061: Multifamily Market Trends 2024 with Michael Episcope

00:00 - 00:20 | Michael: At least you've done your own due diligence, because like I tell, you know, most people will read what is in front of them, but they don't take the next step of verifying what is in front of them. They just take it for face value. And I think that's a necessary step for anybody who wants to grow and protect their wealth and avoid some of the landmines out there. You have to take that next step.
00:22 - 00:49 | Christopher: Welcome to Tech Equity and Money Talk. I'm Christopher Nelson. I have the privilege today of being joined by Michael Episcope. Michael is the co-founder and co-CEO of Origin Investments. Origin Investments right now has $1.7 billion under management. And Michael, though, did not start his career in real estate. He actually started out as a trader, was a prolific career trader. I think it was at Commodities?

00:49 - 00:51 | Michael: Yeah. Interest rates to be specific.

00:51 - 01:26 | Christopher: Yes. Oh, wow. And was named top 100 trader of the year. But there's no one better to give us some insight to what's going on in multifamily right now than Michael Episcope. Welcome to the show. Thanks, Christopher. The privilege is mine. Appreciate it. So there's one thing I want to I do want to double click into before we get into this market overview is, you know, You and your partner, David, as you were exiting your trading careers, you said, how are we going to protect and grow our family's wealth? And you made a decision to choose real estate and not just real estate, but multifamily. What was some of the criteria and things that led to that decision?

01:26 - 04:51 | Michael: Yeah, it's interesting looking back. I think one of the things when you make money at such an early age that your biggest fear is losing it. We've all seen people have gone through that that iteration and you make the you can make a lot of mistakes in investing and suddenly go broke and nobody wants to utter the five worst words as I used to be rich. Right. And so a little bit of this was about paranoia. Real estate was something I was introduced to when I was much younger by my grandfather. He owned apartment buildings on the west side of Chicago. And I always tell people like real estate, it's not it's not rocket science. It's been such a great builder of wealth, protector of wealth, generate passive income, has amazing benefits. There's a simplicity to it that I love. And so when I got out of trading, I found myself at a very different point in my life. When I started, I was single. I had no money. You know, just I had a job that I knew I could replace. And then by the end, I was married. I had two kids. I had one on the way. I stacked up chips in life. And I'm like, OK, how do I take the next stage, which was really managing my own wealth? And that's what brought David and I together. And we were working for many years just sharing investment ideas. And we were also working on a nonprofit. We were kindred spirits and decided we can do better. And we invested as LPs did some stuff, learn the business, learn what was good about it was bad. And we wanted to really create something. We didn't have the vision in the beginning, but I would say, like, as I articulated today, it was an institutional platform for investors like us, wealthy investors, ultra wealthy, but, you know, not billionaires, because once you get to a certain level of wealth, the billionaires, they can create something what we've done. But if you have. $3 million, $5 million, $20 million, $50 million, even $100 million. You're not going to go do a whole deal by yourself because the deal can cost $25 million. So generally, you're going to come into a fund or individual deals by themselves. And so that's what we kind of set out to create in the beginning. But I always say in the beginning, there was no vision. It was two guys buying real estate, trying to find good deals, put their money to work that we then brought in. friends and family into it as well. And it was just about getting the most out of real estate. And what I find interesting about real estate is it does cut both ways. It's probably generated more wealth than any other sector, maybe except tech, you know, now that we're talking about. It's also been a great destroyer of wealth as well. And you look at some of the mistakes that people have made. And I've always been a student of the game when I was going through when I was getting my master's in real estate. This was 0678. It was an incredible time to be learning. And I've always been focused on what did people do wrong? How did they lose money? What is happening? How can we do this differently? And you hear these stories. And I think one thing that we've really adopted over the years is this idea of risk management. And I tell people, look, when the market's going, we're not going to make you the most money, but you're going to be really, really happy. And you're going to understand and learn a lot when the market goes down. And this is one of those times that we've seen people who are undercapitalized, people who are overleveraged, people who are just doing things that are, you know, may maximize the upside, but you're also like, you know, taking a lot of risk on the downside. And I think that's what I'm most proud of is today we serve 4,000 investors. We have, I think we're on our eighth fund now of various products. We have 62 team members and it feels great. And we're 17 years into this now. So long time. And thank you. Thank you for the question.

04:51 - 05:43 | Christopher: Oh, my pleasure. And so then I think that's a great lead in because you obviously have been around since 2007. And I think that's interesting, right? You started the company right before 2008. So I'm sure there's a lot of lessons learned. But you've now seen from 2008 you know, to now here we are in 2024, you know, some different cycles. And we're at this point right now where there was this extended cycle coming out of 2020. There was this fervor, okay, there's more you know, and we had the quantitative easing and all of a sudden, you know, we're getting this momentum that's pushing us into, you know, late innings and obviously a heated economy people overbought. Then all of a sudden interest rates started shooting up in 2023. Like what, what is the state of the market right now? What are you seeing out there in the multifamily asset class?

05:43 - 10:35 | Michael: Yeah, and I'll actually maybe take you back a little bit further. It's interesting. I was in Las Vegas yesterday scouting a project out there and a broker had looked at some old podcasts that I did. And he said, yeah, I saw you in 2021 doing a podcast and you were actually spot on. You gave sort of the crystal ball, you know, and look, I don't have a crystal ball better than anybody else. But again, it goes back to common sense. And what we saw in 2021 and one of the reasons we've been able to sort of sidestep this recession in real estate is Coming out of 2020, you saw prices exploding and replacement cost is a big metric we look at and we're not going to buy property 10 years old that is trading 30, 40, 50 percent above where we can build. So at that time, we decided to really embark on a barbell strategy. How do we protect capital? And we protect the capital by going a into preferred equity and protecting it through capital structure. And the way we do that is we had equity above us. And we were also going into markets. We knew projects we knew very different than a bank when you are looking at it from the point of the equity perspective. And then the other way was that we were getting into ground up development and ground up development to a lot of people. Well, that's risky. Well, I would tell you that that is actually the way that we have protected capital through this. Our job is to manage the ground up development risk. But very simply, if the existing market is trading for four hundred thousand dollars per unit and we can build for three hundred thousand dollars per unit, you're way better off building than buying in that market, because nobody knows where the world will be in the five years, right? And if the world changed and still kept going up and multifamily units were worth $500,000 a unit, well, you're capturing that margin as a builder. And we looked at that. We're like, OK, but if you're wrong and the market moves back to 325 a unit, 325,000, that's how we look at its price per pound. Well, if you bought it 400,000 and you leveraged up, you're probably looking at a 70% loss today. Whereas if you built, even if you have some cost overruns, you're just not making as much, but you haven't lost principle. And that's really what we looked at is that time, like we're not going to go in and buy above replacement costs because that's, you know, a big metric. Fast forward about four years, we haven't bought a deal since March of 2020. I do remember, you know, when we look back buying that deal, that was That was pretty horrible. I think we closed on a deal on like March 8th or March 10th. And then all of a sudden it was like, what did we just do? And the world shut down. Turned out to be a good ending. But that was the last time we bought a deal. So preferred equity and ground up development. And so today, though, the world is getting much more interesting in terms of deals we're seeing, opportunities we're seeing out there, we're seeing some Distress is very isolated, generally good markets, great projects, but distressed capital structures like this deal I saw yesterday. And that's what we're looking for. Right. And I always tell people it's like buying a blue chip stock. You know, there could be an event inside the company that happens and the stock goes down, but you This is a company you want to own for the next 20 years. When we look at the markets we're in, they are depressed right now, and there's a lot of supply. But this is what creates the buying opportunity to be able to buy high-quality real estate in a market that has good long-term growth prospects, reset the capital structure, and then buy it actually on depressed earnings. That creates a good recipe. And some of the things, number one, even in the last couple of weeks, we've seen the tenure come down from 3.7% to about 3.4%. I think where we're sitting today, maybe even slightly lower than that. That's a good sign that's going on. We've seen public REITs rally off their lows. And then we see supply coming, you know, slowing down, at least the oversupply coming to an end as we look out about a year. So some of our funds, especially our income plus fund, the flagship fund, we're going to be rearranging that fund to be less debt and more equity over the next year because we see, you know, what I'll say, sort of this mass, the capital markets issues, things like that, the supply getting behind us over the next year. And when you have a $500 million fund, you have to be looking out a year or two when you want to rearrange these things, even if it's, you know, converting and moving things 10, 20, percent in the fund. So we you know we like what we see and we've been able to kind of avoid the last couple of years and the mishaps. I can't say everybody's been able to do that but we feel good about the relative I'll say that returns that we've been able to generate. Nobody's looking to make 3 or 4 percent returns. But when the market has gone down you know 15 to 20 percent and you can break even in that environment, it does feel good. But we're not magicians. We're still subject to the laws of financial gravity. So I would love to have bought puts on the multifamily REITs out there and load it up. But again, that's not our job or our business. And I certainly didn't have the foresight, but we did some good things.

10:36 - 10:50 | Christopher: And so when you think about the multifamily market as a whole, just generally speaking, right, there was a lot of building and construction that kicked off in 2020, I think from 2020 to 2022. Where are you going to see in the next few years, supply versus demand when it comes to multifamily?

10:57 - 13:54 | Michael: Sunbelt markets are oversupplied right now, by far. And when you look at a market like Austin, I believe the supply over the last couple of years has been 15% of stock. It's massive. Historically, it's interesting. There was an article that came out by a gentleman, Jay Parsons. If you want to learn about multifamily, he's great to follow. And for 10 years, The oversupplied markets actually outperformed the undersupplied markets when you're looking at them as the percentage of multifamily units delivered relative to the existing stock. So in places like Charlotte, where they were delivering 3, 4, 5 percent per year, the rents actually went up a lot more significantly than places like Chicago because you have demand. Supply is very easy to measure and it's quantifiable. Now, demand, though, on the other hand, is very difficult and it usually shows up after the fact. This is a little bit different. There is record demand in these markets, but it's not keeping up with supply. And everything that I've read is that we are going to see softness in these markets for about the next year or two. So if you're a multifamily developer in these markets, delivering doesn't mean you're going to lose money. You're just going to be, you know, you're going to make probably yield and no appreciation for investors like us. We're certainly not going to build in a market like Austin, but we will be looking to buy distressed deals, good quality deals that have a bad capital structure or weak sponsors who can no longer hold on and buy those below replacement costs. Because I think those are amazing opportunities. And at any one time in the cycle, you know, you're either You want to favor lending or you want to favor developing or you want to favor buying. And certainly when we go back to the great financial crisis, you would never have built in 2009 because existing properties were trading for 40, 50 cents on the dollar. That would have been the better buy. Today, we're starting to see, you know, inklings of that. This isn't the great financial crisis, but it definitely, you know, has, you know, certain elements to it, if you will, on a very isolated and basis. But, you know, to answer your question, Christopher, the northern markets, ironically, are actually outperforming the southern markets on a rental performance basis. Chicago, if you look at this market, we don't invest here anymore. We are expected to outperform on every metric imaginable in terms of rent growth and things like that. But you have to be careful about running for the bright and shiny and do that. A lot of institutional investors do. If I'm a betting person, which we kind of take a thesis, maybe I don't want to use bet, but you have to have a thesis. And I do believe that if we can buy really good quality real estate in Austin at a discount, that will outperform going into Chicago and buying a stabilized deal today over the next 10 years. And I will bet on the Austins, the Charlottes, the Nashvilles, lifestyle cities in states that have no taxes, because as the kind of work from home movement, it's slowed down, but it hasn't ended completely. Migration will still continue.

13:55 - 14:49 | Christopher: It sure will. And so let's talk a little bit because the real opportunity that's coming up has to do with the fact that overpriced assets were traded in 2021, 2022, and 2023. I know of some deals that were closed at the tail end of 2023 that were bought at the height, and they were structured with a lot of bridge debt. And It would have maybe a two-year term, three-year term, and then one and one. And it's a lot of those particular investments that now as rates have moved and they get to hitting that one, they're looking at being upside down. people that are listening in understand how you would come in and look at a particular investment like that to understand if moving in to take over a distressed deal, what are some of the underlying fundamentals you would want to see debt structure aside?

14:49 - 18:53 | Michael: Yeah. Well, first of all, we have a very defined strategy. We focus on about 12 markets nationwide. So we're in the Southeast, we're in Florida, we're in Georgia, we're in North Carolina, those areas in the Texas markets, Tennessee and Southwest, got about four markets over there. So that's the first thing. And then generally we're looking for class A properties. This can be class A has a lot of ranges. We're not looking at high rise. We're generally garden or wrap. We don't do podium. Those are very expensive. However, if podium is on sale, we might consider that, right? And something like that. So, you know, you asked the quote, like the qualities we look for, we focus on the class A because this is a renter by choice. These are, you know, higher quality properties. These are college educated renters who can, you know, when I say renter by choice, what that means is that they can buy, but they choose not to. Maybe they want the flexibility. This is a temporary stay for them. They don't know what they're going to do. They don't want to be bogged down by owning a house. And the new generation is much more akin to rent. And let's face it, I mean, owning is incredibly expensive today. Mortgage rates at like 7%, so renting is the better deal for sure out there. So those are the things we're looking at. And then it depends on the deal. Is this a deal still in construction? Is this out of construction? What's the story? Great real estate doesn't fall off the Apple truck. So we don't generally see a deal that has 96% occupancy and great cash flow and good debt and all this stuff. So there's usually a story behind it. Okay, it's not leased up yet, the rents are expiring, something happened, there were cost overruns to the deal, this, this, this, and this. Now, those are problems of the past and capital structure issues can always be solved. You can't change the location, you can't change The quality, if you're looking at things that are obsolete or maybe the layout's bad or something, construction defects, we generally don't touch things like that. And then we don't go into the class B and C because those tend to be, especially when you have a recession, those will empty out the fastest. And I know everybody has a different philosophy about that, but when you segment, Unemployment, and you look at it, even during the great financial crisis, well, people who had, I think unemployment went up to like eight, nine, 10% or something like that during that time. But if you look at people who had a college education or even an MBA, that unemployment was low. It was like 4%. But if you start going down and you're like, okay, people with associate's degree, well, that unemployment was at 7%. And then people with only a high school degree, that unemployment was at 12%. And people like without a high school degree, that was at 18%. And so, you know, that's one of the things like when we think about risk, you think about it through the entire continuum of ownership, not just the capital structure, but what you're buying, who your renter is, what happens if things go wrong on that side. And class A will still get hit, but it's just it's not a matter of all of a sudden you're chasing bad debt and you might be 92% occupied in a class B. But you have another 10% of people who just aren't paying rent and now you're debt collectors. And so we've done that. And it's been a choice over the years. And it's been sort of a migration to this product. But when things come whipping back, you know, class B, if you can buy that at dirt cheap, you're going to do very, very well. I just I don't think we've seen the bottom yet, though. What do you think the bottom looks like? I think we're near the bottom right now. It's all going to be interest rate dependent. I think the Fed will get the job done. We have inflation that's both too high. and better than it was last year. So if we look at the trends and what's going on, you also have one of the most restrictive policies, Fed policies in history. We've never had an inverted yield curve for this long. I think we just, as of two weeks ago, passed the previous record. So whether that turns into a recession or a soft landing, we don't really know. But I do think that we're going to see interest rates coming down and, you know, hopefully things improving on the back end for real estate in general. Does that answer your question?

18:53 - 19:08 | Christopher: Yeah, it does. It does. And I'm curious, you know, because I mean, now we see even today, right. Central Bank in Europe dropped by 25 points. Canada, I believe, dropped as well. Like, I mean, does this are these indicators that our policy could be changing in the near future?

19:08 - 20:44 | Michael: I think so. Yeah. I mean, that's the Fed can only control the short term rates. But when you look at the long term rates, which we watch like a hawk because your borrowing costs are really relative to where the five in the 10 year are trading. So there's generally a spread against those. You know, I'd love to see the 10 year below 4 percent. And I just you know, this thing don't fight the Fed right now in operationally. Real estate is actually doing pretty well. And so like there's a lot of noise out there and you have to be careful where you get your information from. Because, you know, if you're reading the New York Times or the Wall Street Journal, they're only going to publish the bad headlines. They're only going to tell you about this wave of supply and this mountain and all that. And if you look at a market, you know, kind of at the 40,000 foot level, like Las Vegas, for example. I was out there yesterday, we're talking to property managers. Well, you know, you can get a feel like when you go to the market and you see and you talk to them. And I remember one, I haven't been there, you know, about a year and a half, but I said, well, how's occupancy? And she's like, we're 97%. Well, how's rates? She's like, you know, they've been kind of flat. We're not giving away any free rent. And I said, well, what have you done over the year? And she's like, we've pushed rents about $100 over the year. And if you look at that relative to what you've read, you'd be like, there's no way possible. But these things are like, you know, there's so much misinformation out there meant to scare people that until you're on the ground getting actual information and you see this stuff in real time, you just you don't have true information that we use. And so when we're going to scout properties and look at things, we're, you know, going out and doing kind of a boots on the ground and talking to property managers and making decisions based on that kind of granular information.

20:44 - 21:01 | Christopher: It's so important and I think, you know, this is something that happens in tech too, right? You have to look beyond the headlines. The headlines talk about all the layoffs, don't talk about the hiring, the fact that You know, hiring's up 2% year over year, right? You would not even know that if I didn't tell you, I'm sure. I didn't know that.

21:01 - 21:05 | Michael: So I just learned something because all I read is about the layoffs.

21:05 - 22:33 | Christopher: The layoffs, right? And the reality is, is while they're laying off in some areas, right, and they are targeting mid-level managers, some executives, they're hiring, especially now, you know, new AI, a lot of technology. That I think is the lesson I just always want people to understand, right? And I think this is with investing your time and talent or investing your dollars in real estate is you have to look beyond the headlines, boots on the ground, there's nothing like it. Now that you've said that, like looking for what's behind the headlines, I do want to start pivoting this conversation because we know that there's distress in the market. And I would like to get your insight because I think your shop And to be transparent with my audience, which is so important, I'm an investor in your funds, and I learned a lot by studying your resources. And I also really enjoy the transparency of you and David of, ask us any questions. I feel so comfortable. You are your team. I can literally ask anything. Let me talk to another investor. Let me see financials on deals that I'm not in. I mean, I can ask anything. I think that there's a lot of investors right now that are in investments that have stopped preferred returns, that are maybe doing capital calls. they may be unsure what are some of the things that they should be asking. And I would love to get your perspective on if they're in that scenario, what are the top five or 10 questions that they should jump on the phone with their, their sponsor and be asking right now.

22:33 - 25:13 | Michael: Yeah, five or 10 questions. I mean, every situation is so different, Christopher, as you know, and I mean, just what comes to mind is, you know, there are good projects out there that are just not, they're underwater for a lot of reasons. And I would have to know those reasons, but really the thing you want to know for sure is, Am I throwing good money after bad? Or is this really going to solve the problem? And I've talked to some investors and we've helped them look at deals. And our investment partners were always happy to help. And you can underwrite the deal. And there's times where you're like, look, yeah, with the right amount of capital, this deal will probably work. And you want to make sure that your new investment is obviously generating return for the risk. And then maybe you're getting some money out of your old return. But there's certain deals that are just so underwater today that unless you resize the deal, I'll give you just an example. We're looking at a deal out in Las Vegas and I think the total cost of the deal was around $120 million. We have to wipe out about $18, $19 million of equity in order for us to make this deal work. So we're buying sort of right around $100 million purchase price. maybe, and it's a high quality deal, great sponsorship, but it just wouldn't work unless you're going to take a write down of the old equity in something like that. So, you know, when I'm looking at these deals and advising other investors, I always say, look, have the sponsor present to you what these new dollars, the incremental value that these are going to create and justify that. And then there's sometimes a little bit of common sense. And I think if I have to you know, put a number out there and tell you what, you know, multi-family class A is worth, it's probably trading at a, you know, 5 to 5.3 cap, depending on the quality of the real estate. And I was looking at one deal and talking to these investors and they're like, well, you know, if the sponsor takes this money, he said, you know, we need between a 4.5 and 4.75, you know, cap of the sale of these assets to, you know, to break even. And I'm like, Well, the market's, you know, above there today. So really, you're just throwing money kind of into a hole, hoping you have growth on the future. And you can put that money anywhere today and probably do better than something like that. So it's it's a you ask the right question. I wish I had five to ask. This becomes, you know, really incumbent upon knowing the sponsor, trusting the sponsor, and then having Even if you don't have the acumen, being able to turn to somebody else and say, like, help me understand this, because you don't want to just keep feeding into a black hole and losing more money. There's time to cut bait. And there's other times where dollar cost averaging does make sense. I've done both in my life, for sure.

25:13 - 26:19 | Christopher: I think we can tease a couple out here because I think one of the things that I always, if somebody reaches out to me and I've had a couple of these calls as well, like, hey, is this good or bad? I just always go quickly to let's look at what's the DSCR. Are they really underwater in debt and are they really trying to feed this? And there's no way that the rent growth is going to get out of it. Right. Or I try and understand, right. Is, is there really a management issue? I think that what I've observed here, cause in Texas, right, there was a lot of the. Syndication education shops were pumping out a lot of like first year syndicators coming out in the early twenties. And what I think that they've done is they have a very hands-off approach to their management team and they don't realize that the management team should be an extension of them being boots on the ground. So that's the other thing is, call the sponsor up and say, I want to go walk the property. Let me see what's actually physically happening. Because I know some of those particular investments that went upside down in Houston, I mean, it was obvious when you walked the property that nobody was there taking care of it on the day to day.

26:19 - 28:31 | Michael: Oh, yeah. I mean, that's a great point. I mean, yeah, going to kick the tires and doing that. I mean, I guess you bring up a good point. Like, I mean, there's a few metrics. I mean, I'm always looking at, you know, your cap rates, your revenue, your sales comparables, things like that. Like anytime we're evaluating a new deal, there's half a dozen variables that you'll really pay attention to and dig in that tell you, look, we're 90% there and then it becomes down to due diligence. But You know, it comes down to revenues, expenses, and then your terminal exit, which is defined by your cap rate. And those things will tell you a lot. And really, you know, it's easy to kind of spot check those things too, especially with the proliferation of information today. There's times that I do this, right? There's trust, but verify. And so even if you're looking at a pro forma of somebody and you're like, Hey, these are the rents and here's our comps. You go to apartments.com and find any one of those comps and say, what are the one bedrooms, right? And you should do that, right? And if they're showing one bedrooms that they're comparable properties at $1,700 and you pull this up on your phone and you go to apartments.com and you go to that, everybody advertises right there what the price of their unit, their available units are. And all of a sudden, if you're $1,300, you're gonna be like, hey, now I have a question to ask at least. Hey, this is what I'm seeing out there. How are you coming up with this? there could be a reasonable explanation. Well, in our numbers, we're adding on the trash valet, we're adding on the lifestyle fee, we're adding on the amenity fee, we're adding on the cable, the electric, the utilities. Okay, I understand that, right? Okay, so be willing to do your own due diligence. But also, if you're with a sponsor who you've known for a long time, I mean, this is, we've built a lot of trust with our investors over time, and some people just don't have the time to do this. They'll ask me, I always laugh, and they're just like, Michael, is it a good deal? Are you investing in it? I'm like, yeah, it's a good deal. Right. Like, you know, it's my name, my reputation on it. And they have a direct line to me. They're like, OK, I'll do it. Right. So I understand both sides. I've been in that, you know, I'm with technology managers. I don't know the first thing about evaluating technology. But if I'm with a manager, I know I love and I trust and they've made me a lot of money. I'll be like, OK, they're coming out with a sidecar. I'll give them a call. What do you think? You know, I'll be like, yeah, we didn't think it was a great deal. We wouldn't come out with a sidecar. So

28:31 - 29:27 | Christopher: That's great. Well, and that's the thing is I think, you know, and this is why, you know, as I have gone out to market and I have, you know, put dollars with other sponsors is when you have a benchmark and you understand what good operators are, the questions that they'll answer, you know, you can start going against that. I mean, the point that I cannot emphasize enough that you just stated is There is a point in your career and there is a point in a relationship with an operator where you have to look at all of the assumptions and you have to go out to third party data and you have to go verify those. Or you may not be able to look beyond that person and understand what's really going on. This goes back to, I think, you know, this point we're making earlier, like looking beyond the headlines is I do think that people who are in stressed deals right now need to look beyond what they're getting, and they need to go gather some of their own data to really understand if they're going to answer a capital call.

29:27 - 31:04 | Michael: Yeah, Christopher, I want to touch on one thing, because this is something my team and I have been talking about. And I think this is a big mistake that investors make. And they believe that because they're going into multiple deals, they're diversified. But if you look at real estate, especially in the private sector, the risk is not always in the deal. It's in the manager. And this is what institutions learned a long time ago, is they want to go very narrow, have a few good managers, but not have a lot. And there is a term called diversification. And we have seen that. And by the more managers you spread out to, the more likely you're going to find the bad ones. And I would say that as an investor, maybe in the beginning, you want to test a few out, find the good ones, go very deep there. And one of the most important things with managers, especially in times like this, is what does their balance sheet look like? How profitable are they as the company? What is going to happen if they have to shut the lights off for two years? And I've seen this and heard this. Well, I want to diversify my portfolio. OK, you're with 12 managers. I know two or three of them are not going to be good when we have a downturn. So you've just done that. But if you told people, hey, force rank your managers, they'd probably pick the best ones at the top. Good balance sheets, great track records, team. you know, alignment, everything that you look for in a manager. So I do like that's one thing. I don't know who coined that term diversification, but I think, you know, the more you spread out, like you can actually do yourself a disservice by spreading across a lot of different managers, not necessarily deals, but it's okay to be in a fund or spread across multiple deals with the same manager. And it's not quite putting all your eggs in one basket.

31:04 - 31:41 | Christopher: I couldn't agree more. I mean, this is something that I'm discovering now in my investing journey as I am, like you, planning out my family's portfolio for the next two, three, five years is I'm actually looking at going deeper with fewer sponsors and really investing because I think the environment has really come to show me who are the sponsors that are really have those strong balance sheets that go and get third parties to drive their assumptions. They're not just making them up and are actually building very strong teams, leverage a lot of strong technology. I think it is a key lesson that people need to learn in their investing journey.

31:41 - 32:09 | Michael: Yeah, you know what? Every single recession, the same lesson is learned over and over and over time. It's forgotten. But if you want to, I mean, this is a page out of the institutions. This is what they learned a long time ago, is that they have the correlation between good and bad investments. And it's not the markets. It's not anything. It's the sponsor they're with. And they go an inch wide and a mile deep with sponsors and just make sure. I mean, they obviously have big teams and things like that and have different choices. But I think the same can be applied to individual investors.

32:09 - 33:06 | Christopher: Well, this is great. No, and I want to thank you for your time here today. I mean, is there anything that you would add right now for people who may be looking for new opportunities in this market of things that they might be aware of? One of the things that I've seen recently, I actually think people need to really, really be cautious is I've seen some sponsors that I know you know, from talking with a lot of sponsors that they have some, some trouble deals. And I know that to actually boost their balance sheet, they're trying to go and get new deals and new markets. And one of the things that I've noticed that's part of this pattern is now they're actually buying older vintage too. What are some questions? And I mean, I, you know, I know we were talking earlier about some of the things that you're seeing like challenges in the market, because I think as, as some of these shops are having trouble, they are going to go out and try and and talk about how great they are. They're going to try and raise a lot of capital. And I think we need to ask questions to understand the truth.

33:06 - 34:53 | Michael: Yeah, it's a good point. I mean, that's true of a lot of industries. It's strategy drift. And that's what they try to do. And to a lot of these shops, especially the more transaction oriented ones, the development shops and things like that, they have to keep the lights on. And in order to do that, you have to do more and more and more transactions. And you always have to understand the motivations, I think, of an investment manager and you know, how do they keep the lights on? What does the balance sheet look like? What does the income statement look like? What's their motivation for doing this deal? You know, and dig in deep to those things. And I think it's okay to approach things as a skeptic, cautiously, because money is, it's, you know, it's easy to lose and hard to make. And once you make that investment, you don't have a choice to unmake the investment. You're just along for the ride, whatever that is for the next three or four years. So I think, you know, like, look, everybody in this, you know, what's interesting today is that, Capital has completely fled the system, which is actually causing some distress in the market, which is creating an environment of way better deals than we had three years ago when capital was flooding the system. So I think, you know, in some ways, if you're a contrarian today and you have patience and you can kind of see through to the other side, this is a great time to be investing. It's just, you know, tread carefully and make sure that you're going into deals and a manager for the right reasons and the true Opportunity is there and this is just isn't a way for the sponsor to, you know, pay their team and keep the lights on and they're doing. And by the way, we see this all the time, you know, we're on the lending and the investing side and there's just some deals that are so incredibly thin and we're almost like, God, they're doing this for close to a break even. And the answer is, well, they get a $3 million development fee and they've got 80 people to feed. So, you know, they're doing it for different reasons.

34:53 - 35:22 | Christopher: Yeah. And I think I just want to wrap up on this conversation on that particular point, which is, and I think this is so important in my eyes have become really open to this is how do you actually incent your people? How do you actually fund your actual business? Because if it is with any type of upfront fee, what that means is that then they're going to be incented to do more deals. And if they're forced to keep their business alive and maybe do a deal that's 80% of criteria, they'll do it.

35:22 - 37:23 | Michael: Yeah, but here's the thing. You're never going to completely in a financial institution get rid of all of the conflicts of interest. So it becomes how do you put the pieces in place so that you minimize or limit or manage those for people? So like in an organization like ours, I think, you know, one thing this goes back to risk management. We have a very diversified product mix. So at any one time, depending on the market environment, lending is very in vogue today. Well, we have a lending arm, right? And ground of development is not. And guess what? We don't have any ground of development. Maybe have a sidecar here or there if we find a special deal, but it's not scalable in today's environment. So when you have different product mixes and instead of saying, hey, we only do value add on 20 year old product and it's good all the time. Well, it can't be good all the time. And so like, you know, and I think this is one thing like as entrepreneurs and people managing our own money. We don't ever want to be forced to just go in a direction because that's the only place. There's an advantage to that in ways. But I love our platform because at any one time we can just stop doing X and start doing Y. And we have recurring revenues that more than pay the bills. But we also make transaction fees. And you know, don't get me wrong, our team has goals and incentives and things like that in place. But we're not going to force those things. And there are certain criteria that are met. And we don't talk about EBITDA. When we talk about our goals as a company, it's client service and returns, right? The market will tell us and there are certain metrics. And you can set out to have the greatest plan in the world. But when suddenly you're faced with a recession, guess what? People are going to, you know, bonuses are going to be skinnier for a couple of years. And that's what people have to understand in a market environment like this. And that's OK. But I think for our firm and the advantage of any of our team members is that we have a diversified product mix. We're doing well as a company, even in this environment, because we span the spectrum from lending to ground up development, to value add, everything in between to be able to survive times like this. And we don't rely on one revenue stream.

37:23 - 37:35 | Christopher: Well, I appreciate you joining me today and thank you so much for the conversation. I'm definitely going to want to follow up and learn a little bit more of that lending soon enough. Great. Christopher, thank you for having me. My pleasure.