Welcome to Episode 10 of Offshoot with Carrie Nikols from The Nikols Company.
Carrie is the co-founder and Chief Executive Officer of The Nikols Company, a private lender who has originated over 500 loans without a single foreclosure or loan loss.
Carrie’s experience in the commercial real estate lending industry is vast. She brings strong underwriting expertise and knows how to create win/win situations that benefit her borrowers, sponsors and investors.
Listen for some of the nuggets that Carrie shares, including:
- Hedging credit cycle risk by keeping loan terms short.
- Putting underwriting ahead of origination as the central aspect of her company.
- How to be a real fiduciary, acting to truly protect the interests of your investors.
- Using daily prayer to
- maintain awareness of the fact that money isn’t a god.
- bring a true winning mindset into every transaction.
- find center before you walk into the office.
- How some credit issues can be overlooked, but character cannot.
- How speed and certainty of execution is a critical component of her company’s value proposition.
- How women can thrive in the commercial real estate industry.
Transcript
Kevin Choquette:
Welcome to episode 10 of Offshoot with Carrie Nikols from The Nikols Company. Carrie is the co-founder and chief executive officer of The Nikols Company, a private lender who’s originated over 500 loans without a single for closure or loan loss. Carrie’s experience, especially her underwriting expertise is vast and she’s incredibly intelligent.
Listen for some of the nuggets that carries shares here, including hedging credit cycle risk by keeping loan terms short, putting underwriting ahead of origination as a central aspect of her company, how to be a real fiduciary, truly acting in the interests of your investors, using daily prayer to maintain awareness of the fact that money isn’t a God bring a true win-win mindset into every transaction and find center before you walk into the office.
Additionally, how some credit issues can be overlooked, but how character is not one of them, how speed and certainty of execution is a critical component of their value proposition and how women can show up and thrive in the commercial real estate industry. I hope you enjoy the podcast.
Hello, everyone. Thanks for tuning into another episode of Offshoot. Today, I’m happy to welcome Carrie Nikols to the pod. Carrie is the co-founder and chief executive officer of The Nikols Company where she is primarily responsible for loan origination, underwriting and servicing. Carrie’s 39 years in the commercial real estate industry ranged from institutional permanent lending and large scale bridge loans to small balance bank and private lending.
The significant success Carrie and her husband, the other co-founder have had with The Nikols Company comes after a good journey in the lending space. In the early ’80s just after graduating from USC, Carrie worked as a mortgage banker for the now defunct, John Burnham & company. She then moved to the lender side with 13 years of loan origination and service to organizations like Heller Financial, Fremont Investment and Loan and Sanwa Business Credit.
She then served as regional manager for their Daimler Chrysler Capital Services originating 10 to $75 million bridge loans. As a great recession took hold, Don and Carrie went all in on the entrepreneurial journey, that is The Nikols Company where Carrie is now originated just under $900 million of debt from Nikols Mortgage Fund, that $165 million investment via that they’ve raised and over which they have full discretion.
I’ve had the good fortune to do a fair amount of business with The Nikols Company and the questions we field as Carrie and her team underwrite an opportunity probe right into the heart of the issues, be that character, financial capability or the underwriting assumptions attached to a deal. Nothing is getting by her, which is underscored by the fact that in the company’s 14 year history, they’ve had zero loan losses. Carrie is sharp. And it’s a real pleasure to have her on the show. Carrie, welcome to Offshoot.
To get started, could you just tell me a bit about yourself and The Nikols Company?
Carrie Nikols:
Yes. As you said, actually, I grew up in a blue collar family outside of Los Angeles and Ventura County. I was the first person in my family to graduate from college. I went to USC on a full scholarship and then I really fell into business with a degree in an emphasis in real estate finance. How boring is that? But once I started, I was hired by John Burnham & Company, as you said, down in Orange County. I absolutely love the business. I love the deal business. I love figuring out every piece of real estate because it all stands on its own. And I count myself as really fortunate to have fallen into it.
I was actually thinking of going to law school, but I didn’t have the money to afford that. And I just fell in love with the transactional real estate business. I met my husband, who’s also my business partner, founder, co-founder of Nikols Mortgage Fund. At that time, he was a competing mortgage banker with the Alison Company. I like to say the competition got friendly.
After we got married in 1985, he went on and formed a development company. It’s builder developer for some years until the recession of the early ’90s took that down. I went on and became a lender and really fell in love with the structured finance type of lending because that’s a real thing where you have to always put the puzzle together. No two days are ever the same.
I got bored with just permanent financing, which was very much everything is in a box. But it’s certainly taught me all of the institutional skills that I needed to know for what became my career, because I understand what my exit is, how permanent lenders are looking at things. I understand when you need to have certain third parties and when they aren’t so important.
So I know when I can let go on things. So nothing really stays in a box around here. So most of the companies I worked for as you just named are all credit companies and we were doing large 10 to $80 million transactions, structured finance, highly leveraged. I brought that lending philosophy to the fund when we founded it in 2007.
Initially we were bringing in small chunks of capital. So our loans had to mirror that. Then as we started to grow, we had larger amounts of capital to deal with. And really today, if you looked at the portfolio, you’d say that it’s a mini-credit company portfolio.
Kevin Choquette:
Excellent. Just at the very beginning, when you talk about John Burnham, what had you go that way? Was there something in particular that an uncle, a grandfather… What had you initially hold your hand up and say, “Hey, I’m interested in commercial real estate?”
Carrie Nikols:
Well, I had degree in real estate, an emphasis in real estate finance. So I knew I was going real estate and I think it was just the opportunities that hit me. I interviewed with numerous groups, but it was pretty much all of the opportunities on the finance side that hit me.
Kevin Choquette:
I guess, I’m just trying to figure out how you ended up with real estate. I guess maybe in college at some point you would’ve decided…
Carrie Nikols:
Yeah, that is a good question because I often say I’m one of the luckiest people in the world because I fell into something that I really simply love. I don’t think it was so intentional. I think I just started taking some classes and I just liked it a lot. Then I decided to do an emphasis on it.
Kevin Choquette:
And then when you guys decided to start The Nikols Company, I mean, it was right at… I mean, it was right at the beginning, if I’m not mistaken of the great recession. Is that correct?
Carrie Nikols:
It was.
Kevin Choquette:
So how did you guys do that?
Carrie Nikols:
Do that? We were working with La Jolla Loans. First of all, back in the early 2000s, a lot of people would approach us and say, “If you ever find a good deal, I would like to invest with you.” We were actually brokering at the time. We started thinking, “Gosh, that’s an interesting thought. Why are so many people approaching us on this?” Then we got an opportunity to work for La Jolla loans. Don was president of it. That’s down in San Diego and I was an originator.
We started to learn that side of the business. We thought there was a real opportunity in founding a fund as opposed to they were fractionalized investments. We just decided that that would be a great way to go. In 2007, I think it was right before the crash of 2008. [crosstalk 00:09:45]
Kevin Choquette:
Right. Perfect timing.
Carrie Nikols:
Yeah. Like they might right now feel a little bit that way. But it seemed like we wanted to carve our own destiny too. I think we’ve worked for people for long enough that we… Not to say anything negative about anybody that we’ve worked for, but we have our own opinions on how we thought things should be done and wanted to carve our own destiny. So that was a lot of it.
And to this day, as you said, we have full discretion and we have been approached by various institutions to put in large chunks of capital, but they always want a look at everything that we do. My comment on that is I’m not selling my soul. I’ve sold my soul for all these years to always perform and get things done and honor my commitments with the various organizations that I worked for. I just want to do it my own way. So that is kind of the backbone to why we did this.
Kevin Choquette:
Yeah, that’s great. I understand it very well having done a lot of business with you guys through the years. What’s happening in the business right now? What are you guys seeing? What challenges are you facing?
Carrie Nikols:
As fast as we’re putting new loans on the books, they’re rolling off. There’s so much capital right now as everybody knows that markets are just a wash and capital. This year we’ll do 25% more loan volume than we did last year. We’ve been running about 25% increases every year for the past few years, but it’s not without a lot of work. A lot of disappointments that have come out of left field that we didn’t expect with either private individuals themselves getting very, very aggressive in the debt space or our competition. They cut their pricing severely. We’re retaining our pricing, but it’s with a lot of work.
Kevin Choquette:
Asset types, investment minimum/maximum, geographic focus, primary/secondary markets, development, entitlement for those guys who might be listening that could consider you guys as a lending source, what’s in the strike zone and what’s an easy pass?
Carrie Nikols:
Yeah. We’re two to $20 million. It’s all short term. Typically 12 months with extension options. Bridge loans and ground up construction loans. The thing that we always look at that’s key is how are we going to get out of the deal? What’s our exit? These are business plans that we’re financing and we’re always looking at the sponsor’s ability to execute that business plan. Or solely in California because those are the markets that we know. We always make the joke about certain deals need an out-of-state lender and we don’t want to be that out of state lender.
Kevin Choquette:
Right. I’ve done a fair bit of business with The Nikols Company over the years. I think I can say objectively there are deals which Nikols has done, which many other lenders would look at and say, “That’s too risky. We’re a pass.” That’s not an error or any slip on Nikol’s credit underwriting. Quite the contrary. I think you guys are really good at assessing risk and landing… Well, the track record speaks for itself, but one sort of window into that, and there are lots is you guys are less constrained by loan to cost, right?
The convention in the marketplace is perhaps 65% loan to cost, 75% loan to value. I know there are circumstances where Nikols has gone rather high on a loan to cost perspective with a real focus on LTV, which I think is commercial. It’s pragmatic, it’s logical, it’s rational, et cetera. How do you guys view the… There are a lot of conventions in the lending space that I think are held as tried and true and sort of gospel. And I see you guys come in fairly regularly and be like, “No, we can do that.” How do you do that? Why doesn’t the competition do it?
Carrie Nikols:
What I like to say is underwriting is our core competency. When I was with the credit companies, we didn’t get appraisals. The originators who were expected to source and fully underwrite themselves. All of the transactions, all of those companies were unregulated as well. So I really learned a lot of appraisal/underwriting skills. And in fact, in one course narrative report away from being MAI.
That’s where I really formed very, very good underwriting skills. And I brought that philosophy to the fund. That’s why you would come to me is I’ve even done 100% of cost, loans, if we underwrite to where the value is at the end of the day, as we really believe in the value.
I’m more expensive. I’m six to 10% middle of the road, 8% and two point per year. But if I can get you up into the 80, 90%, sometimes even a 100% loan to cost, that makes a lot of sense because I’m an inexpensive form of equity. You don’t have to give a piece of your deal away. And more importantly, you don’t have to lose control of your deal. So that’s really how we compete. We roll up our slow leaves and we figure each transaction out.
It stands on its own. A couple years ago, we brought in Josh Stude, who is MAI and was at CBRE for 17 years in the valuation division. He ran a top valuation team. And he had done appraisal work for me for five years before I hired him. He either actually did the work or he found the right person in the system to do the work who really understood the product type in the market that we were talking about.
I think that that shows how important underwriting is to us and also why we’ve never foreclosed on a loan, never lost any money on a loan and always got positive interest because we bring that discipline. A lot of groups might have… When they went to expand the platform, the first hire might have been in originations, but what we needed was somebody to help us go through the transactions more rapidly and more accurately and be able to bottom line things really well, which is what Josh is able to do today for us.
He knows so many people, so many appraisers that he makes the bottom line call all the time so we can get a transaction in and within an hour. It’s a yes or yes, this has legs on it, or no, this isn’t going to work for us.
Kevin Choquette:
And how do you guys spot out opportunity? What channels are productive for you in terms of just deal flow?
Carrie Nikols:
It’s really through the brokerage community. Although, once they come in, about 65 to 70% of our sponsors are repeat sponsors, but also 65 to 70% of our brokers are repeat brokers. 65 to 70% of the business that’s brought in has a broker attached to it, as is it repeat business? So that’s an interesting statistic, I think. Throughout the years with the credit companies I worked for, because we were transactional lenders, I developed very deep clientele base with the mortgage banking, mortgage, brokerage community. So that continues to be our main source.
I like to work through them like yourself, Kevin, because you’re the middle man. I can say things to you and the sponsor can say things to you that it’s more difficult for us to say to each other. Plus, when you go directly, borrowers, they don’t really understand how to package themselves up. We’re essentially having to do a lot more work and a lot more detective work. I just think the brokerage community really adds a lot to the transaction.
Kevin Choquette:
You’re like knocking down all my questions before where I can ask them. Let’s talk a big picture because you started with the notion that there’s a lot of capital in the marketplace, and we certainly are aware of the national trends in terms of pumping liquidity into this system. I was just talking to a lender the other day who’s also a private lender but on a smaller scale than Nikols. They have primarily been active in the fix and flip space or single family sort of SFR construction financing.
They’ve historically been a 9% and higher rate, and a couple points. But at what I would describe as kind of prudent leverage, which would be maybe 70% or below. This is all just anecdotal in a way to bring color to the conversation of the credit cycle.
He’s telling me that some of the Wall Street backed guys in the same space are now doing 90% loan to costs on the acquisition of fix and flips and 100% of the improvement costs. So net-net, call it 92, 95% loan to costs. Again, this would be for like a single family flipper at maybe eight and two, eight and one. And they’re just like pencils down. They don’t know how to even address what’s happening in terms of the underwriting standards and the leverage and the pricing.
On the bridge lending side, kind of a joke around the office is like, “Oh, look, another bridge lender.” They’re just seem to be proliferating. So I’m curious where do you, guys think we are in the big picture of credit cycles? As debt proliferates all the loans that were made previously look good, because there’s another lender to take it out?
Carrie Nikols:
Mm-hmm (affirmative).
Kevin Choquette:
That music doesn’t always play. I know you guys are large cycle thinkers, but I’m curious what your thinking is today. It’s worth saying we’re at mid-November 2021 and who knows what’s around the corner, but what are you guys thinking today in that regard?
Carrie Nikols:
For sure. So one thing I’ll say is that that’s one of the reasons that we’ve maintained the discipline of our loans being all short term, meaning 12 months typically with extension options. Sometimes we’ll do a 24-month because we don’t want to have to peak around the corner too much. I think that’s where you get yourself in trouble. So for example, I’m cautious on some construction, ground up construction business plans that are going to be three years because I don’t really know what situation we’re going to be in, in three years.
Finally, there is going to be a recession that’s going to come. I’m not sure when it’s coming. We keep thinking that. For years, we’ve all been saying that. It will be my fifth recession of my career. I feel like every time we’ve gone through these, everybody says, “Well, it’s going to be different this time.” But the really bad ones that we’ve gone through. I mean there’s been a couple blip cycle like the one in the tech blip in the early 2000s, but certainly the ’90s and then the great recession of 2008.
So I’m always peeking around and wondering what is going to push it over because it does definitely feel frothy. I’m looking at all the 1031 exchanges. You can almost say… I mean, that’s really not… Those aren’t purely driven by economics. So that kind of concerns me. I’m not doing 36 month business plans anymore. I primarily like the business plans that are 12 months and I can see how I can get in and I can get out rather quickly before things change too much.
Obviously, we’re seeing inflation now. I think probably some of it is transitory, but so much money is being poured into the market by the government that it’s very concerning to me. I think ultimately that’s good for real estate. And I think rents will go up and as interest rates and caps go up, but there’s certainly going to be some dislocation. So did that answer your question? [crosstalk 00:23:28]
Kevin Choquette:
Well, I mean, I think we’re getting it in front of us. So another angle on all of that you’ve mentioned is money supply, right? So I’ve heard said that 25% of the money that’s in circulation now was created within the last 12 months. And if you look at a chart on the thread charts, it’s the proverbial hockey stick sort of a slow ramp and then COVID happened and we’ve just pumped trillions of dollars into the economy.
So just prior to this, I looked a couple up-to-date numbers to make sure this is mostly accurate. There’s $29 trillion of national debt on a $21 trillion gross national product or gross domestic product. There is a lot of zeitgeist switches like, “Well, interest rates have to go up. So let’s just pause it that they go to 5%, which would only be three and a half points higher than where the tenure is now.”
That takes your debt service to $1.4 trillion, which is equivalent to the cost of the federal healthcare budget and the federal defense budget. It’s 22% of our $16 trillion budget. So how do we do that?
Carrie Nikols:
How do we do that?
Kevin Choquette:
Right. I mean, I don’t have these answers. I can ask the questions for that. That seems unlikely. The fed is not going to tell you that they’re not going to raise interest rates because it’s going to break the country, but are they going to raise interest rates in the face of $1.5 trillion of debt service?
Carrie Nikols:
Right. I don’t know if… And if I had all the answers to all of this, I probably wouldn’t be sitting here right now. Right?
Kevin Choquette:
Yeah, totally. Totally. Do you guys have views on cap rates then? At least that sort of aspect of it?
Carrie Nikols:
I think everything cap rates forever for half a percent in our underwriting and we just keep seeing them going down. So again, fortunately, I’m not doing five year low owns where I really have to nail this. We really like to triple net space, triple net retail space, because those that you… You build it and you sell it. So quick turnaround situation. So I’m still using a little bit of a cap rate increase, but I’m not… I have a couple… I haven’t recently on a few deals.
I’ve just said, “You know what? I think if anything, this is going down right now, so I’m just going to leave it right where it’s at.” It’s a deal by deal decision.
Kevin Choquette:
No, I really get the hedge. I mean, keeping it short term, you are insulated from some of these issues, that’s for sure.
Carrie Nikols:
Yeah.
Kevin Choquette:
We’re seeing all of these entities, these funds, these vehicles, your competitors, right? They’re getting bigger and bigger and bigger. Like the Blackstone rate I think now is… Well, I’m sure that this number is out of date. It’s got to be bigger by now. It’s like $1.7 billion Strata, the San Diego company. I just saw notice yesterday just sold 15,500 units to colony for their rate.
These vehicles are just consuming the world. Real estate as an asset class is here to stay. The allocations to real estate are increasing. Your historic financial advisor who would tell you, 60% equities, 40% bonds is now saying, “Well, you need to have 10% and real estate and 10% in alternatives.” Those dollars across the entirety of the investing population are massive and it seems to me that the little deals, which in the world of that a two or 12 or $20 million project is a very small mall deal.
They’re kind of getting left behind. I wonder what your guys’ view is of the marketplace as the bigger guys continue to get bigger and bigger and bigger?
Carrie Nikols:
Well, we intentionally are small because we think that if you grow larger, you lose control and that’s where you start having problems. We do have a plan to take our overall assets under management of how 250 million is the biggest size that we think we can really handle with this platform. We’ve toyed with going out of state. But the only way you do that is you get people that are really, really sound in those markets, and really know those markets like the back of their hands.
It’s harder. I think we are a bit under the radar screen because the larger everybody else grows, they’ve got to really do the big deals to keep feeding the animal. But it doesn’t really feel like it this year. I still have a lot of competitors that are really letting a lot of underwriting standards go. Like I say, we’ll do 25% more, but it’s not without a lot of work. But I do think as a general practice, us being in that two to $20 million space has served us well because that space is under the radar of a lot of groups.
Kevin Choquette:
Yeah. Less efficient pricing and you can actually create value.
Carrie Nikols:
Exactly. Yeah. The fact that I’m still getting mostly 8% on these loans two points per year is really a miracle, I think. It’s because of our reputation that we built up. They know that we say, “We’ll do it, we’ll do it.”
Kevin Choquette:
Well, I also think to be candid, it’s the value, right? You’re creating value for the borrower. If you’re going to 85, 90, 95% of costs, there’s a huge value proposition there. So when you guys pivot away from that discussion of the smaller funds versus the bigger funds, the value proposition, another thing I see in terms of the borrower profile, right? If you’re a borrower, who let’s just say is going to Blackstone, the bias to track record financial wherewithal in particular financial wherewithal, meaning your credit worthiness global cash flow, net worth, liquidity goes really high.
I think previously demonstrated financial success is a pretty good proxy for credit worthiness. What is your net worth? What is your liquidity. What’s your recent transactional past. But there are also the newer “emerging manager” guys who really do have the plot, but for some reason or another may not have net worth liquidity and another basket of collateral that might be available for that lending risk. I know as a lender, you’re not in the business taking equity risk and you’re underwriting that exit as you alluded to in the beginning.
But how do you guys assess the… If you take like the five C’s of credit, character being one and capital being the other, that balance sheet borrower generally comes up as stronger than the character of an emerging manager who might not have that balance sheet. How do you guys play in that space? How do you look at the potentially under capitalized but capable borrower?
Carrie Nikols:
Well, when we were coming out of the great recession, it was pretty easy to understand if somebody wasn’t so capitalized. At this point, it’s a little bit odd because what have they been doing since we’ve been on such a big run. But in general, if they really have the knowledge, I believe that they can execute the business plan, which in this scenario means they would’ve been with somebody else and now they’re breaking out and they’re doing it on their own.
We certainly have those borrowers because we’re attractive with our leverage. I look at a minimum of a one to one on net worth to loan amount and 10% liquidity. We build up enough of a budget so that we really don’t have to worry unless there’s something cataclysmic hits us of running out of interest reserve. We always build that up. So because of that. And if I’m comfortable that we do have the cost nailed down correctly and they know what they’re doing, and we do have a good budget. I’ll turn my head to some of that weakness on the financial side. Character is-
Kevin Choquette:
Do you have…
Carrie Nikols:
Pardon me?
Kevin Choquette:
No, go ahead.
Carrie Nikols:
Character is more important to me than the credit worthiness or financial wherewithal. Bad credit certainly isn’t good. Financial wherewithal is less important than character. Since we founded the fund in 2007, there’s only five transactions that we didn’t end up closing on when the sponsor had executed the application. All of those were because of character issues that were revealed in the application process that we couldn’t have surfaced until we were actually under application.
Kevin Choquette:
How often are your borrowers going to the other side? Let’s just put a hypothetical $100 million guy up. He’s got $10 million liquid. He’s coming to Nikols and paying 8% and two points because there’s a fit. How often is that, the borrower profile?
Carrie Nikols:
Yeah, it happens, but it’s not 50% of my portfolio for certain. That happens when they don’t want to lose an opportunity. They are bankable and do have bank relationships. I would say banks are my primary competitor. If they have bankable relationships and they trust that the bank is going to be able to get it done within the timeframe, then of course they’ll go to the bank, but if they’re afraid they’re going to lose the opportunity, then that’s where I shine.
Kevin Choquette:
Where you guys step in. Yep.
Carrie Nikols:
Because I deliver a certainty of execution and speed.
Kevin Choquette:
Do you perceive any dysfunction in the… This is pretty much a softball, but in the banking community?
Carrie Nikols:
Yeah. So we actually call all the banking regulations, the Nikols Mortgage Fund Full Employment Act.
Kevin Choquette:
Right. There you go. Yeah.
Carrie Nikols:
Yeah.
Kevin Choquette:
We’ve got a deal right now. It’s going to Wells Fargo. I mean, this is the classic stuff. You’ve got three parcels that have owned for four years. The design development, schematic design, construction drawings, grading permit, all ready to be pulled. The owner is into it for 2.8 million of equity. There’s a $3 million senior debt piece. And they’re arguing for a million dollar lift in the value of the land with an appraised value that’s in the mid sevens. And they’re going in it at 5.5 million.
Wells is having a hard time trying to figure out if that equity is actually in the deal. The Nikols Employment Act.
Carrie Nikols:
That is our full employment act.
Kevin Choquette:
Going back to the fund size, let’s go through… Look, for those who have tried to go and create a discretionary fund… Or I should say it this way. Many who try do not succeed. Getting dollars in the door, blind pools of discretionary capital is very difficult. And congratulations to you guys for getting it done. Whether you go institutional, which I just heard you say even though that door is now open, Nikols isn’t interested in it, or you go private.
It’s a long road. It takes a lot of… Well, why don’t you tell me what it takes because it’s very difficult. I wonder what you guys attribute your success to in that regard.
Carrie Nikols:
Yeah, it’s a very difficult road, and I often say that if we had known how difficult it was going to be, I’m pretty sure we wouldn’t have done it. But now that we’re on the other side, obviously, we’re reaping the rewards from all of that. It’s just one foot in front of another. I oversee the whole loan side of the business from the originations down to the draws and the servicing, closing and all of that. Don oversees the investment capital side of the business.
He often says that when we founded the fund, he switched businesses because it became… It wasn’t every day about financing real estate. He became, I guess essentially he would say, a salesman for this investment capital. Fortunately, we have such deep relationships from all of our years in the real estate community that really knew us and knew how we think about things that we were one foot in front of it.
The other able to bring in all of these individuals. We know now have 225 member accounts and it is all family, friends, some charitable trusts. And you’d be very surprised at the percentage of them that is real estate, commercial real estate based. So that’s kind of nice because they can be a bottom line call for us. There’s certain of them that have pretty deep experience in different areas.
But yeah, that’s been difficult. Along the way we’ve had… For us, somebody just putting in $50 million would’ve been fabulous, but I just need a look at every single deal, and I knew what that meant, because the magic of what we do is we can immediately say yes or no. Our yes is are yes, our no is a no. The minute I have to go to somebody else to get approval, it just slows the whole operation down and takes away everything that we are.
Somebody told us at the very start who was also doing a fund and had sold out and was bringing in institutional capital and having to answer to them is somebody we respect. I won’t say who. But he said, “If you can keep this all to yourself and retain full discretion, that’s absolutely going to be the way to go.” So we’ve retained that philosophy.
Kevin Choquette:
And you’ve kept a small team. You mentioned that. Why stay small? What is the total head count now? It’s less than 12.
Carrie Nikols:
Yeah. There’s seven of us.
Kevin Choquette:
Okay.
Carrie Nikols:
Yeah. We’ve kept it small because I think you start to lose things when you get too big. We’re I’d say small, but mighty team. We’re very cohesive. I run a meeting with the staff every single morning and we start out with capital and what are the capital needs between investors and our bank? Western Alliance Bank provides our line of credit. We talk about what’s going on with that. Then we move on to existing loans. We go through the whole portfolio. Just calling out every loan. And if anybody, any one of us knows anything about that, they’ll pipe up. So the whole team is brought current every single day.
Then of course you got loans. We don’t have any bad loans. We have 30-day defaults or everything’s current, but there’s certain loans that we’re a little concerned about. And we talked this through those take a little longer and make a game plan every day. Then we move on to business that’s in closing because there’s always plenty of pieces going on with that. And then business not in closing yet and then kind of administrative. So that’s our agenda every morning. And I think that’s really why we’re able to operate with just seven people.
Kevin Choquette:
And what about the investor relations side of it? I mean, you’re saying there’s 225 folks, but how do you keep them apprised of what’s happening? What’s the cadence? What’s the deliverable that they have come to expect?
Carrie Nikols:
I write an investor update once a month. We make monthly distributions. I write that investor update and Don actually sends it out. But every month, every investor gets an update of exactly where the portfolio is. So we’re touching them. You’d be surprised when that goes out, how much capital… That’s when capital starts coming in. It’s kind of funny now that we’re at this stage and I probably should have said it earlier when you were asking me that question.
Initially, every single investor that just really meant something when somebody put in money in the fund. Now money just keeps dropping into our lap, so to speak. Don and I look at those the list and we say, “Wow, we don’t even know who some of these people are anymore. We used to know every single one of them.” Now, we don’t even know who they are because our best way of getting business, our investment capital is through the referrals.
So we do that. We do an annual report every year. We have an annual holiday party for all of our investors and then our borrowers and brokers that have brought us business. Actually, so many of our investors are from this immediate community that as I tell the staff often, “Don and I, we work all weekend long. We run into people everywhere.”
It sometimes kind of funny. I say, “We can’t get away from anybody.” Believe me, they were chasing us down in the lockdown, March 2020. Oh, wherever we’d run, people were chasing us down.
Kevin Choquette:
What’s going on with the portfolio?
Carrie Nikols:
It’s fine. No problem.
Kevin Choquette:
Well, look, after 14 years, what are you guys most proud of? What’s the one thing that you look back on with? Well, maybe not one, but maybe one of the things you look back on with a lot of pride.
Carrie Nikols:
Never losing any money. No foreclosures. There’s always a return on every single loan. We’ve always gotten an interest rate. In one loan, it was 14 at the very beginning. I can’t believe 14% interest rate. We got all our money back at 4% return on that.
Kevin Choquette:
I didn’t realize that no loan losses also equated to no foreclosures. I would’ve figured that, what, it’s 500 and something transactions?
Carrie Nikols:
Yeah.
Kevin Choquette:
I would’ve figured there was a foreclosure too in there somewhere.
Carrie Nikols:
Yeah, foreclosures. We’re not alone to own. Everybody wants to sleep at night.
Kevin Choquette:
That’s fantastic.
Carrie Nikols:
And I don’t want to back shop that’s busy with that.
Kevin Choquette:
Absolutely. Right. That’s kryptonite if you have to start becoming asset managers.
Carrie Nikols:
Exactly.
Kevin Choquette:
Well, if we shift over to the personal side and you and I would’ve had some conversations about this in the past. You guys have gone from start to success. You’ve already alluded to the fact that I’m certain there’s some institution out there saying, “Wait, you guys are delivering net, say six and a half returns to your investors over this time period? Here’s 100 million, here’s 200, here’s 300 because they probably can’t find those risk adjusted returns easily in the broader marketplace.” How do you say no? How do you say no to that, to the next thing, to the next thing, to the next thing?
I know Don pretty well also. I think he’s got a similar affliction to me and that a lot of things will catch his attention. They look persuasively interesting and compelling. Me anyway, would be like, “Hey, let’s go do that.” We can do that too. I’ve watched you guys for now 14 years, just hold the course. I’m curious how that shows up for you.
Carrie Nikols:
Yeah. Well, that gets back to not wanting to sell my soul. I really, really love what I do. You’re right. Don and I, we’re having that conversation. Eventually, we can’t do this forever, so we’re figuring out what exactly we would do if it would be an employee buyout situation, or if we would sell off to an institution where I would be the one that would be obtain for a period of time to run the portfolio and to originate.
That’s how you bring our brand to it is you got to have some overlap. So I’m not saying that we definitely wouldn’t do that, but we’re looking at all those possibilities right now.
Kevin Choquette:
Yeah. But I know we would have conversations about… Even things that are outside of the day to day, right? You guys are capable. There’s smart people with lots of money who see somebody like you and say, “Hey, well, couldn’t we also do this? Can’t we stand up another business?”
Carrie Nikols:
Yes. We’ve looked at having an equity fund. You could probably say we do have an equity fund because our debt is so highly leveraged. But we’ve looked at doing that. But we just felt like we could do service to either one of them. We just really need to focus and stick to our knitting and do what we do best, which is debt. That’s probably been the biggest opportunity that we’ve said, “Eh, should we get distracted with that?”
We’ve also thought about starting another fund and having different buckets. But then you get into a situation with, which deal do you give to which fund? That’s why we recently took the fund size of investment capital up to 200 million so that we could maintain a diversification versus… And that’s why our investors approved it, because they saw that if we had a different fund, then we were going to be in a situation which deal goes into which bucket.
Kevin Choquette:
Is that easy for you to say no to those opportunities?
Carrie Nikols:
It’s probably easier for me than it is for Don as you pointed out.
Kevin Choquette:
That’s the power couple right there. I can see him going, “Honey, come on. Come look at this. This is amazing.”
Carrie Nikols:
Exactly. We’re opposites. We have complimentary skills. In fact, we had an employment consultant look the whole team at one point, and she said that our personalities are 100% the best business partners that you could have and 100% the best marriage partners you could have. So I don’t know how I fell into that one, but I did.
Kevin Choquette:
We’ll take it. Huh? That’s fantastic.
Carrie Nikols:
I’ll take it.
Kevin Choquette:
Daily routines. I look at the start of my days and say, “Okay, if I can get my head in the arena and get grounded, understand where I’m at, who I want to be as a son or a father, a friend, a citizen, business person. That concludes meditation, looking at vision board, reading through maybe annual quarterly goals, stuff like that. It’s not a extensive process, but I try to run bit of a routine in the morning to hopefully get me where if I can start there, win the day, then what is life, but a whole series of days, which hopefully we can come out better than worse day after day.
I wonder for you, if there are any personal routines or habits or rituals, anything that helps you sharpen the saw and stay in the game, stay on top of your vision and your team?
Carrie Nikols:
Yeah, absolutely. That’s really important to me. I have a whole morning routine. Don and I are Catholic Christians. Our faith is very important to us and I start every morning with a cup of coffee and I do morning prayer. And that really grounds me for the day. It reminds me that there’s something bigger than me, that money isn’t my God. And it informs me as to how I approach everybody that I am facing all day a long between investors, borrowers, brokers, employees.
Everybody is important. And we want all of our transactions to be win-win transactions. It’s not my win is your loss. That is a loss for both of us that ends up like that. It should be a win-win transaction. And that’s how both Don and I approach life. That’s really important. I exercise every morning. That’s important to me. I have a wonderful… Well, I have at home gym equipment and a trainer now thanks to COVID, I do over a Zoom call.
I do that three days a week and every day I walk. We’re fortunate to live in a gorgeous neighborhood on Newport Harbor. And there’s a couple private beaches where I walk around the neighborhood and I see the harbor. It’s a lovely walk and that really grounds me for the day, because as I always say, once I get to the office, I don’t know when I’m going to get out and I don’t know what’s going to be facing me during the day. In a perfect morning, I’ll practice my piano also. I’m a classical pianist and I really enjoy that. But that doesn’t always happen.
Kevin Choquette:
I never knew that about you. That’s fantastic. This bounces around a little bit. But what about principles? You just portrayed one there and that you like every transaction to be a win-win exchange. Early in your career, perhaps you’ve picked up some from mentors or other relationships. Two examples that I can put up to just get us in the arena, if you will. I remember the founder of a debt fund up in Idaho. I’ll just say that and people who know will figure out who that was said to me, “There’s a difference between money and my money,” and that always stuck.
Then another one I’ve heard is, “Tell me how you’re paid and I’ll tell you how you perform.” There are a few things like that, that I carry with me on a regular basis. I wonder if there are any principles that guide your decision-making and metering out of opportunity.
Carrie Nikols:
Well, I had a mentor when I was with Daimler Chrysler Capital Services as regional manager, [Greg Alaca 00:53:55] who really, he was a very, very honorable man and his word was his word. His fiduciary responsibility was very important to him. I think that’s where I really learned, really role modeled after him in his approach to lending and his responsibility to whoever he was working for.
He was hard to work for. He expected a lot out of everybody that worked for him, but at his core, he supported you absolutely to the end. If you brought in a transaction that he didn’t think really was too great, he would support you on it and say, “Never do that again.” Or if you had done something, maybe you’d cut the pricing or something like that. “Okay. I’ll support you on it because we said we were going to do it, but never do it again.” I very much taken that philosophy to running the fund.
Kevin Choquette:
Which part of it? Being a true fiduciary and really meaning what you’re doing, being about what you’re saying and you’re doing as a fiduciary or having that kind of harder edge if things go a little sideways?
Carrie Nikols:
Both. Fiduciary is of utmost importance. I think that’s why we have a track record that we have. But also, yes, that’s happened to me and where things have been. We’ve said something to a sponsor that I wouldn’t have said. And fortunately hasn’t been so bad that was going to push us off the cliff or something. But what I will just say, you know what, I wouldn’t have done it that way and this is why. But since we’ve told them that, we’re going to honor our word and I can’t think of specific examples right now, but typically it has been situations were gradually harmful to us. But we’re going to honor that because that’s people that we are.
Kevin Choquette:
Do you have any, if you will, favorite failures? Anything that have happened either at Nikols or in your previous career where… Like I heard somebody say experience is what you get when you didn’t get what you expected. Any of those that have maybe been valuable and worth reflecting on?
Carrie Nikols:
Once those things happen, you’re never going to do that again.
Kevin Choquette:
That’s right.
Carrie Nikols:
But the mentor, I was just talking about, Greg Alaca, soul of the earth. One time I had an apartment deal in Anaheim, and I know I’m wandering off a little bit, but I’ll get back to the point. I had a apartment deal in Anaheim and he had a situation at some point, some place in Texas where road work had blocked the access to the apartment building and it became a problem loan because the road work went on and on and on.
He had me at the city of Anaheim doing an investigation to see if there was any potential road work from any of the major access highways into this particular infill location in Anaheim. I mean, it was crazy. So I always laugh at people that at these certain situations and you say, “You’ll never do it again.”
Character is one thing that every time I go down the road with a somewhat shady character, in my opinion, it’s come to bite me. I mean, I’ve ended up just having to tell certain sponsors when they’re always trying to pull things over us. This happens a lot on construction with the realtors. There’s the real budget that we had one sponsor say to us that accidentally somebody in his shop told us that there was a set of books that the lenders’ set of books and the sponsors’ set of books, there was two sets of books going.
You know what I did? I told him, “You know what, you’ve got to pay us off.” That was a little bit to our detriment. One could say, if you were greedy about keeping the loan balances out, but we just didn’t know what landmines were there for us with that type of character. So that’s been one thing with the fund that I will not anymore, I will not convince myself that this is a good… The property’s good, the business plan is good. Everything’s good about it, but I’ve got this issue with this character of this sponsor. That’s a now fly zone for me now.
Kevin Choquette:
And on that deal that you guys requested to be paid off, did you get paid off and do you know how it ended?
Carrie Nikols:
Yeah, we sure did. We got paid off.
Kevin Choquette:
And did the projects end okay?
Carrie Nikols:
I think, finally. I think, finally.
Kevin Choquette:
After some delays?
Carrie Nikols:
Yeah, exactly.
Kevin Choquette:
I didn’t know that you played classical piano. I don’t know if you know that I now have two little girls that are one and three. I mean, to be totally candid with you, I have a great deal of respect for you. I’m also not blind to the fact that you operate in an industry that is 95% male.
Carrie Nikols:
Yes.
Kevin Choquette:
I went to a cannabis convention a couple years ago in Vegas and I was blown away. I was like, “Whoa.” It was like half the room is female. And it’s because I’ve just spent so many years in these commercial real estate rooms where it’s all men in suits. I just wonder what your experience of being a woman in this industry that for better or worse, and probably mostly for worse is dominated by men? I’ll say it another way. I’d be thrilled if one or both of my two girls could find a way into this industry the way that you have and have the kind of success that you have had. What’s been your experience and what thoughts do you have for other women who are coming up or even with ones that might be a generation or two behind?
Carrie Nikols:
Yeah. It’s been interesting. Even in business school, I was typically the only woman in my classes. I think there was one other woman that I would see at points. There was a woman in business club. I was actually president of that club. I think there were maybe 15 of us or something in that tiny little club in college. It is very much a man’s world. It’s been interesting and it surprises me, continues to surprise me that there aren’t more women in this business.
I still really haven’t figured that out. It drives me a little bit crazy. I never really experienced issues with it as I was working with the various lending institutions that I worked for. I was always successful and I never really noticed that there was any issue with me being a woman that I wasn’t getting transactions from brokers because of that, or I always felt a lot of respect from everybody. I will say that I think there is that glass ceiling thing that they talk about. I Think that that is real.
When Don and I partnered up in 2007, I was absolutely astounded at the number of men who I had done business with throughout the years, and I knew that they respected me because I had always said… If I said I was going to deliver on something, I always delivered on it. What I said I’d do, and in the timeframe I said I would do it because again, my word is my word. And I would kill myself to do that, which is the whole getting back to selling your soul part.
I would be on the phone with all the companies I worked for who were either in the Midwest or in the East Coast. I’d be on the phone at very early hours in the morning with two little kids to make sure I got everything done with the home office before I drove the kids to school. I’d stay up all night writing loan summaries and pre-screens and all that kind of stuff.
Since I’d always delivered, had a great reputation. But when we founded the fund, all these men would call Don. It was like I all of a sudden became the wife. I lost my identity when we founded the fund. That’s changed since, but it was a very, very odd situation. I still struggle with that, even with… There’s some of our investors who it tends to be a generational thing. I think it’s probably typically guys that are 10 years. I don’t know. Five to 10 years older than me.
Mostly guys my age, I don’t have that issue with. But I don’t know. I guess it’s stay the course is all I can say. Somebody said the nicest thing they’ve ever said to me in my entire life. I’m sure I’m exaggerating that. I’m sure my children and husband have said nice things. But it was a woman in our business who walked up to me and she said, “Carrie, I just have to tell you, I have to thank you.” She’s probably 10 years younger than me. “I have to thank you what you have done for women in the real estate world.”
She said, “You have just got the best reputation.” I have no idea who she talked to. I was just absolutely dumbfounded that she would say that or think that because I’m basically just doing what I do. So I guess that’s my word is stay the course. I was raised by a mother who hadn’t gone to college and it was important to her that I have a career. She instilled that in me.
So I think that thanks to my mother, I never thought twice about it. I was always one of those women that I just very much wanted to both have children and work and believed I could do it all and do feel like I’ve done it all. So I guess I’d say stay the course and you got to be yourself and don’t short change yourself. I think maybe some women short change themselves and that they don’t think they can do the transactional side of our real estate finance business. So they stick to more the paperwork kind of side. I don’t know. I still haven’t figured it out, Kevin.
Kevin Choquette:
Look, it’s a fascinating space. And what you said about that kind of bias to the patriarch in terms of your partnership with Don. That’s super interesting. I mean, what’s the graceful response to… When faced with that what are you…
Carrie Nikols:
Yeah. Sometimes I haven’t been too graceful. I have to be honest. Our employment consultant, she’s actually… One of her expertise is in women. She’s done a doctorate on this whole study of women. She runs an executive women’s group that I’m part of. So it’s very important for her. I’ve had to run to her a couple of times and say, “Oh, man. You won’t believe what I just did.” One time an investor… It was in 2018 and there wasn’t a lot of transactions going on. If you remember, I was worried that the 1031 was going to be taken away and the market had really gone to a lull.
We were sitting on cash this before we had our line of credit and we were not getting loans and we weren’t going to do bad loans. We were with an investor and were explaining what was going on saying everybody needs to be patient here. This is what’s going on. This is the concern and we’re not going to do a bad loan. And the investor said, “Well, I know how to fix this. How about I take Don to a country club situation? A gym of a country club.” And I said, “No, you would take me. That’s my side of the business, not Don.” And he said, “Well, you can’t go because it’s a men’s only club.”
I was not happy with that and said so. So you might think that was an embarrassing thing. Or when I talked to her, my employment consultant friend about it, she said, “You go. You have to push back at certain times. You just can’t stand there and take it.” But other times I’m trying to be more gracious about it.
Kevin Choquette:
Yeah. Well, I’m sure it’s a fine balance. I don’t know. I can’t comment on to the individual choices that any other women are making as it pertains to being on the producer transactional side versus administrative, but I’m always impressed with the professionals that choose your path. I mean, candidly, I think you’re a cut above, your whole peer set in the same role. So I appreciate the opportunity to work with you.
Carrie Nikols:
Thank you.
Kevin Choquette:
And kudos to the courage to go into a room, an industry full of men and come out at the top. I mean, it’s really impressive.
Carrie Nikols:
Thank you. So just encourage your daughters. Don’t let up. They can do anything.
Kevin Choquette:
Yeah. I’ve got a couple decades to prime them up.
Carrie Nikols:
Yeah, keep them primed. Hopefully, the path will… It won’t be as rough of a path once they get there.
Kevin Choquette:
Yeah. So look a message to entrepreneurs. I mean, if you had a couple already, but if you Zoom out, go back 14 years ago, you say, “Hey, well, Don and I just really kind of…” I’m putting a little bit of a spin on this. We were tired of working for other people. We wanted to blaze our own trail. You go out and you say, “Well, I didn’t realize what we were getting into.” If I knew it was going to be this hard, maybe I wouldn’t have done it, which I think it is universal across entrepreneurs, by the way. Everybody jumps out of the airplane and then they go, “Holy shit. This is going to be a lot different than I thought it was.”
Carrie Nikols:
Exactly.
Kevin Choquette:
But what message might you have, especially to those… Where I think you guys are truly unique, there’s lots of bridge lending shops that might have say an insurance company behind him. And because of that, they lose the discretion you mentioned or they might have an ultra high net guy behind him who just writes the checks. Or there can be a whole array of like they perhaps have an alliance with a hedge fund and that’s their source of capital. Or they’ve gone the other path and actually put together that institutional investment base.
But for folks who have a vision of creating a discretionary fund and doing it the organic heavy lift, which is to say I’m not just going to go to the University of Northern Carolina in Charlotte and say, “Hey, why don’t you give us $75 million for a debt fund?” Which by the way, they would say no. But what thoughts do you have or advice? What might you lend? Whether it’s a debt oriented discretionary fund that’s going out to be raised or perhaps it’s just a multifamily developer or a build to rent guy or a guy who just wants to aggregate a bunch of single family rentals. And he knows that the retail investor base could probably be rather happy with the risk return profile that he can offer, but he’s got to start step one.
Okay. Let’s go. Let’s go raise a fund. One, two, three, four people at a time, what kind of advice might you have for folks on that trajectory that are thinking about doing what you guys have pulled off?
Carrie Nikols:
Yeah. Again, it’s one foot in front of the other and just stick with it. As I say, if I know, we wouldn’t have stuck with it, but it really is a just stick with it, stick with your vision. I think that part of it was also sticking with doing what we do best, which is the debt and not letting ourselves get distracted along the way.
Kevin Choquette:
What’s on the horizon for you guys. I mean, you did allude to the fact that there’s perhaps this… Maybe you’ve had enough time in the commercial real estate space for now, but what’s on the horizon? What are you guys looking at?
Carrie Nikols:
As far as loans are concerned or what we’re with the business?
Kevin Choquette:
Yeah, what you’re doing with the business? What you see out there? I don’t know. Maybe the answer is just hold the course and keep winning with the way you’re winning, but I think it’s not-
Carrie Nikols:
Yeah. We are holding the course, and like I said, our goal is to get this to 250 million and every year we’re increasing it. Because it is short term. As much as you put on the books, you’re rolling off the books. So it’s just like a slow rise in average asset center management of 250. As far as product types go, not really changing anything yet. I think that once there is dislocation and we are in some sort of recession, I think that it’s good to be a private money lender because you can pivot relatively quickly. And there’s always opportunity.
You got to go through that dislocation time. A lot of private money lenders that were founded in a great recession did really, really well because there were a lot of opportunistic plays that we all haven’t seen in quite some time. So I just think you have to have the wherewithal and hopefully not all the issues on your existing portfolio that would distract you from being able to take advantage of that.
Kevin Choquette:
Right. You have to have made enough good loans that when the disruption comes, it doesn’t derail your entire business.
Carrie Nikols:
I pride myself on the fact that when we came into the beginning of COVID and the lockdown, we had to hold investors hands a lot, but we kept saying, “We had no office in the portfolio, no hospitality in the portfolio. And only 4% of the portfolio was retail.” That was all fast food drive through. That was intentional. Some investors have said, “Oh, you’re so fortunate.” And I say, “No, actually, we weren’t fortunate. We were very intentional about peeking around the corner and retail office hospitality, we’ve shied away from those for a long time. So I’d like to think that when we come into that, we’ll be in a similar situation.
Kevin Choquette:
Being intentional is pretty critical. We can kind of give it a wrap here, but would you like to share Nikols’ website, main phone number and email, whatever you’re comfortable with or nothing, but I’ll let you do that. And then any other sort of closing thoughts or comments you might have, feel free.
Carrie Nikols:
Sure. Our website is www.nikols, N-I-K-O-L-S-C-O .com. My email address is cnikols, and again, this is funny spelling, C-N-I-K-O-L-S @nickolsco.com.
Kevin Choquette:
Okay.
Carrie Nikols:
I really appreciate your doing this, Kevin. I think very highly of you. I know we’ve done numerous transactions together, even as a sponsor of ours and I’ve always admired you. I think you’re super smart and I really enjoy working with you. Thank you for this opportunity.
Kevin Choquette:
Yeah. Well, thank you. That’s not the closing comment I was the looking for, but I’ll take it. Thank you very much. And everybody listening, thanks for taking the time to listen to another episode. My production team tells me I’d be remiss if I don’t remind you to please consider putting up a review, if you like the exchange. That’s I guess the catalyst that moves this thing along and thank you for taking the time to listen. Carrie, thank you very much.
Carrie Nikols:
Thank you.
