April 30, 2020
I never planned to make real estate investment my career path. Instead, I focused on building a resume in public markets- working on the sell-side, going to a good business school, and finding a way onto the buy-side (ideally in the hedge fund space).
At the same time, I also invested with my best friend on single-family real estate- rentals, flips, and loans. These performed just about like one would expect for Oklahoma real estate- low entry prices, very small price appreciation, but nice/steady cashflows that covered 15-year amortized debt.
While in my day job, I would watch stock prices move almost randomly in nature, in real estate the value seemed to align much more closely with our decisions on the ground (who to rent to, how much to invest in specific properties, etc). There were two instances during my days running a hedge fund that pushed me towards private markets in general and real estate specifically:
Retailer- I invested in a consumer electronics retailer operating mainly the southwest. This retailer (back in 2010 before retail faced online headwinds) sold to middle class folks and often lent money as part of the transaction. This not only provided a valuable enhancement to the consumer experience but provided another form of cashflow to the company. Investors, however, didn’t see things that way and while its tangible book value was roughly $10/share it traded into the $3 range even as the credit on its lending book remained stable. It was emotionally painful as a fund manager to watch as the stock price going down day after day while underlying fundamentals were stable to improving. The stock did eventually rebound past my mid-teens target price, eventually hitting $70/share (ironically it has come full circle and now trades below $5).
Airline- I invested in an airline that had two lines of business: as a retail airline itself (think smaller version of Southwest or American) and as a service company that contracted small airplanes to the majors. The first dealt with all the competitive pressures and volatility of your typical airline (gas prices, demand, pricing) while the second was a much more stable fee-based model. While it made sense to divide these up, management decided to do so by selling the retail side at a fire sale price (1.5x EBITDA vs. market 3-4x). Yet, as a passive owner I really couldn’t do anything.
Why do I share this? The above two examples (and many others I cold mention) pointed me towards private real estate- where there isn’t the “Mr. Market” quoting you an arbitrary price every day, where the business plan is fairly straight-forward and understood at the outset, where long-term demand continues to exceed supply on a consistent basis, and where the investment is completely tangible in nature.
So where does that leave us today as multi-family investors and mangers? While we will deal with short-term liquidity volatility as we work with tenants who are impacted by the Corona Virus, we are open for business and still leasing available units even today. Even as we are impacted today, demand for our product hasn’t changed like it has for large swaths of the economy. Likewise, we are far less impacted by what goes on 8,000 miles away in Saudi Arabia or China than many public companies are.
While risk is the flip side of potential return in any investment, we like having our personal investments in private vs. public and real estate vs. operating companies.
Disclaimer: Not an offer or solicitation of an offer to buy. Such offers or solicitation may only be made to the qualified offerees through the confidential memorandum and LLC agreement, if applicable.
About Lead Equity Group
Lead Equity Group is a multifamily acquisition and property management company with over $80 million of assets under advisement. Headquartered in Dallas, the Company is focusing on the growing areas of Georgia and Northern Florida markets.
Contact: Chris Clark, firstname.lastname@example.org