Chris Finlay- Chairman & CEO, Lloyd Jones
The Power of Institutional Real Estate Investing
The Great Recession of 2008 provided numerous investment opportunities in the multifamily arena, and after a few years of investing for his own account, Chris established Lloyd Jones to offer outside investors an opportunity to participate in his acquisitions. A few years later, he added senior living and development subsidiaries to capitalize on the exploding demand for senior housing. More recently, seeing acquisition opportunities in the hospitality industry, he added a hotel investment division.
Today, Chris leverages his successful 40-year track record and experience to lead Lloyd Jones and all its subsidiaries as chairman and CEO.
What You're Going to Learn
- Unbelievable cap rates and yields in today's market
- How safe should you feel in today's real estate market
- How COVID created opportunities in senior adult residential
- How to find phenomenal deals in real estate amid COVID-19
- Great investment deals in hotels post-COVID
- How to hire top-notch talent to build the best team
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Unbelievable Cap Rates and Yields in Today's Market
Chris Finlay: You know, just about every market that we look at in the southeast and southwest is just doing unbelievably well. You know, the multifamily asset class is just doing tremendous. And I think part of it also is that, you know, there's these huge investment asset management firms out of New York and Chicago and other places, and they've just raised such a huge amount of cash that they're making investments at yields that don't make sense to me. It may make sense to them, but it doesn't make sense to me. What kind of yields are you seeing people match? Three and a half cap. A three and a half cap is normal, right? So, you know, that's like a normal deal nowadays. And you used to hear about that in L.A. or San Francisco or New York for super trophy properties right now. 70's vintage is selling three and half cap in Orlando. Ok, so I mean, it's just incredible. So their threshold yield, and a lot of these are non-traded REITs that have raised this enormous amount of money. And those non-traded rates have to get it out, and they're basically projecting a five percent yield. So if they can get their investor a five percent yield, they're happy. Right. Their cost of money is so low. As long as they get to an overall five percent yield, they can accomplish that. For me, a five percent yield is you know, most of our investors want seven, eight percent yield, somewhere in that range. Five years ago, it used to be 10.
How Safe Should You Feel in Today's Real Estate Market
Chris Finlay: You know, we've been in business 42 years now, and the first major downturn occurred in 79, the late 70s, early 80s. Massive. The S&L crisis and it moved up into the commercial banks in the Northeast and so forth. And during that time, we became a very large asset manager for the FDIC in the Northeast. One of the top. And there you saw such a collapse in values. And it really was a government decision that caused that. So in those days, they required the banks to mark the assets down to liquidation value. So then we come along in the 2008, 2010 recession when we had the explosion of the primarily single family mortgage debacle and all of that. That didn't have anywhere near as bad an impact on real estate, primarily because the feds allowed the banks to extend and pretend. Right. So as long as you were paying the mortgage, even though the asset was probably worth less than the mortgage, the bank didn't have to write it down as long as you paid, and paid on time. So, you know, it certainly got hit, but it didn't get hit anywhere near.
Chris Finlay: So now we're facing a situation where there's such a huge amount of capital. It's just not the institutions, it's the federal government creating capital. And I mean this is an unchartered territory. I mean, this is so massive, the trillions of dollars that the Fed is printing, you know, on a regular basis. I mean, it's just, what is it, 16 or 17 billion over the past year and half. Trillion. 16 or 17 trillion dollars over the past 18 months. And you ask, am I scared? I mean. You know, I think you have to be careful. You really have to be careful. And you know and I know, you've been around a long time and seen this, careful means leverage, right? If you are not stretched on the leverage and the price comes down and you can still survive. It always comes back. Right? Always comes back. So the key that we're trying to do is just, this is not the time to put preferred equity on, mezzanine debt, lever the damn thing up to 80, 85, 90. That's crazy. You're just, you know, because there's going to be some correction here sooner or later. There has to be a correction here sooner or later. There's no question in my mind.
COVID Created Opportunities in Senior Adult Residential
Chris Finlay: Well, senior housing is, to me, the best opportunity out there right now. The absolute number one opportunity. The reason being is we have a demographic, an overwhelming demographic tsunami coming at us of all people like me. And sooner or later, they're going to need to go into a senior housing facility, whether it be an independent living, which is where you go to have fun, right? And you don't have to cook and clean and all that stuff and you meet people and you party all the time and then, you know, it goes from there to assisted living in memory care and further as you need more help, right? So that business is just, I think, two things: We felt in 2019, we purposely decided to focus on senior living and make that a strategic decision for us moving forward. Then, of course, COVID hit right and it came to a complete standstill. So here we were ready to execute on the strategy. COVID hit us and then bingo things shut down until probably six months ago. Deals started coming back on the market. We've got five deals that are closing here before the end of the year. And you know, these are deals that you're buying at 7.5, 8.5 Caps.
Chris Finlay: Class A properties. Great markets. This, to me is like multifamily 2010. And it's the same sort of demographics, right. In 2010, you had the millennials and they were about to explode. Now you have the baby boomers and they're about to explode. And that's the impetus for these markets. So the COVID, tragically, for the people that have had to weather that storm, it's it's now even a better investment because we're seeing people that just are tired. They want out. You know, COVID really took a lot of capital. They're down to their reserves and it's just caused a lot of difficulty, occupancy wise. I mean, let's face it, these places, turnover is 18 months, average. So you close the door on one of these facilities, and the government required them to literally lock down for nine months. If you've got half your building is empty now and you can't you can't re-lease it. So they've been impacted more than, way more than multifamily or almost any other asset class, even more so than than shopping centers, I think.
Finding Phenomenal Deals in Real Estate Amid COVID-19
Chris Finlay: So what we're finding out there is there's, what we classify as as heavy value add, almost redevelopment. Some of the assets that we're acquiring are going to need a very heavy lift. When I say very heavy lift, we're talking 40, 50 thousand a door, major redo. Almost like a new development, except it's already built and it already has some occupancy, maybe 30, 40 percent occupancy, right? Those we classify as a redevelopment. Our strategy there is to execute on those in a three year hold period, get them redone looking like brand new, fully occupied, meaning fully stabilized in this asset class is like eighty five percent. So you're eighty five, that's like the ninety five for multifamily, right? And so once we get there, then we can either recapitalize them or sell them. But we're underwriting those that at least a twenty five, 25 IRR. That's extraordinary. Over a three year old. So, that's the that's what we call either redevelopment or heavy value add. Then on the other side of the spectrum, we're looking at Class A assets that have done one of two things. They just came online during COVID. They've leased up obviously far slower than proforma. They've eaten up all of their interest reserves and carry. And so now these folks are either going to have to make a capital call or they've got to try and unload it. And to unload them, they're willing to take a much lower return or even no return. Just give me my money back and you take over. So we're finding some very, very nice assets, gorgeous brand new properties in that category that, you know, that are unbelievable. And on those were underwriting those generally to a 9 or a 10 and a 20 IRR. So 9 or 10 average yield over a five year period and a 20 IRR on the exit at the end of five. It doesn't sound possible. It's multifamily, 2010. Think about it. Back in 2010, that's how we underwrote a deal.
Adam Gower: That is exactly right.
Great Investment Deals in Hotels Post-COVID
Chris Finlay: I think COVID now really made hotels a good opportunity. And as you alluded to before, the Cap Rates have not, you know, hotels have not crashed. People think, oh, hotels, they're gone, you know? Well, a few big, major city convention hotel-type, those have struggled. They're going to struggle. Some of them will survive and do very well. Some of them won't survive. They're going to have to be repositioned. But when you when you look at extended stay and select service, that category did very well. I mean, in many cases, those guys broke even. And, you know, granted, they didn't make huge amount of money, but they were able to keep the doors open, keep the staff working, pay the mortgage and keep the asset going. And they were net positive. So those assets are still out there. But I think here again, you've gotten people that are tired, the smaller owners and operators have just decided, hey, it's time for me to move on and move to a different asset class. So we're seeing, we've brought on board an extremely talented team of professionals in this space because it's a very niche category. You've really got to know what you're doing. And so we've brought a great team on board and we're seeing tremendous opportunities. Here, again, our target is the southeast, southwest. There's phenomenal opportunities there. And the returns are like senior housing, 10 and 20.
Hiring Top-Notch Talent to Build the Best Team
Adam Gower: How do you build a company so quickly around something like, I know you've been doing this for a very long time, so you've got the experience? How do you do that? How are you structuring Lloyd-Jones to take advantage of these opportunities that are in front of you today?
Chris Finlay: A great question, so (a) we start out with a separate vertical for each asset class. So we're not trying to get the multifamily folks to do underwriting in hotels and the hotel people doing underwriting in senior. We have standalone vertical operations that include an investment team and an operating team. And then, you know, obviously we have a very strong multifamily team doing it forever. On the senior housing team, although it hadn't been a focus, we've been involved with that for twenty five years. Now, we've recently, because of what's happened in the market recently, there's been a great deal of consolidation in that senior space. So a lot of big guys have been gobbling up the medium-sized outfits and they're over. Like Eclipse, for example, Eclipse Senior Living as of midnight last night is over. They shut down. And so what's happening is there's been some very senior, very talented individuals that are now available to companies like me that want to get the best help, ramp up quickly. And so that's what we're doing. We're going out and finding the best talent available, and that same opportunity is happening in hotels. So think about it during COVID, all the big hotel guys, you know, they cut back on executives and top talent to the boom, right? So there is an abundance of super high quality talent for senior housing and hotels that a company like ours can acquire. And you know, and those folks, I think two things one, they like the idea of coming to a smaller company. And B, they like the idea of getting back in the growth mode, right? So. So that's the answer is, I think, vertical stand alone and then getting absolutely super talent in each individual specialty.
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