JF2363: Losing Credit Last Second With Gary Beasley #SituationSaturday
Gary Beasley is the Co-Founder and CEO of RoofStock, a real estate investment marketplace. He was a previous guest on episode JF1129 where he shared more of his journey and start into real estate but today he is going to share a sticky situation where he was in the middle of a deal and lost his funding while in the middle of it and only had one month left of cash.
Gary Beasley Real Estate Background:
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“It’s amazing how resilient our industry is, especially after COVID19” – Gary Beasley
Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today we’ll be speaking with Gary Beasley. Gary, how are you doing today?
Gary Beasley: I’m doing great Theo. How are you doing?
Theo Hicks: I am well. Thanks for asking and thanks for joining us again. Gary was previously interviewed in an episode aired three years ago. We’re going to catch up with what Gary has been up to, as well as talk about a sticky situation because today is Saturday, Situation Saturday. We’re going to talk about a sticky situation that Gary was in, how we got into it, how he got out, lessons learned, that you can apply those lessons to your business.
But before we get into that situation, a little bit about Gary. He’s the co-founder and CEO of Roofstock, a real estate investment marketplace. He was also the co-CEO of Starwood Waypoint Residential Trust, which owned and managed 15,000 single-family rentals. His previous episode is Episode #1129. Make sure you check that out. Based in Oakland, California. His website is roofstock.com. So Gary, before we get into that sticky situation, do you mind telling us a little bit about your background and then what you’ve been up to since we last had you on the show?
Gary Beasley: Sure. It seems like ages since I was last on this show three years ago, a lot has happened. So my background, I’ve been sort of at the intersection of real estate and technology for the majority of my career. I started off in a somewhat traditional real estate capacity, doing financial analysis prior to business school, got my MBA, did some work in the REIT industry for a while, and really caught the entrepreneurial bug at Stanford Business School. I knew that ultimately, I wanted to do something a little bit more entrepreneurial. So Roofstock is my third real estate startup. Broadly defined, those early days at ZipRealty, which was one of the first online residential brokerages, and we were fortunate enough to take that company public in 2004. I was the CFO of that business.
Then my second real estate startup was called Waypoint Homes. We built a platform in the single-family rental space during the big downturn ’07 to 2011, and built that into a company that we ultimately took public in partnership with Starwood Capital. That was called Starwood Waypoint Residential Trust, and that’s where we’ll talk about a sticky situation that we had when I was at Waypoint.
So we took that public, and I was the co-CEO of that business, as you mentioned. We took that public in 2014, and then I left in 2015 to start Roofstock, which is really a marketplace for single-family rental homes. So think about it a little bit like Amazon for houses. As a retail investor, you can buy or sell properties that already are tenanted, much more like a stock or a bond, through our platform. We do a lot of work to get the home certified and break down those geographic barriers so you can make it much more like a financial transaction.
When we last talked in 2017, we were still quite small. We’ve grown quite a bit since then; we crossed over, at the end of last year, a couple of billion dollars of transactions through our platform, and we’ve continued to grow. We’ve had some interesting experiences through COVID where the business really dropped off a cliff in March and April, and really started to come back in earnest over the summer. So we’re now sort of back ahead of levels we were at pre-COVID. So one of the things we could talk about is the resiliency of the sector we’re in. But anyway, that’s kind of what I’ve been up to. We’ve got about 150 people into offices, and we’re active in about 70 markets around the country with our marketplace today.
Theo Hicks: Thanks for sharing that. So as you mentioned, the sticky situation… I’ll let you explain it in more detail, just at a high level. Gary’s company, Starwood Waypoint Residential Trust, had a big line of credit negotiated with a bank, and then it seems like they backed out last second. You only had a certain number of months worth of funds left to use for your company, so you had to come up with a solution to that problem. Do you mind telling us more detail, kind of set the context for the situation, and why it was so sticky, as we say?
Gary Beasley: Just hearing about it is making my blood pressure go up, so this will be cathartic. I haven’t talked about this in a little while… But as an entrepreneur, oftentimes you do face these existential threats to your business. We were one of the first groups to raise significant equity capital to buy distressed homes back during the last housing crisis. We raised 200 million dollars of equity from a company called GI Partners; they were a very high-quality, private equity firm based in the Bay Area. And because it was a new asset class really, the single-family rental homes at scale, there was really — at that time in 2012, when we were doing this, there was no debt market. You could get individual mortgages on properties for perhaps 50% of the value, but that was not very efficient. We were buying thousands of houses and we needed a credit facility that was similar to what was done for multi-family or other sorts of commercial assets.
So what ended up happening was, we were working with a large bank, and we had fully negotiated the deal. This was roughly a 200 million dollar credit facility we were negotiating. So it was going to be the first of its kind in single-family rentals. The bank was super excited about it, we were super excited about it; we thought it was going to take three to four months to put it together. It ended up taking nine months. It was extraordinarily complex and it ended up going to the very top levels of the bank, because it was new. And I think it was because people wanted to sort of take credit for what a cool and innovative structure it was, so they wanted to get it really noticed within this bank, even though at that level it really didn’t need to go up that high. So it was ostensibly approved until the very end.
I remember this was during the London Olympics, and one of the senior bank members was at the Olympics. The decision was made at the last minute, and really kind of right prior to funding, that the bank just couldn’t do it because of the headline risks of funding a company that was building a business off of foreclosed home assets. So even though this had been discussed at some length, and we could legitimately say we were part of the solution to the housing crisis, we were not the problem. What we were doing is buying homes that needed capital, renovating them, and renting them to families who were looking for affordable housing products.
But that left us in a real bind, because what we had been doing is we built this machine to keep growing and we had our full team going, we had acquisitions, renovation, and property management people all over the country in addition to our corporate staff… And we were investing, call it 30, 40, 50 million dollars a month of capital. And because we were counting on this debt to be in place, we were investing all of our equity. So we had an expectation there’d be another couple hundred million dollars of capital available to keep funding the business and keep buying. So we’re kind of accelerating toward this cliff. And then the rug got pulled out from under us, and they said, “Sorry, guys. We just can’t do it.”
So because it took so long to do, we knew that it would be impossible to put another facility in place anytime soon, and we had literally a month, perhaps two months of cash available. So we really thought we were done. We said “Okay. Now, what could we do? Can we just become a property management company? Should we sell the portfolio? What can we do?”
And it’s funny how life works… The next day after this happened, we had a meeting scheduled with another very large lender, Citibank, who came in. It was just a call, that they came in kind of a courtesy call, to kind of see how they could be helpful, blah, blah, blah. At that time, I said, “Well, I’ll tell you how you could be helpful. You could give us a 50 million dollar bridge loan in 10 days. Close that, and then do a 200 million dollar facility within 60 days. That’s how you could be helpful.” [laughs] And I was almost joking about the bridge loan, but I figured I had nothing to lose. They looked around the table and they had a lot of the senior people from the bank there, including the head of credit from the real estate side and some senior bankers… And they said, “I think we could do that.” And they did. So it was really extraordinary. In fact, I think they close that bridge loan inside of 10 days, it was probably more like seven days. Worked with us incredibly constructively.
We went from being on the brink of really having nowhere to run to then having this great relationship that we developed there. They ended up doing even a larger facility, it was a 250 million dollar facility; it was pretty innovative so they’re the first to do it. They viewed it as an opportunity to step in and help us out and in the process, put themselves in a leadership position in the sector to develop the first facility of its kind.
What an interesting learning experience there was it was beneficial to both parties. We felt like we didn’t have a lot of options, they did not take advantage of that situation. What they saw was that the situation that we were in created opportunity for them. So that was a good learning experience – when you have these crises, how can you find a group out there that might view that as an opportunity for themselves and not just an opportunity to crush you, but view that as an opportunity to be helpful and forge a long-lasting relationship, which I’ve had with those guys ever since, even through Roofstock. It was really good all around.
So definitely had to get creative there. Had we not had that meeting on the books with those guys, I would have been making a ton of phone calls and trying to set something up. But I think the reason that we were well served there is even though we didn’t need to have that meeting with Citi, because we already had another facility, we were moving forward with, the idea of constantly staying in touch with lots of people in the industry, because you never know how things can develop… An old CEO of mine had a very wise phrase that I think about quite a bit – Mike Shannon, who runs KSL Capital. or used to… He said, “A smart mouse has more than one hole to run to.” Especially when you’re running businesses that can be too reliant on any one single thing happening, having optionality is good.
So I think just being able to cultivate relationships that you never know when you’re going to need to turn that into an opportunity… I almost canceled that meeting when we were moving forward with our other facility, and like why do we need to meet with these guys? Something told me to keep it and I’m really glad that I did. It was awesome.
Theo Hicks: That’s very fascinating. So you kind of hinted at this, but was it literally the next day? This meeting.
Gary Beasley: It was literally the next day.
Theo Hicks: Okay. So you already hinted at this… So let’s say we go back in time, and you either canceled the meeting with Citigroup because you assume that this other deal is going to go through, or you ask Citigroup for the bridge loan for the facility and they either say no, or they say yes, and the same thing happens again. What would you have done in order to rectify this situation and gotten capital?
Gary Beasley: We had a couple of different options. One was to go back to our equity partner and get more equity and say, “Hey, guys. You’ve given us 250 million. Can you give us another 50 so we could continue to fund the operations? We’ll slow our buying…” And that was our best alternative, is to go back to them; they were very supportive. Not sure that they would have been able to do that, because that was the full allocation that they had approved for our investments, so I’m not sure that we could have actually gotten that done.
We could have then gone out to other pockets of equity. But the problem with that would have been just going to another equity partner, it would have been impossible to get through any sort of diligence process that quickly. So it was really going back to our equity sponsor; that would have been really our only option to continue that way.
The other option was to literally stop our buying operation. We would have had to have furloughed or let go the majority of the people in the field who are doing those activities, and sort of been like a turtle that then goes in its shell. And at that time, stop our buying, continue the property management operation, while we worked feverishly to try to raise more capital to grow the business. That would have been really difficult for us, because as you’re building these businesses, a big part of it is getting the right teams in place and the right processes. So it takes a while. We were firing on all cylinders, and if we then had to let everybody go, and then a few months later having to restart, we would have lost enormous momentum, enormous credibility. I’m not sure we ever would have gotten back to where we were.
So it could actually have just ended the growth of the company. We probably would have ended up just having that existing portfolio and managing it, and ultimately selling it, and going to do something else. It would have been arguably a good real estate trade for the equity investors, but what it turned out to be is both a good real estate trade, but also it allowed us to build real enterprise value in taking the company public. So it created a lot more value, a lot more jobs, it was just good all around. So I think we were fortunate.
But as I think back on it, a big part of my role at the time was to try to be that steady hand during that crisis. When I think back on it, it was really scary. But being terrified internally was very different than what I needed to project to the team. I didn’t know if we’re going to solve it, but I said “We’re going to solve this and we’re going to figure this out. If it’s not with Citi, we’re going to go back to GI. But we’re going to do this.” But it was very clear – when you’re in those kinds of situations, people are looking for leadership and looking for somebody who’s going to be a steady hand at that wheel. So it definitely was a good leadership lesson for me.
You don’t want to be disingenuous with people, you want to be honest but optimistic. Because I think the only way as entrepreneurs, typically, if you’re successful, is if you have to have real optimism, because there are all these hurdles that you need to overcome.
There is a good story that a good friend of mine, Aneel Bhusri, who runs Workday; he founded Workday with Dave Duffield. A very successful company. I was talking to Aneel and he said… It was very funny. I asked him, “How are you and Dave Duffield different?” He said, “Well, we are different.” He said, “If I look at a glass of water, I’ll say that’s half full. Dave will look at it and have a totally different view; he’ll look at that glass and say it’s entirely full, not half empty.” So its optimism oftentimes that drives success, I think, of entrepreneurs who can see past those what looked like impossible challenges.
Theo Hicks: That was actually my next and, I guess, final question, which was keeping your cool during this type of – you called it an existential threat to the business. So you mentioned the reasons why you needed to stay cool, but how did you actually, in practice, do this? Was it just natural? You just told yourself, “Alright, I’m going to be cool,” and it just happened? Did you have outside help? Did it take some time to get into this groove? Maybe kind of walk us through that really quickly.
Gary Beasley: It’s the first time I ever meditated. I was willing to try anything… And I still do that. I think I’ve always had, for whatever reason — when situations dictate and the pressure gets raised, it increases my focus. So I can’t say that I crave that all the time. But when it does happen, I find that things sort of slow down and I can think clearly, where I know some people get more paralyzed by it. For whatever reason, the opposite thing tends to happen to me. I don’t know why that is, but it’s been the case ever since I can remember.
I think that’s one of the reasons that I enjoy starting companies and I enjoy being an entrepreneur, because that uncertainty and those challenges, I find very rewarding. I like trying to sort those things out and I don’t mind the unpredictability of it. I think part of it is you have to be realistic with yourself, but optimistic, and just be comfortable with the downside, and do some scenario planning, and sort of say “Okay, worst case, this is what happens.” You have to kind of make sure you figure out and mitigate, to the extent you can, if you can’t solve things, “This is what I’m going to do. It’s not going to be the end of the world, we’re going to make the best of it.” So you have that plan, and then you work like hell to not have to do that. So I think you have to think through those downsides, understand the implications, and then do everything you can not to have to go there. But at least you know you have a plan.
Theo Hicks: All right, Gary. Is there anything else that you want to mention about this situation? Or where people can learn more about what you’re doing now at Roofstock before we sign off?
Gary Beasley: I guess I would just say, if people are interested in learning more about investing in real estate for their own account, check us out. You can go to our site roofstock.com. What we’ve tried to do is take a lot of the learnings that we as a collective founding group and management team had from our prior lives, working for larger organizations, and make those tools available to individual investors. So you don’t have to be a big institutional investor, you can be anyone and get access to a lot of the same data, same tools, same types of inventory, and then access to the services that you need to start investing.
So I would just suggest, as you’re looking at investment options in this environment, whether it’s through Roofstock or not, I think investing in housing – it’s a pretty interesting asset class. It performed quite well during COVID, and because of the lack of supply of housing, and I think, the increasing importance of shelter for people and housing, there’s going to be a lot of demand for single-family homes. So it’s, I think, something worth looking at as part of your investment portfolio.
Theo Hicks: Perfect, Gary. Well, I guess your catharsis is now officially over.
Gary Beasley: I feel much better.
Theo Hicks: Good. [laughter] Don’t think about it anymore. I really appreciate you going into a lot of detail on what happened, and then how you were able to get through the situation. Really, the main takeaways from this – number one thing to do, as you mentioned, is worst-case scenario planning. What you will do if the worst-case scenario happens, and then making sure you do everything you can to set yourself up so that that worst-case scenario never happened, but if it does, you’re ready. But the other one, which is obviously the bigger one, as you talked about making sure that you are constantly proactively networking with people that might not necessarily be based off of something that you immediately need right now. Don’t just network when you need something…
Gary Beasley: Yeah, pay it forward.
Theo Hicks: …because you don’t really know when you’re going to need anything.
Gary Beasley: And I would say the last thing is don’t be afraid to ask for exactly what you need.
Theo Hicks: Very good. That’s a good point. Don’t be afraid to ask for exactly what you need. Obviously, lots of other great lessons in there as well. So Gary, I really appreciate it. I really enjoyed this conversation, I learned a lot. Make sure you guys check them out, roofstock.com, and his other episode 1129. So Gary, thanks again for joining me today. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.
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