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- [00:03]
A
The model doesn't mean anything if you're an lp. The GP will say, the model looks great. That means fucking nothing.
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B
Welcome back to the Promote Podcast, your insider guide to the money and mania of the CRE markets. I'm Hitan Samtani.
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A
And I'm Will Krasnyy.
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B
A shout out to our sponsors, Bravo Capital. They're a leading HUD and bridge lender with extensive experience in both the multifamily and sniff worlds.
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A
And Loan Boss, the best in class, CRE debt management software.
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B
This week, we wade into the underbelly of restructuring, looking at Pimco's $1.8 billion lifeline on its disastrous office building bet. It's a valuable lens into the shenanigans that can happen deep in the nethers of the capstack. Next, we got to revisit the saga of Scott Everett, the multifamily syndicator who's now declared that his $400 million fund is a donut zero return of capital. Look, we sensed this was coming, but it still hits.
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A
Just like those margaritas in Cabo. Some housekeeping before we get going. First, doing the mailbag. Still, I would have done it already, but we didn't get enough questions.
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B
Not enough love. What's going on?
- [01:15]
A
We have way more listeners than when we did this last time. We should have gotten better and bolder questions. I'm like Ron Burgundy. I will answer any anything you put in front of me. So email podcasthepromote.com with any questions about not just real estate, anything. I will answer two reviews. We love reviews. So Apple, Spotify, write whatever you want that doesn't matter, but five stars, so it's a loophole. So even if you hate us, you can write that, but give us five stars.
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B
And three, we're opening up a sponsor slot for the punch list. So you can hit us up@partnershipsofthepromote.com if you want to get involved.
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A
That's partnershipsthepromote.com and before we get into all of our stories, the aforementioned punch list, our signature rundown of the newsiest news, and cre.
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B
All right, baby. Ab. AB and Sons, the mighty office and retail landlord out of New York, RFR Realty. A.B. rosen. I'll buy it to Will. So if you remember, RFR is Rosen Fuchs Realty. Now, the Fuchs is, of course, Michael Fuchs, who had been hearing that he was out of the picture and so started digging around and realized that, yes, in fact, when it comes to RFR's new American deals, Fuchs is no longer involved. He is still a partner in the legacy portfolio. And then he's going to take care of stuff in Germany. So a clean geographic succession.
- [02:35]
A
One of my favorite closings, the Real Deal ever did with AB they ask, what's your biggest expense? And he's like, I've loaned my partner tens of billions of dollars. He's never paid me back. It makes sense. Fuchs has spent more time in Europe recently. I think Absolute, despite being in St. Moritz and St. Barts and all the different saints on Instagram, is ostensibly in New York.
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B
He's a rare hybrid between a New York real estate titan and a cool New York guy as well. He's a top tier socialite.
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A
Yeah, he is. He's married to what, Samantha Broadman.
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B
Who's Boardman?
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A
Yeah, big socialite. Makes sense. But also he's got the kids now, real estate as fathers and sons, as we say. And they're coming into that age where they're running their own deals. They're getting more responsibilities and rfr still the R is on the door.
- [03:18]
B
You know, Gabby and Charlie are the sons. They came in during COVID so it was a triage mode almost right away reworking that giant portfolio. Two and a half billion dollars of debt that they had to figure out. And they're through the worst of it. They've done very well on the Seagram. They've had some big refis and restructurings
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A
and some big sales.
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B
Some big sales as well. I think they sold north of one and a half billion dollars of stuff in recent months. And we've talked about some of those trades. And now they're on the hunt. They're looking to develop and it's pretty clear that it's going to be A.B. and the boys going forward.
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A
It's a good band name.
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B
Okay, next one. I love in general when the promote looks at these characters behind the scenes. So what's going on here?
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A
We talked previously about Ken Griffin creating the Citadel mega campus, corporate campus in Brickell. But how does one actually effectuate a full condo buyout? What's the name of the guy who did the buyout that we talked about?
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B
Joey Colombo.
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A
Joey Colombo, the legend. So Ken's guy, Joey Colombo is actually a realtor named Mario Borda who has really created a little niche of doing these condo buyouts. And there's a couple things that are important to note. You don't need to get all of them. You need to get 80%, a super
- [04:26]
B
majority to then essentially effectuate a sale or push the other holdouts to sell.
- [04:31]
A
What this does, though, is it creates a lot of leverage because you don't want to go first if you're one of the condo members because you get the lowest price. So the folks who go early, before it's clear that someone is trying to do a buyout, they get the lowest dollar. But if you wait too long and you're the 81st percent, you get nothing. You get nothing. Good day, sir. So there's this interesting dynamic between wanting to wait but not wait, too. And Borda has done a great job of leveraging this. Some of these stories about how he gets these things done, and it's scores of transactions per deal. It's not going to one or two folks.
- [05:01]
B
This was what, 138 units? There's 100 plus transactions you had to basically do in the span of a couple years. So this is a long game. I wonder how commission structures and all that work on something like this. Do you get paid per unit and then you get a kicker once you deliver the super majority?
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A
There's got to be something like that too, because I think your budget also differentiates as well, because I think in this article it talks about how he kept telling people he wouldn't go over a million dollars. And then of course, like 35 units sold for more than a million dollars. You can't just go in and say, like, I want to buy this. I want to pay more and more and more. Because the higher you offer folks early on in the stack, the more it becomes known that someone's trying to buy the whole building. Our true enemy has yet to reveal himself. So it's really this delicate dance and it's about finding replacements for people who sometimes aren't financial sellers.
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B
It was reminding me of two things. One is rent stabilized buyouts in New York City.
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A
Yep.
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B
And the other is assemblages. Assemblage. The art is very similar. It's stealthy, it's behind the scenes. It requires a lot of patience. You've got to strongarm people, cajole people, coax people. The payoff can be massive. But you can also get stuck. Yes, very, very badly if you don't execute correctly.
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A
And I think what shows that is that this is the rare article with a Miami realtor who did not respond to several requests for comment.
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B
Okay, next one more Aum gobbling Kane Anderson. They've been buying up a bunch of companies and they too in turn have been gobbled up now by Bridgepoint.
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A
Yes, indeed. So it's just the real estate operations of Kane Anderson, about half their AUM for quite a lot of Bridgepoint stock, which very tax efficient, is a good way to do this. But what's interesting I think too here is they talked about how they need. Basically what our thesis of this podcast is is that you can't be in the middle. You need the deepest pockets, the biggest balance sheet, the biggest reach, the biggest distribution. And Bridgepoint offers that in a way that Kane Anderson felt that they didn't have. So they pull the rip board and sell. But of course it's right before a generational buying opportunity that I've ever seen in my career.
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B
It's described very poetically in this article in the Journal. Paul Blank, who is now the chief executive of K Anderson, said that we believe we're at the beginning of a super cycle. What the hell is a super cycle?
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A
Nobody knows what it means, but it's provocative, gets the people going.
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B
We're just going to see more and more of this.
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A
No offense to Kane Anderson, but it's like a little bit slimmer pickings. It's not the brand names, it's not Ares, for example. Yeah. It's these other folks who are sort of in the middle. Artemis, this bridge even you have to hit such escape velocity and that number for what escape velocity means just keeps going up. It gets bigger every day.
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B
Absolutely. Okay, next one. So we've talked a lot about the rent stabilized carnage that we've seen in New York City. We've seen various LPs get wiped, we've seen bondholders get wiped. This was a particularly interesting LP who probably took a self driving car to check out the units before he invested.
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A
Sergey Brin. Probably the reason he's railing against the wealth tax is because he dealt with the New York wealth tax which is investing in rent stabilized buildings. Sergey Brin had been an LP and A and E and of course the A's. Arriaga for John Arriaga, the legendary Silicon Valley investor. And John Arriaga son is one of the largest landlords in New York, one of the largest rent stabilized landlords in
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B
New York along with Doug Eisenberg. That's the A and E. They're huge in the rent stabilized space. So they have been one of the front and center casualties of everything that's happened since the 2019 rent reforms.
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A
It's not been a super fun time to be A and E. And they bought out Sergey Brand who's an LP in one of their funds.
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B
Omar sold the dope back in the wire to prop Joe for 20 cents on the dollar.
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A
Market wise, you fellas buyers, you feel
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B
me here, Brin is selling his stake back to A and e for just 6 cents on the dollar.
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A
Oof, that's tough.
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B
The statement that came up, do you
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A
want to read that here? Yeah, A and E. It's very funny. It's a very self flagellating statement in a lot of ways. Where they say the simple and deeply troubling fact for renters is that institutional capital, both equity investors and lenders, are fleeing New York City's rent stabilized apartment sector. Now I will say in real estate, we think we're the most important. Everything touches real estate, we love it. But one important thing to leave everybody with here is that don't feel bad for Sergey Brin because the gross value of the stake in these properties was valued at roughly 79, 80 million. The records show he still has a net worth of $268 billion.
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B
Just some perspective. Okay, I'm here with Aaron Krewitz from Bravo Capital. What are some of the elements of the business that you'd like to see come in or evolve in the next, let's call it 12, 18 months.
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C
We're optimizing for quality. And if that's what your goal is, your first question has to be, how can I attract more quality borrowers? And of course, higher leverage, lower rate, speed of execution, scalability, those all matter. But if you ask a borrower today what do you want from your lender, they'll tell you, we want off market deals, equity. And I want to bring in teams that can do that. To not have a shoulder shrug when your borrower needs something. Right. And to not say, oh, sorry, like I can't do that. But to say, I will run through a wall for you and I'm going to find a solution.
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B
Thank you, Aaron. And where can people find you?
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C
People could find us@bravocapital.com.
- [10:33]
B
There are investment sales that happen from time to time. But in this market, most of the action, most of the good stuff is happening in the nethers of the capital stack. And we have a fascinating example that we're going to chop up right now. So CXP, Columbia Property Trust, they had defaulted on about $1.8 billion of debt and they just received another lifeline. But the specifics are so interesting here.
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A
They are indeed. So cxp, if you may recall, was taken private by Pimco at literally the
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B
worst point in the entire 2021 for $3.9 billion.
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A
Really rough trade, almost immediately defaulted. They had a debt Package from Goldman, Citi, Deutsche Bank. The entire left lead side of the menu.
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B
There was a billion dollars or so which was held on the balance sheet. And then there was about 500 million securitized and then some Mez and some B pieces. Okay. In 2023, early 23, CXP defaults on the debt. And this is when things start to get really interesting.
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A
Well, let's take a little bit Huey Lewis back in time because prior to Pimco buying cxp, CXP had bought Normandy Real Estate Partners.
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B
That's right.
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A
Which was a big New York owner, operator of mostly office assets.
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B
And the co founder of Normandy was a guy called David Welch. And when Welch sold Normandy to cxp, he went and founded a company called Green Barn. And he did it in partnership with SL Green's former cio, David Schonbraum.
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A
Yes, he did.
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B
So it's the two Davids in charge
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A
at Green Barn, but he was one of the only guys who left. A lot of the Normandy team essentially went over to cxp.
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B
What we love to say is that in real estate, incest is a good thing.
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A
The things I do for love. Yeah, I mean it is.
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B
What do you want? It's true. So Green Barn was backed by little known Rhythm Capital, as we like to call them. And this was their first big play.
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A
It's also important to note that David John Brown was one of the real architects of SL Green's credit strategy. So Green Barn with David Walsh, who was operating and running office assets in New York forever. Obviously SL Green, one of the largest landlords. But David Chinbrone wasn't just an office guy, he was a credit guy. So Green Barn, they're looking to do obviously real estate equity, but also opportunistic credit. So Green Barn goes ahead, buys the Goldman piece and then together with a bunch of their partners started just sort of slowly gobbling up other little pieces here. There's a lot of letters in this cap stack, so you know they're going pretty far down the Alphabet.
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B
Yeah, Green Barn bought the Goldman piece, then they bought the Citi piece and went to Con Onset at its real estate arm. Most of their guys went to Exonic and then Greenbart and Exonic did a JV and bought up the rest. The golden piece, the Citi piece and the Deutsche piece.
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A
So at this point what you've got is basically a distressed credit play where you've bought stuff below par, get paid off, you make a nice little credit return.
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B
The last dollar basis for Pimco was about $1,000 a foot on this portfolio. The lender group that came in, it's about 40% of that.
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A
Yes. That is less. But again, at this point, if you control the senior debt, you really are looking for a credit profile return, which is someone's going to come in and buy this, refinance you out, you get paid off and your discount to par is really what drives your return. However, this cap stack, very complicated, as we said, multiple tranches, many letters. And these guys know these assets really well because they owned quite a lot of them.
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B
They're the same people.
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A
They finagle away through the back door
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B
to get control of this thing sometime in 2024. The first time they did a loan mod, they negotiated some control rights. So that gave them a seat at the table to get things going.
- [14:04]
A
And again, CXP is staring down the barrel here because office debt capital was really hard to find. And you've got people who are going to give it to you. You give up some control. A lot of running an asset is based on how much you paid for it. So it's people who knew what they're doing at a lower basis. Importantly, they got a bunch of leasing done because New York office has really
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B
turned a corner, bounced back with a vengeance. Yeah. For example, at 229West 43rd, which is the old New York Times building, they did a renewal and expansion with Versant, a marketing company for 250,000 square feet.
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A
Pretty good.
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B
Pretty good.
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A
That'll work. What's interesting here is that a traditional lender is probably just going to try to put a gun to the sponsor's head, get them to sell it, especially these assets. These are really nice assets. There's going to be a bid. We've seen other stuff that little known Rhythm Capital has bought like Paramount. Everybody showed up at the doorstep for that auction.
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B
Yep.
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A
There would have been a bit these guys a little more flexible, a little more nimble and willing to do a bunch of dirty work and are able to operate these things. And so they're looking to do what they can, bring in partners, rework the debt and flip the cap stack so that they're now running the show.
- [15:09]
B
Yeah. So for example, in SF there's an asset called 6 foot T California. They brought in Presidio Bay, which is a well known operator out there. There's one asset that they're probably going to give up on. There's another asset that they're marketing for office to resi so they can look at a portfolio like this and do what needs to be done as opposed to execute to a specific mandate that just the lender has.
- [15:29]
A
Yeah, this is really the new world that we're in right now where if you were doing one thing forever and that thing ends up being out of favor or facing structural headwinds, do you just not do anything? I'm serious. Do you just keep trying to buy like class B office buildings and renovate them? If like that, that business is kind of over and so having the ability to switch. And I think this is really like folks like Rhythm Apollo, all these big firms that this broader mandate, bigger pockets of capital, they can do these different strategies and have the capital for it. And that's again why we're seeing folks like Cain and Artemis sell. Because if you can only really do one thing and that one thing's really challenged, it's really hard to go raise capital.
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B
Right. And the other point here, as we said, about half a billion dollars of this is securitized. Torchlight controls the process. In this case, the lender entity can't necessarily call the shots as such, they can't be a property manager, asset manager, they can't be an agent. However, there's some workarounds that you might be able to put in place here.
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A
Yeah, it's funny, Rupert Murdoch famously never really told anybody what to write. It just so happened that everything at the New York Post in the Wall Street Journal just reflected his worldview. What are the odds?
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B
So what happened here was CXP hired Green Barn as an advisor, an external advisor, and the recommendations that they would make were non binding.
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A
It's all semantics. These things are so big and complicated and you may think like real estate's passive, it's incredibly not. That's like another one of the theses of this podcast. And so even if you are in trouble and your lenders are bringing down your neck, if you're able to have an external advisor and that person can help run the assets with suggestions, they might be good suggestions, better than you could have thought of on your own. This type of deal, the markets get more efficient. 30 years ago you could just find a building off market that was way below market leases, repaint the lobby, get folks in at higher numbers, make your returns that way.
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B
That's over at least in the major markets at a scale.
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A
You can't do that outside of making, you know, a big market bet at inflection, like Diffco west did in San Francisco, like SL Green did with one Vanderbilt. But as the markets get more efficient, these types of transactions were being creative, figuring out loopholes the wrong word, but figuring out a way around to where you can exercise a modicum of control in such a way that you can drive the outcomes without necessarily being the guy on the piece of paper. You didn't have to do this 30 years ago. This is what you have to do now.
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B
Two things on that one good use of the word modicum. I like that. Haven't heard that in a while.
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A
Thank you.
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B
And two the same dynamic duo, Green Barn and Exonic are also in the other cap stack we discussed the AID Carlisle 111 Washington Fidai Saga that deal's finally closed. Maxim's come in with a $300 million loan and then these guys got paid off on their nav loan and have now taken a mez position for about 77 million or so. So CXP, what I'm curious about is if this hits all the marks that the lender group's hoping for. Is this one of those rare occasions where you're actually going to get quote equity like returns on a debt like position?
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A
That's the whole point. You're certainly doing equity like work.
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B
Will, you've worn many hats in your glorious life so far. Pro baseball player, thespian, Tornado remediation specialist. I want to ask which was your least favorite?
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A
The first two. Ugh, there were dreams. The third was a nightmare turning into a dream though. However, if you asked me a few months ago, I would have said Xel Monkey was my least favorite. Modeling out the debt tab was really really annoying. Maturity dates, Extension options, Rate caps.
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B
Ugh.
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A
My spreadsheets were beautiful, but at what cost?
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B
Sounds like you had good roi, but your ROIBD return on invested brain damage not so good. So what changed?
- [19:25]
A
I discovered Loan Boss. All my loans live on one screen. No more. Let me just pull that up while I jazz hands a capital partner and the extension option tracking with automatic notice reminders. I used to have a post it note on my monitor for that. A post it note?
- [19:39]
B
A 10 in this day and age?
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A
Don't. I'm not proud of it but the one click DSCR testing every lender adjustment, every unique requirement Automated oh my God.
- [19:49]
B
No more getting surprised by your own capstack listeners. Check them out@ LoneBoss.com that's LoneBoss.com and tell them the promote sent you.
- [20:00]
A
I read the titles for each of our segments and they don't often make it into the tape, but I think in this case it should. This segment is titled in our doc S2 Pocalypse Now.
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B
Well done. I love the smell of napalm in the morning. We kind of knew this was coming. This is one of the very high points probability outcomes from all of this. Scott Everett, S2 Capital, $400 million multifamily value add, big quotes, fund return, zero, nothing, zero dollars is going to go back to both common and prep investors.
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A
So this is like the Bluto Blutarsky gpa. Well, he became a senator, so I think Scott's going to maybe do all right here.
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B
How do we get to this position? We had talked about SEC and their private read complications a few episodes ago, and we were actually accused of being a little bit soft on S2 in that podcast. And at the time, we didn't know what we know now.
- [20:55]
A
So I think there's two things that we need to differentiate between. First, Right. The losing of the money and the investments and everything. And then the fact that just today it was announced that S2 industrial through it. Yeah, you just post through it like, this isn't going to take down his business.
- [21:11]
B
He made gajillions from fees on this multifamily.
- [21:15]
A
Yeah. He's not gonna have to return that money. Maybe he faces some litigation or something. Just because people are mad, who knows? But there's two separate things here, right? No one's really getting mad at Pimco for losing that much money on CXP that we just talked about.
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C
Right.
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A
The point we were trying to make in the previous fund is that he is graduated from being just a syndicator with no balance sheet who one deal goes awry, doesn't let him raise any more money. He had iq. He has iconic. He has like real serious people in these funds, real investors, and he's able to continue to raise money. He just raised the distressed fund. He's doing all these buys in the industrial platform that they sort of formed with for capital. So again, this is a tire fire. Let's call a spade a spade. This is a disaster.
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B
Okay, so you've raised the money on the other fund too. But doesn't a declaration like this, hey, I have basically wiped out $400 million of capital. Doesn't that impact your ability to do business going forward for the next fund, for the next raise, for the next deal?
- [22:08]
A
Yes, but he just raised it. So you want to book the next movie before the reviews for the last one come out. We learned that early on in Entourage. That's sort of what he's done here. And if these deals perform, which, who knows, but if he makes 2x on the Chicago deal. In 3 1/2 years this is going to be forgotten. And it sounds crazy to say but all of these things get memory hold. There are some big private equity funds, like real brand names.
- [22:32]
B
One I think about a lot of Savannah. They took a bath after bath after bath on office deals. But again they're in the first round of calls for any big office deals deals in New York right now.
- [22:41]
A
Same with Van Barton, same with RFR we talked about. They torched a lot of money, they gave buildings back. A.B. and his sons are still going at it. Again, let's not minimize the loss here. There are a lot of people who lost a lot of money in this.
- [22:53]
B
Let's zoom in a little bit and look at what happened. What is the state of this portfolio that the fund controlled?
- [22:59]
A
The numbers are staggering. This is a 20 property portfolio that the fund bought. Expenses went up 16%. Not great. Debt went up 50%. Really bad.
- [23:09]
B
But remember will, fixed rate is for suckers.
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A
Yeah. So that's the other part of this too is that he really kind of brought him on himself in the public sphere. Maybe posting, you know about your vacation two days after this letter goes out, it's like maybe not, but 50% increase in debt costs really bad. But most importantly the rent. The whole thing about this whole business plan, when Alan Stockop was on this podcast and he was saying, oh you just renovate, increase the rent 25%, sell at the same cap rate, and Bob's your uncle that the rent went down 24%. So that's the real problem is that they spent all this money on capex. It's not just that rent goes down, expenses go up. It's that you're continuing to pour more money into these assets. With the variable rate debt through your unit CapEx plans or common CapEx plans, your basis is getting bigger every single day. Yeah, you don't need rent to go up 5%. Don't need a little bit of organic rent growth. You need rent to go up double
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B
digit growth consistently for the foreseeable future.
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A
This was a business plan that worked for a long time. The folks who did this did it for a reason. This is not something born out of whole cloth.
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B
And we should say folks who did it did it for a reason and LPs who invested with them also invested for a reason. A lot of people made a lot of money for a long time.
- [24:16]
A
Right. There's this misnomer that real estate is a appreciation game. Return comes more from residual value increases than from the cash flow that it provides. That's what this business plan was really based off of. There's no interim distributions on a S2 or a GDA value add deal. Like that's just not how it worked.
- [24:34]
B
It's on exits.
- [24:35]
A
It's on exits. It's not bad. There's nothing wrong with this business plan. Like that's something I want to also touch on is that there are folks who say you can only renovate to the studs and do it all cash and refi it out or you know, buy low growth. That's one way to do it. This was another way. And it worked for a long time until it didn't. George Soros says, when I see a bubble forming, I rush into buy adding fuel to the fire. You know, you don't want to avoid it necessarily because you can make a lot of money. In the run up as the news
- [25:03]
B
of this fund dissolving came out, there has been a ton of schadenfreude out there from real estate GPs, many of whom use the same strategies. There have been others who are like, I would never take money from retail. There's been a lot of moral superiority and all of that crap coming out too. So I thought that was interesting.
- [25:18]
A
Now I think I caveated enough here by saying that a lot of other people have lost money. He's continuing to raise money. S2 is not going to fold because of this loss. But this is a disaster. Let's not sugarcoat it. A value add strategy is not supposed to be so risk on that you lose all of the money and pref
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B
and pref all the pref investors wipe too.
- [25:41]
A
It's really something. And multifamily historically has been one of the safer returns. Because you have year long leases, you can actually increase them year over year to adjust for inflation, unlike an office or retail.
- [25:53]
B
And no single tenant has incredible leverage on you all of that, right?
- [25:57]
A
Definitely not. So what that means is there's risk in everything, right? But if you buy fixed rate debt, low leverage, the risk is pretty low as long as you can cover the debt service. If you know what your debt service is going to be. This Last cycle post 2020 made multifamily something it wasn't. Multifamily is not really a double your money in three year business. That's not what it is.
- [26:17]
B
It's not supposed to be a cowboy game.
- [26:19]
A
It's really not. For a time that's what worked. Tides S2, they made tons of money. But you know, on a dollar weighted basis $400 million going to zero, like, really reduces those returns. But what you need to make these things work was crazy. But for a while that happened.
- [26:36]
B
I guess if everyone's walking on the high wire, then you just look like you're walking on ground.
- [26:41]
A
Exactly. That's very well put from the writer here. It just boils down to something which I always want to talk about, and I don't think it's hit on enough, which is the model doesn't mean anything. If you're an lp, the GP will say, the model looks great. That means fucking nothing. The model is for one thing. And all it does is tell you what you need to believe to hit the level of returns shown in it. That's the only thing. It's for a model being a 25 IRR or a 17 IRR doesn't mean anything. All it means is you need to believe X. And to hit the returns they showed here, which I'm sure were 15, 17, what have you, all you had to do is zoom out for a minute and say, I need to believe in how much rent growth. I need to believe in how much exit cap compression, how much residual value cagr.
- [27:30]
B
Even when things got really bad, Will, when they were looking for a rescue prep for a lot of these deals, the IRR they were projecting was 34%. If you're a participating investor, and we
- [27:39]
A
talked about this the first time, like, that's complete nonsense. What it shows too is like every dollar put in after this, right after the initial capital was just completely wasted. And so it's something that folks who are doing capital calls, there's a right way and a wrong way to do capital calls. The wrong way is to show people that they're going to make 34% on them. And the right way is to say, look, we think if you invest this capital, it will help save the value of this investment. And on these forward dollars, you can make a certain level of return. There's no really bad deals. There's only bad basis and bad cap stacks. There are assets in here, I'm sure, like, I haven't gone through property to buy property that I'm sure you'd want to own at the right number.
- [28:15]
B
I'm glad you bring that up because in fact, in this letter, Everett says that there is a bunch of assets that he wants to raise about $100 million of new capital so that he can go and buy the debt and put those assets into a new vehicle. So he has identified ostensibly some gold in this muck.
- [28:32]
A
Why I'M sort of not quite maybe coming down as hard as I'm sure some people want me to on this is Blackstone. When they bought Hilton, they were mark to market down 90 at one point, right? Yes. And they bought their own debt back. And I'm not comparing this to Hilton. It's not the same thing.
- [28:45]
B
It's so funny you say that though. I tweeted about the situation a few weeks prior and I said, Scott is doing what everyone on here is doing, just a little bit bigger and a little bit louder. And he replied and he said something like, marks aren't permanent in either direction.
- [28:58]
A
He's right. Now we can all debate the value of underwriting getting away from Everybody on the $400 million fund. Not to minimize this by any stretch of the imagination, but this is just the microcosm of what happened. I'll tell you for a fact, there are big brand same real estate private equity funds with 2020, 2021, 2022 vintages that are sitting on not much better than this and they haven't realized them.
- [29:21]
B
I mean, we talked about Naveen the other day. Go into any pension funds disclosures and you will see some of these guys who are doing panels about successful investing and they're in deep, deep, deep red.
- [29:31]
A
At scale, it's really hard to put out 400 million of equity and generate returns. Star wars just raised 10.2 billion. How are you going to go make a 15 at that scale? It's really, really hard. You can find good deals left or right. And I think what's so interesting about this crisis is that it's been just like a slow moving morass. There's not been like a single point of failure. You can point to Lehman failing or you can point to a certain thing that happened. It's just been nothing, nothing for years.
- [29:59]
B
Months ago we were talking about tides every other day. Then it was Alan, Stalkop and GVA every other day. Now it's S2. What Scott did that was differentiated was this private REIT vehicle that essentially acted as a lifeline or a stay of execution.
- [30:13]
A
It was almost like Voldemort putting his soul in different horcruxes to extend his lifeline. Do this and none shall be harmed. But at the same time, all the money you raised to go do that,
- [30:26]
B
gone get a little personal here. Because real estate investing is also an emotional exercise. And a lot of people who put in money with Scott who have been wiped are pissed at the lifestyle. He lives like a rich guy and people are allowed to live how they want. But if you're torching capital, the dissonance there is something that has come up a bunch.
- [30:46]
A
And look, if you run a firm at this scale, you're going to make X amount of money. I don't think people necessarily begrudge that. But it's like a little bit of let them eat cake, right?
- [30:55]
B
Yeah.
- [30:56]
A
And it's just PR101 that it's probably not the best look to be posting through it two days after you, you send out this let.
- [31:05]
B
The other thing is the postmortem is finding a bunch of things that you could have found in the pre mortem as well. So for example, people putting up the org chart of S2 and saying look at how many Everetts there are. I'm like, well all those efforts were there when you invested as well.
- [31:18]
A
That's exactly right. And we talked about it with Monty Bennett. You knew he had this contract if you bought the stock. Yeah.
- [31:24]
B
If you have created a business in which you are getting rewarded upfront just for raising the money or doing the deal as opposed to executing and realizing a profit, what does that tell you and is that going to change after we've seen so many of these back to back?
- [31:41]
A
Show me the incentives, I'll show you the outcome. In a lot of these cases the incentive was to raise the money and do the deal. I just want people to remember though, it gets memory hold a bit. The stuff that was going on in 2021, in early 2022, it was unbelievable. Everyone had so much money. It had to go somewhere and. And people were doing private deals, trading on Robinhood Gamestop right at this period.
- [32:05]
B
What did Alan say? Stock. What did he say he was buying a deal every 20 days or something crazy.
- [32:10]
A
This isn't necessarily the hangover. This is waking up in jail after joyriding your car down the Vegas strip. Just not a reasonable place to park.
- [32:17]
B
Let's talk about where Scott can go from here. He's got the other fund and he can go and he can actually go and rescue some of these deals with that because it's a distress fund if he wanted. He's got the industrial thing going where he bought the opco, but in multifamily itself. If he doesn't have a good relationship with the agencies, Fannie and Freddie, he's going to be in a lot of trouble. The chatter around this thing is Freddie, are they okay working with him going forward? Fannie, what are they going to ask of him? Is there going to be a mass sell off of the portfolio that he does still have is probably in the high 20s, 20,000, 28,000 units. What happens with that portfolio if he can't make the agencies dance with him?
- [32:53]
A
It's just going to get sold off in pieces over time is what's going to happen. But the bigger thing is the agencies are such a big liquidity provider of the multifamily market. And I think it's important to differentiate. Scott was not a huge agency borrower on the acquisition. Neither was Stockop, neither were any of these guys.
- [33:09]
B
That was all bridge lending on the acquisition.
- [33:11]
A
But the goal was to either get sell and pay off the bridge loan or get to an agency takeout. Everyone wants to get to an agency takeout because the terms are the best, you get the best spread, you get the best rate, you get IO, non recourse, all these things. And if you can't do that, that's a huge arrow in the quiver that's taken away. And the agencies will put people in the penalty box, which means that you can't be on the org chart.
- [33:35]
B
You go to the box, you know, you feel shame.
- [33:37]
A
And it's not even necessarily with defaults, but if you've ever behaved in ways that are sort of not becoming, I guess, for lack of a better term, and it takes that away. So you have to do lifeco, you have to do debt funds, you have to do bridge loans, and all of that adds risks or different profiles to your deal. So this business plan of renovating, class B, 80s, 90s, that's done. So you got to figure out something else, and maybe it's buying higher quality core stuff at lower leverage points. You don't have to go home, but you can't stay here.
- [34:09]
B
Another point just about the narrative management in a time like this. One of the things we think about a lot nowadays is the fractured media landscape and what you can kind of get away with. Even as this was going down, the private REIT stuff had just happened. He was on the cusp of announcing that this was going to be a total loss. He went and had an interview with Costar last month and it's like a splashy interview. S2 Capital founder opens his own wallet to reclaim 12 apartment properties. And, you know, we've been through the worst of it. Everything's fine. You can kind of do this in today's environment. You can go on a podcast, talk about your book, and completely be oblivious to any of the problems that are happening in a way that you probably couldn't do 20 years ago, where if you were in the Journal or in the New York Times, and there was an article about you that was tough. You were kind of screwed. Everyone would look at that. There was one point of reference. And now he could go on podcast next week and just do this all over again.
- [35:01]
A
Absolutely. That's just how the game is played. And he's played it really well. He has, in a way, gotten to the other side because he raised more money. The game's going to be different, it's going to be industrial, it's going to be a different business plan and multifamily if he does that. But we're going to look back on this era, all the scoring records in the NBA from the 80s when they were playing at crazy pace, and you're like, how did Elvin Hayes Average 37 points a game? We're kind of going to look back on it like that.
- [35:30]
B
That's it for the promote podcast this week. Billion dollar underbellies that show you exactly how big deals get done in this market. And one of the most prominent syndicators flames out. But is he done? Probably not quite.
- [35:42]
A
It is really not the straightforward time in real estate we're dealing as to put it so eloquently, at the top. The nether regions of the cap stacks here, whether it be in New York City office or buying back debt on Sunbelt Multi. This is what we're going to be dealing with for the next couple years because I got some bad news. There's not going to be rent growth for a long time.
- [36:04]
B
There's some good news in all that. The POD is going to be a lot of fun to do each week with you, dude.
- [36:08]
A
Oh, well, it's already a lot of fun, so thank you very much.
- [36:11]
B
It's just going to get more and more interesting. So many crazy things happening indeed. A shout out again to our sponsors, Bravo Capital. They're a leading HUD and bridge lender. You can find them at Bravo Capital.com
- [36:21]
A
and Loan Boss, a best in class CRE debt management software. You can find them at loanboss.com Will
- [36:26]
B
Krasny needs some questions, so hit him up on the mailbag@podcastepromote.com I get to
- [36:31]
A
do one or two a year, so this is very special for me. So please, for no other reason than my own joy, write me some crazy questions.
- [36:39]
B
Remember, for feedback on this podcast, podcastepromote.com and if you want to advertise with us, we're@partnershipsthepromote.com all right, Will, that was a fun one. I'LL see you next week. Thanks.
- [36:49]
A
Thank you.
- [36:50]
B
Ciao.