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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.
Speaker 2 (00:00.286)
All right, welcome to another episode of Dealful Friday. I'm your host, David Mogavum. And today we got Andrew Kwok, principal at Arcus, the new shop, should I say rebrand?
Yeah, new shop. But a year, a year new.
Wow, congratulations. I appreciate the swag bag you brought here. Yeah. You know what? I should show the camera.
The swag bag, all right? We got Arcus Capital.
Can we see that? we see that? There we go. Yes. Got to the breath fresh. Thanks again. You guys always are on top of it with the swag. You know, when before with Capital One and Be Street, you guys really keep the swag on point and it's important.
Speaker 1 (00:31.074)
Keep the breath fresh.
Speaker 1 (00:45.845)
It's the little things in general, branding, it's the little things in deals, especially now.
Yeah, I think you guys need to have some like decal stickers for some of like the older swag you got with different names. just slap on the Arcus instead.
You know what's interesting is in in our office when we were decorating we realized that we had some leftover Beach Street, OG Beach Street We put the beach street poster we had them framed. They look really nice We have a kind of a informal conference room and we put them up there just to as a nod to kind of our our background Yeah,
just want that, I kinda want some OG gear.
Speaker 2 (01:24.622)
You have like, you know, the OG team, right? With like Tina and Greg and so.
So our whole team, the four principals of Arcus Harbor, Greg Reed, Kristen Croxen, Tina Quirin and myself have been working together. I'm like the short end of the stick. I'm I think 18 years working with three of them and they're like 20, 25 years. we go all the way back to Deutsche.
Team, different, yeah, different jersey, same team.
Yeah, and we've all held different roles at different times. Greg, Kristen, and myself have largely been on the production origination side, and Tina Quirin was actually our head of credit at Capital One. So we can unpack the whole story if you want.
I think we'll get to that. know, quack just for the audience to know you've been an awesome friend through business at this point and we've done a lot together. Been in the game for a long time, over 10 billion of transactions and financing agency, bridge to agency, all types of instruments. So definitely want to get into what you guys are busy with. I definitely want to also start on what you're seeing in the market. I saw this LinkedIn post.
Speaker 2 (02:42.476)
You sent a couple days ago, think you're, so you're on the board for the USC. Yeah.
is my fourth or fifth year. I went to USC and wanted to get more involved several years ago and had an opportunity to fight on.
My family is a Trojan family. went to BU so they little disappointed but I still tailgate as if I went to SC. Exactly, no conflict. My wife did go to UCLA but you know what, she's not into sports anyways so I could trick her to be a Trojan fan and she'll be okay with it.
No conflict either.
Speaker 1 (03:22.498)
Yeah, so I sit on the board. It's, I believe my fourth year and it's a great, it's probably about 75 people. You have the advisory board, the executive board, and then the kind of center members. And it's comprised of about 75 people. And there's a portion of it that's networking and then there's a portion of it that's thought leadership.
talking about what the latest and greatest in commercial real estate is, what the latest trends are. Yeah, other alumni, and there are even some non-alumni on the board, but we sit there and we meet, I would say once a quarter, and we talk about the latest trends and we bring in guest speakers. And the idea is to bring together thought leadership and leaders in the commercial real estate community in Southern California and drive what
alumni or other yeah
Speaker 1 (04:16.982)
Ultimately, I think will be the curriculum for the real estate program.
Yeah. And honestly, USC's, their network is so strong. I mean, I'm just like looking at other schools and their programs. Like everyone has great programs, but when you get out of the program, you start graduating like, wow, USC, they're so interconnected and it's, yeah, that's a great place to be. And then one part of that is your posts. You kind of had some key takeaways with some, yeah, with some emojis. US economy strong, bond market volatility driven by lack of liquidity and
lack of market participants and kind of bonds as like the safe haven, private credits on fire. So I want to unpack a little bit about because I am seeing to that private credits on fire. But you kind of had an interesting point of how it's basically on fire from also some of the bank regulations and deregulating. So what's like the boots on the ground of what you're seeing right now?
why is private credit on fire and give me kind of your eyes and ears on what you're seeing out there.
I mean, to start with, I think you know this just as well as I do. There are so many debt funds and credit shops out there. Anybody, any private equity firm that has a focus on private credit and wants exposure to commercial real estate is participating in the private credit space for commercial real estate. Yeah. And it's growing. It's continued to grow. So you have all the private equity firms that invest equity and now credit.
Speaker 1 (05:51.424)
into commercial real estate. And then you're starting to see operators, large operators that are starting to allocate dollars from their investors to credit strategy. So you take big names like True America, they're starting to look at credit positions, whether it's, know, preff, firm, as or senior loans. Some of the other bigger players that have been in it for a long time, you know, bridge housing.
They have debt strategies team. Greystar has had a credit strategies team for quite a while. They started out by buying securities, credit securities, and now they're full-fledged. I think they raised upwards of a billion dollars of equity. And if you lever that two to three times, that's three billion dollars of dollars that they need to put out. And I think that's going out in the form of whole loans.
You know insert also regional shops that that are looking at credit opportunities so it's.
And I think part of it too is like a lot of this came when rates hiked and there was, it was very lucrative to be in credit. You can get those kind of mid teens IRR on being on a safer position of a stack. Yeah. And you know, actually I'm in the middle of reading Ray Dalio's book, how countries go broken. He kind of says the same thing. Like when there is this rate hike period,
you want to be on the credit side and then as that kind of gets tighter, when yields get tighter, you want to be on the equity side and so I think you're kind of seeing a little bit of that.
Speaker 1 (07:34.978)
Yeah, definitely. think you're seeing that. also think you're, you know, from your perspective, I'm sure it's very tough to find. So if you can.
Sure, yeah. Strategy as an operator, right? We're so management intensive, management focused, and we're not taking bets on different parts of the stack. We're on the equity side and we're taking bets on different markets, different. So I think it's definitely an interesting strategy of how some of these operators have a credit and they're placing credit in different parts of the stack on different deals.
Yeah, it's grown, it's continuing to grow. There's a lot of capital being put towards a credit strategy. And I think it's twofold. One, to your point, as interest rates have risen, being in a credit position is not a bad spot to be. The other is just a lack of deals in the market, or a lack of deal volume or...
that makes sense, That actually buyers and sellers.
Yeah. And so if you can go and generate mid teens or even high teens, low twenties, return from a credit strategy, I mean, it's not a bad position to be in. And what these guys are doing is they're taking for every dollar of equity that they're raising. They'll go in and borrow money from the banks at, you know, call it 125 to 150 over SOFR and borrow two to three times their equity.
Speaker 1 (09:09.55)
and generate a healthy return lending money at $300 to $350 over.
So when you know what I am seeing recently, I guess through this first half of the year is now it's a little bit of a knife fight on the credit side, right? People are starting to race to the bottom and there's a little bit more stability in the market than what there was a couple of years ago. I feel like the shift is starting to turn a little bit out of credit into equity, but I would love to kind of hear what you're seeing as well.
Is there still good returns on the credit side? where have you felt like you've really had to stretch to like win deals now on the credit side? What are you kind of seeing out there?
Yeah, I mean, I think there's there's a lot of available capital, but that capital is continuing to be fairly selective and it varies even on the credit side. And it varies sometimes day by day. Appetite, whether there was a CLO that went out in the market, whether or not another fund has raised additional capital to allocate solely to credit. So as you're starting to see that, know,
even on the credit
Speaker 1 (10:22.764)
I would say in the last six months, I have seen strong changes in appetite on the credit side. So let's just take a multifamily debt fund bridge loan right now. If you asked me six months ago, the majority of the shops were saying, we don't want to touch anything that's older than 2010 vintage. Then fast forward 30 to 60 days, it's 2000 vintage or newer. And it's like, okay,
we like 90s vintage and newer. it's just the pricing has also gotten more aggressive, but a lot of it just depends on the different players who's just put out a CLO, who's freed up balance sheet capacity. So there's a lot of that that's driving the decision-making on the credit strategies.
And I know, listen, most of our listeners are pretty like savvy, but I think it's also interesting to talk a little bit about like how it's structured, like CLO, what does that mean? Like when you originated Bridge Loan, what's happening in the back of the curtain? So maybe like briefly kind of touch on that.
Yeah, yeah. mean, I think, you know, have most debt funds, most bridge loans that you're seeing today through a debt fund are reserving the right to sell the loan or securitize the loan. And a CLO is just, it's a collateralized loan obligation. Right. It's just a fancy term for saying CMBS for bridge loans. Yeah. It's a securitized product. They aggregate into pools and sell off different tranches to the bond market.
Well yeah, and they can sell the loan, they can sell part of the loan, yeah, exactly.
Speaker 1 (12:04.034)
And then there are some funds out there that are solely focused on holding the loans in their fund and their funds restrict them from leveraging the fund. So there is a degree of that, but I think everybody's reserving the right to either sell the loan or put it into a CLL.
Exactly, selling it doesn't necessarily mean CLO, it could mean selling it to another credit. so I think what you're seeing also right now is the fact that there's now more liquidity in buying those pieces of the loan, those tranches of the loan is now making the spreads be a little bit more competitive because there's now people on the other side or on the back end that's willing to buy it.
Right. There's that. And the other thing that's driving pricing is the back leverage that's being offered by the banks. if you're looking at how a lot of these debt funds operate, they either have some sort of a warehouse line or that they put these loans on to ultimately deliver them to a CLO or they are financing each loan with note on note financing from the banks.
And what we've seen is the banks having a strong appetite for that because it is incredibly low leverage relative to the actual underlying asset. And it's also a way for banks to put out large amounts of money, albeit at much lower yields.
without having to like go out and originate themselves.
Speaker 1 (13:38.922)
And then that kind of gets into the bank regulation. So since the GFC, you had Dodd-Frank come into effect. You've now had, think, kind of the full force of Basel III come into effect, which are banking regulations that require certain amounts of capital being held for each loan and certain capital requirements for the banks. And what it's done is it's caused the cost of
operating or cost of lending to banks to increase so The cash drag it's you know, they have to hold I think under Dodd-Frank Basel 3 Anywhere from 8 to 15 percent depending on the risk rating the loans for each loan So you layer that on top of the fact that there's now a lot of regulatory compliance associated with making commercial real estate loans and other loans but but
Because of the cast drag, basically.
Speaker 1 (14:34.35)
Here we're talking specific to commercial real estate. So you have all this compliance. So you need a robust compliance team. So your cost of putting out every dollar, even though the bank's cost of capital is probably the cheapest across the board, it's gotten more expensive. And you layer that against an unregulated debt fund or a private equity shop that can set up a fund.
Let me back up. those regulations are just with banks. Thanks. Okay. So like a debt fund doesn't have to comply with the same type of.
they don't have the same oversight. So they're not a regular.
Which is why like a debt fund can potentially be more competitive than than a bank. Is that why or?
Yeah, I mean, the thing is, is there isn't whether a debt fund makes a 50 % LTC loan or a 80 % LTC loan, there isn't a regulatory body that says you need to keep X amount of capital behind this loan to to to kind of shore up your balance sheet or to to backstop your balance sheet. When you make a loan like that at a bank, you have, you know, all kinds of regulatory bodies like the OCC that say
Speaker 1 (15:44.472)
well, depending on how this loan is rated, you have to set aside a certain amount of capital. And so that's one of the big difference. so I've, and this idea that post and the idea that private credit is being driven largely by banking regulation actually came from, I think a podcast I was watching with Scott Bessent, the treasury secretary. And he said that, and I said,
This is really interesting, but he didn't elaborate. So I did a bit of research on it and it turns out that there's a significant cost differential between the two. And it's really these regulations that are driving a need for private capital, private credit in the market. so we're seeing that in today's market.
Nice, nice. So which podcast was it? Was it the all-in one that he was talking or? Yes. Yeah. Yeah. Yeah. a good one. Yeah, that was a good one.
Yeah, for sure. So I did a bunch of research and I think what ultimately came out of my research is that for just commercial real estate loans in general, the bank's cost relative to say a debt fund or private credit is probably somewhere between one and a half to two X what it costs a debt fund to put out dollars. that changed.
Is that regulation now changing where they're trying to even the playing field or is
Speaker 1 (17:10.318)
there's talk about it i don't think there's any change regulation yet
The idea is that that's why private credit is so attractive is because they just have less regulations to abide by.
Yeah, and the risk rating that are assigned to each of the loans, like the risk rating that would be assigned to say like a 70, 75 % LTC loan today is considered pretty risky at a bank. So they're gonna have to set aside quite a bit of capital against that loan, which makes it more expensive. And then they're having to rerate the loans every quarter. So it's an expensive endeavor. Whereas,
If you're going and making back leverage to a debt fund and your relative dollar is 30 to 50 % of the underlying collateral of the loan, I think that's a much easier position for a bank right now. So you've seen a lot of growth in that space.
So I guess with Arcus, you guys also have different products than just the typical agency that I think you guys have a partnership with Lument on. we've, in the past, have done many types of balance sheet type programs, bridge, bridge to agency. What do you guys have offering right now and how are you guys getting competitive in the mix? I'm assuming you guys are also kind of abiding or have to abide by these regulations as well.
Speaker 2 (18:37.408)
as a bank or are you considered like a debt fund or something?
We're an advisory firm and Lumint and Oryx are a financial services firm. So if you take a step back, we engaged in a long-term exclusive correspondent agreement with Lumint and their parent company Oryx. Oryx is a Japanese financial services company, probably about $125 billion of assets, $30 billion market cap, plus or minus.
traded in Japan and on the NASDAQ here in the US. We struck that agreement with them that allows us access to their agency licenses, so Fannie, Freddie, FHA, as well as their balance sheet. And in addition to that, we also have the ability to go out to the broader capital markets. So that funds CNBS banks.
So exclusivity with those sources of capital, then can also as an advisory firm, originate different other types of capital.
Yep. we kind of, would, I would say we have kind of two verticals. We have our, our multifamily finance vertical, is largely Oryx and Lumens balance sheet, Fannie, Freddie and FHA. And then we have our debt and structured finance vertical, is everything else. A multifamily non-multi self storage. We're looking at, we looked at some office deals. We've looked at some, some retail and that will run the gamut. Lifeco, bank.
Speaker 1 (20:09.778)
CMBS debt fund. So we're really focused on really being able to provide capital for any of our clients in any scenario.
All parts of the stack are mainly credit.
Credit, are doing, you know, we're looking at pref equity opportunities, a lot of pref equity opportunities, a lot of Mez. We, I think, envision in the future being able to go out and pitch like JV equity for our clients. But I think that's, right now there's not a lot of demand for it. But we're, I think that's maybe Arcus V2 and, you know,
It's a little tough right
Speaker 1 (20:55.374)
towards the end of year two or year three, think we'll start to try and build that out.
Nice. So I guess this is a good time. Like, you know, the Arcus name, why the rebrand? Give me a little bit of idea of like what, you know, the past almost 20 years that you've been working as a team, what's different now with Arcus and why the decision to rebrand?
Yeah, so I'll kind of back up. our background, we really, the four principals of Arcus Harbor, Greg, Kristin, Tina, and myself started Deutsche Bank and the predecessor companies to the business unit at Deutsche Bank that we were in. Greg, Kristin, and I left in 2011 to start the West Coast operation for Beach Street, which you remember.
Tina joined us at Beach Street, think in 2012 or 2013. She was on the credit risk and underwriting side. fast forward to 2013, we had built Beach Street to about a $13 billion book of loans and sold that company to Capital One. And over the next two years, we integrated Beach Street into Capital One's commercial banking platform.
and ultimately became their agency and commercial real estate group. We had a great run about, let's see, 10 years. Yeah, 10 year run with Capital One. We did a lot of deals together. did a lot of agency together. We did a lot of balance sheet. But one of the things that really came up over the last three to five years is our clients started asking,
Speaker 1 (22:38.816)
you know, what other capital sources, what other, what other products do you have besides Capital One's balance sheet? Yeah. And the agencies and, and what we found is that it was very difficult to pick up the phone and call a debt fund or call Lifeco from a bank because everybody's first reaction is why aren't you guys doing it? Yeah. And you know, that's, it's a tough sell. You're starting, you know, kind of from your back foot. Yeah. You're selling, Hey, we're not trying to offload deals that we don't want to do. It's just not a good fit for.
for us.
the relationships that are coming to you with you know, wanting advice of some sort or some sort of like alternative capital and you see there's a demand but there's no need that's filling it. At least that you can provide.
Yeah. And so I think, you we had a great run with Capital One, but we kind of thought last year it was time and we spent a lot of time thinking about the next step and what we wanted to do and whether it's go to another mortgage banking shop that's maybe an unregulated shop. And we came up with the idea of, is there a way we could do this on our own, start our own company, but still have, you know,
some sort of direct access to the agencies and a balance sheet. And frankly, we pitched the idea to a number of places and a number of places were like, yeah, no, you either come and work for us or you don't. And then a couple of groups were very interested. They liked the idea of revenue sharing and really having a partnership. And we ultimately settled on an agreement with Lumen.
Speaker 2 (24:05.421)
Right.
Speaker 1 (24:20.526)
It's a long-term exclusive correspondent agreement. It gives us the direct access to capital through the agencies. It gives us access to Lumen and Oryx balance sheet. It also allows us to go and clear the capital markets for our clients, which was the primary.
It's really like a one-stop shop at least on the credit side, right?
Yeah, that's exactly it. And I think the philosophy behind what we were trying to do is, when you're at a large organization, there are a lot of stakeholders, right? If it's publicly traded, there are shareholders. If it's privately held, there's still the shareholders or the owners of the company. You you have your clients, you have all of the other people involved in the business and
when you have a small, very nimble entrepreneurial company, you can say, yes, everything, all that stuff is important, but the number one thing for us is our clients and putting clients back at the top of the list. And when you get into some of these larger organizations, the clients, you tend to forget that the clients are why your business exists. And so the clients start to fall down the list of priorities. And we wanted to be at a place where
commercial real estate and multifamily was a top priority and we could put the clients at the top of the list. And so that's the philosophy behind Arcus and that's what we're trying to do and that's what we're building.
Speaker 2 (25:52.27)
mean, that's definitely the experience we've had with you guys. You guys were always, you know, you guys were always like person to person, how can we help you rather than just what deals you have, this, that. It was very much like, how can I help you in anything? And it was a very friendship first of some sort through business.
It's important to work with people that you enjoy working with. Our business, it can be tough. And so if you're going to work through challenging issues, why not work with people that you like? And for us, think we also set it up, set up the company so that A, we have a seamless team. our entire team has been with us a minimum of five years. So we have
Phil Cobb and Raquel Bushia who have been with us for, call it about five years, maybe a little over five years. And you have Celeste White who runs all of our transactions in due diligence. You've worked with her before. She's been with us for, gosh, 10, 12 years. And Ali, our operations manager has also been with us upwards of five years. And then you know the story with Greg, Kristin, Tina and myself. We've been together 20 years, our big pitches.
We have 90 years of combined-
You guys combining the experience. exactly.
Speaker 1 (27:19.054)
90 years of combined experience. we, the way that we're set up is, you know, when you work with us, you don't just get, you know, Greg or Kristen or Tina working on your deal. You get our whole team. get, you know, Greg, Kristen, Tina and I giving different perspectives. And also, you know, if when we're really busy or somebody's, you know, out on vacation or doing stuff for their kids.
Like you have just this team that's somebody's always on and always there. yeah, so we, we think it's a little bit different of an approach and, and so far it's worked. We're I think 15 deals in, so we're, 12 months in, we started in June, 2024. We're 15 deals in about 550 million closed with another, I would say we've, we've got in various stages, about a billion and a half in the pipeline that we're
looking at or either processing. it's.
How much of that is like traditional agency versus kind of alternative programs?
I would say right now based on what's in the pipeline, active in the pipeline, like we're working through currently under term, under application or term sheet and closed. would say we're probably, I would say two thirds, one, one third split, two thirds of it is. And one third of it is balance sheet and of that kind of balance sheet bridge. We've got, I think three deals that went to Lumens balance sheet and then.
Speaker 1 (28:55.63)
We've got another five that are with debt funds or other capital sources.
So I want to keep cutting up the pie because I think it's telling, right? Like a shop like yours that has access to different types of credit, what you're busy with. So two-thirds agency, one-third alternative, I guess. Out of the two-thirds, how much of that is acquisitions, ballpark? How much of that is like, cash-in refisers something?
Let's see.
I think it's a good lip necess, right? Of kind of like where we're at in the market and tie.
I would say just off the top of my head, it's probably 20 % acquisitions, but we're seeing that start to pick up. We're looking at a lot more acquisitions, but it's still heavily skewed towards either refinances, just, you know, maturities like loan maturities, agency loan maturities.
Speaker 2 (29:57.198)
Like an agency floater or an agency fixed like a 2025 year. Do you already have years after 2020?
Morning.
Speaker 1 (30:04.11)
Yeah, 2025 year.
They weren't really doing much five-year in 2020. So it's really like either old 10-year fixed loans or seven-year fixed from 2018. So there's a decent amount of that.
I guess sorry to cut you off like in 20, you know in 2018 from what I remember Rates were like at a like a like a low. everyone's like, that's three five three five like it's low It's not gonna get lower than this and then COVID hey and it went lower and he's like, shit Yeah, so I guess you have a lot of maturity
had that run up towards the end of 2018. But yeah, there's maturities, so there's a few of those. that's somebody that has to transact.
And I guess those aren't, I mean, you tell me like, those ones from 2018 aren't like cash-ins, right? There's been so much.
Speaker 1 (31:04.462)
Those are generally, I would say the profile of those are generally either a fund or a family office that's held those assets for decades upon decades and generations. So this is probably their sixth or eighth refi since they've bought or built the asset. A few of those, we have some floaters, agency floaters that are
We have a few of those.
Speaker 1 (31:31.682)
just their cash flows being consumed by, you know, rate cap escrows. And so we've had some cash neutral ones. We've had a few cash cash in or pseudo cash in where the rate cap escrow is, the cash going back into the deal to kind of fund the difference. So it's, it's not like the sponsors are having to come out of pocket or do issue a capital call. And then the, would say that's
That's the majority of it on the agency side. And I will say what we're seeing is if somebody doesn't have a gun to their head today or a real reason to transact, I think a lot of people are, I want to get into position to transact, but I want to kind of wait and see and watch the market what happens with what's going on in the US economy, US politics, geopolitical things that are going on all over the world.
tariffs, all, you name it, there's all kinds of forces that are pulling the market in different directions. And so I think we do have a lot of clients that if they don't have a reason that they need to transact today, they're like, let's tee this up and get it into position. And if we see a window in the market, we'll pull the trigger.
And I think anecdotally, I feel like this year there's a little bit less of kicking the can than there was in the past couple of years, right? There was a clear motivation to kick the can when we were in 2023, 2024, survived to 25, all that. I think like now we're in 25. And if you already made your capital calls or put your pref on it to give yourselves a couple of years, here you are now. It's hard to justify doing.
putting more capital again into the deal after doing that once or twice. And so I'm at least starting to see less of that and more sellers capitulating, deals getting done. That's why I was kind of picking your brain on like your split of deal flow because I think you're seeing a little bit of a shift. it sounds like you have a few of those still and maybe they have their reasons, there's still uncertainty, that makes sense.
Speaker 2 (33:44.322)
What have you been seeing? Is that match up to what you're seeing or? Yeah.
think what we're seeing particularly on the acquisition frontier point, sellers capitulating, I think there's a couple of camps. One are guys that maybe made a bunch of money. They bought right in maybe like 2015 or maybe even before that and they missed the mark. They could have sold in 2022 for a big number, 21 for a big number, but they're still like, okay, I'm...
Either I'm at a basis or I have some reason that I want to transact, take some chips off the table or 1031 into something at today's basis. Cause I think there are some, yeah, there's, some opportunities. Then there's some acquisitions or transactions that are occurring where I think you have your merchant builders that want to sell and they're still there. Their basis is still below today's replacement costs. So you're seeing them say, well, I didn't, I didn't get
feel it's a bottom right now.
Speaker 1 (34:46.926)
the number that I was performing, I'm happy to, you I'm a merchant builder. Like I'm not set up to hold and operate this thing. So I need to sell. And so you're seeing that. And then you're also seeing sellers truly capitulate either, you know, getting out unscathed, you know, didn't make any money, but didn't lose anything or maybe taking a little bit of a loss or
and your next development.
Speaker 1 (35:16.046)
not making as much money as they maybe thought they were gonna make or they had proforma. And so on the flip side, the guys that are buying and the guys that we're financing, we're these assets trade and we're financing these assets at a great basis, right? You're seeing deals trade at well below today's replacement costs, anywhere from 10 to 30 % below replacement costs, which is, I mean, it's a great deal.
I've seen some deeper honestly. Well yeah, mean in Sunbelt for sure it's like around that 30 % maybe where it's like easier to build and I think where it's harder to build you're still seeing like those really deep discounts to replacement costs and kind of like what you're saying sellers are meeting the market because they're in it for less than what it costs today to
I'm sure you're looking at a lot more than we are.
Speaker 1 (36:07.18)
And the interesting thing is the math on some of that stuff works really well because there's still strong demand for apartments. So you're not, where you're seeing impacts to cash flows, you know, the usual suspects, insurance, labor costs.
Still maybe some short term struggles of like maybe like low nineties occupancy instead of mid nineties or like 3 % bad debt instead of 1%. Yeah. And that's exactly, but I agree with you. think like taking a step back, it's still a good bet because there's still housing crisis nationally. Some places worse than others and people need a place to live.
Market by market.
Speaker 1 (36:45.4)
Yeah, yeah, I completely agree. So we're seeing that. And then we're seeing, you know, on the acquisition front, I think that that kind of covers the acquisitions. We're seeing, you know, some good opportunistic buys. And, and we've seen some interesting deals where the cap rate is you're back to positive operating leverage. You you're financing it, you know, low to mid fives and you're buying it a true five and three quarters, six cap or even north of that, depending on the market that you're in.
And so that's, that's, think, promising to see.
funny I had like a different pod where we were kind of debating because like you're saying low to mid five but that's after the buy down it's like okay now you're tricking yourself there's a bike you know what I think the idea is you know the buy down however you want to justify it is towards the basis and you're borrowing at a lower coupon than what your deal is yielding at and I think the bottom line too is you haven't seen yields like this in a long time right and we've I mean
since I've been in the market, I've been operating in such a long bull run that you always had to justify some sort of negative leverage because there was growth and there was, you know, resolving to a yield on cost rather than in place metrics. And that's changed now.
Yeah, it's definitely interesting. think some of the buyers that we're seeing right now are kind of old school syndicators. So still syndicators, but old school syndicators that buy, don't ever sell and look for long-term value growth. And in the short term, they're looking at what does the cash on cash look like? What can I pay my investors?
Speaker 2 (38:29.534)
I want to unpack that a little more because like old school syndicators, these are guys who are using the tax incentives that real estate has and finding ways to create cash flow, which is like not what usually syndicators think about. They think about IRRs, promotes, things like that. But these old school ones are like, all right.
That's the modern day syndicate.
Yeah, exactly. The old school ones are like cash flow. Yeah. And turn 31 eligibility into the next deal and just ride it. Keep deferring the taxes. Keep getting cash flow. I think that's a great structure to be in in this time right now where you know long term it's going to be good and you might have to bite the bullet a bit with short term struggles operationally, but long term like this could be goodbye.
Yeah, I mean, for guys like that, positive operating leverage is what you need to make your business model work. I think we're starting to see that. that's promising. And then if going back to, I'm going to shift back to the other part of our conversation where we're still seeing cash in refinances. I think we've seen people say, let's hold and see what happens with the market. And I think we're seeing
Operators and sponsors come back to us and say, okay, well, we've called capital. We're ready to refinance, take out the step fund loan that we originated back in 2021 or 2022 and take their three to five year hold and recast it and look at it more of like a seven to 10 year hold and put five year fixed rate debt, pay down the existing debt.
Speaker 1 (40:24.45)
and kind of take a look for the long run. I think those are guys that probably bought right, but over levered, took advantage of the leverage that was available at the time.
Right in terms of you know, it's a good long-term strategy, but you need more runway. Yeah, you know
Yeah, you need more rent rent growth. Yeah, you've had forces working against you. You've had interest rates run up. You've had insurance costs double, triple, and that's probably on the low end. Yeah. Yeah, especially in Florida. mean, Florida, I've heard. Yeah, I mean, I've seen I've heard nightmares of, you know, six, eight, nine times growth in and insurance costs and.
Thanks Lord.
California too.
Speaker 2 (41:11.586)
And what you're seeing now is actually when like we're starting to see renewals come down. And so if you kind of made deals pencil a couple of years ago, you're getting some upside just from renewals coming in. It's actually, I always compare insurance market to like a lending market in a sense, because just as we were talking about like CLO and selling a piece of selling a tranche, like that's how insurance works is selling a tranche, selling a piece of the TIV.
that's insured and selling that off and the reinsurance market was not only are we dealing with natural disasters becoming more frequently, but reinsurance markets froze just as the lending market kind of froze.
Yeah.
So, that's coming back. we're being honest, I think there was a severe misprice in insurance for quite a while. Assuming the 200 to 300 per unit per year was probably, we were all very lucky at that time. Yeah. And I think...
Because there was a lot of liquidity, right? So that's how it was.
Speaker 1 (42:18.478)
And so it was was mispriced and then we had a series of natural disasters that caused massive payouts and going all the way down to the reinsurers. so I think
going all the way to the Fed, like banging out the hinge.
So yeah, anyway, so we've seen, it's interesting because you've seen top line growth, a lot of top line growth, but you've seen that eaten up by insurance, labor costs, interest costs. And so it's definitely been challenging for a lot of our sponsors and you know, guys will pick up the phone and call us and be like, we grew income by this much. And they're like, why doesn't the loan pencil?
Yeah.
You're like, well, there's the expense problem.
Speaker 2 (43:10.092)
Yeah, it's the operators that performed operationally, still have, they still do have more choices than the ones who didn't, right? Which is why you're saying like cash in people are able to do the cash in and actually get equity or some sort of alternative capital to get more time because they performed. The ones that don't have that chance.
I mean, they sell out a loss, have to capitulate.
If you can look at the numbers and look yourself in the mirror and say, our basis is X, today's market is Y, and we can get back to X or we can exceed X, I think that's a conversation that a lot of sponsors are having to look at. Did I buy right or did I overbuy and then over leverage? is it time to cut bait or is it?
Can I, can this be salvaged with an extra three to five years of term?
So I guess, guess, you know, one thing I want to ask is as you're seeing operators start to make that decision, right? What's like your advice to them? What are some good lipness tests for making that sound decision of whether to cut bait or to move forward? What are some of the products you're seeing that it's like you should consider? Like what is, what's your advice?
Speaker 2 (44:42.816)
as you're kind of making this decision. Because this is the year that people are making that decision.
There are definitely tough decisions. I think I go back to there is a lot of capital out there and available. I think, you know, engaging with or working with somebody or a group that can provide a lot of perspective and really, really truly clear the market and give you an answer of is there something out there? Is there a product out there that can help solve
the short-term problem that we have. you know, I, I being very candid, there are a lot of, you know, phone calls that we, take and we have that are like this, unfortunately the basis in the deal is it's going to take a long time to, but I also think that sometimes nobody's had that conversation either in the organization or
Bad news,
Speaker 1 (45:42.702)
outside of the organization. so I think, you know, really taking the time to look at the deal. It's not like the heydays of, you know, 2021, 2022, where it's like send a pro forma and a T12 and a rent roll and, you know, we'll get an answer for you. It's like.
We're based on sponsor pro forma number.
As you're as you're seeing everything is. It it's taking more time, it's more difficult. You need to really dive into the get into the weeds. Even, you know, as an advisor, we need to we need a ton of information to be able to assess the situation and then look at OK, here here are the different options. And I mean, in some cases, sponsors are coming to us. 90 days before they even.
execute a term sheet because we're first just analyzing the deal at the Arcus Harbor and Lumen level. And then we're saying, okay, here's what we think we should do. Here's the strategy. Let's go to the market. Let's go look at agency loans plus a slug of Mez or Pref, and let's go to the debt fund market. And when you go to the debt fund market, you're talking about like 40 to 50 shops sending a package out.
I'm fine
Speaker 1 (47:03.47)
Gone are the days that a debt fund will take a sponsor pro forma and a one pager. It's like we're putting together very robust analysis, looking at different options, forecasting cash flows, and really looking at does this make sense and how do we make this make sense for someone that's going to lend on this. And so it takes a lot of time. And a lot of times that's
That can be a 60 to 90 day process just to get to, okay, here's like, we've narrowed it down from, you know, 50 to 60 options. We've narrowed it down to three and here's, here's the best options to, to, go through.
It's also when you're narrowing down those options, you know, one thing I've learned through this cycle is don't just go with the cheapest rate and the devil's really in the details of like how, how do they, you know, what are they doing when they originate the loan? Are they selling the APs or the CLO in it? Are they sliding into there? Like who's the decision maker? Are they keeping on the balance sheet?
Will they work with you like a relationship is so key and I I really learned that through this cycle that you can't just pick the lowest rates. Yeah, I guess my question to you too is like are you guys kind of vetting that in the same way like hey, here's one option that's the cheapest but hey like you might want to just pay a little bit more and work with this group.
Yeah, I mean, I think a big portion of that is figuring out what each, like each shop has a different process. You know, so my background in, you know, balance sheet lending with Capital One and agency lending, you know, we understood those processes very, very well. And now if we're going out to 50, 60 different, you know, capital sources, understanding what their process is. I mean, some guys will issue a term sheet.
Speaker 1 (49:01.386)
no problem, but that term sheet hasn't been blessed by the CIO or credit committee or investment. It's just. Yeah, it's it's literally just terms on a paper that they, you know, they're willing to go and put in front of the their investment. Yeah. Other guys are, you know, going to investment committee or, you know, their CIO is is reviewing the deal before they even issue a term sheet. And so.
worth whatever is on the paper.
Speaker 2 (49:16.47)
and leave you
Speaker 1 (49:27.854)
Just understanding that. And I'm not saying one way is right, one way is wrong, but if you understand that, then you know what you're dealing with. And you probably don't want to make a full-fledged decision on one of your assets based on a term sheet that's not fully vetted. And so I think that's taking your time and making sure you allocate ample time. Because I think from start to finish, you could be looking at 90 to 120 days from the time that you say,
Hey, Andrew, let's start taking a look at this deal. Here's our pro forma. Here's the rent roll T12, you know, all the different information that you need. It could take, you know, quite a bit of time to narrow down to those final ones. And not everything is what it seems to. There's a lot of like, there's a lot of nuances that may not have been important in 2021, 2022 that today are very important.
So for floors, like you, if you're of the opinion that the fed's gonna start to cut later this year and it's going to be successive over the next, know, 12, 18, 24 months and you're gonna get into a floating rate loan and you have a, you know, three and a half percent sofa floor. Like that's probably not something, that's something that you wanna negotiate. That's a devil's in the detail, but there are pricing implications, especially if
somebody's looking to CLO that there are pricing implications to having a lower sofa floor. you know, it's like those little details where, you know, everybody's looking at proceeds spread and, you know, those are very important aspects of it, but there's a lot of minutia.
It's interesting because when you probably run that through a model with like, you know, the projected curve, it's kind of stabilizing around three and a half. So you don't really think of it as like on paper is going to really like affect the numbers, but you got to see through it and the curve is never right. And so you need to you need to be on top of like those that little minutia for sure.
Speaker 1 (51:31.598)
Yeah, and even things like, if you're doing a floating rate deal right now and you're, have to, the lender's requiring an interest rate cap, you know, looking at what that strike is and whether or not they're comfortable with you buying a two year cap upfront versus three, because that could be a difference between 20 bips of your loan amount versus, you know, 75 bips. So, you know, it's a meaningful number, especially if you're, especially if you're doing a bridge to bridge right now.
Yeah, what I've learned too though is, you know, that might help on paper a bit, like downside protecting and like just getting, like even if the lender requires less and just maybe just getting more, I think that was something that I've kind of learned through this is just because the lender is letting you pay a little bit less, maybe it's not the best idea, like maybe get a cap that is the same term as the maturity of the loan.
you can always sell the cap after you sell the deal. Like there's little things like that that you always think the lender might have more stringent requirements than an owner, just like going with agencies, things like that. There's always, but sometimes with these debt funds, they also just want to get the deal done and it's like, hey, let's take a step back. Let's maybe just, instead of what looks the best on paper, you know, a couple of bits here and there.
Yeah, and there's, mean, there's all kinds of different strategies. Like if you get on the phone with like one of the Chatham guys, sure, can they get you a two-year cap or a three-year cap or a five-year cap, whatever you want? Sure. But they have, they do all kinds of really interesting stuff where you can almost ladder a cap similar to the way that like, you know, somebody that's- Latter a cap. Yeah, where you, you basically, you can buy-
different strikes at different.
Speaker 1 (53:22.542)
There's different different duration. So if you're of the opinion that you know, interest rates are going down, maybe you buy a three year cap, but you buy, I don't know, a 4 % strike this year. And, you know, a three and half percent, percent strike second year and a 3 % strike the third year.
be cheaper in the second year.
Yeah. And so they can do all kinds of interesting things. So yeah, there's, there's all kinds of little nuances. That's, that's my advice is you need today more than ever. You need somebody that's in the market every day. That's looking at all these different structures. You know, we're reviewing tens, sometimes hundreds of term sheets or, you know, sets of terms from different lenders. And so we're seeing everything that
That's why we need you.
Speaker 1 (54:11.438)
that lenders are putting out there and creative ways that they're looking to maybe either juice the spread or change the risk profile for them for a CLO and maybe have a trade a little bit better. So we're seeing all the different tricks of the trade, so to speak. I think you need all of that along with a wide range of perspective.
Yeah, especially, you know, as operators were so entrenched in the market and the deals, sometimes we don't know some of these little things that, as you said, the devil's in the details. So, Well, Kwok, it was really great having you on. Is Ark is still doing some some golf shotgun starts, any of that? What do we got going on?
Thank you so much, this was fun.
Speaker 1 (54:58.606)
I, we are endeavoring to bring back Pelican Hill.
Here we go. Argus Harbor. We had a good time together. I don't remember much of it because you got me black out. you know what? Tequila will do that. Yeah, exactly.
yeah
Speaker 1 (55:13.902)
Anytime you want to come down we can go play golf. Okay, I'm terrible at golf. Awesome. You know, yeah, I'm good
That's drinking exactly that's I was so good. So awesome. It's great great
Yeah, well that's it. Yeah, thanks man.