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Kirkland Capital Group - Commercial Real Estate Private Equity & Debt
Kirkland Capital Group
Kirkland Capital Group originated from an opportunity to provide investors annual fixed income net returns of 8.5% - 9.5%, with a focus on capital preservation, through micro-balance commercial real estate bridge lending.
First, most lenders will not consider commercial real estate bridge loans under $1 million due to extensive manual process; our technology background enables us to leverage this opportunity. Second, first lien mortgages against income producing commercial real estate, at a reasonable loan-to-value, and conservatively underwritten, have historically been a place of safety in down economies; especially for multifamily, as everyone needs a place to live.
Adam Gower: Brock, Chris. Finally. We actually managed to connect today. Thanks so much for your patience. It's like playing ping pong with you. You hit it back to me. I hit it back to you. Finally we're here playing the game. I'm very happy to meet you. Why don't you start off, if you would, please, and introduce yourself. Name, rank and serial number. What do you do there at Kirkland Capital Group and then we'll roll into the questions.
Brock Freeman: My name is Brock Freeman. I'm at Kirkland Capital Group. I'm the COO, or Chief Operations Officer. The reality is, mostly what I do is take care of loan flow. Everything from getting loans in from brokers, to underwriting them to making sure that they fit with our guidelines, training underwriters, a whole bunch of stuff with that. I do things here and there on the marketing side, etc, as well.
Adam Gower: Chris.
Chris Carsley: I'm Chris Carsley. I'm the Chief Investment Officer at Kirkland Capital Group. I basically do everything Brock said he didn't do. No. I basically work with a lot of the investors. I oversee and work with accounting and portfolio management and risk structuring of the fund. So, anything that does with the metrics and the movements of the funds operations outside of, you know, the underwriting and origination and everything else, that's what I'm in charge of.
Adam Gower: So I'll tell you what. My next question actually is, what is the story of your company? But, I'm going to pull it out of sequence because you actually have a very interesting value proposition. So, I'm interested first in knowing, what is your company's investment strategy? Kind of, give me the high level overview. What do you do? And then we'll talk about how you got to doing that.
Chris Carsley: Sure. Brock, do you want to take that or do you want me to fire away?
Brock Freeman: Go, go. Because I think you're from an investment standpoint, you're probably going to bring it down and then once we get down to the nitty gritty of loans, I'd love to answer. Take that.
Chris Carsley: Sure. At a high-level premise, we are originating micro-balance commercial real estate loans in a capacity constrained area because we're targeting a market under the sub million dollar loan base. That gives us pricing power and it gives us the ability to really get in and build relationships with smaller borrowers as they grow. One of the things that we found ourselves continually doing is working with properties that are workforce housing. We're working with some different minorities in a variety of different secondary and tertiary markets. So the key aspect there is, we can actually obtain outsized returns because of the illiquid nature of the inability for people to borrow money. Some a million dollars, because we know banks and other lenders are just not in this area and we can actually do that in a timely and consistent and thorough manner.
Adam Gower: Micro-balance. What does that mean exactly? What is micro-balance?
Chris Carsley: Micro-balance. Really, we came up with that term because we realized, when we used the word "small", everyone thought we were writing 25 million dollar loans. So, we had to come up with a with a new name and, sort of, coin that because we're really looking at those loans that are $250,000 to a million. That's really the area that we target.
Adam Gower: Ok, and when you say pricing power, that's because you're able to lend the entire amount to a single sponsor and control some of the terms as a result, presumably.
Chris Carsley: Correct. And also, the nature of this market is, most of your lenders out there are not writing loans less than a million dollars. It's the old adage of: why do a $500,000 loan when I can do a 50 million dollar loan and make the same origination points and fees? And, I'm not arguing that point. That's still valid at a certain level. But, there is a lot of different interesting portfolio risk factors that fall in our favor by writing these small loans.
Adam Gower: Alright and so, what kind of- these are loans to, these are all real estate collateralized. So, tell me something about the kinds of loans. We're actually talking about the fund, which is not what I wanted to do. We'll get to the fund in a minute. Instead, just tell me about both of your backgrounds. Let's spin back in time. What brought you here? If you're not watching this, you're just listening. I recommend that you do watch the video because right behind Chris is a crazy poster that speaks to his technology background. What's interesting is, you do talk about technology expertise in your investor memo and some of your docs. I'm interested to know: What's your background? Tell me about that.
Chris Carsley: Sure Brock, why don't you....
Brock Freeman: Well for me. Yeah, sure. I actually - funny enough both Chris and I come from finance. I mean, we both have a degree in finance. But, quickly after that, we kind of went different ways. I did start off in capital markets. In fact, my first role - one of my first roles was in Taipei, working in Taiwan there on the type, for a local company, local stock trading, basic Securities company writing reports on the Taiwan stock market for institutional clients. But then, I came back to the US and I went into the loan business.
Adam Gower: Did you learn speak to Cantonese while you were there?
Brock Freeman: I spoke Mandarin.
Adam Gower: Mandarin in Taiwan is it? Cantonese is just Hong Kong, right?
Brock Freeman: Hong Kong and the area next to it, yes. Guangdong province or Canton Province, yeah.
Adam Gower: OK.
Brock Freeman: Very, very different languages, actually. Completely different languages.
Adam Gower: Chris, what's your background? How did you and then Chris, tell me your background and then how did you come to meet Brock and then...
Chris Carsley: Sure. My quick background will sum it up because I've been very fortunate to do a lot of different things, but, I've always been in finance. I started trading when I was 13 years old. I always knew I wanted to be in investments. I managed people's money. Got the opportunity to be a hedge fund trader. Obviously, dealt with some securities analysts work on the technology side hence, as you stated, the poster behind me is the taxonomy of the dot com universe. And then I transitioned in - out of, when I left the hedge fund trading world, I actually went in and continued to traffic in the alternative investment space, which was venture startups. I really, sort of, labeled myself as sort of the investment specialist because I found myself dealing with M&A, investment banking. Everything very - all related to the private markets. And, the short story of how we met roughly 23 or 24 years ago. Both Brock and I are martial artists and so we met and have maintained contact with each other, even though our careers deviated. You know, we stayed in touch, even though we were in separate countries sometimes. And then, real quick, he came to me in 2019 and said, hey, I think I have an idea for a fund and I want to get your opinion, if you think we can build something around this. And well, here we are obviously. I thought he had a good idea.
Adam Gower: Alright. So tell me. That's very interesting. So tell me about your background in commercial real estate because you talked about - now that's who you're lending to. So how's that - how did that come about? That's what you chose to lend to.
Brock Freeman: The truth is, that's not where I started. I actually started on the residential side and then a couple of years ago decided to, when I wanted to go back to real estate, I wanted to do commercial. Didn't want to go back to the residential side because the residential side had really become very, very commoditized. And maybe I'm, you know, I was part of that commoditization, whereas early on I had worked for a, what now is called "non qm" or a subprime lender at the time and really automating their operations. Everything from the loan origination that came from the brokers, underwriting, secondary marketing, all that stuff. I went from being a finance person to you know, I had a knack for automating. So, went over to the IT side and started automating and built a whole automation system for them. In fact, the first web-based system for - in the industry, at that time. Everything was green screen. So, I'm kind of dating myself there, but that's OK. And then, part of the reason that I started being interested in commercial was simply because, this area was ripe for disruption. And that's simply, I mean, you've seen it Adam. You've done a ton of very interesting podcasts and everything on how this area is being disrupted by, sort of the, fintech or proptech. And I felt like, hey, you know what? I did this before in residential. We can do this again in the commercial. That micro space. So, that's sort of what's driving this whole thing is, there's a number of different factors, but that's one of them.
Adam Gower: Alright. So, actually, let's drill down on that because that's an interesting topic that comes up a lot that is part of your DNA. Less so directly fund related to the more, who you are and speak to your strengths. Tell me about tech and the way that you use tech. You used the term "proptech". It's interesting. So just tell me how you do that. How you use that today in your current business.
Brock Freeman: My approach just always been a people-centered type of tech approach. So, to give you a little background. I'm involved a little bit with the blockchain community. Which is, always, just a great fun when you go out there and you go to these blockchain events and you get these blockchain excellence that they're like, oh, we're going to completely disrupt the industry and no one's going to be left. There's going to be no middleman, nobody, you know. We're going to eliminate real estate agents. We're going to eliminate loan agents. We're going to eliminate people. I was always a head-scratcher because my approach to technology is, we can use tech to leverage and quickly do things that are repetitive, that are really not where a human can do value-add. And I think, those are great places to apply technology where you can reduce errors, where you can use tech to leverage things that people have a hard time doing. Seeing patterns, AI type of stuff. But, there's plenty of places where humans, you just can't get around it. I mean, when you're talking about looking at a local deal Adam and I'm sure you'd agree with this. There's nothing like having someone with experience, with boots on the ground, that's going to be able to tell you, hey, watch out for this, or here's what I think. You know, honestly, I don't see how you can automate that or use blockchain for that. So, what we look at is like, how can we marry the two? How can we take and automate things that are just really great at automating because they're repeatable, they're easy to automate and then pair that with humans that really understand how to leverage that and really sort of 10x or 100x the value of what a person can do, leveraging the technology.
Adam Gower: Got it. I get the theory. Give me a practical example of how you apply that to day-to-day life at Kirkland.
Brock Freeman: Well, like a lot of our inbound loan requests are automated but we still have a person look at them. Even in - our goal. So let me tell you, kind of, our goal and we're slowly getting there. Is to use all this data that's now becoming available out there, just incredible amounts of data that we wouldn't have been able to leverage, even 5 years ago, to do what we want to do, which is this focus on this micro-balance niche, under a million dollars. So you go and you get that AI, whether it's economic data, whether it's rental data, all this stuff, and you can put it together. And essentially, what I think is generate more, not approvals. So, no such thing as automated approvals. But what you can generate, I think is, a lot of automated "red flags". Things that humans can easily miss. You look at - your eyes glaze-over after you look at 10 loans in a day and you miss stuff, and that's what really gets people in trouble. Instead, what we want to look at is like, how do we automate the ability to red flag those items so that you don't miss something on the 10th try because you've looked at it and your eyes are glazing over. Then we still have that human be able to look at something and say, is that a legitimate red flag or can we mitigate that or is that something that I look around? Does that make sense? It's almost like, OK, how do we pare back and look at the cream of the crop? How do we use automation, AI to do that?
Adam Gower: Fascinating. Chris, tell me something about - so Brock has been talking about the strengths of Kirkland. Tell me something about the weaknesses or the challenges that you face and how you're overcoming them.
Chris Carsley: Well, we're an emerging manager. There's constant challenges of being a starting manager. You're limited in, who can invest in you. My background is, on mostly the institutional side, so a lot of my network - the big RIAs - you're just not big enough. They need to write a 10 million dollar check and you're managing 5 million. That's just never going to happen because they have certain mandates. So there is the challenge of being an emerging fund. We have the right idea. There's no table we sit at and people go, oh, yeah, you're not doing something I'm interested in. I mean, yield capture on a risk adjusted basis is literally what everyone's looking for. It's just a matter of - are they going to come get it from us? I mean, there's lots of different yield capture funds out there, not just in real estate, but a lot of different sectors. But that's probably one of our biggest challenges is just, you know, slogging through, sort of, as a startup company, i.e., an investment manager and being that emerging manager. It's not a lack of experience from myself or Brock. It's really more of, well, we just have to find that right group of people that are saying, listen, I do invest in emerging managers and this is how I structure it.
Adam Gower: That's very interesting.
Chris Carsley: That's probably our biggest challenge.
Adam Gower: I'm dying to talk to you about the fund, but I do want to keep these two, these two sections separate. So, we will talk about the fund in more detail but let's dive in just a little bit. So, you provide micro loans to real estate investors. What are the asset classes that you look at?
Brock Freeman: Multifamily is our favorite. So, we'll generally look at those and take those first, simply because, everybody needs a place to live. And so those tend to do well, day in and day out, even during the worst of times.
Adam Gower: So I hear that all the time. Everybody needs a place to live. And the only reason I mention that is because everybody needs to eat too. So why not finance farmers as well? Just, you know.....a total.
Brock Freeman: I think that's a great question. We'll do some of the other typical office, retail. But, let me talk about that for a moment. I know nothing about farming. Aside from growing up and being sent out to weed my parents. Yeah. There's something I appreciate that Buffett and his sidekick will probably kill me for saying a psychic said, which is, you know, when we look at certain things, we need to target and we need to narrow it down into something that is not - that might be complex, but at least as complex as these that we understand. And Chris and I really have that same type of approach about asset classes. It's one reason we don't do mobile home parks. We looked at a few of them and I said, man, there's just some things I don't - we don't understand here. And we could take time to go understand it and probably learn about it and take six months or whatever. But is there enough other things out there for us to really invest in or make loans on that make sense and we really have our heads wrapped around already. I'd rather stay with those and not dig into complexities that are going to really challenge my ability. I don't want to look, after we have a loan go south on it and go, man, that was - we were blindsided by that. We could have never even anticipated that risk because we just didn't know. We didn't have enough experience. I don't want to sit in front of my own investors and say, and repeat that.
Adam Gower: So, what are the - last three questions. Last one. What are the opportunities ahead of you? Where do you see the big - what is the big opportunity? You're just starting out. You started in 2020. What are the opportunities? Why are you doing this?
Brock Freeman: For a couple of reasons, I mean, obviously, the one is, make money. And I think there's a lot of money to be made in this. But really, we try to think holistically and there's two other reasons. Number one, this sort of middle level or micro level is really the salt of the earth of America when it comes to commercial real estate. I think that, when you're talking about the smaller multifamily. When you're talking about the smaller strip mall retail or a car wash or a retail or restaurants or a little small office or multifamily medical office. These are things that we see a lot of, just normal people, start to get into and could actually afford to invest in. And I think that's great for two reasons. Number one, we see a ton of minority investors in this that are going and moving up from maybe owning a few rentals to owning some commercial real estate. And this is their first stop. And so, we're really happy to be able to provide that financing that wasn't so easy for them to get before. And number two, it really provides key housing and for first responders. So creating - taking a place that was Class C, turning it into a Class B. That some place where our first responders couldn't afford to live and want to live. I think that's important and a lot of these are in minority communities or minority communities that are majority of minorities. And then on top of it, a lot of these retail outlets are not some expensive high-level mall. They're a mid-level place where a lot of people can get started with a business and we're super happy to provide those opportunities where all of us are making money at that, sort of, renewing America. I think, if you want to talk about - you want to invest in America, this is where you invest.
Adam Gower: Fascinating, right.
Chris Carsley: I got one other answer to that side and it's much more on the fun side. This gives - when I was sitting down and when I'd finished my due diligence on the real estate and I had to actually start building the fund and thinking about the actual metrics of what this is going to look like and how it was going to operate. It really opened up the opportunity to bring something I knew that was in demand in a form to investors that offered full transparency and allowed me to create really, one of the best alignments I've actually seen in creating funds. Even other funds that I've worked for or built, this one allowed me to really be able to say there's nothing you can't ask me and there's nothing I won't show you. And that's rare in a lot of different instances when you're dealing with alternative investments. But I mean, just as a quick note, one of our investors, she was an actual alternative fund auditor and, we actually line item out our expenses and she said, well, there's something wrong with your fund expenses. And I said, OK. So, we hopped on a phone call and I literally just jumped on, screen-shared and just started showing things, the breakdown of the fund expenses. And she was amazed at how quickly I was like, well here everything is. Open kimono, you know, what questions do you have? And it turned out that, my fund, the the fund expenses weren't wrong. They were just lower than she'd seen historically in other hedge funds and other funds she'd reviewed, which is the second point. We're able to run this to where every move we make, because Brock and I are large investors in this one. So, we're treating our own money, really, side by side, really controlling costs and operations at really every step. So, that's the other reason I was really excited about, not only do we have the investment theory in the right angle. We have the ability to create a platform that was, you know, going to be really aligned with investors. That was really important to me.
Adam Gower: Brock Freeman, COO and Managing Partner. Chris Carsley, CIO and Managing Partner. Thank you very much for sharing with me your background on this Sponsor Profile for the Deal Time Podcast. Thank you.
Chris Carsley: Thank you Adam.
Brock Freeman: Thank you very much.
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