JF2554: Recession Resistant Assets with Ted Greene

From RV parks to mobile home parks and self-storage, today we’re talking with Ted Greene about recession-resistant asset classes. Ted tells us about the in-depth back-end process for getting parks up and running, how he’s finding and acquiring self-storage deals in a hot market, and why he might not invest in one of these assets again. 

Ted Greene Real Estate Background:

 

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TRANSCRIPTION

 

Ash Patel: Hello, Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Ted Greene. Ted is joining us from Golden, Colorado. He has 20 years of experience and his portfolio consists of self-storage properties, 10 of which went full cycle. And Ted also owns RV and mobile home parks.

Ted, thank you for joining us, and how are you today?

Ted Greene: Hey, good morning. I’m great. Thanks for having me on. It’s fun to be with you.

Ash Patel: It’s our pleasure. Before we get started, can you give us a little bit more about your background and what you’re focused on now?

Ted Greene: Sure. So I’m a Seattle, Washington native, third generation. And after high school, I went to Seattle Pacific University, I did an internship with Merrill Lynch, and I did that for free for a year and a half, so that I could finally get hired. Eventually, they hired me, so my first job at Merrill Lynch lasted for 17 years; I ended up as a portfolio manager in the PIA Program. I did six years as Chief Compliance Officer for an RIA, and one of my responsibilities was evaluating private investments such as syndicated real estate, and talking with regulators from state regulators about due diligence and all that fun and exciting stuff.

I joined a friend who was starting an IRA facilitation company, which we eventually sold to a group out of Manhattan called YieldStreet. That was a particularly fun change of pace for me after 20 something odd years of managing money, and working with investors. And then on the far side of that transaction, I joined the crew here at Spartan Investment Group, and I’m the investor relations manager here at Spartan.

Ash Patel: So RV parks, mobile home parks and self-storage – those are three really hot categories right now, everybody seems to want to get into those. So you’ve seen every asset class out there, but you picked these three – why is that?

Ted Greene: Before I came to Spartan, we did an exhaustive analysis of characteristics in real estate that we wanted to be a part of. And recession-resistant assets was critical to us, because when rates are low and the Fed is pumping in $1.2 trillion a month, and liquidity is everywhere, and even your brother and your sister and your friend next door, they’re talking about buying one more single-family, that tells you something. To me, having been in the risk business for quite a while, it says proceed with caution. To us at Spartan, back in 2016, when we did the deep dive, the analysis or the outcome of the deep dive is, “Okay, we don’t mind being the hot dot. But when the green turns to red and the risk-on turns to risk-off, we want to make it through that.” Think of Japan in the late ’80s; in Japan and their real estate in the late ’80s, that was everything that I was reading about when I was in high school and getting out of high school.

So everything cycles. Because of that, we wanted to focus on self-storage, because it is proven to be recession-resistant to a degree. Nothing’s bombproof, but storage is very interesting from a risk-off perspective.

Ash Patel: And then mobile home parks.

Ted Greene: We’re not heavily focused there. We do have some assets that service net gas and oil, down in Texas. We’re just there. We’re not adding to that inventory, but we’re there.

Ash Patel: And is that one that you purchased or developed?

Ted Greene: Purchased, ground-up developed, and I can’t recall what the bonus depreciation was, but it was a big chunk; it’s more so than multifamily or storage that’s for sure, because it’s based on the improvement that you do.

Ash Patel: Yes. So the oil and gas industry, when oil prices were low, did you guys take a hit?

Ted Greene: Yes, I think the worst tenancy we saw was 25%. We’re starting to see interest from the OECD organizations for economic development down in Texas, and contracts are starting to spill into 2022. So we are seeing interest. When oil is priced to extreme, that’s when you want to step sideways out of that asset. When you get hit by a hurricane, which we’ve done that; and you have COVID, which we did that; and you have oil, where you have to pay to get rid of (we’ve seen that), it’s not a recession-resistant asset class. So we’re there, we’re tending, we’re making distributions, but it’s not a recession-resistant asset class, from my perspective.

Ash Patel: Is that one asset that you wish you did not acquire?

Ted Greene: I can’t say that. I can’t say that in good conscience, from the perspective that we can see in 2022 occupancy on [unintelligible [00:05:42].11] that’s our perspective. There’s money to be made there. I’ll say it differently – I prefer recession-resistant asset classes. I don’t have the confidence in transitory mobile home parks that I do in storage, I’ll say it that way.

Ash Patel: Yes.

Ted Greene: It’s a little bit of scar tissue.

Ash Patel: Yes, I get that. And then the RV park… Or is it parks? Is it multiple?

Ted Greene: Oh, yes. Okay, so it’s a mobile home park that we have. And I think when I retire, I’ll look back and that’ll have been the one unicorn that I actually saw. And the reason for that is somebody approached us that had 28 acres, and we could actually get to the point where we were constructing mobile home plots… It’s really hard to find; mobile home parks are really hard to develop. So it was flipped to us, we participated, we’re selling the property this fall; it’s probably going to be a 2,75X to a 3X for investors, and two, maybe two years three months, depending on when we get to closing… So it’ll be the unicorn that I actually got to meet. [unintelligible [00:06:46].28]

Ash Patel: Let’s dive into that. This was in the process of being developed when you purchased it?

Ted Greene: No, we did the development. We were approached by an acquaintance who’s a realtor out in Sequim, Washington, and we were able to partner with them and take it through entitlement. And we’re now literally – so this is July of 21 that we’re doing this recording, and we are paving the roads, sidewalk and gutter are in, and the first home will be moved to that property in Sequim probably in August or early September.

Ash Patel: And you’re selling it before the first home goes in?

Ted Greene: Yes.

Break: [07:25] to [09:27]

Ash Patel: For our Best Ever listeners that don’t know what entitlement is for mobile home parks, can you explain that?

Ted Greene: Yes, so there’s a lot of work; you’ve got to get the county, you’ve got to get the city, you’ve got to get the PUD, you’ve got to get sewer, you’ve got all the plumbing. You’ve got to get everybody on your team and you’ve got to give them the respect and courtesy of being sensitive to what they’re concerned about. So can the sewer handle 218 homes working into the sewer system for Sequim, Washington? So there’s work to do there. Power – is there enough power locally? What do we need to do to work with the city to bring power in? Same with water. Business concerns; local business owners – some are going to be a proponent, some will be an advocate. You’ve got to go through the hearings; you’ve got to respect everybody’s interest, I think that’s probably the best way to say it.

Documenting all that, working through the paperwork, being amenable for city managers… It goes on and on and on and on and on. So you’re kind of like a politician when you’re trying to work through taking a pasture to a community, and you want to be a good neighbor; nobody wants to be living next to a jerk, or nobody wants a neighbor to a mobile home park to feel like, “I can’t stand my view.” So it’s a process; you have to be political, you have to be sensitive, you have to be a good neighbor, you have to be a business person. Some of the ladies and gentlemen on the team are very shrewd, upfront, good at negotiation, good at giving ground when it’s time to give ground… It’s exhausting.

Ash Patel: Yes. So, Ted, no municipality wants a mobile home park. How did you initially sell them on this concept?

Ted Greene: That’s exactly right. The property was able to be converted—and in all transparency, Ryan was working on this back in late 2018, early 2019, and that predates my time here at Spartan. So Ryan would be the person to actually give you, “This is how I approached the City Council, this is how I approached the manager of the city” etc, etc. But the property was able to be zoned that we could do this. And in fact, I think it was zoned that it could be a mobile home park back in 2018. Whatever the wrench looked like that Ryan got out to turn that screw and a hammer to bang on the nail, he got it there. It’s just bananas because—

Ash Patel: Alright.

Ted Greene:  —I mean—

Ash Patel: We’ll get him on the show.

Ted Greene: Yes.

Ash Patel: I want to hear the story. So why not rinse and repeat? Why not do this again if it was such a unicorn?

Ted Greene: There’s just—it’s so hard to do. You can’t just go out and say,” Okay, show me 13 properties in the state of Washington where I can build a mobile home park.” You put out a call for offers on that and you’re going to have no responses. It’s not a thing. It’s the whole, “Not in my backyard.”

Ash Patel: Hence the unicorn.

Ted Greene: Yes.

Ash Patel: So with self-storage – very competitive market right now. How are you guys finding deals?

Ted Greene: I think the answer to that is, it’s a two or three-prong stool. One is we are fortunate to have a fairly expansive investor network; we’re always looking for more investors to bring in and work with, but because we’re able to raise 100% cash… So our offers are all cash. We’ve done our due diligence, for the most part; not exhaustive, so we still have a 30 or 45 day once we’ve given escrow funds to complete due diligence.

But when you approach a seller – it’s kind of like the residential market. If you approach a seller with an all-cash offer, you’re taken much more seriously. So from our perspective, if we put together $10 million or $40 million for an all-cash offer, we get taken more seriously. The brokers know their markets, they know who’s active, they know who’s flaky, and you don’t want to be the flaky group; you want to be in the active, act professional, pass on a deal if you just don’t think you can scrape the bucks together in that period of time, and just be respectful of the brokers’ efforts. But we’re known for being able to close.

So combined experience, we currently own 15 storage assets. So combine the ability to raise the funds, combine the reputation so that the brokers know, “Maybe we want to get on the horn with Spartan and let them know what’s coming.” So you start to bundle some of that together and you’re going to be in the race; it doesn’t win you the deal by any stretch, but you’ll know of what’s happening in the marketplace.

Ash Patel: Ted, do you guys actually pay cash for these deals?

Ted Greene: Yes.

Ash Patel: Why not leverage it to increase your ROI?

Ted Greene: We’ll do that after we’ve closed.

Ash Patel: Okay.

Ted Greene: Typically, within six months, we’ll circle back with a 60% advance.

Ash Patel: When it comes to taking investors money, let’s say you have $10 million that you used to close on a deal. And you put financing on it and now you’ve got $7 million of investor money that’s not growing. How does that affect their returns?

Ted Greene: Well, the debt investors are very much aware in advance before we close on a deal. They know the game plan is three or six months from now we’re going to refinance, we’re going to take our time in the refinance, we’re going to get the package that works for the transaction. Right now, we’re getting a 3.55, 30 year amortization schedule, interest-only on 18 months. And that was because we brought in the money, we closed on the deal, now we’re looking for the bank and we’re kind of twisting the bank’s arm. You’ve got to sharpen your pencil a little bit.

So anyway, the debt investors that come in for 60% of the deal – they know that they’re going to get refinanced out. We’ll pay one point upfront, an annual 7%. If they’re in it for six months, they get 3.5% of interest plus 1%, so that’s 4.5% for that period of time; they get a person guarantee from the homeowners, they’re on the deed in first position. So it’s their safe money.

I’m in my early 50s, my parents are in their 80’s. Literally, mom and dad do this, and I’m not stretching it. So for a kid who’s looking out for mom and dad who have a couple of bucks, but should not be taking risk in their 80s, this is what mom and dad do.

Ash Patel: Yes, do you have another class of investors that are in it for a little bit more risk? And what does that look like?

Ted Greene: Yes, so that’s the equity investor. So that’s the 40% of the hypothetical $10 million purchase; 60% is debt, 40% is equity. So in the equity side of the deal for 10 million bucks, we’ve got $4 million coming in, cumulative preferred 7%. Internal rates of return can be anywhere from, if it’s Class A with not a lot of value-add, it might be 13.5 IRR. Our Southeast portfolio that’s up on our portal currently, that’s a 15 IRR right on the money. So just like everything, comparing it to the stock market, you’ve got your rocket ship Amazon stock, and you’ve got your high dividend-paying utility stock that’s got a lower theoretical capital gain of 30% or 35% at the liquidity event in five years.

Ash Patel: And your hold period is typically five years?

Ted Greene: Yes, but, Ash, as you know, last summer, the Department of Labor made a change for what 401(k) plans can invest in, and now the target-date retirement funds, so the 2030-2035 target-date retirement fund that’s on the menu for your 401(k), those mutual funds can include the asset class of commercial real estate. So Department of Labor made that change in August of 2020.

So from Spartan’s perspective, we’re now talking to the Blackstones and the other private equity groups. As a private equity firm, they’re interested in purchasing standardized portfolios that all run on Oracle’s enterprise accounting software, they’re all standardized as far as the software that is used to operate the facility. But they’re looking to buy portfolios of $250 million or more on behalf of the 401(k) plans that are their customers. So in the market, the cap rate for those assets is 4.5%. So if you can purchase individual properties at a 5 or a 5.6 cap, expand the facility, pay your pref, drive the net operating income higher, and then sell that portfolio at a 4.5 cap, which is where the market is now for a standardized $250 million to $500 million portfolio… But your investors, they’re going to know, like and trust you if you execute on that business plan. And I want to be very careful here and articulate the risk; the private equity firms, their appetite could change. So I wouldn’t want an investor to think, “Oh, look how great this sure thing is.” In the risk business, there is no sure thing. So the markets can change, the PE firms could back away, and we’re left with assets that are producing, [unintelligibl [00:18:23].22] but we might sell them at a 5.5 cap or 5.2 cap. But right now, the institutions have a real appetite, and we’re running towards that. So I bring all of that up from the perspective that it may be a five-year hold, it may be a three-year hold, it may be a six-year hold; it just depends on how Spartan is doing in putting together that $250 million or $300 million portfolio for the next transaction.

Break: [18:50] to [21:54]

Ash Patel: This is where that free one-year internship pays off, all of your experience on Wall Street, you’re able to leverage a lot of that experience. So how do you package a deal for a giant hedge fund? Let’s say it’s apartments, self-storage or a mix of all the above. And what does the due diligence period look like?

Ted Greene: You’re asking great questions. I can only guess at the answer. So we have this major change for 401(k) plans in commercial real estate. This just happened less than a year ago. So we have not done one of these transactions. Our CEO, Scott Lewis, our Chief Investment Officer, Ryan Gibson, they’re preaching publicly that this is our intention, we’re after these assets, and the brokers are starting to get an understanding of what’s happening in the institutional space. So it’s not like we’ve got some fantastic secret. The world knows about this. But to specifically answer your question, I don’t know. We’re going to have to figure it out.

Ash Patel: Yeah.

Ted Greene: But I know we’ve got about $200 million in our firm palm that we’re holding onto and we’re looking for another $50 million of assets. And we’re having conversations currently with, for example, Blackstone about characteristics of properties that they articulate, that we know they will like about certain properties to comprise a portfolio.

Ash Patel: Yes, it’s crazy when Wall Street firms are buying mobile home parks.

Ted Greene: But is it? Think about it, the P/E on the stock market is in the Upper 30s. In 1982, when that 14 year bear market ended, the PE ratio on the Dow Jones was less than 7. So if we have inflation and it kind of feels like we are, will stocks go down? They might. Do bonds go down if interest rates go up? They do. So when there’s a pension funds, CalPERS (the California Public Employees’ Retirement System), the 401(k)s, wouldn’t real estate be possibly a better allocation in your 401(k) end in mind, as opposed to a stock mutual fund that might go down by 30% or 40%?

I jumped on you a moment ago, I should apologize.

Ash Patel: No, no, I agree with you. And it’s the smartest guys in the room are buying real estate, which says a lot.

Ted Greene: It makes you take note, but at the same time, with rates being low… When rates move higher, the cost to acquire an asset gets more expensive. So what will happen to Spartan’s commercial real estate assets? Will they be less marketable? It’s bananas. The dialogue that goes around the halls of our firm about “We’re in the risk business, guys. Don’t forget that.” Yes, the Fed is active with pumping liquidity in, but they’re going to turn that off and slow it down. And what happens next?

So I heard somebody talk recently about they’re trying to scrape together the downpayment on a fourplex. And this person actually said, “All I need is the down, and I’ll sit back the next three or four years and just let the thing grow.” And I’m like, well, looking backwards, that’s what’s happened, but we don’t know what’s going to happen in the next four years. My point is, always exercise caution. I think that’s my point.

Ash Patel: Yes, and as you live through a few market cycles, you learn those lessons.

Ted Greene: Yeah. Yeah.

Ash Patel: Yeah. Ted, what’s your best real estate investing advice ever?

Ted Greene: I’m going to play off of what I just said – we’re in the risk business, and keep your wits about you, don’t invest to make as much as you can. Invest prudently, manage your position sizes and invest to make what you need. But give yourself a disaster plan. Give yourself an out. Don’t put yourself in a position where you’re betting too much if the deal goes south, because it’s easy to feel confident when recent history tells you it’s risk-on. But what happens when it goes risk-off, and things slow, and interest rates are higher? Have liquidity. Keep your wits about you. I don’t want to be overly old and boring, but keep your wits about you, I guess.

Ash Patel: Yes. Good advice. Ted, are you ready for the Lightning Round?

Ted Greene: Hit it, dude.

Ash Patel: Let’s do it. Ted, what’s the best ever book you recently read?

Ted Greene: I am halfway through a book called Peak. It’s bananas. It’s about a guy that taught himself how to remember multiple hundreds of digits. So in other words, it’s about performance, mental performance. I’m not done with the book; it struck me as really intriguing. But anyway, the book titled Peak.

Ash Patel: Ted, what’s the best ever way you like to give back?

Ted Greene: We do—here at Spartan, we do sprints. So I like to ride my bike to work, because I’m getting old and there’s too much of me. And so this week, actually, last week we started – everybody pays 50 bucks, you keep track of your mileage. Whoever wins, we get a cheap old little gizmo here at Spartan. But the proceeds go to the food bank here in Seattle. And we do our Disabled Veterans… Here in there. Just being a good community member.

Ash Patel: Got it. And Ted, how can the Best Ever listeners reach out to you?

Ted Greene: For me, I’m the bat that’s hanging up in the attic of LinkedIn. So Ted Greene, and investor relations manager at Spartan.

Ash Patel: Got it. Ted, thank you so much for being on the show and sharing some insights about being risk-averse, the mobile home market, the RV market and self-storage. We appreciate your insights. Best Ever listeners, thanks for joining us, have a best ever day.

Ted Greene: Take care, Ash.

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