JF1068: $5,000,000 to $50,000,000 Value Add Deals!!! With Matt Lasky
Matt and his company buy BIG deals in healthcare and retail assets! He is in charge of finding, structuring, and analyzing the deals. Get an insight how the big boys underwrite their deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Matt Lasky Real Estate Background:
-Managing Partner at Equity Velocity Funds, a boutique real estate private equity fund
-Responsible for deal sourcing, structuring, and analysis
-Company focus is an emphasis on value-add and opportunistic healthcare & retail assets
-Post-acquisition, Matt helps implement the strategic business plan on each asset to enhance its value
-Based in Columbus, Ohio
-Say hi to him at www.evfunds.net
-Best Ever Book: The Most Important Thing
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.
With us today, Matt Lasky. How are you doing, Matt?
Matt Lasky: I’m doing great, Joe. How are you?
Joe Fairless: I’m doing great as well, and nice to have you on the show. A little bit about Matt – he is a managing partner at Equity Velocity Funds, which is a boutique real estate private equity fund. He’s responsible for sourcing, structuring and deal analysis. His company is based in Columbus, Ohio. You can say hi to him at his company’s website, which is in the show notes link. Let’s get into this, my friend. Matt, do you wanna give the best ever listeners a little bit more about your background and your current focus?
Matt Lasky: Sure. We’re a private equity fund that’s spun out of a deal sponsor who was celebrating their 30th year in existence this year; the whole time we’ve pretty much stuck to healthcare and retail investing; those have been our core competencies, in kind of a smaller and middle market. Most of our projects are between 5 and 50 million. We’re not duking it out with a lot of the bigger institutions in the core markets most of the time. 30 years ago, when our founder kind of laid the vision, health care and retail were highly disparate activities, and as you see – or as you’ll probably hear when we speak – healthcare and retail are merging; we’re seeing a lot of health care uses in retail spaces, and that’s part of our philosophy, so I don’t know if it was fortuitous [unintelligible [00:03:52].02] Now those two sections have a lot of overlap, and that just happens to be what we do now.
Joe Fairless: So let’s talk macro level, and this is just to give some big picture perspective on the type of dollars you’re dealing with and the type of stuff that you all invested in your overall business model. Will you give us an example of maybe the last fund that you did, what type of specific things did you buy within it and what is your role in that process?
Matt Lasky: Sure. We bought about seven or eight assets; we were the whole owner of six of them, and then in the other two — one we went and bought about a 30 million dollar deal with another equity partner, and then also partnered with some physicians on a medical office development. So our fund’s value add and opportunistic. Our goal was mid teens net returns to our investors, and we wanna write a minimum million dollar check, so our first fund’s asset value was just shy of 100 million dollars, and we deployed it in just over a year. We wanted to raise the funds and invest them in the same environment that we were kind of raising them in, maybe a little different than the bigger institutional funds who have a 1-2 year capital raise period and then 1-3 year investment period. We just maybe took a different philosophy there, and we were able to do so just given the project size we typically pursue.
From a macro level, that was pretty much split 50/50 between retail and healthcare assets, with one repositioning and one ground-up development; the rest were value-add acquisitions.
Joe Fairless: Repositioning, ground-up and value add – so most value-add, one repositioning and one ground-up. What’s the difference between value-add and repositioning?
Matt Lasky: In this, repositioning was kind of a unique situation. We had a tenant through kind of our sponsor that I mentioned we spun out of, and the corresponding brokerage firm. The tenant needed space, and we ended up finding a bank-owned, completely vacant building, but had already structured the lease deal with them [unintelligible [00:06:07].19] and so it became a construction project and kind of a retrofit, from a [unintelligible [00:06:13].10] medical office to put the practice in.
Joe Fairless: What is your role in this process?
Matt Lasky: I’m responsible for deal identification, helping lead our underwriting team, and then post-close implementing the business plan and doing some of the high-level asset management. We believe strongly that the people making the assumptions on deals should live with them, so our acquisitions team is the same as the asset management team [unintelligible [00:06:43].15] from inception to disposition, which involves the acquisition assumptions and underwriting helping with the debt structuring, and then closing on the asset, and then post-close monitoring performance and helping — usually we have some sort of problem to fix, being a value-add player… Whether that’s deferred maintenance, vacancy, or all of the above. We’re helping oversee the corrections of those issues and then ultimately the disposition.
Joe Fairless: Have you exited out of all these deals?
Matt Lasky: No, our first investment was made October 2014, so we’re just starting the exit on some of our deals.
Joe Fairless: Okay. Have you exited out of any?
Matt Lasky: Yeah. Our first one, we kind of bought a portfolio and we’re exiting in stages. That was a retail deal where we sold it in parts, and that final part – actually, we should be getting the purchase contract to the final part today. So we’ve exited out of two, and assuming we exit the third where we think, and we’ve had multiple offers in the same area, we’re looking at a 2,5x or 3x equity multiple at the project level over, call it just shy of three years.
Joe Fairless: And for someone who’s not in your world of equity multiple formulas or metrics, what is an equity multiple?
Matt Lasky: That’s basically saying that for every dollar you gave us, with that 2,5-3 equity multiple you’d be getting $2,5-$3 back over the course of the investment.
Joe Fairless: And does that include your original investment dollars back?
Matt Lasky: Yes, it does.
Joe Fairless: So let’s talk about that one that you’re starting to exit in pieces. Can you tell us how much you bought the portfolio for, what exactly is it, and then just give us the numbers on these exits that you’re taking chunks from to exit out of?
Matt Lasky: Sure. We bought the portfolio, which was a couple single-tenant buildings and a strip center that was about 60% occupied for 3,5 million dollars. It was our opinion that the strip center just needed some more hands-on ownership; it was in a market where the average occupancy was well into the ’90s, with rents a lot higher than this center. It’s in Pickerington, Ohio, which is a South-Eastern suburb of Columbus.
Joe Fairless: Okay.
Matt Lasky: This is a little off the beaten path of [unintelligible [00:09:20].21] and it’s gonna be more of your local tenant mix, and the owner, who had some TI dollars and being well capitalized to capture some of the tenants that were in the market could do so. So over the course of 2,5 years we’re now at a true 100% occupancy; we have no vacancy.
Joe Fairless: Wow, congrats.
Matt Lasky: …and we had a good timing. We bought in late 2014, and as a lot of your listeners probably know and other people talked about, cap rates have continued to compress, or I guess otherwise that building values have gone up. So we both bought it right… On one of the single-tenant deals the tenant was expiring in a couple years and we kicked them out in an extension to over 10 years, which creates a lot of value in the single-tenant net lease marketplace, but not enough to kind of get a premium.
The original going in price, like I said, was around 3,5 million. We had a renovation budget of a hundred thousand, and now we’re selling it piecemeal. I guess, for reference, the strip center exceeds our overall project budget, plus the two single-tenant deals that we exited.
Joe Fairless: That’s outstanding. So you’re basically selling the strip center for the price that you paid plus renovations costs for the entire portfolio.
Matt Lasky: Correct. We’re flipping that [unintelligible [00:10:48].05] we could sell the single-tenant pieces and get all of our equity out on the strip center, with no money into it… So kind of the inverse of what you’ve just said. But either way you look at it, we just thought the single-tenant stuff would be easier to sell going into it; adding value in retail is always a little bit of a question mark. We think we can do it, but we’re never positive that months 6 do we get leases done, month 12, 18, 24, or whatever… But we knew what we had in the single-tenant stuff, so we kind of took the mirror image of the approach you mentioned. It’s similar ways of looking at it. We just thought each part was greater than the sum of the whole, and if we could add value, we’d be in a good spot.
Joe Fairless: Here’s a stupid question – when you sell, say, the two single-tenant buildings and you’re able to now own the strip center with no money into it, is that owned by you and your company, or is that owned by the fund, so you, your company, plus your investors will own that?
Matt Lasky: It’s a complicated question. Technically, it’s owned by the investors and the sponsor, and the same partnership agreement as the whole portfolio, if that makes sense. This project was a little tricky because of the way we collateralized the debt. On the front-end we knew we might do this, so we had to pre-negotiate the lease amounts to free up equity as we sold off a part of the portfolio.
Joe Fairless: I wanna talk more about that 60% occupancy that now is 100%, because I’d like to get into specifics. I love the philosophy that your team has – the team that acquires the property is the same team that is managing the asset, so you have to see through the vision that you had painted at the beginning. A lot of the Best Ever listeners who have a smaller company are like, “Well, d’oh, you have to acquire and then you oversee it”, but larger companies might have an acquisitions department, and then separately an asset management department.
So let’s talk about the 60% occupancy and now it’s 100% – how many storefronts did you have to get occupancy for and how did you go about it?
Matt Lasky: That’s a great question. The total size of the center is about just over 25,000 square feet. The bays or the storefronts were 1,400, so I’m not sure what that math works out to be, but we needed a handful. We were fortunate enough to have some great leasing guys, and so we kind of took a top-down approach of who were the biggest users… So we had some blocks of space where we could combine continuous space to reach 4,200, which was three of the bays, in a couple situations. So we tried to identify, as a team, users who are in these types of centers – this was a Kroger anchored center… For the Best Ever listeners out there, Kroger is a market-leading grocer in the Midwest, headquartered in Cincinnati; we’re up in the Columbus area, so there are kind of an 800-pound gorilla of grocers here, which is what attracted us to this project, so we were like “In what other places are there centers like this that are Kroger anchored, kind of off Main & Main, and what does their tenant mix look like?” So we databased and did research on a number of those, and then we went after categories who we thought would take multiple bays. The results were pretty interesting.
The two big tenants we got were 1) the public library of Pickerington; they did a branch office in our building, which was great, and we’re right across from a public high school; we think that plays really well, being across from the high school and being a library. And believe it or not, that is a little bit of an atypical use in retail, but it’s not the first time that’s been done in Columbus. There was a center that I described in that process earlier of how we were looking at other tenants in a town called Worthington – the Worthington Public Library is in a Kroger center that’s not on Main & Main.
So that wasn’t that original of an idea; maybe a little out of the box, but we were like, “Hey, we should really talk to these guys.” It ended up working out. Then we got a karate studio, as well.
As a landlord who’s experienced in health care and retail, I guess one of our big philosophies is – kind of coin the internal term “Amazon test”, which is we would put in tenants who can’t outsource them to online. You can’t do karate online (yet) or go to the library actually online; you can buy books and what not, but it’s not exactly the same experience, especially with the school across the street.
So we’re trying to be cognizant of that as we look at the tenant mix and who might be the best long-term prospects for centers.
Joe Fairless: That’s fascinating. I was gonna call you out when you said “the Amazon test”, because you said the public library — I was like “Come on, that’s how Amazon was founded, by selling books!”, but I get it, because this school is across the street, so kiddos go over to the library. Any special deal negotiation parameters that you had to be aware of negotiating with a public library point person, versus someone in the private sector?
Matt Lasky: They were inexperienced just because this was the first real estate deal they had done since their main campus. They’re not in the business of real estate, they’re in the business of being in the public service. We were really collaborative. We had to get a little creative on how they win and what their structure looked like, which involved a couple levels of board of trustees and approvals for people who weren’t gonna be involved in the day-to-day, but just oversee decisions. They were great, because they were very collaborative and they really did make the process smooth and easy. We try to be open book when we can, and we want a true win/win for everyone, so it was kind of through that collaboration and them saying “Hey, these are our sticking points.” As a landlord, you always want the highest rent possible with the least amount of concessions, but ultimately there was something that worked for both groups. We gave a little flexibility; we ended up giving them half rent for one of the suites, because [00:17:26].09] looked like a big win for them based on their internal politics, and it allowed the people who wanted to operate there and the directors of the library to get board approval.
Joe Fairless: And as far as the single-tenant buildings, you said you extended it from one to ten years, which helps with the value of your property, because it shows a long-term commitment, just like if there are apartment buildings, month-to-month versus a one-year lease – same thing. Why weren’t they already on ten years and how did you come up with the solution for them to want to do ten years, versus what they were already doing?
Matt Lasky: They had built their building on a ground lease, and their base term was running out. They had built the building in ’04 or ’05, and the term was running out when we acquired the building. As part of our due diligence on all our acquisitions we interview all the tenants; if it’s a local tenant, we try to talk ownership; if it’s a more regionalized or national tenant, at least the manager, and a lot of times the real estate person, and it’s a collaborative situation where we just wanna understand how the space works for them and what their needs are, and if we can budget in capital expenditures to make the property better, to meet their needs and ultimately help their business; that’s the type of landlord that we wanna be.
It was through that process that we met with the owner of the single-tenant concept. We were on this edge of town where — it is the gross edge of Pickerington, and this center came out of the ground about a year or two before ’08 happened, and then all the housing starts that were supposed to happen stopped, but they’ve since picked back up and there’s a ton of new houses out that way, relative to what else is going on in Columbus. So he knew that the houses were coming back; he was a really well-experienced restaurant operator, and he just said it’s a little slower than usual, so we ended up negotiating on his rent increases from when his lease would expire. If his was to renew, his option – for five years his rent would have increased higher, and we kind of met him in the middle and said “Hey, let’s not increase your rent as much, but let’s extend you for 10 years. We’re more in it for the long-term and the surety of income than your term rent increase.” Ultimately, he had a lower occupancy cost and wanted to be there long-term, so we were able to come to an agreement.
Joe Fairless: I could ask you questions about this for probably 60 more minutes; I find this so fascinating, because you’re playing at a higher level, and I love learning about how funds operate from a professional standpoint and how you methodically approach things… But we’ve gotta keep rolling, so what is your best real estate investing advice ever?
Matt Lasky: I think my best advice is really understand and be collaborative with whomever you’re dealing with. A lot of our investment philosophy comes from our backgrounds – everyone on our fund’s team was a broker or in an advisory role at one standpoint, so we’ve been on each side of a transaction. I think that really helps us pick apart and understand everyone’s motifs. So just being a human, going out there and actually meeting people, or getting face-to-face I think really goes a long way in today’s digital age.
We’ve had a number of confrontational phone calls, and then kind of the guard comes down and we’re all humans at the end of the day, and things get advanced.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Matt Lasky: I am.
Joe Fairless: First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Matt Lasky: Probably “The Most Important Thing” by Howard Marks. It’s chock-full of high-level investment philosophy that really makes you reflect.
Joe Fairless: Best ever deal you’ve done?
Matt Lasky: Probably the one we just talked about, that went phenomenally well. If we could always do that type of returns, in a couple of years we’d be in a great place.
Joe Fairless: What’s a deal that hasn’t gone well?
Matt Lasky: Probably our nicest retail asset that actually passed the Amazon test; we’re working through and have a lot leasing momentum, but we bought it and a year in had two bankruptcies for tenants who had 50 and 250 locations respectively and had been around for over 60 years each. It was fortunate enough to be in a good market and we’ve got a lot of leasing momentum, but it caught us off-guard because all the managers, through our due diligence process told us that the locations were performing well, but then they had kind of whole company failures, independent of the locations.
Joe Fairless: Best ever way you like to give back?
Matt Lasky: I am a mentor at my college’s business school, which is [unintelligible [00:23:30].10]. There’s a young professional committee that I’m on, and I have a few student mentees… I’m really trying to help today’s youth, and I end up slanting all conversations back to real estate. I’m trying to recruit some bright young minds and help them as they transition from student to professional.
Joe Fairless: And how can the Best Ever listeners learn more about your company or get in touch with you?
Matt Lasky: My e-mail is firstname.lastname@example.org and our website is EVFunds.net. I will disclose that this morning we found out we actually had had our website hacked, so we’ve got some random links on there right now, which is really fortuitous timing for this call.
Joe Fairless: [laughs] Well, this call will air probably after you get those resolved, so I suspect it will be okay to go check out your website. But just in case, you can just e-mail Matt at the e-mail address that he mentioned.
Matt, thank you for being on the show. Thanks for talking about the fund that you all are in the middle of, the acquisition approach — really the asset management approach is what we focused in on, with the strip center and the single-tenant buildings, how you approached identifying the best tenants to fill in the strip center based on what’s worked in the past with others; you brought in the public library, you brought in the karate studio, you do the Amazon test… And then the extension of the lease from one to ten years to add value, how you were able to exit out of it, and man, isn’t that just beautiful when you can exit out of something and still own pieces of the deal with no money into it? That’s a real estate investor’s dream.
Thanks for being on the show, I really enjoyed this conversation. I hope you have a best ever day, and we’ll talk to you soon.
Matt Lasky: Thanks, Joe, you and the Best Ever listeners as well.
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