Welcome everyone to episode 25 of Offshoot. Today, my guest is Josh Volen the Principal and Co-founder of CIRE Equity, an $890MM NAVREIT.
Josh graduated from Cal Berkeley then spent 6 years at Marcus and Millichap where he became one of their top brokers. In 2010 he started CIRE. From 2010 to 2019 their acquisition were funded entirely through high net worth syndications. In 2019 they combined 13 of those assets into this NAVREIT, which functions just like the Blackstone BREIT, in that it is not on the public markets but does offer market-to-market transparency and limited redemption. In forming the NAVREIT they also partnered with a broker dealer to really boost their growth
Josh is unique, as he got deep expertise in the hard science of finance and real estate as well as a rich understanding of people and culture. Weaving these two strengths together has created a really powerful platform that I honestly suspect is just getting started.
Because it didn’t come out in the pod, for those interested in investing with CIRE its C I R E and you can find the group at CIREequity.com.
Listen in as we cover topics that include:
How six years in the boiler room of a Marcus and Millichap brokerage shop really added to Josh’s skill set.
How CIRE view themselves as operators, not capital allocators.
Why Josh’s primary job is replacing himself a little bit more every day.
How successful remote work requires being intentional with accountability, solid meeting rhythms, and robust meeting structures.
How their underwriting process is first: what they could lose, second: base case, and third: upside.
How CIRE Equity is really just a professionally managed family office that’s nimble enough to beat other institutional capital allocators.
The fee structure in their deal offering
The compensation offered to CIRE’s employees and how that drives alignment.
How health, wealth, and security are core components of what’s being offered to the CIRE team.
How core values inform the day-to-day operations of the company, and how those core values are the north star of what they do and how they function.
The distinction between transaction shops (most real estate businesses) and a sustainable business.
Why hiring better than yourself is critical.
And finally, the importance of showing up for yourself, first, being present and clear, setting intentions, reminding yourself of important affirmations and continually learning.
Transcript
[00:50] Kevin Choquette: Welcome everyone to episode 25 of Offshoot. Today. My guest is Josh Volan, the principal and co founder of sire equity and $890 million NAV rate. Josh graduated from Cal Berkeley, then spent six years at Marcus Millichap where he became one of their top brokers.
[01:07] In 2010. He started Sire from 2010 to 2019. Their acquisitions were funded entirely through high net worth syndications. Then in 2019 they combined 13 of those assets into this NAV REIT which functions just like the Blackstone B REIT in that it’s not on the public markets but does offer mark to market transparency and limited redempt opportunities.
[01:31] In fact, they call this the SEA REIT for Sire. In forming with the Navreit, they also partner with a broker dealer to really boost their growth. Josh is super unique.
[01:40] He’s got a deep expertise in the hard science of finance and real estate as well as a rich understanding of people and culture.
[01:47] Weaving these two strengths together has created a really powerful platform that I honestly suspect is just getting started because it didn’t come out in the pod. For those of you who might be interested in investing with Sire, it’s C I R E Commercial commercial investors in Real Estate and you can find the [email protected]
[02:06] Listen in as we cover topics that include how six years in the boiler room of a Marcus and Millichap brokerage shop really added to Josh’s skill set How Sire view themselves as operators, not capital allocators why Josh’s primary job is replacing himself a little bit more every day how successful remote work requires being intentional with accountability, solid meeting rhythms and robust meeting structures how their underwriting process is first what they could lose, second base case and third upside How Sire Equity is really just a professionally managed family office that’s nimble enough to beat other institutional capital allocators the fee structure in their deal offering, the compensation offered to Sire’s employees and how that drives alignment how health, wealth and security are core components of what’s being offered to the Sire team How core values inform the day to day operations of the company and how those core values are the North Star of what they do and how they function, why hiring better than yourself is critical.
[03:14] And finally, the importance of showing up for yourself first, being present and clear, setting intentions, reminding yourself of important affirmations and continually, continually learning. I really enjoy this conversation with Josh.
[03:29] I hope you do as well.
[03:38] Josh, welcome to the podcast. Thanks for joining me.
[03:42] Josh Volen: Thanks for having me.
[03:43] Kevin Choquette: Yeah, got you bright and early on a Saturday morning. So that’s, that’s saying something. Thank you. I appreciate it.
[03:49] Josh Volen: Whatever it takes for a friend.
[03:51] Kevin Choquette: That’s awesome.
[03:53] Hey, so Sire Equity, obviously we’ve known each other for a while, but for myself and the listeners, can you just kind of give an overview of what you guys are up to, what you do?
[04:04] Josh Volen: Sure.
[04:05] Josh Volen: So founded Sire Equity back in 2010.
[04:09] Nothing original with the name and Sire, it’s commercial investment. Real estate is what it stands for.
[04:15] But founded in 2010 after being a broker for six, seven years and always knew I wanted to be on the principal side. But what we do is we’re a vertically integrated owner and operator of commercial real estate around the nation with our main product or offering being a non traded nav reit.
[04:37] So that is our focus and again commercial, so retail, industrial net, leased some medical office. Not a lot of multifamily.
[04:51] Kevin Choquette: The Navrait is.
[04:53] It’s a new thing. Relatively new for Sire. Right.
[04:57] If I don’t have it too wrong, you had a kind of previous iteration of the way you were going about it and I believe there was liquidity point on that.
[05:06] And then you came back with the Navrate model.
[05:10] Josh Volen: Yes. So founded the company in 2010 with my business partner, Trevor Smith. He’s based up in LA. I’m here in San Diego and you know, 27 years old, starting a company coming out of the GFC where a lot of blind funds didn’t do very well.
[05:30] You know, just made sense to do deal by deal when we started off. And so we would, you know, syndicate deals, pass the hat around with friends and previous clients from my brokerage days and people we knew and met and so raised deal by deal from 2010 up until 2019 with the end goal that we had built some scale with those deal by deal offerings to where we would send an email out, call it on a Thursday and by Tuesday, you know, raise 20 million bucks, $25 million which was no small feat having a couple hundred investors in the in the queue and a good following, but had the scale of these deals or a Sizable company at that point just weren’t getting the benefits of that on the deal by deal side, right?
[06:19] You have, every deal has a different lender. Every deal is holding special reserves. Every deal has that singularity protection, but also risk, right? So from a durability of cash flow for our investors, things like that, it wasn’t meeting all those needs.
[06:35] And then from a scalability of a company side, not to say you can’t do deal by deal forever, it just wasn’t providing the scale that we wanted for ourselves and for our investors.
[06:47] Because we would go and you know, you’d buy a deal, you, you operate the deal, it’s performing.
[06:54] But at some point there’s a liquidity event that investors are looking for or not looking for, right? So even if they’re not looking for you sell an asset and then you’re not 1030 wanting those assets because of the complexity most of the time.
[07:07] And the investors are like, thank you for a great return, but I’m mad at you for giving me my money back. Now where do I put it?
[07:16] Kevin Choquette: And I’ve got a tax bill.
[07:18] Josh Volen: Exactly. Now I have a tax bill. And so just structure wise, it didn’t make, you know, we always, from the inception in our vision, planning and strategy, it was to build an evergreen product at some point that could have been an mlp.
[07:35] There’s different partnership structures. But Navrit was on that list which I had been exposed to from the brokerage side from some pretty large companies that use that. And it was, it kind of answered all the objections from my client days working with high net worth, ultra high net worth, family office type of clients and even institutional clients mandating some type of reach structure to simplify, you know, taxes and simplify reporting.
[08:06] And so in 2018, actually came to terms with a group out of Chicago to help launch the Nav REIT. And we rolled up 13 assets that we currently owned into this Navreit structure, which Navrit is net asset value.
[08:24] So it’s just, it’s an equity REIT and real estate investment trust. It’s non traded versus publicly traded, I’m sorry, non traded versus traded on the public markets.
[08:37] So the way you subscribe is through accredited Investor subscription process, 506B or 506C offerings.
[08:46] It’s all still paperwork, right? And you still have to have qualifications. But for all effective purposes, we’re similar to a public, you know, a traded reit, except our liquidity is on a quarterly basis, our dividends are distributed on a quarterly basis, and it’s just not the minute to minute or second to second liquidity you have in the the trade markets.
[09:11] But anyway, we took these assets, we rolled it in, you know, 13 to start and by May of 2019 we had launched the Nav REIT and we’ve been growing that product ever since.
[09:22] We do have some offerings outside, but that’s our flagship offering. It’s Sea reit. If you’ve heard of Blackstone’s B REIT or Ares Areit or Starwoods S reit, we’re not very us real estate people are, I guess, not very creative in naming and we’re sire Treit.
[09:43] Kevin Choquette: So cool.
[09:45] And you just mentioned some of the attributes there, right? It’s non publicly traded, it’s for accredited investors. They’ve got to qualify. It’s quarterly distributions and quarterly redemption. Um, but it’s.
[10:00] We spoke a couple weeks ago and seemed like also on the incentive structure in terms of, you know, anybody who’s running other people’s capital, there’s always some sort of an alignment there that gives them a reason to come to the office every day and, and aligns them for optimizing the profit of, of the, you know, the enterprise’s holdings.
[10:24] It sounded like the Navrate has a pretty unique structure in terms of getting compensation to the management team both in terms of overhead and also sharing in the upside. Can you kind of get into how the mechanics of that work?
[10:38] Josh Volen: Yeah, I mean so this, the structure on the Nav read is we have a 5% pref hurdle and then it is an 8020 with a full catch up on that.
[10:54] So aligned. Right. You have to make money to earn money. From a sponsor perspective, the promote is paid out and crystallizes on an annual basis. Because what happens in these perpetual vehicles or these evergreen vehicles, nav REITs and others similar is we’re marking to market.
[11:13] Right. And so on a monthly basis we’re, we’re doing market valuations and marking to market. Our third party evaluator today is CBRE at doing all of our appraisals. So every asset needs to have a full appraisal at least once a year.
[11:30] It can be more than that, but it’s at least once a year. And it’s mainly being done off a discounted cash flow analysis. So the valuation shouldn’t be shifting a tremendous amount from, you know, stabilized assets versus a value add.
[11:43] It’s mainly the discount rate that’s being used. So fluctuations in the interest rate environment, things like that may move cap rates or the discount rate used to value the properties or if there’s a shift or loss of tenancy or an upgrade in tenancy that will move value.
[11:58] But mainly it’s, you know, cash flow and then some type of event valuation scenario where it appreciates or is written down.
[12:09] But yeah, five pref hurdle 80, 20 with full catch up.
[12:13] We have our asset management fee is 150 basis points and then ack.
[12:21] So acquisition and dispo of 1%, that’s kind of the fee load on it. But since inception. So now we’re five years in on operating, which is, you know, comparable pretty much with any of these others, if not longer than most of the navies out there.
[12:39] We’re performing at a net 12.8% net to our investors. And this with a current dividend target of about a 6.1%.
[12:49] And since inception that would be about only 2% of our total return has been taxable. So it’s all, all the rest, the dividend to the total return has been tax deferred.
[13:03] So that’s pretty meaningful when you think about it.
[13:08] Kevin Choquette: And then that when the promote is paid out, is it paid in cash? I mean, it doesn’t seem like it could be paid in cash because you’re only kicking out say 6% of a 12% return.
[13:21] So how is the promote paid? I thought there was kind of a unique, unique structure there as well.
[13:25] Josh Volen: Right.
[13:26] Kevin Choquette: If you’re, if you’re crystallizing a promote every year, what does that look like?
[13:29] Josh Volen: Yeah, I mean technically you could take your promote in cash. Right.
[13:34] And the 6% is not the total, call it FFO or the total income that comes into the REIT. So the way REIT status works is you have to pay out 90% of your taxable income.
[13:44] Josh Volen: Right.
[13:45] Josh Volen: To qualify for your REIT status and not to have to pay the double taxes and, but because of the beauty of commercial, you know, of real estate, having the interest write offs, the depreciation or accelerated depreciation as well, our taxable income is much lower.
[14:01] Josh Volen: Right.
[14:02] Josh Volen: So when we pay out a 6% dividend, again, that 6% dividends, not just on your starting investment that you put in that 6% dividends on what your investment’s growing to or has grown to as well.
[14:13] So that’s one of the catch 20twos with the nav structure.
[14:16] Kevin Choquette: But.
[14:19] Josh Volen: You know, so we have more, we will have excess cash flow and excess cash flow goes towards more investments.
[14:26] Josh Volen: Right.
[14:26] Josh Volen: We just target a 6% dividend. We could target a 4%, we could target a 5%. Most of our competitive sets targeting somewhere between 4 and 5. We are one of, one of the, if not the highest dividend provider out there.
[14:40] So kind of a fixed income alternative that’s tax deferred. Right. So you know, me being in California and maybe someone in Illinois or New York or some other states, you know, even if you’re just in a tax free state.
[14:55] Josh Volen: Right.
[14:56] Josh Volen: The 37% fed tax on your income, you know, 6.1% dividends equivalent to almost a 10, 4 pre tax.
[15:04] Josh Volen: Right.
[15:05] Josh Volen: And if you’re in a California, it’s nearly double. So 6 is like a 12 higher tax brackets. So to have that from a, an income producing durable income and passive cash flow to an investor standpoint, it’s a phenomenal vehicle.
[15:20] And also just from a compounding nature, I mean that’s what real estate’s about. It’s about the building wealth through time, over time, it’s a long term investment.
[15:29] So to be able to have a, you know, earn six and then call it total return of somewhere in the 10 to 12 range, compounding, it’s pretty powerful.
[15:38] Josh Volen: Right.
[15:38] Josh Volen: Just from a wealth generation. But you’re taking illiquid assets, Kevin. Right. You’re taking illiquid assets in all these instances and you’re making them liquid to some degree, which is kind of an oxymoron.
[15:51] Josh Volen: Right.
[15:51] Josh Volen: Like that’s just, that’s where the public markets are not, I keep saying public markets. We’re going to be publicly non traded here probably in the next 18 months because it’s just a natural conversion.
[16:04] It’s more about size of fund, number of investors. You have to become publicly registered. Right.
[16:12] Kevin Choquette: But you’re not publicly traded on the open exchanges.
[16:15] Josh Volen: Correct. So the difference is traded versus non traded. Right?
[16:20] Kevin Choquette: Right.
[16:20] Josh Volen: But like the traded ones, like if you think about it, you’re taking an illiquid asset class like real estate and you’re making it fully liquid second by second. So volatility, if you watch the, the traded markets, the volatility is actually more volatile than S P500.
[16:40] Right.
[16:41] Volatility factor versus the private real estate market average is somewhere in the low fives. We happen to be slightly better than that in low fours.
[16:50] Josh Volen: Right.
[16:50] Josh Volen: But it just, and, and that’s still providing liquidity.
[16:55] Josh Volen: Right.
[16:55] Josh Volen: Versus you know, some other private funds that have no liquidity until you sell something or refinance a capital event. So it’s just an interesting structure. It’s also to protect investors. Going back to how we get paid and how we’re aligned with investors, there’s a high watermark Right.
[17:12] So we only get paid on when we generate profits. It’s not. So if one year we, you know, we’re up 20% and the next year we’re down 20%, we don’t make anything that down 20%.
[17:25] Besides the, you know, asset management fees or acquisition disposition, that’s just operational fees.
[17:31] More than anything, we have to get above that dip to get back in.
[17:36] Kevin Choquette: Order to get back to a promote.
[17:37] Josh Volen: Yeah. So it’s high watermark.
[17:40] Kevin Choquette: But I want to go back to what you said about the dividend or distribution or both are based on the net asset value. So try to make a simple example. Let’s say there’s a billion dollars day zero and you grow 10% for a couple years.
[18:00] You’re at 1.21 or something like that billion.
[18:05] That 6% that you’re paying out is based on the 1.2, not on the initial 1 billion.
[18:12] Josh Volen: Correct.
[18:13] Kevin Choquette: So, I mean, everybody’s going to have their own calculation as to what that really looks like for them. But it sounds like over time you would expect an individual investor, I mean, assuming the journey continues to be accretive, to be doing quite a bit better than this stated dividend on the net asset value.
[18:33] Josh Volen: Right. So not 100%. Yeah.
[18:34] Kevin Choquette: It’s not their basis. It’s the asset value.
[18:37] Josh Volen: Well, I think that’s, it’s, it’s just a fundamental investment principle. Right. People typically quote back what they’re returning on investment versus returning on equity.
[18:47] Josh Volen: Right.
[18:47] Josh Volen: So they’re like, I’m making 20% cash on cash. It’s like, no, you’re not. It’s not possible unless you’re saying your assets a 20 cap or, you know, if it’s unlevered or if it’s a 10 cap with 5% financing on it or something.
[19:00] Josh Volen: Right.
[19:00] Josh Volen: Getting out the gate. But when you mark something to market, that’s your return on equity, or marking your equity to market and then using that as your denominator, the return should be lower.
[19:12] Josh Volen: Right.
[19:12] Josh Volen: Because there’s an opportunity cost of holding that asset each time that you, you know, take those dividends. And so paying 6% over time we’ve had through Q2, I can, you know, give you some stats through Q2, our numbers are 15/4 of increased dividend.
[19:28] Josh Volen: Right.
[19:28] Josh Volen: So if you invested 100 grand with us in early 2019 through now, you would have started off, call it around $1700 or $600, you know, quarterly distribution to now where it’s $2800 today.
[19:49] Kevin Choquette: The structure you’re talking about by Marking it to market forces you to recognize the actual equity in the deal and then the yield in the equity rather than stating your yield on your basis.
[20:02] Josh Volen: Yeah, I mean it’s actually part of the education for our previous investors. Right. Or with investors in general because they’re like, oh, it’s only a 6% dividend or 6% cash flow.
[20:15] I’m getting again, they go back to I’m getting 12% or I’m getting 15% with these guys. But that’s like a closed end fund, you know, like say you bought a multifamily building, right.
[20:25] In 2019, 2020. It’s an appreciated, it’s, it’s appreciated. Right. And they’re going, well, I’m getting 20%, 15% cash on cash. It’s like, yeah, but your $100,000 is what you’re using for that.
[20:39] If the building doubled in value or tripled in value, your equity, you know, two times in value over the last six years and your hunter’s now 200 grand and you’re, you know, you’re getting 14%, you’re really getting seven.
[20:51] Kevin Choquette: That’s right, that’s right.
[20:55] That’s all very helpful. Thank you for getting into that. And then as far as, you know, one of the things that I think you shared with me is I believe you guys as principals have a pretty significant co invest.
[21:07] Like your money is also next to the investors which, you know, as a, as an external investor looking at something like this, one of my main questions would be like, well, how much do you guys have in.
[21:18] And I’m not asking that question, but it, I did kind of get a sense that you guys are materially invested alongside all of the third party investors.
[21:28] Josh Volen: Absolutely. I mean, part of the formation, the reason to do this was exactly that, you know, I wanted to go starting the company was to be on the principal side and was to earn passive cash flow and to be able to sit on the beach and still earn.
[21:42] Josh Volen: Right.
[21:42] Josh Volen: Like that’s part of my story of getting into real estate in general. Commercial real estate is to build wealth over time. And one of the best wealth building vehicles or freedom generating vehicles was commercial real estate.
[21:55] Right. And so to launch the company and then to further launch the reit, the REIT solved in my opinion again how I, how I thought of that with my partner was, you know, dealing with all these family offices and that first generation generating a tremendous, you know, generating some wealth for the family and for the legacy.
[22:15] And then they were the operators of that real estate. And then second generation comes along and not all generations, not all kids are created equal or not all interests are aligned to continue to manage those assets.
[22:27] And so you’d see some degradation between, you know, G1 to G2, right. And God, God, you know, willing it gets to a third generation potentially at some point still and be intact.
[22:39] I mean, that was super rare. So I saw a lot of my clients being those, you know, G1 or G2 clients. And you go from, you know, a patriarch or a matriarch or family having, you know, two kids, and those two kids go into seven grandkids and those seven grandkids go into 30.
[22:57] There’s just a problem from an estate planning side, right. Besides just operating the assets itself, the actual estate plan becomes difficult and you have illiquid assets and then you have an event of passing and now you have differing needs, an alternative wants from all these trustees.
[23:17] It creates a misalignment and it creates, from an, from a buyer standpoint, it creates an opportunity, right? That’s right.
[23:25] Death, distress, dissolution, a partnership, all those Ds of motivation, it creates one of those opportunities and for the people that, you know, we’re supposed to benefit from all this hard work and you know, over time, you know, usually it creates infighting and lawyers and CPAs and other people benefiting from it, but not the actual trustees themselves.
[23:45] And so part of the solution there is not knowing if I was going to, you know, I was definitely wanting kids, but not knowing, you know, what that looked like with having kids and, and I didn’t want to set my kids up for that.
[23:56] It’s okay. I wanted to build a professional platform, an institutional style platform with the entrepreneurial nimbleness that a family office may have and a viewpoint that’s aligned with other, call it family offices.
[24:09] So like a multifamily office vehicle that had liquidity provisions that mark to market, that paid current cash flow, but was always optimizing.
[24:19] Josh Volen: Right.
[24:20] Josh Volen: And that was aligned to do so. So I, you know, how do you professionalize a family office effectively? And that’s effectively what this REIT vehicle is, right. Between me and my partner were over 16% of the common share ownership, right.
[24:34] I’m the largest private shareholder today and I’ve reinvested twice this year with additional money besides our DRIP or direct reinvestment of our dividend. So very much believe in it. This is, this is long term focus and really it’s just to build cash flow, right?
[24:54] It’s, it’s a cash flow machine and very tax efficient compounding.
[24:58] And if you know Something happened to me. God forbid, then, you know, if the charities we support are kids or any other trustees, right, they have, they have shares and they have cash flow dividends coming in on a quarterly basis.
[25:13] And if they needed liquidity, they don’t have to sell a full asset. They can sell some shares.
[25:17] Josh Volen: Right.
[25:17] Josh Volen: If you had a, you know, think about it. If you had, you know, you have two kids, right? And you, you own this, let’s say you own one really nice wall, you know, triple net asset.
[25:27] I won’t even use Walgreens because I don’t think that’s a great example now today. But call it a solid asset and, you know, one kid is.
[25:36] Needs some cash or something. What do you do? You gotta try to refinance.
[25:41] Josh Volen: Right?
[25:41] Kevin Choquette: Right.
[25:42] Josh Volen: Or you’re. Or do it by sale, buy, sale, like that. Just. And it’s. And at a time when you really need that or you’re not thinking clearly, you’re in distress because you just lost a family member.
[25:53] Like, that’s just not right.
[25:55] Kevin Choquette: And then maybe they’re in a tenancy in. And they need both parties to consent and one of them’s not going to. So then here comes a partition action. And. Yeah, I’ve seen all that.
[26:05] Josh Volen: Lawyers win.
[26:06] Kevin Choquette: Yeah, lawyers win. That’s exactly right. So, like, going through the idea of this being a more permanent and almost like defensible execution around your own family office, obviously, with the ability to bring in external capital and grow the business enterprise on itself, how do you think about the management?
[26:30] Like, go back to, you know, let, let’s both forbid that something negative would come your way. What’s the executive team look like? How does it happen that Trevor and Josh, you know, have a.
[26:43] Have a really bad day and shareholders are still intact and the strategy is intact. And, you know, how do, how have you guys thought through that whole piece of it?
[26:53] Josh Volen: Yeah, no, it’s a great question. So people ask, you know, what, what’s your role? What’s your job function? And my job function and all of our job functions for all of our team members to some degree in our company is to replace ourselves a little bit more each and every day.
[27:10] That’s the responsible thing to do. In order for this to be a scalable platform, it can’t depend on one person. It can’t depend on two people. You know, at some point you start looking around, you can look at your team, and sometimes you’ll see a team member and they’re a bottleneck to their own success, or the.
[27:25] They might be a bottleneck to growth, right. In some form or fashion. But when you’re looking around, you gotta look at yourself because you know, we could be potentially the biggest bottlenecks to our own success and growth by still being so involved in the day to day.
[27:41] Not to say there’s not a value there, but in order again to scale, you gotta pass that down. You gotta give to get is what I say, right. Sometimes you have to give up some of the things that you’re great at even to get to that next level.
[27:53] And it’s all about that change management and moving through change.
[27:57] Josh Volen: Right.
[27:58] Josh Volen: And elevating and then also backfilling behind with mentorship and support, facilitation, delegation and just leadership with people so that they can continue on. And so that, that succession planning is a big thing we always talk about.
[28:12] So we’re looking at either automating, delegating or eliminating in any situation. Is there something that we can automate to help, you know, get more bandwidth? Something we can delegate out, right.
[28:23] That could be onshore or offshore talent.
[28:27] And then is this something we really still need to do? 8020 rule like Pareto principle, Is this actually driving the business forward or can this be back burner in or eliminated from a process to simplify, right.
[28:40] Being a little more lean.
[28:41] So yeah, my job is to replace myself a little bit more every day. So that would be on the investor relations side as we hire people on the acquisition side, something the role that should be elevated up and still is with getting input from a great team.
[28:55] Hiring people better than yourself with different experiences and a varied background of people and experiences is to make better decisions.
[29:04] Josh Volen: Right?
[29:04] Josh Volen: And that’s on the visioning and goal setting and trend seeking data analysis piece.
[29:11] But you know, the team today is over 40 people in seven different states and four countries and we’re fully remote slash, I guess quasi hybrid. I’d say we have some pretty nice storage offices, small space, smaller spaces that are around in San Diego and Beverly Hills, Phoenix and some other satellites Houston.
[29:39] But for the most part, you know, we’re a hybrid to remote company that has great team members that know what success looks like or that is the aspirational that everyone knows what a great job looks like, but they have the autonomy.
[29:58] We’re small enough to know you can’t really hide, right. Because connected we’re all working together. We’re fairly lean.
[30:05] Kevin Choquette: Were you guys remote prior to Covid?
[30:09] Josh Volen: We, you know, so this is interesting. So March 12, 2020, you know, with my family for you know, skiing up in Mammoth and Going back to the office on March 13 to close it down effectively.
[30:24] So San Diego main headquarters, it had. The majority of people were busting at the seams. We had, you know, 20, 30 people in that office.
[30:34] And March 13, we come, we closed the office down and everyone had a laptop already, except for five people, which was our accounting department, which is pretty interesting.
[30:48] Josh Volen: Right.
[30:48] Josh Volen: So we, we only had to get. We sent those accountants home with desktops, but everyone else was already mobile to some degree. And if you think back historically, like Trevor, my business partner and I, we’ve always been in separate offices, always been.
[31:04] Right. So that didn’t change at all.
[31:08] And taking that concept of a pretty archaic way of looking at things from just real estate moves very slowly and change typically. But you know, just looking at that, we’re, you know, we.
[31:20] I was always questioning and we were always questioning as an executive team, strategy wise, is why we will. Why would we limit our talents pool to San Diego or la?
[31:30] Josh Volen: Right.
[31:30] Josh Volen: We wanted the best talent, whatever that talent may reside. And I think Covid just gave everyone, especially our firm, a good boost or kick in the butt to go, hey, this is that opportunity to test that.
[31:42] And we had to. And figuring that out to be able to stay remote or a hybrid company really comes down to accountability and people knowing what they’re supposed to be doing and feeling included and feeling like they have a voice and feeling engaged and having some autonomy.
[31:59] And it has to be built into the culture. And it. And it is. And it has only been enhanced. It’s not perfect in any, you know, way, shape or form.
[32:09] I don’t want to say that. But it’s something we work on and it gives us, I think, a tremendous edge to the market to go recruit talent wherever they may reside in the world and to give flexibility to people that don’t want to have the rigid, you know, nine to five, if that’s even really the work time anymore.
[32:31] Kevin Choquette: Right. You know, but how do you think about.
[32:36] I’ll just use that sort of well used phrase of like water cooler talk.
[32:43] I can imagine if I was fortunate enough to be in an office with you for 1, 2, 5, 6 years and just kind of hearing who you’re talking to, how you’re talking to them, what you’re talking about, that just by proxy, I would pick up a lot in terms of the way that you think about and survey the landscape and you know, my experience of the remote thing has been unless I like, we actually bought little Internet appliances.
[33:18] They’re the, I think it’s called the echo or something like that, The Amazon echo. So like, if I were on a call with you right now and I had another associate looking through that window to me talking with you, then he might be able to pick some of that up, which is the virtual equivalent of him being across the hall.
[33:38] But. But that piece of just having proximity and letting junior people pick up really, like almost literally by osmosis, a bunch of decades of experience and like I said, just that vantage point of kind of having made a lot of distinctions around a whole myriad of what otherwise might look like complex fact patterns to a.
[34:05] A newbie. How do you guys approach that aspect? Because, you know, like, you look at a law practice, right? Like there’s a reason, I think that they all come together and there’s senior, mid level and junior guys.
[34:15] And it’s partly just being in the room and hearing like the art be refined amongst people who are doing the art on a regular basis.
[34:28] Josh Volen: Yeah, I’ve got a lot of thoughts on this. So there is definitely a benefit. And like you said, to learn through osmosis, to learn by just being in the environment or being around things.
[34:39] Right. To pick up or hear nuggets here and there.
[34:42] But it’s not intentional.
[34:46] It’s very scattered and it’s piecemealed. And I think that to some degree can be taken for granted. Like that’s actual training, but it’s not. That’s not intentional. That is just you heard something and you might take that completely out of context or apply it completely incorrectly.
[35:03] Josh Volen: Right.
[35:04] Josh Volen: And I believe training needs to be more intentional. And before, when we were in office, water cooler talk aside, which is more culture and just kind of the release valve. Right.
[35:15] Like, it’s nice to go to the office. Some people enjoy going to the office more than being at home, sadly. Right. But you spend that much more time in the office too, historically.
[35:27] But you know, just, you know, we had our offices was an open bullpen with glass offices because it was about transparency, right. Open door policy, like, come in and talk to me whenever you want.
[35:40] But the truth of the matter is how many people actually took me up on that?
[35:45] How many people raised their hand and said, hey, I’m just going to go try to pick Josh’s brain for the next 30 minutes or 45 minutes. No, they would wait for me and I felt the obligation to come out of my office where I’m highly productive, come out and do a lap around the office and hopefully not be like Michael Scott, but like go around the office and do a lap Three to four times a day, right?
[36:10] Like that’s not efficient. That’s intentional. But it wasn’t intentional. Like, I’m gonna go sit with these people and just start talking about our acquisition strategy right now, right? Unless there was a meeting set up.
[36:22] So, you know, there’s a fatigue of setting up the meetings, but it’s a slowing down to speed up thought process with intentionality of, hey, this is what we do. Here are our meeting rhythms.
[36:33] Truly our open teams policy or open door policy that anyone can ping me. You know, a lot more courage over email, a lot more courage over messenger to ask a question than in person.
[36:46] That can be intimidating. Like, hey, I don’t want to bother him. He looks really busy. They don’t know what I look like. You know, I could be in shorts with my hat backwards and a T shirt, which is most days, right?
[36:58] Reach out to me and I can respond back. And they know I’m going to respond back. They can see I’m online, they can see it’s green, that I’m open, right?
[37:06] And they can send me a teams or they can, they can call me or I can call them. The amount of frequency and touch that I have with more employees, more team members today is.
[37:18] It’s exponentially more. And our rhythms are better, right? Like our intentionality around culture building and team skill building and technical skill building is more intentional. Could it be better? Absolutely.
[37:32] Everything can always. There can always be a better practice. There is no best practice at our company, right. It’s part of our core values. It’s persistent improvement. So overcoming and being gritty to improve.
[37:44] Not just consistent, it’s persistent and quality performance. Like all these are built into our organization. So, you know, we have opportunities for people to learn. It’s part of my, you know, my goals every month.
[37:57] Again, part of succession planning is I have to be training and passing on this knowledge to others.
[38:02] So we have people that sit in on our acquisitions team calls every Friday, right. That, you know, technically don’t have much to do with the acquisitions process, right. They’re getting to hear what’s going on the pipeline every Monday morning call where we have all hands listening, kind of like a stand up 15 minutes, call it, right.
[38:20] We go through pipeline, we go through what’s changes or technology that’s coming through the company, successes, opportunities and challenges for the week. Like it’s just part of our rhythms built in.
[38:32] Besides our monthly town hall meetings where we kind of do open format questions that happen at the end from the team and we have our Culture building. And that’s our water cooler talk.
[38:44] Josh Volen: Right.
[38:44] Josh Volen: We use something called Mentee to do surveys on, you know, fun surveys on people’s birthdays that are super competitive and funny.
[38:53] Josh Volen: Right.
[38:53] Josh Volen: Like, it’s just, it’s shifting it.
[38:57] Josh Volen: Right.
[38:57] Josh Volen: It’s just the paradigm shift of being more intentional with it versus just spending time. It’s quality over quantity, I think is the best.
[39:06] Kevin Choquette: The intentionality, I think is what, what I’m really taking away from you. Right. If you’re, if you’re not able to have it by, by proxy and then, you know, it’s important, then you need to reach through the computer monitor and make sure that there’s a structure, a cadence, some sort of format to make sure that there is in fact, even in that virtual setting, connection.
[39:31] Right. Rather than like, well, you know, Billy works in Omaha and hears from us every three weeks.
[39:37] Josh Volen: Yep.
[39:38] Kevin Choquette: Yeah, yeah, that’s cool.
[39:40] Josh Volen: There’s very little siloed. It’s very little silo. And the other thing too, Kevin. I think it’s not a knock. I, I just, I want us to be as high level critical thinkers as possible as team members.
[39:53] Josh Volen: Right.
[39:54] Josh Volen: And so not to say we won’t get to this point, but it’s, it’s a lot rarer positions that we’re hiring someone just out of school.
[40:04] Right. Or just getting into the business. Like an internship program. I’d love to have a robust internship program to give back. We don’t have a lot of internship opportunities. Right.
[40:17] A, being in the office is one issue, and B, it’s the big law firms, the big firms in general, they feed off of that young talent and they put them through the grinder, get the 80 hours of, call it grunt work out of them at a cheaper cost.
[40:35] And that’s how the machine is fed.
[40:37] You know, that’s an archaic style in itself, in my opinion.
[40:41] Josh Volen: Right.
[40:41] Josh Volen: Like putting some intentionality and thought process with that. There’s a lot of automated tasks that you could put in. You want to use the buzzword AI.
[40:49] Before AI, there’s automation. Right, Right.
[40:52] And so that’s just having processes and having outcomes that you’re targeting and, and building those into a repeatable task that should be automated before some human should be touching it.
[41:04] Josh Volen: Right.
[41:04] Josh Volen: And so we’re looking for that higher level, higher level thinkers and higher level doers because you get more output and it’s less consensus needed to move the needle and to, you know, be an operator than, you know, having 100 people, you know, kind of doing the same thing.
[41:28] Kevin Choquette: Meaning there’s less kneading of the dough in order to create consensus. Meaning like they already have the tools in the tool chest and so it’s easier to move together.
[41:40] Josh Volen: Yeah, I mean it’s like putting in a crew boat, putting five people versus putting 50 people.
[41:46] Kevin Choquette: Yeah.
[41:46] Josh Volen: The five person bone is much quicker, much more nimble. And we’ll beat the 50 person boat even if they’re all. We’re rowing.
[41:53] Kevin Choquette: Yeah.
[41:53] Josh Volen: Right. Like it.
[41:54] Kevin Choquette: Yeah.
[41:55] Josh Volen: Doesn’t work. It’s too, it’s too heavy. And so yeah, I think that is just our approach today at least.
[42:05] And I hope it doesn’t change much in the future. Not to say I don’t want, you know, younger, younger talent coming in. Like we definitely do have positions for that.
[42:15] It’s just. And again it’s highly intentional in the training and that’s a majority of our firm has experience.
[42:23] Kevin Choquette: Like that’s cool. Thank you for going into all that detail. I wanted to kind of focus on that structure and the REIT because it’s super unique. I mean, yeah, there’s the B reit, the S reit, you know, the A reit, those are far larger.
[42:41] You guys are getting quite large also. But. And it’s a unique product and I wanted to sort of open that up a bit. But let’s go into like the brick and mortar if you will.
[42:51] What, what are you guys seeing right now in terms of opportunity? Where you investing? Like let’s just talk straight real estate.
[42:57] Josh Volen: Got the structure.
[42:58] Kevin Choquette: Awesome. But like where are you guys in the marketplace? Primary, secondary, tertiary markets, multi tenant stuff, Value add, opportunistic, core, Core plus like what, what’s the opportunity set? Where are you guys focused?
[43:12] Josh Volen: You just nailed it. You just named mold all of it.
[43:16] So our primary focus is right now has, has mainly been industrial. So our portfolio today is made up of multi tenant retail shopping centers, primarily in the southwest. So Denver west.
[43:32] That’s what our initial roll up was in 2019 was mainly 11 shop, you know, called 11 shopping centers or so that we rolled into the REIT. So there’s a couple million square FE multi tenant retail which was really discount daily needs and services type tenancy.
[43:48] Josh Volen: Right.
[43:48] Josh Volen: Your grocery, your sprouts, anchor shopping center with your TJ Maxx, your dollar tree, your gym, your quick service restaurants and drive throughs, things like that.
[43:58] And on the other end of that, we haven’t bought a multi tenant retail shopping center since 2019.
[44:04] Kevin Choquette: Okay.
[44:04] Josh Volen: So that, you know, that portfolio piece of the portfolio that was, you know, 95% of our portfolio on a, on Initial contribution is now less than 50%. It’s actually closer to 40% of the portfolio today.
[44:19] The other 50 to 60% is made up of mainly industrial and net lease product and a majority of that’s industrial. So kind of a barbell strategy. And the way we look at that is industrial.
[44:33] We were looking at onshoring pretty early on in 2019 and being. And distribution being a barbell to retail, right? So everyone talks about last mile or that was the buzzword.
[44:47] Last mile has always been retail.
[44:50] I just think it’s funny that they talk about it from an industrial standpoint. But the last mile really is retail because that is the most accessible location besides delivering to someone’s home.
[45:00] That’s efficient, right? Because if you think about shopping centers that are located right off a freeway with high visibility, high, high access points, high traffic counts, or inside a neighborhood, right?
[45:13] That is truly the last mile. That’s why you have Amazon or the omnichannel distribution standpoint of the Walmarts of the world, the targets of the world, the Amazons of the world.
[45:23] Amazon buying Whole Foods, Amazon partnering with Kohl’s for returns, right? It’s the shipping cost is going to kill, that just kills online companies, right? The cost of acquisition, the cost of sale actually to clients from online.
[45:37] And so that’s one side of the equation. Plus I always thought about those as covered land plays. You know, retail is probably the worst asset class from like an efficiency standpoint of how you use land, right?
[45:48] You’ve got totally, you got old box buildings along the freeway and then you got these huge parking fields as a, you know, gap and then you got these little buildings blocking visibility and quick service restaurants or little pads on the frontage on a 30 acre parcel right off the freeway.
[46:03] Like that’s crazy. Office goes vertical, multifamily goes vertical. Industrial has no parking requirements really. Like it’s just the one asset class that’s just fundamentally uses more land and gets less bang for buck for that.
[46:18] So we also always looked at that as potential redevelopment which you started to see with multifamily being developed or kind of these live work play type of redevelopment opportunities or.
[46:29] Anyway, so that’s the retail side on the industrial side again, onshoring was something we were looking at and that was manufacturing power being an issue. We went heavy, no pun intended, into more heavy industrials.
[46:40] So things that had heavy power or outside storage for future development, that was early on. And then distribution as well. So distribution, manufacturing and one of the niche plays that we’ve really carved out for ourselves has been in the flex space world right now because, because of such negative headlines.
[47:04] Can you still hear me?
[47:05] Josh Volen: Sorry?
[47:06] Kevin Choquette: Yeah, I can hear you.
[47:08] Josh Volen: Because of negative headlines around office that you have purist buyers right out there for industrial. And if it has more than 15 or 20 build out of office or lab space, it gets branded, you know, this subcategory of flex flexible space.
[47:26] Right. And we found that there’s a tremendous amount of opportunity there. So we’re getting better pricing in, in some cases or a lot of cases for these assets that are fully functional.
[47:38] Josh Volen: Right.
[47:40] Josh Volen: We’re getting, you know, call it closer, you know, between industrial and office pricing on them. So a higher yield and we’re still getting industrial type treatment most of the time. Maybe a slight premium that we have to pay on the debt side.
[47:53] Right. Leverage spread is huge.
[47:57] Josh Volen: Right.
[47:57] Josh Volen: It’s much greater.
[47:59] And also if you think about the shift of how it would work before maybe a company had their ivory tower, 20,000 square feet of office space in that class A office tower and then they had all their manufacturing workforce in the distribution building somewhere.
[48:14] Manufacturing building somewhere. Well now with remote and hybrid now maybe they take their 20,000ft of office that they’re using for their accounting departments and marketing team and, and executives and they’ve cut it down to 3,000ft for the executives and team get get togethers and then they consolidated the rest of that 17,000ft into 10,000ft of an industrial building.
[48:38] Josh Volen: Right.
[48:39] Josh Volen: And so really believe that is part of the hybrid future, how that works. And it’s been proving, proving us right. So far the markets we’re targeting are primary and secondary markets.
[48:52] We do own some stuff in tertiary but we’re typ primary location in that market. If we’re going to go to a tertiary that’s further and few between.
[49:01] So really primary and secondary markets. But you know, industrial is different than retail.
[49:09] Josh Volen: Right.
[49:09] Josh Volen: So industrial what we’re looking at are port, port cities, access points, transmodal transportation. So a big following in Houston from the flex side or Medtech side. We have a big, big and growing portfolio in Minneapolis.
[49:25] Right. And then we own again call it Texas West. So in the markets we’re already in and have operational efficiency and boots on the ground in, you know, Colorado, Arizona, California and the Nevada and the Pacific Northwest.
[49:41] Kevin Choquette: So and then that’s kind of the risk profile. Are you doing core deals? Core plus? I mean you’re, you’re alluding to the fact that you know, maybe there’s excess land, maybe there’s some free optionality when you buy retail center and think of it as a covered land play, you know, I can, I can hear that there’s some value creation intrinsic in the acquisitions, but if you were to say, you know, core value add, opportunistic, where are you guys focused in on the majority of your acquisitions?
[50:12] Josh Volen: Yeah. So I would say first and foremost we target, we’re middle market buyers.
[50:16] Josh Volen: Right.
[50:17] Josh Volen: And I don’t know if that’s an overused wording or description, but call it 20 million to $100 million today. And that’s expanded in, in the market today.
[50:27] That’s what the range is. In 2021, that range was 5 million to 25 million because some of the institutional buyers started getting, you know, desperate in getting into smaller and smaller asset classes or purchase price points.
[50:46] But middle market, so 20 to $100 million, the quality of the asset, I would always say is core plus.
[50:54] There’s always a value add component that we’re looking for. So it’s always core plus I. For us to just set it, forget it and ride beta. Buying core, that’s just not who we are.
[51:04] We’re again, operators. We’re not allocators.
[51:07] Right.
[51:08] So the closest thing to something like that is recently this last year we bought, you know, we did a corporate sale leaseback with Goodyear Tire, right. Publicly traded company, double B plus credit rating for one of their assets in the Inland Empire.
[51:23] And this asset was, you know, in 2022, they were trying to trade for about 107 million, right. And we closed on it at 67 million.
[51:35] Kevin Choquette: Wow. So that’s awesome.
[51:37] Josh Volen: And you know, 800 plus thousand square foot, you know, we got it at 82 bucks a foot in the Inland Empire and 8 cap.
[51:45] Now shorter term lease, five year and good probability that Goodyear was going to leave or, you know, they needed actually a million two square feet.
[51:54] And so when they leave, there’s a couple things. We structured the deal where our rent was below seven bucks a foot.
[52:01] Josh Volen: Right.
[52:01] Josh Volen: Our neighboring tenant owned by one of those other letter plus REIT companies, you know, their basis is $220 a foot.
[52:11] Kevin Choquette: Wow.
[52:11] Josh Volen: Their rent, their rent’s $10 to $12 a foot. Our rent is 660 a foot.
[52:16] Josh Volen: Right.
[52:16] Josh Volen: And so the type of deal that we like to do and I think anyone likes to do is you win if they stay and you win if they leave. So it’s a win win scenario.
[52:26] It becomes kind of that no brainer. Doesn’t mean there’s no work, Right. We’re not afraid of work.
[52:32] Or having to do work into the future. But it’s not a blind allocation, right? Like it’s a, it’s a strategic purchase that has a value add component to it being, you know, we can, if they stay, we take their rents to 10 bucks a foot, right.
[52:47] They leave, we put a couple dollars into this and we get 10, $11 a foot, right. We demise it if we have to. We’re thinking about. Because we look at every acquisition for a long term hold, doesn’t mean we’re going to hold everything long term, but we look at everything on a 10 year plus hold because we’re an evergreen fund and that’s how we should look at deals.
[53:07] And if a deal doesn’t pencil to own it for 10 years plus, we probably shouldn’t be buying the deal.
[53:13] That’s where people get in trouble, right. They have a one way in, one way out strategy. And if they don’t nail the timing or nail the execution of that, then it screws up the returns.
[53:25] We look at it going first and foremost, how do we lose?
[53:28] Our underwriting process is pretty straightforward.
[53:31] Let’s put out all the different ways we could lose in this.
[53:35] Let’s beat this thing up.
[53:36] Josh Volen: Right?
[53:38] Josh Volen: And it’s usually never binary in that regard. And if it is, then it’s definitely a kill of a deal. But you know, we beat it up first and then we look at a base case before we ever look at upside.
[53:49] We’re always looking at downside first. And that’s also operator mindset and being an operator and it’s also an alignment mindset of we don’t win unless our investors win.
[54:00] I’m buying things that I want to buy for myself being a large investor inside the reit, which is alignment on top of it. And so that’s an example of a deal that may seem like it’s not a value add, but there is tremendous value out there.
[54:13] Kevin Choquette: You got a good basis and you got below market rents and you got.
[54:16] Josh Volen: Some excess land and you got. Yeah, there’s a bunch of different things going on there. All the way to a multi tenant, you know, cold storage facility we bought in Houston that is class C product, but we bought it from a family office in their 80s last asset in Houston.
[54:34] They’re based on the east coast.
[54:36] Two buyers fell out. We’re the third buyer in the backup position, which is typical, right. We’re typically not the first buyer in to win a deal. If we are, we kind of scratch our heads like what just happened or you know, you get the buyer’s remorse like we offer too much or are we missing something?
[54:55] Typically, you know, typically these deals are semi off market, on market, lightly marketed or off market, just based on relationships at this point. But you know, multi tenant asset where you know, the ownership again, hands off ownership on a very hands on needed asset that, you know, needed some TLC for sure with roofs and, and the parking lot, but you know, almost 500,000 square feet.
[55:20] You know, we, the building, we use it all the time as an example because it just shows our differentiator.
[55:26] Josh Volen: Right.
[55:27] Josh Volen: So call it around $40 million deal. If you see this thing, it’s definitely not going on the COVID of a brochure for any of the names.
[55:35] Right. But for me, like I look at it, all I see is cash. Like I just, like, I love it because this is what a majority of American real estate looks like.
[55:45] The US real estate market is like this is middle market to the T. And you know, we’re, we’re professionalizing it, we’re adding value to this. It came with an extra 30 acres.
[55:55] When we were going through the title report, we pulled title, this is just how hands off, right. The seller. There were two extra parcels with buildings on it that the seller didn’t even know they owned.
[56:06] Kevin Choquette: Oh, wow.
[56:09] Josh Volen: The manager on site. You know the funny thing, the manager on site, you know, there was a BMW on the balance sheet that no one could find.
[56:17] Again, family office.
[56:19] Josh Volen: Right.
[56:19] Josh Volen: There was a 5,000 square foot building that the manager on site was using for his personal car garage. Wow.
[56:25] There was a, there’s a toll booth on site. You know, because all these trucks come in. It’s a, it’s a multi tenant cold storage facility. Right. So you know, people come in to pick up produce or drop produce.
[56:36] And, and it’s just funny because, you know there’s a gate fee and they’re charging 10 bucks and they had raised it to 15 or 20. It’s like, well, how did you guys come up with the price?
[56:46] And they’re like, oh, you know, whatever is Gary came up with the number. I was like, well, how often do you change it? Like we, that’s, we changed that about seven years ago.
[56:56] I was like, okay. And I was like, well, do you pay by credit card or is there accounts and like, no, they have to pay cash. Yeah, the truck drivers hate it.
[57:05] They have to always have cash on for this. And I’m like, so you have someone.
[57:09] Kevin Choquette: In a game running the gate? Loves it.
[57:11] Josh Volen: Yeah. Collecting cash where we could easily automate this and, or have charge accounts or fobs or whatever. I mean just come on.
[57:19] Josh Volen: Right.
[57:20] Josh Volen: Like so just puking cash flow out of the gate. No, no pun intended. And future upside, there was 30 acres that came with it. I mean just value add on value add and value add.
[57:31] But to buy a $40 million asset, I can tell you my institutional competitive set won’t touch this. They’re not getting out of bed for under 100, $200 million deal. Right.
[57:40] And even then, and what was your purchase call it? 40 million bucks.
[57:44] Kevin Choquette: Yeah. That’s interesting. So you’re, you’re in a completely different competitive set just because they’re so large they have to allocate larger chunks.
[57:54] Josh Volen: Well, and just operational efficiency wise, like to manage an asset like this, we have three people on site. Right. Like, but the amount of alpha, actual alpha generation we will have from this asset is going to be huge.
[58:08] Kevin Choquette: Yeah.
[58:08] Josh Volen: Right now to go us to go buy a $5 million asset to do the same thing. That’s probably not, doesn’t make sense. Right. That’s why. So there’s some economies of scale and continue to hone in, but it’s a good example of where we play.
[58:24] And yeah, for us to put a billion dollars out, maybe that means we have to do 20, 25 deals versus them doing two. Right. Or three.
[58:31] Kevin Choquette: Right.
[58:32] Josh Volen: That’s where again, diversification in the portfolio, nimbleness in the portfolio, liquidity in the portfolio. Because right now that’s where the big guys are hurting.
[58:41] Josh Volen: Right.
[58:41] Josh Volen: With their redemption cues and everything else. They have these large assets and who’s the buyer for it? It’s other large opera, you know, other large allocators that aren’t allocating and that gives up.
[58:53] That’s why we’re able to buy. I mean we’re closing on an 80 plus million dollar asset this week, this coming week. And it’s going to be the largest single assets, a five tenant deal up in Portland.
[59:06] Sold.
[59:08] It’s going to be the largest deal this year or might be the largest deal for a long time, but it’s the largest deal and it’s a large institutional group as the money partner selling it.
[59:18] And that’s who we’re buying.
[59:20] Kevin Choquette: The thing you just said about, you know, we’re operators, not allocators is, is maybe subtle, but it’s a very meaningful distinction. I see the biggest firms as sucking up the dollars in the marketplace that you know, like what is.
[59:37] There’s some principle that I’ll not be able to quote right now. Modern portfolio theory. Right. Your allocation primarily determines your return Profile. And so real estate is an asset class.
[59:48] You know, Blackstone, blackrock are just saying, hey, you’ve got to allocate. I’ve got, you know, whatever it is, 1.5 billion of this fund available for you. And that guy says, oh, yeah, okay, we’ll go 1.5
[01:00:01] billion into that.
[01:00:04] They are not thinking about, well, I’m sure that I’m overstating this, but they’re not a scrappy entrepreneurial guy who started as a broker and built a company and knows how to extract value.
[01:00:15] They’re just saying, hey, you gigantic sovereign wealth fund, you gigantic, you know, pension fund. You’ve got to allocate to me and I’ll allocate to the marketplace. And I’m sure there’s really sharp guys that are, you know, like you, like you’re saying finding alpha.
[01:00:31] But I think it’s a completely different animal when you’re way more pure play allocator than an operator who knows how to extract value.
[01:00:41] Josh Volen: I agree. I mean, I’m biased, obviously, but this is where I want my money at, right. I’m going to bet on the operator every day because it’s about rubbing nickels there to create quarters is what I always say.
[01:00:51] Right. But it’s also, it’s when everything hits the fan, when you get a Covid, how do you handle that? When, when you have adversity, how do you handle it? And it starts with the boots on the ground, right?
[01:01:05] Property management, as an example, is fundamentally misaligned as a business model, right. Because you have a pro. Third party property management is that you have, you want to keep the tenants happy so that they pay the rent, right?
[01:01:21] So if a, you know, if there’s a plumbing leak or a clog or something like that, you’re calling the plumber that gave you the tickets to the basketball game. And they’re not the cheapest, but they make your life easy and they make the tenants happy.
[01:01:33] And then you send that bill to the owner and you got to keep the, the owner happy enough so you don’t get fired and you collect the fees in between.
[01:01:40] That is not great, right? Like, that’s not operation that. I mean, and not to say there’s a lot of people that outsource that, but we realized early on that we had to bring that in house.
[01:01:52] We had to become vertically integrated.
[01:01:55] And the reason was, is control the money first, right? So we know where the dollars are going. That’s fiduciary. And then the second was, is the first touch to our tenants, which is our bloodline lifeline.
[01:02:08] Right. Our customer service reps are those boots on the ground.
[01:02:12] Kevin Choquette: Yeah.
[01:02:13] Josh Volen: And they need to be saying the same thing. They need to have an owner mindset to look at things and have three different plumbers.
[01:02:20] Josh Volen: Right.
[01:02:21] Josh Volen: Or if we have enough scale in a market, having our own plumber.
[01:02:24] Josh Volen: Right.
[01:02:24] Josh Volen: Whatever it is. But thinking like an owner and alignment wise to be that high touch customer service before it gets to the asset manager before it rolls up.
[01:02:36] Josh Volen: Right.
[01:02:36] Kevin Choquette: Well and if you just think about the incentives of the property management company, right. They’re, they’re layering on residual income. Residual income, Residual income off of every account they bring on.
[01:02:47] They’re not growing their operational base in proportion to that. They’re hoping to get some scale there. The best situation for them is a check with no touch to the tenant because it’s zero cost, zero marginal cost to just keep collecting that annuity.
[01:03:03] It’s the worst possible experience for both the landlord and the tenant to have that person in the middle who’s just collecting checks and doing nothing for it.
[01:03:12] Josh Volen: 100% misalignment. Right. So we talk about alignment, alignment, alignment all the time in the company.
[01:03:18] Josh Volen: Right.
[01:03:18] Josh Volen: Like I’m a big fan of mental models, Charlie Munger type of stuff. Right. So being exposed to that and it’s just you don’t want to have the unintended consequences of misalignment.
[01:03:29] And so the way we structured the reit, the way we structure our company, right. And, and the way we iterate because you’re not going to get the perfect fit out of the gate and you’re going to evolve and things evolve but we continue to iterate but it’s to maintain alignment with the team.
[01:03:46] So our, you know, even the way we compensate inside our company it’s about, we have our base, you know, base salary or bonuses. We have a bonus modifier which the bonus modifier is based on profitability from operating revenues.
[01:04:01] Josh Volen: Right.
[01:04:01] Josh Volen: And then our profits, our actual profits are promote because we crystallize every year we, we pay out into a 401k profit share. So it’s not a matching, we just pay out profit share.
[01:04:13] So it’s tax avert. And now we do ltips which is effectively profits, interest or shares to our team. And that is everyone up and down in the company that’s from the, the office manager, right.
[01:04:25] That may not be touching the real estate but that’s helping support the team to our property managers, to our asset managers, to our executives base.
[01:04:34] Kevin Choquette: And then a modifier if the operating profits are above some sort of, you know, target number. But what’s the difference between profit share and the LTIPs profit shares on the, the profit that’s coming from the operating company or from the navrate itself.
[01:04:51] Josh Volen: It’s both.
[01:04:52] Josh Volen: Right.
[01:04:52] Josh Volen: So we take a look at the entire bucket at that point. So the way we look at the bonus modifier it is on call it recurring revenue fees or asset management fees are leasing, you know, any of the, any of the overrides or one time fee revenue.
[01:05:06] Yep, that, that we look at a ratio there to see what make sure it covers all of our overhead.
[01:05:13] Josh Volen: Right.
[01:05:13] Josh Volen: So we want it to be anything above a 1.1 or 10% profit margin become the, the that becomes the denominator, the 1.1. So anything above that. So if we’re running at 25 profitability.
[01:05:25] Josh Volen: Right.
[01:05:26] Josh Volen: It’s divided by 1.1 which is a minimum 10 profitability and that becomes the multiplier to the bonuses.
[01:05:33] Josh Volen: Right.
[01:05:34] Josh Volen: So if you have a 50 if let’s say your bonus is 10 grand.
[01:05:39] Josh Volen: Right.
[01:05:40] Josh Volen: And our modifier is a 20% modifier. So now you’re going to get 12 grand.
[01:05:45] Kevin Choquette: Cool. And then profit sharing ltips is on, on top of that.
[01:05:51] Josh Volen: Right. So profit share to your 401k. So we’re, you know, what we want is health, wealth and security for our team members.
[01:05:58] Josh Volen: Right.
[01:05:59] Josh Volen: So mental, physical, emotional health. That’s really important. As people, we care about our people.
[01:06:06] And then the wealth side of it is yeah, we want to make sure they’re getting paid extremely well to live off of cash flow. But we also want them to build for the future or have that.
[01:06:14] Right. And so that’s the wealth building is, you know, tax deferred, 401k contributions directly put in. They don’t have to put the money in. We put it all in.
[01:06:24] Josh Volen: Right.
[01:06:24] Josh Volen: We typically try to max those out. That’s you know, that’s average somewhere between 5 to 8% of someone’s base.
[01:06:31] Josh Volen: Right.
[01:06:32] Josh Volen: And then the LTIPs, you know, we’re putting up to 20 of our promote annually into an LTIPS program.
[01:06:40] Josh Volen: Right.
[01:06:41] Josh Volen: That goes out to the team. So it’s again it’s just alignment. We’re trying to set this thing up.
[01:06:47] Kevin Choquette: Kevin, what were the three things you said? Health, wealth and security. Security. That meaning that they know that they can be with you guys for years and years.
[01:06:57] Josh Volen: I mean, you know there’s expectations that come with that.
[01:07:01] Josh Volen: Right.
[01:07:01] Josh Volen: To learn, grow and be part of that culture. But yeah, it’s the security piece is knowing that we’re a stable company. Hence, you know, we’re, we’re looking for profitability. We are operating to profitability.
[01:07:13] Josh Volen: Right.
[01:07:14] Josh Volen: It’s not a transaction shop. Early on I got challenged by a couple mentors and they said, hey, are you building a transaction business? Are you building a transaction shop or a business?
[01:07:26] I was like, that was kind of, I was, you know, I’m 28 years old at that point.
[01:07:31] Josh Volen: Right.
[01:07:31] Josh Volen: I’m like, what do you mean by that? Like, what kind of dig is that?
[01:07:34] Josh Volen: Right.
[01:07:35] Josh Volen: But it was, it was a great question because, and this is not a knock on anyone, but a lot of businesses are set up. A lot of the real estate companies are set up.
[01:07:43] It doesn’t matter if they’re closed end funds or whatever it is. It’s buy it, build it, buy it, build it, sell it, buy it, fix it, sell it.
[01:07:51] Josh Volen: Right.
[01:07:52] Josh Volen: It’s like the same kind of hamster wheel.
[01:07:56] Josh Volen: Right.
[01:07:56] Josh Volen: And not to say we don’t sell things, but we reinvest. But it’s. Building a business is something that can sustain that. If you don’t buy any asset, you don’t do anything else but just operate your portfolio.
[01:08:07] Are you profitable? Are you able to cover your overhead?
[01:08:11] Josh Volen: Right.
[01:08:12] Josh Volen: And that’s how we’ve had that same type of mantra from the beginning. There’s definitely times where re like we’re investing ahead in talent and technology and a lot of other things right now, but we’re still profitable, right?
[01:08:24] Kevin Choquette: Yeah. And that would be the business which.
[01:08:28] Josh Volen: Is, which is security to our team. Right. Like early on we would have, we’d be hiring, trying to hire this like great talent coming from a large firm and we’re kind of like, you know, we’re startup and they’re like, can we see your finances?
[01:08:43] Can you open the books to me? Because I just want to make sure that there’s enough here to actually sustain this or support it.
[01:08:51] Kevin Choquette: Well, on the other side, you see, I have enough relationships in the industry. The guys that are merchant build or just more conventional flippers, either way, value creation itself. Just like you said, when the market gets tough like it is right now, meaning what’s the terminal value of, or net present value of a long dated cash flow given that 10 years moving around and it might be hard to start a new deal if you have to go raise third party equity.
[01:09:22] There’s just not a lot of trades happening and it’s not, it’s not clear what sort of terminal cap rate to underwrite. So those shops that are requiring or depending upon their Acquisition fee, their development management fee, their asset management fee.
[01:09:37] On deal 1, 2, or 3, when deal 1, 2, and 3 start selling and they’re looking for that next one. Have the problem that you’re avoiding with your model, which is they’ve got to find a deal to kind of keep the lights on, or they’re.
[01:09:51] They’re living off of past promotes, assuming there were any promotes on the last vintage of deals.
[01:09:58] Josh Volen: Misaligned incentives.
[01:10:00] Kevin Choquette: Yeah. Yeah.
[01:10:01] Josh Volen: The structure effectively misaligns you.
[01:10:05] You know, the same point with that is that you have. That’s a great recruiting sort. Not just buying deals from those groups that have their promote tied up in a deal or they’ve given up on the deal because there’s no promote anymore.
[01:10:15] But from a recruit. I mean, we buy from these people, right? Like, that’s our target audience.
[01:10:21] An end of fun life cycle. That’s great. A single purpose. You know, the deal we’re buying right now. And it’s just, it’s not that it’s misaligned, it’s just how it was structured.
[01:10:29] It’s the last asset in this, you know, in this total development that was a single large investment from a, you know, large institution. The operator doesn’t really want to sell because they feel like we’re leaving money on the table, but the promotes tied up into it and the, the equity makes the determination because they run the deal.
[01:10:46] Kevin Choquette: Yep. Major decision.
[01:10:48] Josh Volen: They make the major decision. They say, no, we’re selling.
[01:10:51] Josh Volen: We’re, we’re.
[01:10:52] Josh Volen: We’re making money on this and we’re moving on. Or we’re losing money on this and we’re moving on. And again, misalignment.
[01:10:57] Josh Volen: Right?
[01:10:58] Josh Volen: Potential. Potential misalignment. I don’t want to say it’s misalignment. It’s potential misalignment on the unintended consequences. But the other is the recruiting away. We’re finding a huge opportunity where these, you know, these talented people have been at a company for five years and they’re in a vintage fund and they’re, they’re the analysts, they’re the rainmakers, and they’re looking at this going, okay, the money’s dried up because we got to recycle this money first or we’re going to deal with redemption cues.
[01:11:27] So I’ve moved from an acquisitions person now. I’m a dispositions person. I don’t like this job. Or I’m an analyst, and I’ve run the math. And I’m taking 80% of market for the last five years because I was going to get this huge promote to make 150% of market.
[01:11:42] And I’m running the math and this doesn’t pencil like there is no promote.
[01:11:48] Why would I stay? And so from a recruiting standpoint, we’re getting talent. You know, we’re getting looks at talent and, or talent. There’s more talent out there than we have positions clearly today.
[01:11:58] But our, our bench of talent, because that’s how we look at it, is we, you know, we’re growing firm. Right. We’ve been growing 50 to 100 every year.
[01:12:07] We look at our talent and we’re going, okay, who’s next on who’s coming off the bench? Like, our downtime for hiring is very low. We have a very rigorous hiring process.
[01:12:15] But, but the, the having strong team members, you know, they’re our best recruiters and you know, typically they’re coming from referrals within and, or people we’ve already been talking to for years.
[01:12:28] Kevin Choquette: Yeah. That’s awesome. Hey, Josh, let’s take a break for just a minute. Come back and we’ll talk about kind of more the personal side.
[01:12:36] Josh Volen: Cool.
[01:12:44] Kevin Choquette: Thanks for listening to part one of my conversation with Josh Volin of Sire Equity. Please listen to part two where we move into culture, compensation and core values of sire, as well as a good bit on the more personal side around self care and self improvement.
