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How to Build - Or Find - A Real Estate Compounder.
You’ll need the following:
(thread below)
You’ll need the following:
(thread below)
A Niche Business Model Where:
• Demand is outpacing supply (constrained market)
• Tenants are “pot committed” (sticky customers)
• Organic income grows regardless of economic cycle
• Demand is outpacing supply (constrained market)
• Tenants are “pot committed” (sticky customers)
• Organic income grows regardless of economic cycle
Low Ongoing Capital Requirements:
• Great cash flow visibility = easier to price deals
• Avoids black swan expenses that derail investments
• Capital spent to grow income, not just maintain
• Great cash flow visibility = easier to price deals
• Avoids black swan expenses that derail investments
• Capital spent to grow income, not just maintain
Partially Self-funding:
• Function of the prior two categories
• Less reliant on capital markets
• Issue less and less new equity (%) per deal
• Function of the prior two categories
• Less reliant on capital markets
• Issue less and less new equity (%) per deal
Committed to External Growth:
• Acquisition culture – entire team drives new deals
• Enables team to keep and incentivize All-Stars
• Leverages existing portfolio & data to expand
• Acquisition culture – entire team drives new deals
• Enables team to keep and incentivize All-Stars
• Leverages existing portfolio & data to expand
Improving Cost of Capital (WACC):
• Fanatical about lowering interest costs
• Used as a weapon against the competition
• Compounds as scale can drive interest costs lower
• Fanatical about lowering interest costs
• Used as a weapon against the competition
• Compounds as scale can drive interest costs lower
Operational Excellence:
• COO is a killer that loves systems (engineering mindset)
• Asset managers are celebrated & compensated for performance
• Heartbeat of firm: drives confidence within every division; empowers acquisition team to win more deals
• COO is a killer that loves systems (engineering mindset)
• Asset managers are celebrated & compensated for performance
• Heartbeat of firm: drives confidence within every division; empowers acquisition team to win more deals
Efficient Capital Allocator:
• Occasionally recycle capital via opportunistic sales
• Issue or buyback equity when market gets irrational
• Use everything in the tool kit – lines of credit, fixed non-recourse, bonds, preferred equity, OP units
• Occasionally recycle capital via opportunistic sales
• Issue or buyback equity when market gets irrational
• Use everything in the tool kit – lines of credit, fixed non-recourse, bonds, preferred equity, OP units
Below Average Leverage:
• Counterintuitive, but less leverage leads to higher returns over long term
• Avoids blow-up risk and need to raise capital at inopportune times
• Allows firm to go on offense when overleveraged competitors struggle in a recession or credit crisis
• Counterintuitive, but less leverage leads to higher returns over long term
• Avoids blow-up risk and need to raise capital at inopportune times
• Allows firm to go on offense when overleveraged competitors struggle in a recession or credit crisis
Investment / Reinvestment Opportunities:
• Long runway of expansion, acquisition or portfolio targets
• Development pipeline or – better yet - developer partners that take entitlement and construction risk (option land)
• Critical to high returns over long-term
• Long runway of expansion, acquisition or portfolio targets
• Development pipeline or – better yet - developer partners that take entitlement and construction risk (option land)
• Critical to high returns over long-term
Net Result = Real Estate Compounder
Flywheel where acquisitions are accretive ($$$) vs. cost of capital. This reduces G&A costs, which further reduces WACC, which drives more acquisitions.
Bonus: Virtuous circle reduces risk via improved deal / market quality at same returns
Flywheel where acquisitions are accretive ($$$) vs. cost of capital. This reduces G&A costs, which further reduces WACC, which drives more acquisitions.
Bonus: Virtuous circle reduces risk via improved deal / market quality at same returns
