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Every Friday, join us as we dive into the latest in real estate multifamily with David Moghavem, Head of East Coast Acquisitions at Trion Properties. David invites top experts who know the ins, outs, and trends shaping the real estate multifamily market across the nation!
Whether you’re a seasoned investor or just curious about where the next big opportunity might be, Deal Flow Friday brings you the weekly inside scoop on what’s hot, what’s not, and what to watch for in today’s ever-evolving real estate scene.
David Moghavem (01:29)
All right, welcome to another episode of Deal Flow Friday. I'm your host, David Mogavum, and today we got Jared Zeisler out here. Jared is a principal at Capital Solutions where he's involved in acquisitions, originations, capital raising, asset management. We're all in asset management at this stage right now, but ⁓ Capital Solutions, they're super active. They're known for providing JV equity, pref equity, structured capital.
in the middle market space, they have about half a billion of equity active right now, and they're growing to do more. So Jared, good to have you on my man.
Jared Zeisler (02:07)
Thank you for having me, appreciate it. I know we talked about this at conference about a year ago, half a year ago, so happy that it's coming to fruition now.
David Moghavem (02:17)
Yes, yes, exactly. It's been a fun time and ⁓ I know before the pod you were asking me, are you having fun right now? And I'm like, all right, to find fun. It's definitely crazy right now with everything going on, but I think we're starting to see a little bit of light at the end of the tunnel. I don't know about you, are you guys having fun right now?
Jared Zeisler (02:38)
Yeah, I mean, think we chatted about this before we got started here, but ⁓ at least you're seeing some transactions, right? For good or for bad. So I think all of us were stuck in the mud for... ⁓
12 to 24 months where there was so much coming at us, whether it be operational issues or interest rate hikes or what have you, and then the election and then some of the positivity and then the negativity that came from it. So it's just been a lot ⁓ of noise coming at us for quite some time and I think at least it feels like some more stability, a little bit more sense of market valuations, a little more.
indication of where rates are going to be or feel like they're going to be. So it allows for all of us to make decisions that are at least found in some concreteness versus previous times where it was a whole lot of unknowns.
David Moghavem (03:28)
Yeah, I think we're starting to see a little bit more stability, which is giving us at least some solid ground to work on. ⁓ I'm happier on the pod because as a capital allocator, you're seeing a lot come to you, a lot sent to you. Capital raising, I've said it on a few other pods. It's as hard as it feels like it's ever been, at least since when I started in the industry. Talk to me a little bit about what you're seeing out there, what's brought to you, what are the deals that are just
Hey, this is cool, this is nice, but we can't get it done. And what are some deals that are like, wow, this is super interesting? Like this can get capitalized.
Jared Zeisler (04:06)
Yeah, so I think first of all for like the volume of deals getting done what you're referencing I think it's a combination of two things one it's still very hard to pencil a whole lot and we talk a little bit about what we're seeing and Why things make sense or don't make sense? But the second framework of it is that all of us in the private equity side, know we're turning and burning for a long time and we own a lot and ⁓
A lot of that has to be recycled or would like to be recycled. People have money invested and like to see the capital back at the return and the cycle's been elongated because of the last 24 months as we started with. So I think there's capital tied up, which at some point has to unwind and we can talk about that as well. And then there's just trying to make sense of what deals work and what deals don't work. So I'd say that, you know,
Before I would say the interest rate change and kind of the change in our environment. ⁓ you know, it was everybody was chasing ⁓ value add ⁓
vintage, older vintage, and what we've all learned over the last 24 to 36 months is, you know, those things are operationally expensive. And there's some challenges, not everybody's running 99 % occupied with a 1 % collection loss. And the reality on the wall is that, you know, these things operate differently, perform differently. And so I think pricing has taken a long time to get there. And even the lending environment has been such that, you know, outside of the agencies, a whole lot of people are shying away from it.
anything that's older. So we've seen a lot of velocity and kind of price discovery in things that are older and I can't tell you that we bought anything in that vintage quality I would say you know two thousands or newer since the top of the last cycle. We own a bunch of it and we're working through it and some of it's know challenged some of it's performing great and everything in between.
David Moghavem (06:00)
Mm-hmm.
Jared Zeisler (06:09)
⁓ On the development side, costs haven't come down at all. haven't. Yeah, I mean, haven't seen it, you're in Miami, so maybe you see some different work, but we haven't seen ⁓ increasing prices or substantially increased prices, but...
David Moghavem (06:14)
They've gone up even, yeah.
Jared Zeisler (06:27)
As an IRR driven investment firm, bank leverage has come down materially since the top of the cycle. And there's been no shortage of increases of taxes. Insurance we've seen settle in, which is good, which has been a challenge over the last couple of years. But ⁓ it's just hard because...
where the tenure lives and where interest rates want to live and what the requirement for an investor is both on unlevered and levered return to make these things pencil. And so you either have to see a couple different things transpire in the underlying underwriting of deals. You have to see real NOI growth, which has been stagnant or stale for 24 months.
⁓ And I think that's a lot because of the oncoming supply glut that occurred in many of our markets as that stopped or is stopping I think you know for example we own in Austin it still hasn't stopped yet. There's still supply oncoming so ⁓ As that stops, which should be sometime this or next year I think all of us will find performance in our portfolios start to improve and as that improves to a point where you get to a spot where it makes sense to then develop more product
I think most of the markets, excluding maybe a tight pocket here or a tight pocket there, there's still too many concessions and too much pressure on actual rents, the effective rent, to make deals pencil still.
David Moghavem (07:56)
Yeah. And part of that is even though supply as our deliveries have decreased, there's, we're still in the absorption phase, right? Like we're still absorbing all that. So just because you're looking up, you know, what the development pipeline looks like or how many units are under construction, maybe we're past that stage, but now we still need to absorb all this. And I think that's what you're seeing and what you touched on earlier with concessions, a very soft market. ⁓ Even now that we're
Jared Zeisler (08:05)
Yeah.
David Moghavem (08:25)
you know, in June, it's supposed to be peak leasing season and a lot of these seasonal markets for sure, you're not seeing that that uptick in in on top of the funnel or or conversions because it's still soft.
Jared Zeisler (08:39)
Yeah, so I mean there's like a tale of two markets. I'll try to give an example I mean in one market we own let's just use again Austin. We have a property that's delivered. It's a stick-built Surface part deal not a terribly high basis our leasing is going well and Brokers are coming to us and saying hey, let us list your asset We'll sell it for a four cap or four and half cap. Guess what? It doesn't matter because rents went went from 1850 on average down to 1400 in this market and
⁓ So the reality is that that deal that you would normally look at is a build it flip it merchant build it and move on to the next That could be a five or ten year hold for us, right just to kind of get back to even and make a couple bucks Exactly exactly just because how do you recover from a four or five hundred dollar discount? When a development team that we partner with there, but most developers look at your rent expect you're gonna deliver a better product
David Moghavem (09:22)
Yeah, grow your way out of it.
Jared Zeisler (09:35)
or a similar product and grow rents 3 % per year until you deliver and trend it. That all got washed out for the cycle. So, you know, we have some of those.
At the same time, there are markets in development. We have project outside of Portland, Maine. We have some projects here by our town where we live, which is Montgomery County, Pennsylvania, where it's fairly difficult to put product down. And the deals are just fine. mean, they deliver fine and leasing up and yields are in good shape just because you're able to actually grow rents. I think...
David Moghavem (10:10)
because of the
lack of supply delivered in those markets. Yeah.
Jared Zeisler (10:12)
Yeah, it wasn't crazy. mean, when we
went into, we developed a deal in Grand Prairie, Texas with a partner and it's a great deal and it's doing well. But when we went down there to develop it, initially, there was four or five other properties just within our eyesight that were either under development, newly developed or would be developed.
David Moghavem (10:32)
It's like a knife fight just trying to get a tenant to move into your building. Yeah.
Jared Zeisler (10:35)
Right, so all
of us self-inflicted as a function of ⁓ greed and free money, cheap money ⁓ and economic growth expectations and we all just put a lot of product down together and now all of us as a real estate community have to make sure that those that have the staying power will stay through it ⁓ and will grow out of it and eventually recover all the capital and then some. But the hard part is for those that don't have the staying power.
⁓ and have to deal with refinances and lower, higher interest rates environments. I think all of us are hearing stories about that across the country.
David Moghavem (11:15)
Yeah. So I mean, taking a step back, you know, with the money that you guys have deployed right now, and I'm sure, you know, a good amount of that was pre-rate hike. Some of that you guys are still active post-rate hike.
how much of it are you guys struggling to work through right now versus how much of it is a buy that you feel like is in the bottom is going to recover?
Jared Zeisler (11:36)
Yeah, so, you know, in looking at our history so far, right, we have, you know, over $500 million of equity at work. And when we do capital calls, we're not a fund, so we capital call our LPs alongside of ourselves. We have, you know, percentages, 2-3 % of our portfolio that had to capital call in terms of total equity.
So it hasn't been, like we haven't gotten rocked. Maybe that's because, you know, hopefully we're smart money, but ⁓ of course nobody's not impacted by the way that the cycle has gone. ⁓ There's a couple of deals that I would say were, you know, levered with bank loans, good bank loans at the time, 70 or 75%, where the operating partner did not deliver on a business plan. ⁓
In many instances those business partners had their own issues outside of us So an operating partner bought 20 deals or 30 deals or had eight deals under development and we were the ninth and we were the fifth or whatever ⁓
David Moghavem (12:37)
Right.
Jared Zeisler (12:41)
we've had to step in and perform substantially more asset management and a hands-on approach to real estate ownership, right? Because typically we're an LP or a preferred equity and we asset management, but we go along for the ride and team up with partners that have a skillset in whatever we're investing in. ⁓ So I would say the challenges in our portfolio are more related to that, which is, know, tough time in the business in hindsight, but also
⁓ defunct or a partner that ⁓ really just couldn't perform in a challenging environment. ⁓
The balance of our portfolio while you'd say, oh, I wish I bought this cheaper or wish I didn't develop this, you know, at this period of time, the truth of the matter is that the assets are good defensible assets. And, you know, I would say if you look at our portfolio, we have 100 % of our deals. I would say 75 % of them, you know, are gonna do well, you know, create a...
great appreciation for investors and of the 25 % that won't do that, many of them will return capital and maybe a couple points over an IRR, IRR-FRD, and that's fine, right? You're gonna have some of those. I think the ones that we spend the most time working on are the most troubling are the ones where capital's impaired and it's impaired for two reasons. One, the cycle was ⁓ to hurt the investment, but also people that we've partnered with.
David Moghavem (13:55)
Right.
Jared Zeisler (14:15)
⁓ have shot themselves in the foot. ⁓ we've had to clean up some messes and there still are a few of those investments.
David Moghavem (14:23)
Yeah, and I think everyone has a little bit of that in their portfolio. I think what's interesting with you guys is the way that you guys are structured and the way you guys capitalize deals, you have a lot of different capital options to even on your own deals, maybe say, hey, there is some rescue capital out there that's putting this out. Maybe we can go to them. And I'm sure people have come to you and said, hey, Jared, do you guys have any rescue capital out there that can help with our with our
situation. Have you guys been putting some of that out where you're not just coming in as like a common ⁓ equity partner on acquisition, but maybe you're coming in, you're solving the capital need, and giving the deal another, you know, three to five years of runway to kind of grow yourself out of this cap capital stack mess.
Jared Zeisler (15:13)
Yeah, so obviously we started our own portfolio first, right? So like I just had a conversation, you know, couple hours ago about a capital call. And the first question you ask yourself is, it make sense to put new money in? Your own money. And so if we go out to a rescue fund of some sort for a deal and they want to get a 15 IRR and a minimum multiple, guess what? That's what we want.
David Moghavem (15:26)
Mm-hmm.
Jared Zeisler (15:36)
and so we know the asset that we have. So if it makes sense to do that and just rescue our own deals or capital call our own deals, we do it because it makes sense. ⁓ In terms of seeing other people's deals being sent to us, not everybody, people have challenges and they go to the capital markets to try to solve those challenges. I've always asked myself, hey look, if I'm investing in somebody's distressed asset,
and I'm gonna come in and rescue them, when I go into the deal, I'm probably 100 or maybe over 100 % of value today of the deal. Yes, well I always say like, okay, why would I wanna cap my upside as opposed to just wait, if it's not gonna be that deal, maybe another deal, fall into the markets and invest where I can have 100 % or 80 % if I'm partnering with 50 % of the ups.
David Moghavem (16:12)
Sure, you gotta reset the basis if you wanna make it for it to make sense.
Jared Zeisler (16:32)
versus taking a capped 15 % return. The instance where I would take that, and we haven't done much of this to answer your question because we haven't seen it make sense yet, where I would do that is if one, I'm not 100 % of value the day that I go in, and secondly, is if the partner that is asking me to be rescued is also investing back in their deal so they believe in it, right? And maybe they can't, and so maybe we evaluate that at that period of time.
But we have not seen what I'll call quality investments in the rescue space yet ourselves. Not to say that others aren't, or they're not marketing themselves for it, so they're seeing more of it, but it just hasn't been something that we've participated in yet as a firm.
David Moghavem (17:18)
It makes sense because rescue capital on paper seems like a less risky part of the stack if you're coming in as like pref equity and ⁓ you're preferred from the common. But if you're not coming in and resetting the whole basis to be at that 100 % LTV, like you said, of today's value, then you're really not taking that much of
you're still taking on just as much risk even though on paper you might seem less risky.
Jared Zeisler (17:49)
Yeah, so like take a normal deal you bought a deal two years three years ago You're a hundred percent of value of all the equity when you're in that deal and there's a load for seventy percent Now and I hasn't materially changed that much for various reasons. We talked about maybe there's oversupply in the market Maybe your expenses but up whatever
and now you're three years later and your low income is due on some bridge loan and they say okay well you know can you save me capital solutions or any other rescue investor and you look at it and say well look values are down since the peak 30 % so as a function of spot to spot the asset if it has the same OI or similar OI is actually just worth the debt all the equity is wiped so if I'm coming in now that's just 100 % of today's market value so why am I giving Mr. Operator
And not to say that I don't care for that person, but just dollars and cents looking at it as an investment, I theoretically should have 100 % of the upside then going forward. So I think there's different scenarios, obviously there's relationships that we have and other people have, they're trying to help people, they think that there's a good chance to get a great return, risk adjusted, and so you know.
David Moghavem (18:47)
Yeah.
Jared Zeisler (19:03)
Each deal is a unique scenario. But as a collective, I've seen more of what I just discussed, which is it's kind of worth the debt. so putting money behind that debt today doesn't make a ton of sense.
David Moghavem (19:16)
Yeah, I I get, ⁓ I get the logic for sure. I you have two different worlds, the pre-rate hike and the post-rate hike. And if you look at today's world, everything looks better, somewhat opera, like everything looks better except the debt, maybe not operations, but yields, ⁓ discount to replacement costs. You know, you're, can buy below replacement costs. could buy positive leverage day one.
It's like we're kind of all going back to the basics of like, what's your in place cap rate? What can you borrow at? It makes sense. We're cash flowing day one. We're making money day one, like just like old school fundamental buying real estate the way people would buy it and less about, oh, we're baking in the upside. Like no one's really underwriting that. But yet it's so hard to make deals pencil or get deals done today. Even with the idea that you can buy at what
is making money day one versus pre-ride hike. It was almost something that it was ⁓ speculative.
Jared Zeisler (20:21)
So I'm not seeing the, so maybe you're seeing different things that I'm seeing, I'm still not seeing great positive leveraged buys yet. I'm seeing maybe par leverage or equal to leverage. We're under contract to buy a student housing asset. ⁓ It's in a going in place, it's still negative leverage to the borrowing cost from a bridge lender. So.
David Moghavem (20:45)
former
Bridgelander. Yeah, that makes sense. Yeah.
Jared Zeisler (20:46)
I mean on the agency
stuff you still have have buy downs when you're getting these things in so like par agency borrowing at you know call it the high IRR business that all that you and myself play and not necessarily the 55 % lever insurance company but that's still kind of high fives and then if you're amortizing you're you know well into the you know mid to high sixes so I haven't seen cap rates there yet at least I have it maybe you find it in a tertiary market but I haven't seen
David Moghavem (21:01)
Mm-hmm.
Right?
Right.
Jared Zeisler (21:16)
as whole. So I don't think we're there just yet on that positive leverage. And I think when you do see that, you'll see gobs of capital coming into play because there's a great cash on cash story. ⁓ Real estate still isn't hitting that great cash on cash story yet, which was kind of the backbones of the business, which is tax-efficient cash flow.
David Moghavem (21:37)
Yeah, it's, you you gotta, people are starting to financial engineer to get to that quote unquote positive leverage, right? You do the buy down with IO and then the going in cap is on some adjusted expenses and this. So I mean, for us personally, we're like super leaning in on T12. We're really like leaning, okay, like what's the T12 cap rate? Like you can't like not adjusting anything. Is it?
positive leverage day one. And I think it's kind of like what you're saying. You kind of have to trick yourself into thinking like you're starting to see the positive leverage when you do the buy down and things like that to financial engineer.
Jared Zeisler (22:18)
Yeah, and I think from an investment standpoint, maybe you'll get better yield on the traditional value add, apartment assets.
that we've chatted about. But so many people have gotten their butts kicked in that space in recent times, including investors. So it's really hard for a large group of people that were super active in our business to be like, all right, well, I got my butt kicked two years ago, but this one's going to be different. It needs to be like more time that gets established between somebody having an impairment on their capital or a return that was super below their expectation when they first invested to kind of ring
David Moghavem (22:33)
Yeah. Yeah.
Yeah.
Jared Zeisler (22:58)
up and continue to deploy capital in a very similar business plan.
David Moghavem (23:00)
Yeah,
I totally agree. What's crazy is I'm already hearing people getting back into taking bridge debt and bridge loans on like a typical value add multifamily deal. I mean, I'm just scarred from what we're what we're seeing out there and seeing the deals that are that have bridge that can't get, you know, capital to give themselves more time. It's like, do you really want to go down that path again?
You really have to have conviction. just don't see a yield on cost pro forma that justifies taking bridge to try to move the needle on your yield. I'd rather just buy something today that's solid, can stand on its own two feet, put some agency debt and cashflow right now.
Jared Zeisler (23:50)
So many of those people, all of us included, had deals where they bought in let's just say 2017, did a little bit of work, and then in 2019 had Blackstones and B-REITs and whatever else paying you double for your asset.
David Moghavem (24:07)
Yeah.
Jared Zeisler (24:08)
Right? So it was really hard for people to stop the music because they had so many positive experiences of making money. ⁓ Real estate in the long run still maintains a pretty profitable business and creating value in the sticks and bricks will make everybody, all investors and ourselves, money over the length of our careers. I would say that the bridge debt, at least today, you have at least a
⁓ higher starting interest rate that you're using and have a more you know defined kind of scope of where at least we think rates are going to be the challenge that I think most bridge borrowers had on deals is that
They bought the deal where SOFR was negligible, right? Somewhere between 0-1%. And they were doing the educated thing. They were looking at the curve, and the curve was saying, oh, SOFR's going to live at 3. But no, SOFR went up to like 5, 5 and 1 whatever it peaked at. then it settled at around 4. So nobody's model had that, nobody.
Because there was no, unless you were saying, from a historical perspective, but when you were utilizing the data that most people look at for their underwriting and diligence and so. Right, right, so okay, so you have rent growth for five years before you get to that three and a half percent silver. No, you had three months. So it just broke a lot of people. And I think, look, Bridge has a reason. There's owners that.
David Moghavem (25:21)
Yeah, the five year so for curve you plug that in and plug and chug.
Yeah.
Jared Zeisler (25:38)
People that own real estate where the income is way below where it should be, know There's people that have third-generation ownership and they're self-managing or you have a in today's world You can have a distressed owner where they really just aren't paying attention to the asset and as you know So that's where bridge lives I think where you don't want to have bridge is you've now ran a process or the top dollar in the market Right and the only way to make your returns work is to then put bridge on it, right?
David Moghavem (25:54)
Yeah.
Right.
Right.
Jared Zeisler (26:05)
I
think that's probably something that most people should try to stay away from.
David Moghavem (26:09)
Yeah, I think, I think, ⁓ think you're right. It's just, I feel like sometimes people trick themselves right into, into thinking there's maybe more upside in this market than, than there is, at least from what we're seeing. ⁓ we just already talked about some of the operational struggles. It's like, how can you have conviction to now bank on some upside? I think you might get some better operations down the line, but not from artificially like renovating units today. just think ROI is on a lot of.
Jared Zeisler (26:22)
shit.
David Moghavem (26:38)
These markets are just not there to what they used to
Jared Zeisler (26:42)
Lot of supply got put down. It's all being absorbed You know, we'll look at this 12 24 months from now and see everybody needs a place to live still Housing is very challenging, right? I mean everybody like
David Moghavem (26:53)
Yeah.
Jared Zeisler (26:56)
I'm a millennial, right? So I've lived in a house for whatever, 12 or 15 years now, but I've also been in a business that hasn't afforded our ability to have home ownership. A lot of people that are just kind of salaried employees, you just literally can't afford it. in fact, the Fed was talking about it today. Today's June 18th and Fed Chair was on the soapbox today. And it's still just a challenging component
component of our overall economy is how do you put down housing that's affordable that people can buy and with rates where they are they're even less affordable. So I mean I still have strong conviction in the fact of owning housing as an investment because unless they can figure out robots that are going to build our houses, know that everybody wants to live in for 50 % of the cost that we get to it today, it's still a pretty capital intensive expensive thing to do to put one house down at a time.
So.
David Moghavem (27:58)
So of the half a billion you guys have out is how much of it is multi at this point?
Jared Zeisler (28:05)
I had to look and see what percentage of it is, but generally the multifamily space had taken up about 75 % of our capital deployment. And then there was offshoots from that, ⁓ student housing, senior housing, medical office, ⁓ trying to think if there's anything else from asset class that we own or owned. But we've done it all.
David Moghavem (28:29)
But primarily
housing, yeah.
Jared Zeisler (28:31)
But it's
primarily been housing. the reason for that is when you think about it, ⁓ the federal government has really incentivized owners ⁓ to own housing because as a function of leverage and quality leverage, the agencies have provided a really good spot for housing related investments.
If you're doing an office building, your takeout financing is CMBS, which is a more expensive mousetrap, or insurance companies, which are a low leverage mousetrap, or banks, which generally have a recourse component. The agency... Right! I mean, they're mostly out, right? So, and if you look at the industrial space, you know, that's had its challenges as well.
David Moghavem (29:08)
And most of those guys are out now, you know? Yeah. ⁓
Jared Zeisler (29:19)
⁓ But that was so red hot and funneled with so much institutional capital that we just couldn't make any sense of any deals that we saw for a really long period of time. So housing ended up being the place, doesn't have to be the place going forward, it doesn't have to be the place that... ⁓
David Moghavem (29:29)
Mm-hmm.
Jared Zeisler (29:36)
that our mandate is to find good investment opportunities all across the board. doesn't have to be in a space, but multifamily ended up being what underwrote the best for a long period of time. And then at the height of the cycle and rates were zero, we were not buying, we were developing. So, you know, that.
David Moghavem (29:53)
Makes sense, makes sense.
Jared Zeisler (29:55)
Back in like 20 and 21, if I look at so many of our investments, they're actually just development deals because we got to the point where we're like, cannot make sense of buying anything and we're selling everything to people at prices that we don't understand how they're making sense of it. In hindsight, we were all right, right? But the things that we did buy didn't have any...
David Moghavem (30:10)
Yeah, for sure.
Jared Zeisler (30:18)
Capri right I was just buying sticks and bricks for prices with partners that we thought you could make a business plan and change it dramatically now some of Yes stabilized yield on cost, but you know the sticks got expensive as well, but everything was expensive So, you know, I would say that Back to the beginning part of question probably 75 % is in the apartment space, but going forward, you know, knows
David Moghavem (30:26)
But you were solving to like a yield on cost at the time. Yeah.
Jared Zeisler (30:45)
Personally, we all we all do deals here as partners and we all source them differently than it all comes into You know the corporate pipeline, but you know I haven't done personally an apartment deal I've done in student housing which we can talk about but just like pure apartments From my origination sources. I don't think I've done a deal since 20 ⁓ So I have to look at it, but it's just
You know, it's just been, our company has, so don't take that one. My partners have, and our Capital Solutions has, but ⁓ you know, it's just been pretty hard to make sense of a whole lot of things.
David Moghavem (31:16)
Yeah, yeah.
So the student deal you guys have signed up, sounds like you're getting, you know, outsize return. You said is ⁓ neutral leverage on bridge debt. So pretty good yield, it sounds like. ⁓ What kind of gave you guys conviction to get that deal done?
Jared Zeisler (31:39)
Yeah.
Yeah, so we've done a couple buys in the student housing space over the past 24 months. So just to give you some history on those deals. The first two deals we bought, first they're low cost basis, right? So we're looking at replacement costs in the deals that we purchased last year and at the end of 23 and 24, the price per bed were like 50,000 a bed, right?
And if you look at some of the amazing student housing that's occurring across the country by some pristine developers, I mean, their replacement costs are like 130 to 150 a bed. So it's really deeply discounted to how you can supply these markets. The other thing in the markets that we purchased in is because of where costs are in terms of development, you can't put down supply. Doesn't make sense. So if you have a market that's either equilibrium or growing and you're buying something cheap,
And there's no new supply to come into the market. What happens when more students come in than beds that you have, you get rent growth. And so it proved out. mean, in both the markets that we bought in, we bought the property, did very little in terms of lipstick, and we've gotten 8 10 % rent increases year over year. In the asset that we're buying now, we're buying at a university in a larger market. We think we're buying in around a six cap.
It does have some adjustments, but it's 2014 vintage deal. It's leased 93 % at the moment. Their leasing effort is up 4 % year over year. From last year, they should stabilize north of 95%. And the business plan there is, look, you're buying it at a six cap, right? So anything you can do beyond where you are today is pretty yield-ocreative.
And again in this case we're buying it for 85,000 a bed. It's a little bit newer, it's 2014 vintage compared to the other two. But they all follow kind of the same thought process, which is you're buying cheap, you're buying an asset, it doesn't have to stress, in place it's performing.
And ⁓ we were buying all these deals that we chatted about somewhere in the high fives to low sixes. And so unlevered, you're in good shape, you're not overpaying for it. And worst case, you hold for a long time and you cashflow these things. And fairly difficult to put down supply because of the underlying dynamics. There are student markets ⁓ that I can speak to that we don't own in, but they were incredibly hot, right?
But because of where rents were, ⁓ it made a whole lot of sense for beds to come online. And all those beds came online, and you have the same dynamic as you have, let's say, the ⁓ Austin, San Antonio's growth market. Low barrier to entry, or even if it's a high barrier to entry, it's just that the...
David Moghavem (34:38)
Yeah, low barrier to entry markets.
Jared Zeisler (34:46)
the school's growing and there's a lot of capital sloshing around the subspace of student housing and a ton of supply shows up. And now your market changes overnight. So ⁓ our thesis has been to try to buy in markets where you can't easily supply it or oversupply it.
David Moghavem (34:53)
Yeah, right.
And then the way you're capitalizing it is ⁓ on the on the credit side, you're putting a bridge line on both of these deals or
Jared Zeisler (35:11)
No,
the other deals we bought with agency, this upcoming deal happens to be a five year bridge loan where we're buying a three year sofa cap. But the truth of the matter is that in all instances in these deals, because of the buy, which as you know in real estate, the buy is just as much as the execution after the buy.
David Moghavem (35:15)
Mm-hmm.
Right?
Jared Zeisler (35:33)
They're just defensible in terms of unlevered yield. So they're easily financable. Why we're going bridge versus agency in this particular case, it's an institutional provider. The rates not very high. It's a little bit more proxy driven. know, the plethora of equity going into the deal. So it's just got some dynamics from a return perspective that works for us, but we don't feel like we're taking undue risk.
Like we're buying at a four cap for the Bridgelander, we have to get to the six or seven cap to be able to get out of it. We're kind of already there. yeah.
David Moghavem (36:07)
Yeah, yeah, makes sense. And then
you guys are partnering with a local or with an operator who's experiencing this and.
Jared Zeisler (36:15)
Yes, so all
of these are operator driven, very traditional waterfall, know, kind of circa the whole cycle. mean, we do have a prep business and that business does perform differently and has different structuring. But in this particular case and on the other deals that I mentioned in the student space, just a JV deal together.
David Moghavem (36:24)
Yeah.
Yeah, and I think what I'm seeing right now is a lot of these LP groups, like they're really picking their horses and they're not just giving equity to anyone or they're not even giving equity to any good deal. They're really looking at like who are the people that are going to execute on the business plan. And I think that's what I'm what I'm seeing out there. And I'm sure that's kind of what your guys' philosophy looks like, where you find someone that you're like, all right, they have a track record, but they also know how to handle themselves during this
current cycle and they have something going that's good and that's getting yield and let's put our money with this horse, you know?
Jared Zeisler (37:15)
I look, I started my career here at Capital Solutions in 2010. It wasn't until 2023 where I looked back at my investments and said, ooh, we got a problem. It was 100 % win-win. We didn't lose. So if somebody would have told me what they told me today, which is if you've never done a bad deal, you've never been in real estate, I bet what you're talking about. You don't have to have bad deals. You have to have all good deals.
David Moghavem (37:29)
Yeah. Yeah. We were on a 13 year bull run, probably higher. Yeah.
Jared Zeisler (37:44)
I've done that, maybe did something wrong. But I think what you learn is that if you hang around the game long enough, there's gonna be challenging cycles and challenging investments. The question is how do you get out of them? And did you do everything? And was it self-inflicted or was it just kind of a bad buy in hindsight? And so I think we've done fantastic deals with partners that back in the great...
Recession in 07 and 08. I mean they got blown out But they were experienced people they knew exactly what they were doing You know they learned from the mistakes and they were great operating partners So to Mike's to my view of it, know, we of course have great relationships with existing partners But we are also always looking for new capable qualified partners with good deals I think yeah those people have to stand up and if they have that deals, know what tell us about it Let us learn like what went wrong
What are you not going to do on this deal? ⁓ So, but yeah, I mean.
David Moghavem (38:46)
That's almost like as more I was actually writing like a post about this like that's almost as important as your track record at this point is like how are you guys handling your portfolio? What was the mistake? But how are you guys making up for it? ⁓ As you said, was it self inflicted? Was it? Were you able operationally to execute on your plan, even though cap stack may have flipped upside down? So yeah, I think you have a good point there.
Jared Zeisler (39:08)
⁓
And I think equity is still very difficult to attract as you mentioned earlier in this discussion. I think when we as equity and other equity providers are kind of now able to pick, right? There was a piece of the business where if it was a good deal and a good partner, it was basically just a race to the bottom of who could lower their cost of capital lowest to win the deal and to partner. So the tides have turned.
into more our favor now, which is look, we get to pick which deals we want to do, when we do them we want it be in terms that are fair and equitable to the risks that we're taking, and they want to be with people that you trust and can rely on. And we like to say that it's always the case in every cycle, markets get frothy, people make a lot of money, and so there's things that come up in hindsight, look back in 2020 and say, oh, maybe we shouldn't have done it with that guy, or maybe we saw the other, you
units being developed and maybe we shouldn't have done that. ⁓ But now forward looking get to have all that experience that you've learned from and try to apply it going forward. And so I think a lot of equity firms are saying, look, I'm going to partner with people that have done this through and through for many years because I've partnered with one or two operators and I've seen the other side of it and that side, you know, that side sucks, right? ⁓
David Moghavem (40:29)
Yeah. Yeah.
Makes sense. So, I mean, I guess on that note, as you know, there's a lot of operators and a lot of GPs look, you know, listening to the pod out there and struggling to raise equity or it's tougher than it's been. What's kind of some advice you can give a GP or an operator on ways to not only fundraise, but just present themselves ⁓ to be in a position to to get more capital raised.
Jared Zeisler (40:39)
short.
⁓ I would say like you know always on an equity side you get thrown a lot of deals regularly People that know how to present to an equity investor start there right have your book tight have your Excel model proper Right be able to answer questions because the first thing we do before we like really dive into a deal is we all desktop it and we see a lot of deals and we have our analysts you know running through things with us and if somebody's got a crazy assumption or it's out of market or
It just feels like they don't know what they're doing. It's way easier to pass than just go to the next one. Right? So have your pitch tight, like think like a sharp tank. Watch it. Like, if you're go present your deal, be ready. Right? ⁓ Don't have holes. ⁓ Secondly is, look, it's hard to get business done. It still is. It's not an easy process right now. ⁓ We are just as motivated to wanna do deals as anybody else is, but the reality is that the market tells you when you can do deals and can't do deals.
by function of living in the numbers and making sure your numbers are honest. And if they are, it'll tell you if the market's providing enough return on the specific deal or not. And I would say that on the development side, we're very focused on the low cost basis. Don't just assume you can build a parking garage and get higher rents and make it work. Try to find deals where there's something special in it relative to...
you know cheap cost of land or a tax abatement or something because costs are expensive and it's hard to just go build a deal and make it work. think all developers probably know that at this point. On the buy side I would say similar to what you discussed with me is you know try to get as close as you can or over leverage and you know don't go in you know thinking that oh because rates are going to drop 200 basis points and know supplies are be absorbed and going to pop.
15 % of rents you're a beer, I'll sell our buildings to you, but I'm not gonna buy into that piece, right? I'm not gonna buy into that. So I think most investors going forward are being picky and developers and operators have to realize that and there's gonna be times where there's feast or famine in our business, in my opinion, and probably from a historical perspective, true. And I would say right now is the time to really kind of pick the right deals and if you have a...
David Moghavem (42:58)
Yeah, right.
Jared Zeisler (43:22)
A good deal always finds money. So if you're a developer and operator and you're really struggling to capitalize your deal, there's probably a good reason for that. There's something broken in the underwriting or broken in the structure. Now whether you know that or not, you're just trying to get it funded because you're pregnant, that's something different. But a good deal, money always gets circulated around it. And then that good deal of course has to be attached to somebody that's reputable and investable.
David Moghavem (43:49)
Yeah, I think to your first point, in order to get a deal capitalized today, you got to have conviction. You got to be able to die on that hill. You're going to be pitching it. You're going to have a lot of skeptics that will dig in and say, you know, it's not the right fit or it's like interesting opportunity, but this isn't the right one. And you just have to have conviction. And the second point that you made, especially on the buying side is now more than ever, you got to protect your downside. Like it's not about
How is this deal gonna be making a boatload of money? But how is this deal protected from downside from different risk in such a volatile environment, which we're starting to see some stability now. You wanna make sure that you're protecting your downside ⁓ operationally capstacks driven things like that. ⁓ So I think those two points are super important for operators when they're looking at deals right now.
Jared Zeisler (44:46)
think the weird part is like if you ask me, know, when the interest rate went from zero to whatever, 5 % on the sofa, I'd say, oh, okay, well, 12 to 24 months, we're really gonna see a distressed market and then we'll recycle. One of the things that none of us have seen, which it still begs to see if we're gonna see it or not, is a flush out, a distressed flush out. You heard about a couple operators here and there, you've heard about problems, but you haven't seen like bulk.
distress. And so if you don't get there, then we're just probably going to continue to be fairly steadily slow because capital means it's still trapped. It hasn't capitulated. Now I'm seeing more capital markets activity and I know you said you were as well. That's a good sign. And so maybe whatever had to be flushed out has been flushed out. But ⁓ we didn't have that big kind of crack in the business.
David Moghavem (45:40)
Yeah,
it wasn't like a sharp V, right? Like crash and then rebound. It's really feeling like a U. It feels like we're kind of in this slush and it's like a slow grind right now. But I do feel like this year has been more active, like you and I just spoke, that we're seeing more on the market. We're seeing sellers starting to capitulate or at least just move on ⁓ to whatever the new reality is in order to recycle that capital.
into what a lot of people feel like is the bottom. So it's like, hey, let's just put ourselves in a position to kind of preserve as much capital as we can on the deals we bought at the peak so we can at least recycle it into deals that we could buy today where we feel like we're at the bottom.
Jared Zeisler (46:25)
Yeah, or you see underperformance in an investment and you say, look, that money's better utilized to put elsewhere and they take a trade. A lot of people had the memory of, well, I owned this deal last year and it was worth 80 million and now it's worth 60 million. Next year it's gonna go back to 80 million. So I'm not selling. But now when you three, four years past kind of the height and you say, okay, well, it's worth 60 or it's worth 55 or it's worth 60.
David Moghavem (46:41)
Yeah, right.
And
there's more data points now, yeah.
Jared Zeisler (46:52)
Yeah, yeah.
We're putting more stability, price stability. And so now that you're price stability, people can make decisions. If it makes sense to trade and hold or whatever thesis they have for their investment company or family or what have you. ⁓ At least the data feels more concrete as we started the call versus some of the craziness that was going on during, before and after COVID.
David Moghavem (47:15)
Right. Well, Jared, it was amazing having you on. ⁓ Looks like you guys are having your own fair share of fun as well in this environment. So looking forward to continuing the conversation and thanks again for hopping on Dealflow Friday.
Jared Zeisler (47:31)
Yeah, they'll really appreciate it. I think it's very cool what you're doing here and I have to be a part of it. So I appreciate you thinking about me.