of the inspections. Right. And so when most said we're all over, it's not only like we're sitting at our desk, we're actually at, you know, we have been to all of the properties. And so from that point it probably looks like a traditional investment process where we're riding shotgun and the diligence, we're reviewing models and then we have a couple of check ins, you know, before we go the deposit goes hard. Then we have another internal meeting, just make sure that we're still tracking. And then kind of post posted, going hard. Most of the time we've done 95% of the work before the deposit goes hard. And that's when, you know, that's the most important meeting. But we do have a final sign off down to the point of, you know, Lee, the CFO will send out an email to Doug Moses and I and say, please one last time, confirm before we send the wire.
- [39:17]
Moses
Yeah, yeah. I mean, I think one thing that we have implanted that I learned at Adaptive and I actually learned it from an operator who, who we did deals with. So this is knowledge that's been passed down several times now is we have a really strict due diligence checklist. So we. Which we need to sign off and we need the operator sign off before we remove contingencies. And Reseed started with the due diligence checklist that we had developed at Adaptive, which in many ways is sort of generally applicable to apartments, but obviously also has California and LA specific facets to it. Over time, as we have encountered other issues in these other markets that we're doing deals in with Reseed, we've added to that list. So it's like a living document that over time has come to embody the experience of reseed. And so, you know, everything from, you know, are. Might someone develop something that will block the views from these apartments that we've been depending on to get good rents? Do gangsters hang around after hours? Like really granular stuff, which, you know, those. That. That could be the difference between a good deal and a bad deal. And you know, God knows I've made so many mistakes. And so the idea is to sort of try to accelerate that learning process for the operators by pushing them to kind of learn.
- [40:49]
Chris Powers
Okay, so I'm gonna keep just going back for a second. So I. I've gotten my acceptance. I now know probably immediately there's six, five other cohort members with me. Am I meeting those folks? Am I going on a retreat with those folks? Like, how am I interact? How are they becoming part of my orbit?
- [41:08]
Rhett
Yeah. So we start with launch week. And what launch week really is is that you. We hosted in Boulder. So everybody will come on a Monday and they'll leave on a Friday. The first couple days we're spent, we're kind of going back over the receipt way and how we underwrite, just making sure that we're on. On the same page. But they're also doing some social events so that relationship starts and that they feel comfortable picking up the phone when they have issues. And then in the back half of that week where they start to tell their story. And we bring in a lot of our capital providers so that they can. They can do two things. They can start to tell their stories to the capital providers will, you know, when they see a deal from them, they'll recognize them. But also it gives them a chance, what I think is pretty unique, to ask questions in a space to people that are potential clients of theirs and they can ask them anything they want. And so we spend a week together. Part of that's with some of the capital providers, but most of it's just with the Reseed team.
- [42:10]
Moses
Yeah. And then over time we do cohort calls where we will talk about issues in the business. Sometimes we'll bring in speakers to address specific issues that they've seen or that we're seeing in the cohort. Obviously, there's sort of a check in where everyone talks about how they're doing, but the idea is really, as Red put it, to kind of foster relationships among them. Because there's. There's a lot of. There's a lot of. There's a lot of knowledge there certainly coming in. There's a lot of knowledge. And then over time, as they. As they do do deals with us, like, they're all learning together.
- [42:46]
Chris Powers
Are they on, like a slack channel together or like.
- [42:48]
Rhett
Yeah, yeah, they are.
- [42:52]
Chris Powers
Okay, we're gonna get to, like, what happens when you cl. Once we've closed. But I wanted to just talk about the real estate market for a second. So when we recorded, I think this probably would have been late 22, the market was changing pretty drastically. And I think even as I checked in with you all that year, I don't know even know if you did a deal the first year. Yeah. Which was probably like, shit, we just launched this thing. We gotta get going. Yeah, Moses, like I said, you've been. You've been on the sidelines for a few years in la. You're finally starting to dip your toe back in. So let's just have, like, a market talk, irrespective of. We can talk about how that impacts reseed. But, like, what have y' all seen in multifamily at the assets that y' all are going after over the last three years?
- [43:35]
Moses
Yeah, so we.
- [43:36]
Rhett
I think it was 23 when we sat down. Okay. And I can. I can remember a point in December. So we, you know, we launched the business in March. First cohort was in August. And I remember in December, I was leading the weekly meeting and I was like, are we ever going to buy a deal? You know, it's like I literally. That came out of my mouth and so, you know, it's changed a ton. I mean, so we didn't do. We didn't do a single deal in 23. We looked at a lot of deals. Yeah, we did one deal that's relatively small in 1Q24. And then the. The kind of 3Q24 is when we started getting really active. So a lot of our activity has been over the last 18 months. And that's when you talk about the market opportunity. Obviously, our original hypothesis, when we looked at the market, we said, okay, there's a lot of the sun belt that we love what's happening in terms of population growth, but the pricing really isn't reflective of the supply conditions. The operating fundamentals hadn't really turned over quite yet. And so we expected a lot of distress. We haven't seen as much distress as we thought. But that hypothesis of the Sun Belt really getting weak. I mean, you look at what's. Obviously what's happened in Austin, that's crazy. Denver's a very difficult place to operate right now. But most of our capital, we've deployed in the Midwest, a little bit in Washington, outside of Washington, D.C. and then San Francisco and San Diego. And those markets have performed very different than some of the markets here. So I'd say the. Now we're getting really excited about what's happening in the Sun Belt because you look, I mean, we were talking about this morning breakfast. We're starting to see deals where pricing is kind of 25, 2015, 2016 levels. And so I think the market opportunity is changing in terms of where the opportunity to cap.
- [45:40]
Moses
Yeah, I think, I mean, maybe we should zoom in on San Francisco. That's. That's been a real bright spot. We bought two deals there. We'd love to, love to buy more.
- [45:47]
Chris Powers
Let's do it.
- [45:48]
Moses
It's, it's, you know, obviously San Francisco was bombed out during COVID I mean, you name it. Obviously the jobs people went remote. The law enforcement situation was a disaster. But a combination of some turnover in city government and then obviously the AI boom has really, like, transformed the city and we were fortunate to get it. We have a very strong operator there. You know, perfect example of the kind of guy we're talking about, like, had an institutional background, but also has. Comes from a real estate family. So he's like kind of. His dad's a contractor and a developer. Like, like a guy will swing. His dad will swing a hammer. He doesn't swing a hammer. His dad will swing a hammer. But, but real, like, perfect combination from our perspective of like, really analytical kind of institutional background, but also like, absolutely an entrepreneur. And he just has sniffed out so far two great opportunities of buildings that are. They're old buildings. They are in different ways underutilized with opportunities to add units and fix up units and everything. So then those are some heavy lift deals. But, man, the yields that were underwriting there for really high quality real estate, you know, post, post renovation, you know, we're talking like mid sixes or north.
- [47:12]
Chris Powers
Of that in a market that traditionally does what.
- [47:15]
Moses
I mean, these are, these are like. I mean, this four and A half caps, you know, five caps. When things are bad, I mean it's a, that's a place that people really want to own real estate and, and these are deals that probably certainly when they were done and even maybe the institutions are coming back into San Francisco because everyone sees the story now. But, but at the time that we kind of bottom ticked it I would say and you know, would love to buy more but even, even just those, I mean just I could not be more excited about, about how.
- [47:45]
Chris Powers
So let's zoom in on just those real quick. So you had said earlier we're buying them all cash. Business plans complete. He's knocked it out of the park. We're at a mid sixes. Are we refined ever? We pull in cash out.
- [47:56]
Rhett
Yeah, we are. I mean almost all the business plans. Assuming that we stabilize with an appropriate spread. We can't control the debt market. Right. Then we'll return a significant amount of capital once it's stabilized. Yeah, I mean a big part of our, we're not opposed to using debt, debt and acquisition. It's just a lot of the time we're buying assets, you know, we expect rents to go up a lot because of what we're, what we're doing and the difference in the risk profile of a deal. If you lever that in the beginning and you don't have tenants and you're, you know, versus levering it at that, the point at which you stabilize. We think the risk profile is like, it's totally different and it, it doesn't change the IRR as much as most people would think.
- [48:38]
Chris Powers
Okay, are there any markets that you won't touch?
- [48:44]
Moses
We've stayed away in recede from LA in part because LA has been challenged over the last five or so years.
- [48:52]
Chris Powers
I just figured it was because you already had it conquered.
- [48:55]
Moses
Well no, I did not have it conquered. I don't know if anyone has it conquered at this point, but partially. I'm not sure I wanted a conqueror create competition for myself and my own. Because part, part of what's going on here is I really am an open book with the operators in terms of down to, you know, we're looking at a deal with, with one group right now where it's changing the use of a building and it's, it's an area that I happen to know pretty well and we're, you know there's, there's all kinds of implications around seismic retrofitting and changing stucco. To be able to. Because you're going to have to shear wall then that allows you to put windows. I mean, this is real in the weed stuff that I've learned at high cost in several cases. And so I want to be able to be like totally transparent with the operators about what we know about this kind of stuff. And I just, I don't, I wouldn't feel great about a kind of growing someone in LA to compete with me.
- [49:53]
Chris Powers
So not la. Is there anywhere else in the country you wouldn't go?
- [49:56]
Rhett
A couple markets that we.
- [49:57]
Chris Powers
Alaska, probably not going to Alaska.
- [49:59]
Rhett
I mean, there's some, some tertiary markets that we definitely won't go. We said that we wouldn't do New York and we wouldn't do Chicago. Out of the gates, it looks like New York was probably the right call and Chicago is probably the wrong call. But those. There are a couple markets that we just looked at and said, hey, from a regulatory and, and fiscal situation, we're not going to play there.
- [50:18]
Chris Powers
What happened in Chicago?
- [50:20]
Moses
Rents have, rents have gone crazy in Chicago.
- [50:22]
Rhett
Yeah.
- [50:22]
Chris Powers
Scott just bought a big deal in Chicago. That's interesting.
- [50:25]
Rhett
Yeah.
- [50:26]
Moses
Yeah.
- [50:27]
Chris Powers
Okay, real back, real quick back. So 23rd quarter, 2024 hits. What had happened in the market at that point that you think, okay, the doors started opening up. Were people getting fatigued? Were, you know, maturities coming due and people are ready to finally move? Like what was happening?
- [50:43]
Rhett
Yeah, I think it's just fatigue. I think it really was fatigue. I mean, every situation's nuance. We had one situation where there was a foreign lender that decided to exit the, the market and that created a forced seller. You know, a lot of what we see is that families have owned assets for a very long period of time and they start really milking the asset very hard. And so they ignore the capex and then at some point it almost becomes obsolete in terms of the product.
- [51:10]
Chris Powers
So.
- [51:10]
Rhett
And you know, they've, they've, it was strong in terms of rent growth, so they're able to hide it. And then the minute rent growth changes, all of a sudden they're not competitive and you know, margins get squeezed. Yeah.
- [51:21]
Moses
I also say the, the substitutional world, for those who are listening who have not played in it, you would be amazed at the incompetence of owners, brokers. I mean, a lot of the stuff that we've bought, the processes have been busted.
- [51:39]
Chris Powers
Yeah.
- [51:39]
Moses
So it wasn't even, it maybe the assets maybe weren't being run optimally. But separate from that, the stuff deals advertised on like the, the residential section of the mls.
- [51:52]
Chris Powers
Yeah.
- [51:54]
Rhett
True story.
- [51:56]
Chris Powers
Being inefficient.
- [51:57]
Moses
Yeah. Like so it's so, it's not, I mean, the person wasn't distressed. They just hired a broker who just didn't know who to call to sell that kind of asset.
- [52:06]
Chris Powers
Yeah.
- [52:07]
Moses
And, and that's part of one of the virtues of, I mean, we're, we're, it's sort of a heavy lift to do what we're doing, which is like set up and capitalize all these different independent operators all over the country. Like there' real cost of that. But the benefit is we got a bunch of scrappy people running around who really know their markets, who are constantly looking under every rock. And we have another deal that we're looking at now where, you know, the opportunity exists because the, the people who own it don't understand the zoning.
- [52:37]
Chris Powers
Yeah.
- [52:37]
Moses
And so you don't. They don't know what can be done with. And no one. And they're, they've owned it for a long time. They're tired and they just don't know what they have. And it's, and, and neither does their broker. And so anyway, so in this world there could be plenty of interesting opportunities even if there isn't that much distress.
- [52:57]
Chris Powers
You said something about buy box. Is the buy box a few square blocks? Is it a state, Is it a city? And let's say we've done really well. And I know this is just kicking off, so maybe there's not precedence for this. Can my buy box grow over time?
- [53:12]
Rhett
Yeah, I think there's two parts to the buy box. There's the quantitative. What yields do we think we need in order to transact in a certain market? And then what are the physical characteristics? And then I think when we talk about geography and expansion, we're absolutely open to that. But it goes back to like, we have to have confidence that you know the market as well as anyone. And so we do have people that are looking and multiple markets, but they've, they have experience in that and, or they've done, done the work to get up to speed.
- [53:45]
Moses
That is actually one of the things I think we've learned is we are, I think we're, we're, we're more insistent that the operators really be in their core market. Yeah, it's, you know, obviously people have done well investing all over the country. There's no question about that. But for these smaller deals, it's pretty important that you be able to get in your car and go over and meet the property manager to see if they're screwing up or the contractor or whatever. So while we are certainly open to people who are doing multiple markets, we would like them to actually be in one of them and really be an expert in that market.
- [54:24]
Chris Powers
Is there a deal that's too big? Like, I know that the, the returns and the inefficiency are in the niches, but you pick a market like Austin where it's like, in free fall, there's probably going to be a $50 million deal that you go, this pretty much checks all the boxes. Would that work? Or are you just saying we want to stay small?
- [54:47]
Rhett
We'll largely stay small. I mean, there's less likely that that happens right at $50 million. But I would say that our average transaction size has been a little bit larger than we originally thought. And we expect there'll be plenty of people that do go upstream over time. But right now we're trying to stay in that kind of sub $20 million.
- [55:08]
Chris Powers
So what kind of, what kind of. If we just got down to real summary of underwriting, what type of spreads are you looking for? Like, what's passing right now?
- [55:18]
Rhett
So I think there's. We think about it in two ways. I'll give you a little bit of nuanced answer and that I think there's. There's an absolute yield that we're trying to hit some number north of six and a half, usually on a stabilized basis, not upon entry, but when we.
- [55:31]
Moses
When we stabilize and actually, let me just jump in to say conservatively underwritten and every. Everyone says that, but we really like it. We're not messing around.
- [55:40]
Chris Powers
I, I've listened to your writing for so long. I'm like, he's never going to get it.
- [55:45]
Moses
Well, we're just, you know, you, you see enough, like, you see enough assumptions in these things, and you're just like, this just does not.
- [55:52]
Chris Powers
And the truth is they don't work. People in this industry will lie to themselves like you've never believed.
- [55:58]
Moses
Yeah, exactly. And, and look in, in the incentives particular, and particularly in. Since we are providing all or almost all the capital and the operators are getting fees and promote, we've created an incentive structure where they should want to just do deal, deal, deal, deal.
- [56:15]
Rhett
Right.
- [56:16]
Moses
And we understand that. And so it's on us to be the check to make sure that we're not doing stuff that's dumb. Now, we'd like operators who also have an investor mindset, but we have to be mindful of that incentive that we've created for sure. So, so anyway, so that. Sorry to interrupt you, but very important to. Because there's six and a Half can mean, as we all know, six and a half can mean different things.
- [56:38]
Rhett
Yeah.
- [56:39]
Chris Powers
Yep.
- [56:39]
Rhett
And I think it's, you know, 150, 200 basis points above market cap rate is, is ideal, I would say is, you know, if you look at history as if, if rates go up, it's less of a spread analysis, more of an absolute yield, and spread goes down. We lean more into the, you know, because if you, if we get back in the interest rate environment like we had in 2021, you know, you can finance in the twos. I'm still not buying things in the fours. Right. So we're, we're. It really depends on the interest rate environment.
- [57:06]
Chris Powers
And that yield just is different by market.
- [57:09]
Rhett
That's right.
- [57:10]
Chris Powers
Yeah. What would be like a South Detroit yield versus a San Francisco yield?
- [57:14]
Rhett
Well, I don't know that we're going to South Detroit.
- [57:18]
Moses
Suburban Detroit.
- [57:20]
Rhett
Suburban Detroit. Okay.
- [57:21]
Chris Powers
I knew it was an ash.
- [57:22]
Moses
So this actually, this is an interesting. This is interesting. And I didn't.
- [57:25]
Chris Powers
Down on eight miles.
- [57:27]
Moses
No. And this is, this is on me for being, you know, ignorant about America. I had such misconceptions about that market because, you know, you read all the horror stories about what used to be going on in Detroit, although Detroit Metro Detroit City is actually doing pretty well now too. But we went out to go look at the suburbs of Detroit and it's just like town after town of this like wild affluence. I mean, there's Porsche dealerships, there's yoga, there's great coffee shops and restaurants and I had no idea. And meanwhile there's just all these little apartment buildings in these really affluent suburban towns that are not being bought by institutions because they're too small or older or whatever. So anyway, the opportunity is there. But not in, not maybe not in South Detroit.
- [58:16]
Chris Powers
You guys said, when we were taking notes, you said this concept on what's gone. Right. You put in quotes, default alive. What does that even mean?
- [58:24]
Rhett
It's really referring to the operating company. So if you're, if, if you're making money, you know, you're default alive. You have a lot of optionality in the business. If money, if, if our operating business is losing money.
- [58:36]
Chris Powers
Yeah.
- [58:37]
Rhett
Then you know, you're default debt. That's the way. So the operating businesses now will be profitable.
- [58:43]
Moses
Yeah, that's. I mean, that's. Let me just make absolutely clear. So in the beginning, people were taking these bets on reseed.
- [58:50]
Chris Powers
Yep.
- [58:50]
Moses
They're going to make this deal with us. We're going to this permanent partnership. But they don't know that reseed's going to exist.
- [58:56]
Chris Powers
Ah, got it right.
- [58:57]
Moses
We have now got to the point where we've deployed enough capital and the fee stream coming into receipt itself is more or less efficient to pay all of receipts itself costs and, and I.
- [59:11]
Chris Powers
Know this is private, we're not going to name names. I will say as somebody who's a little more intimate, you guys have incredible LPs but what if I'm sitting here going they are going to give me money. What's the profile of LP as you continue to raise money? Where's is this syndicated individual checks that you're just hurting together? Are these family offices institutional? Like what. And what kind of money am I taking if I'm taking money from you?
- [59:35]
Rhett
Yeah. So I would say there's two avenues and we really think about we have to match the type of money and what they're looking for and the deals that we're looking for. And the common thread is long term tax efficient. Most of our significant portion of our capital has come from large single family offices or multi family offices. But we do, in almost every deal we do do a syndicate where we take checks of 100,000, $200,000. But most of the capital has come from single family offices and multifamily offices.
- [60:08]
Moses
And part of that the sort of syndicate strategy and as you know, because you've done it and I've done it, it's a lot of work to take small checks and to be honest we don't really necessarily need that money but it is useful to allow people to try us out with a relatively small.
- [60:27]
Chris Powers
Check size that you could grow into.
- [60:29]
Moses
Yeah, exactly. So it's a bit of a, I don't know, maybe it's almost like marketing effectively.
- [60:34]
Chris Powers
Yeah, asset classes. We've talked about multi. Have you ever thought about retail, industrial, anything else?
- [60:42]
Rhett
We have. I mean there's probably a few segments that are so capital intensive that we probably, you know, hospitality, et cetera that I love but we probably wouldn't.
- [60:52]
Chris Powers
You just, let's. We'll just stay at them for now.
- [60:54]
Rhett
Just sleep in them and so, but you know, so multi. We own one industrial asset today. The next Cohort 3 will have a number of operators that are largely focused on industrial. So right now it'll be multi and industrial. I think, you know the big vision for this business is that we can operate. We think that if we prove that we can generate good returns and we're, I think we're well on our way there, then we can expand to additional asset Types over time and multi tenant.
- [61:25]
Moses
Industrial as I learned from you.
- [61:26]
Chris Powers
Yeah.
- [61:27]
Moses
Is in many ways like, fits very nicely with multifamily in the sense that the tenants are fungible. You're not taking binary vacancy risk, not super capital intensive. You don't have to keep putting money back into the deals for the most part. So that's a nice fit with what we're doing.
- [61:45]
Chris Powers
All right, so we've made it through pipeline, we've bought a deal, now we're operating. What's your requirement on property management? These things aren't always especially sub institutional property management. I would, if I was going to poke a hole in something I would say it's not like you have an on site person, an on site maintenance person. This tends to be where novices get hung up. Now you're not letting a novices in through the cohort so we can get rid of them. How do you all think about property management? Because you can buy a great deal and it goes south if you can't manage it.
- [62:18]
Rhett
Yeah, I mean we, we could probably fill a couple podcasts on this. We got time on this question. So I mean look, I think that in the institutional world oftentimes there's a bright line between property management, asset management. I think in our world you can't really allow that to impact you. So some of our operating partners have property management businesses. We spend a lot of time making sure we're comfortable with those before we, we buy a deal. We always have the chance. You know, we, we could choose a different property manager but oftentimes if property manager has, sorry, an operating partner has a property management business, they will. Hi. You know, we'll hire them as, as the property manager in the event that they don't. We have a very active asset management kind of guidelines and templates. You know, they're meeting with the property managers weekly. Their set agendas that we, that you know, we've weighed in on. They've got accounting standards that they have to meet. So it's a, it's a pretty comprehensive process. And the thing that we talk a lot about with our cohorts is this notion of intensity. And it is incredibly important that people take a very proactive stance in asset management even if it means they're bleeding into property management. You know, I, I think we both know Gabe Bode and he spoke at our first launch week.
- [63:42]
Chris Powers
The best.
- [63:43]
Rhett
Yeah. And so I mean one of the things that he says, he always requires logins for his. When he hires a third party property manager, he's always going to have access to their system, whether it's appfolio, et cetera. And so our folks are doing things like that to make sure that they're obsessed with lead conversions, response times like getting really done.
- [64:04]
Moses
But, but even with all that, part of what Rhett's describing is a reaction to the experience that we have had, which has been variable being, you know, being candid.
- [64:13]
Chris Powers
Yeah.
- [64:14]
Moses
You know, you're talking about sub institutional property managers. There is a very wide variance in terms of quality of the accounting teams. One, one aspect that I think that we, we have always appreciated adaptive and I think that we have now come to real to appreciate a receipt is the incentive structures that are created not just by the property management agreement, in other words, between the management company owner, but also the incentives faced by the employees within the property management themselves. In other words, it is not enough as the owner to say, well, you know, we're going to have a nice generous leasing commission that gets paid to the property management company when they fill a unit. Right. Who actually makes that commission? Who in the right. Because if, if, if the, if the property management company is taking $1,000 to lease the apartment, but the actual leasing person is only getting $100, there is an incentive created there, but it's not necessarily the incentive that you would like to have created. And so it's been a lot of, it's been a lot of sort of getting. It's not just looking at the reporting that's coming out and giving instructions, but it's really like getting under the hood inside the property management companies themselves, looking at who specifically is doing the work. Are we comfortable with them, in some cases changing the vendors that they're using? I mean, we're really having to get in the weeds there. And I think probably to an extent that we maybe didn't appreciate when we started the company.
- [65:50]
Chris Powers
You've said heavy asset management and you've also said in this asset class, it kind of. In bigger assets, it's like asset management property management. We can talk about even the problems that exist there. I've got plenty to name, but here, let's picture there. Kind of maybe it's like a Venn diagram. There's a middle. Can you just explain a little bit more maybe what's different and sub institutional versus what you might see at the, at the bigger level?
- [66:16]
Rhett
Yeah. I mean, you mentioned that oftentimes they're smaller assets. You don't have people on site.
- [66:20]
Chris Powers
Yeah.
- [66:21]
Rhett
Right. So one model that you've seen a lot of people try is that you know, it's all virtual tours, right? Like part of your asset management duty is to say, like, first of all, we're not going to do that. We're going to have people that's on, somebody that's on site. You're, you know, when let's go to lead. Maybe it's easy to talk about lead gen. So let's say that you hire a third party manager and you know, they've posted the units on the various websites. How quickly should you expect the property managers to respond? Like that is a metric that you should know, you should lean into, you should monitor on a daily basis and you should be pushing them on that. So it is, it's not like, hey, at the end of the month we had 12 tours and we converted two people. It's like on Tuesday we had two leads and we took 30 minutes to get back to them. We converted one. And here's the pricing, right? So it's just a level of detail and granularity and that's just leasing. We can go across, you know, maintenance and accounting, etc. We just expect them to be in the weeds.
- [67:25]
Chris Powers
Yep.
- [67:27]
Moses
Yeah. I think one of the, one of the, actually one of the interesting challenges that we've had with the operators, I think this is a challenge across for all real estate operators. When you buy a deal with a pro forma, okay, it is very easy and understandable for you to get hung up on getting the rents that, that you perform it. You know, you promised your investors that you were going to get these rents, et cetera. But in real life, sometimes it doesn't happen. Sometimes you deliver the building and it's Christmas and you're just not. There's just not enough tenant activity to get the rents. And so one of the challenges for us has been to really make it clear to the operators that when we signed off on moving forward and buying the deal, we're now, we're partners, like we signed off, we are in this with you. Like we all agreed to buy this thing. Okay? And if that means, and if, and if subsequently the market is telling us, because it's Christmas or whatever, that the rents that we can get are lower than what we pro forma'd, that's life. And we need to go and adjust our expectations and meet the market and lease the unit and we'll move on and we'll raise the rent next year. You know what I mean? And so that has been, I think, and it's one thing to tell the operators that, but to really get them to understand that we're not angry at them. We don't think they're jerks like we signed up to for the same projections. And that's been. I think. I think now they have. They do understand that we're on the same team in that regard. But the reason I bring this up is because it's extremely. Rent. Any space but apartments, It's a perishable asset. You miss a day of rent, you can't go back and get that right. And so it's literally insane to sit there with an overpriced unit. So someone needs to be paying attention. Okay, is the advertising good? Is the marketing good? Is someone picking up the phone? And then if those two things are true, then you can monitor the lead traffic. You're getting, how many inquiries are getting, how many tours we're getting. And if you're not getting enough action, cut the price. I mean, there's not. There's no secret other thing that you could be doing. Yeah, right. And. And there. But there. There is this. This tendency to not want to do that. And so we're. We have to kind of, like, hold their hand and be like, it's okay. Like, we're all big boys here. What we care about is the cash flow, not the. The optics of, you know, you hitting 1400 because you don't have sell next.
- [69:53]
Chris Powers
Week or next year.
- [69:54]
Moses
Yeah, yeah, exactly. Like, go fill the unit with a good tenant and let's move on, you know?
- [69:59]
Chris Powers
Okay, so we're operating. What's my cadence of reporting to y', all, and what are y' all expecting to see from me? Is it monthly, quarterly, weekly? Please don't tell me daily.
- [70:09]
Rhett
I'm quitting. Definitely not daily. Unless we're in diligence. Yeah, we're trying to get through. I mean, it's. So we do have formal reporting on a monthly basis, but we have two meetings a month that we're in front of you. So you'll. One's designed to be a pipeline meeting, one's designed to be asset management. But the reality is those two things play together. Yeah, certainly play together. And then you'll. You're expected to meet with your property manager at least weekly. We should get some notes from that meeting. Just make sure we're tracking. And then you're. When the. We have this financials guidelines or accounting guidelines, and you're taking the first review of whatever the property manager has given us. We have a. Our CFO and controller is also spending time on that as well. But largely, it's kind of a bi weekly basis that we'll meet formally and then I probably talk to two or three operators a day. You know, they're calling for, you know, ask about strategy or capital or buy box, et cetera. So we a lot of informal connections as well.
- [71:11]
Moses
And I expect, I think, you know, the cadence varies too. Right. Like particularly early on, if it's the first deal we've done with the operator, we are going to be all over them. And particularly if it's a value add deal where they're making decisions about construction agreements and things like that over time as the assets stabilize and they demonstrate that they know what they're doing and that they have a property management company that knows what it's doing. Of course we can sort of ease off a little bit.
- [71:37]
Chris Powers
We don't spend a ton of time on it, but we. It is a critical piece of the puzzle that can often get sideways quick construction. So again, do a lot of these operators you're working with have construction in house? Are they hiring third party people? How do you keep people on budget? Like this is something that the greats get really do really well and this is where something gets sideways really quick.
- [72:03]
Moses
Yeah.
- [72:04]
Rhett
So I don't think any of our operators have construction in house. We and this Laura spent a lot of time on obviously leveraged a lot of Moses experience. But we, and that's kind of when we're not going to go a month. Like if you have a large construction project. Well, maybe I should take a step back. If you're presenting a plan to us that's a heavy value add. Before we say yes to that, we're thinking about your ability to execute it and your experience. Right. So Moses mentioned the guy in San Francisco. He's been around construction sites since he was a little kid. Like we felt very confident and he's absolutely delivered. If you've largely been an excel jockey your whole life and then you're coming to the real estate business and maybe done some small Renault, we're not going to go to a full scale renovation. It's just not going to happen. But we put a lot of systems in place. We're tracking budget to actuals by line item and then before you get the next construction draw, it looks very similar to what a bank would do. Right. So we're asking for lean releases and we're looking budget actuals, we want pictures, et cetera. So I mean the processes for on the construction side, they're all out there. It's a matter of like most people get in a Hurry. And they're not willing to follow them. I mean, I can give you a live example. Some of our operators were probably a little bit annoyed and we said, look, we have to have Lean releases on every draw, right? And they're like, well, we're dealing with small time contractors.
- [73:33]
Moses
Too bad.
- [73:34]
Rhett
Yeah. So we actually brought a guy that has a big business down in Orlando, just a guy that met through ypo and he came on a couple of months ago and talked about his experience where he lost a lot of money because he didn't get Lean Releases. And so, you know, that helped enforce the message. But too bad.
- [73:55]
Moses
Yeah, well, I mean, because it's our, it's our money. I mean, it's, you know, you can't. We just can't have, we just can't have disasters. Another thing I think that we've done well with is specifically around negotiating construction agreements. Yeah, we, I think we bring a lot of rigor to that process. I mean, we're just, you know, you've probably read me, right, about this. Like, we're, the contractor is gonna, you know, is, is gonna, we're not gonna put ourselves in a position where the contractor's got our money and they owe us work. Yeah, right.
- [74:27]
Chris Powers
Yeah.
- [74:28]
Moses
Like, so we're just not gonna do that. And so we're like paying attention to how. And, and to, and by the way, to do that requires like carefully reviewing the construction agreement and making sure that the progress payments match up to objective milestones in the construction. And also at the same time, thinking about what the contractor's margin is overall on the project, such that he's not magically in profit, you know, at draw three or whatever. So helping the operators. And some of the operators have plenty of experience and don't really need that much help, but some of the them definitely, definitely do need those kind of interventions.
- [75:06]
Chris Powers
Okay. Something I think about is, all right, we have five or six in a cohort. Originally I was kind of thinking, well, okay, probably each operator is going to get 20 million allocated. But the reality is, in a cohort of six, there's always going to be your shining star. I think, Moses, you called it the power law. Again, we only have a few years of operating, but eventually it's just like in Y Combinator, you get your door dashes and your Airbnbs and you get some. That. How do y' all think about capital allocation? Is it really just, we're gonna pick the best six and if one or two kind of break out, they might start getting like, is there a Promise that everybody gets capital forever or do you kind of fit a power law dynamic?
- [75:50]
Moses
And let me, let me just also say that obviously there, there are, you know, some operators we mesh with better than others. Like that's just the nature of reality. But there's also, they are facing very different market opportunities. It is like it is going to be the case that some markets are going to present more and larger, more, you know, attractive opportunities than others. And so the, how the, how the, the money actually gets put out in what proportions, it obviously to some extent reflects our comfort with the operators themselves, but it also is unavoidably just the markets. Like, you know, it's not like we don't. No, we like these guys. We pick them.
- [76:31]
Rhett
Right.
- [76:32]
Moses
But sometimes there just aren't deals.
- [76:34]
Rhett
Yeah, we have some high level constraints in our fund documents of concentration limits by operator, concentration limits by geography. We're a long way from those constraints. And so if we find great assets that we want to own, then we're happy to really lean in.
- [76:52]
Moses
But yeah, and I think one of the, but the things that's exciting about the model, particularly from the perspective of the LPs who invested in the fund that we have that takes the stakes in the operators and provides the GP capital is you can imagine getting one or two breakout successes where you build these asset management platforms that turn into the next forward or get used to a billion or more or whatever. And that's really exciting. And we, you know, so to the extent that we run, we find ourselves with one of those opportunities, we are for sure going to lean into it.
- [77:30]
Chris Powers
So essentially y' all are becoming, if there is a sub institutional professional real estate operator that is wanting to start, they should. It'd be very silly of them not to try and talk to receed first like you are becoming the go to for first. First time company owners, obviously not deal doers. Come talk to us before you go launch your platform.
- [77:55]
Rhett
We hope so. That's the brand we're trying to create for sure.
- [77:57]
Chris Powers
Okay, so let's just kind of talk about what the future would look like. So even if we, you know, maybe more people that listen to this are familiar with Y Combinator, they probably started out with one cohort a year. Now it seems like every two months I'm getting an email that there's demo day. Once you go to one demo day, they keep you on the list forever. Do you want to do more cohorts a year? Do you want to do multiple at one time? Do you want to separate them by geography? How are you thinking about just cohorts going forward over a. Let's, let's answer these in like 5 year vision, 10 year vision type things.
- [78:31]
Rhett
So this is where we, the model has changed a little bit and that I think the first time we were on we said, you know, we'll do five day people and a couple times a year that was probably a little bit naive. And what I mean by that, it just takes a ton of work to integrate people. And also the positive side of it is we don't need as many. If we have five cohorts or five people in a cohort and they're doing a couple deals a year and they're using 10, 20, $30 million equity, the numbers get pretty big pretty fast. And so I think there's a realization that we do, we just don't need to, it doesn't need to be as frequent and it doesn't, the class sizes can be smaller. So we've actually slowed it down. But I think the, you know, the five year vision is we're going to meet the opportunity. Right. So if at some point self storage is something we get really excited about, we think that, you know, we've, I've done some self storage investing. We think we can go there. Yeah. So it's kind of like we want to execute on the business plan that we have now. We want to prove that it works. We want to kind of methodically expand. But we're, I mean as you, you know, both of us really well, we're pretty conservative guys. Yeah. So our risk is probably actually holding it back a little bit more than the risk of like being too aggressive.
- [79:50]
Moses
Yeah. And I, you know, and both of us, I would say are like militantly opposed to setting capital deployment targets.
- [79:57]
Chris Powers
Yeah.
- [79:57]
Moses
You know, and I think you saw it with our discipline in the first, first year or so of the business where we really didn't buy very much despite the fact we were burning money on the OPEX side at the receipt level. So we're just not going to do stuff that we think is dumb. And we are aided in that by the fact that we're default alive again. So we're at the point where got enough money coming in in terms of fees to reseed itself. And if we have to go through periods where we don't deploy that much, that's okay. I mean obviously our preference is we want to grow but, but we're just the north stars. We're just not going to do dumb stuff.
- [80:32]
Chris Powers
One thing that's just been a common thread is obviously learned a lot in three years. And as you think about going forward, one thing I really didn't ask is when I sign up am I getting like a folder of documents or like you're kind of here's the reseed playbook from day one. And then I kind of just want to ask internally from y' all side, like what are the systems and processes that you envision needing to build out over the next five years? Because in five years if we do this again, you're going to have a hundred operators all over the country sending deals in. I mean you can, I mean we can talk about all the choke points that will exist. How do you think about it from that perspective?
- [81:11]
Rhett
Yeah, so we really separate when it comes to systems. We think about non negotiables and suggestions.
- [81:17]
Moses
Right.
- [81:17]
Rhett
So and you know, the non negotiable is the model, our OPEX study sales comp model. Like how we do that. You're going to do it in that format because we, you can imagine if we let all the operators have their own model, the probability that we get that right is pretty low.
- [81:35]
Moses
And by the way, just to step in, that is a problem that we are solving from the capital's perspective too.
- [81:40]
Rhett
Right.
- [81:41]
Moses
As a family office, even if you have relationships with a bunch of operators you like, they're all sending you stuff in different formats, they're capitalized differently, the fee structures are different. How do you even just normalizing that to begin to say okay, like from a risk reward perspective, what, which of these should we do? Yeah, that's a really serious analytical challenge. And my bet would be that mo even most family offices are not equipped to really. So part of the value added receipt is that standardization that we're doing.
- [82:14]
Rhett
Interesting. Yeah. So you got accounting guidelines. We mentioned the model. Like those are things that are just non negotiable things that are suggestions are, you know, we've got folks on Buildium, we've got folks on Appfolio, you know, different property management softwares. We can't mandate that but there are certain preferences that we have. So. And all of that's delivered via basically like internal wikis. Right. Whether it's in the Slack channels or on SharePoint where there's, you know. And once again Laura does a great job of this of like here's the guidelines, here's the supporting evidence, here's how we need it presented and then, and those are resources or libraries for you to go tap into.
- [82:54]
Chris Powers
When's the next cohort?
- [82:57]
Rhett
We are going to hold launch week in April. I think it's the third week of April. So we are dead in the middle of interviewing and going market visits and working through the list of applicants.
- [83:10]
Chris Powers
Well, this goes out in four days or on Tuesday next week. So is there still time to apply or is this gonna be for next year?
- [83:19]
Rhett
It'll probably be for next year because we. I mean, we've technically closed applications.
- [83:25]
Chris Powers
We'll see about that.
- [83:27]
Moses
Breakfast this morning, we were like, well, if one came in, you know.
- [83:31]
Chris Powers
Yeah. All right, guys, this is awesome. It's been really fun to see the last three years. Obviously, always reading for you guys and appreciate you coming down to Fort Worth. And to anybody wondering, Moses will be in a cowboy hat tonight at the rodeo. We are getting him in a cowboy hat. Rhett. Rhett's been to one already, but we're getting Moses in one.
- [83:51]
Rhett
Yeah. Chris, we can't thank you enough for hosting us. It was really helpful, as Moses mentioned in our. The first interview. So really appreciate you.
- [83:57]
Chris Powers
Appreciate it, guys. Thanks.