DEAL TIME! Parkway Flats Investment Opportunity

Adam Gower: Charlie. Nice to meet you. We chatted already a little bit didn't we?So, now you've got to let us know please. What is your name, company name and position and where you from? Got to ask that, for heaven's sake.

Charlie Rushton: Well, it's probably pretty obvious, Adam, where I'm from - London. But born and bred at Wimbledon. My name's Charlie Rushton. I'm one of the partners at Saber Equity and we are a vertically integrated real estate investing company.

Adam Gower: And you have got a very interesting deal that you're going to be talking about today. Parkway Flats. Tell me what that deal is all about. Tell me first, what is the structure of the deal because you've got some co-sponsors. Very interesting structure you've got over there.

Charlie Rushton: Yeah. So what we like to do is we - we realize and see the value in partnering with a lot of different people. But what we specifically look for are people that have, in fairness, got more experience and a deeper knowledge than we have. OK? And we are so proud to be on this team. Co-sponsors for this deal because it's a magnificent deal. But we've got Ian Djuric from Djuric Family Offices and we've got Jorge Abreu and he's got - Jorge has got his own construction company as well. So, when you put these guys together, they are some real heavy hitters. They're probably around 7,000 units, counting at the moment, collectively. And, what we love about them is that they are, on the ball, asset managers and construction arm to Jorge's company brings us a competitive edge when we're rehabbing and being able to source the materials and cut our pricing. So, from that perspective, we see a great upside here.

Adam Gower: Perfect. So now tell me about the deal. Just kind of, high level - 50,000. But what is Parkway Flats?

Charlie Rushton: So Parkway Flats is a new build - 2017. So, Class A, 300-unit multifamily community. It's got all the bells and whistles. It's fantastic. In great shape. Our due diligence was one of the shortest for such a large property ever. Its being kept in fantastic condition. We're acquiring it from the developer directly. So, that's, kind of, giving us an added bonus for the value add potential that we have in this deal.

Adam Gower: Alright. So, you've got to tell me then. It's a brand new project. You're buying it from the developer. What is the value add? What's the story behind this deal?

Charlie Rushton: Well, so one of one of our sponsors, Megan, she has a really good relationship with this developer. And this particular developer had built the property and, as you probably know, most developers like to build it, begin lease up and then pass it on. Well, this developer, he he maintained it, held it and has operated it for the last 3-4 years. Now, you know, he's done a great job. But as developers are, they're not multifamily operators. They're developers. So, there's operational differences that we can see that we can bring down the expense ratios, which is going to drive additional value to the NOI. On top of that, you know, when developers build them, they build them with a vision in mind and we see that we can, with small amounts of incremental investment, add to the overall value of the units by enhancing them with back splashes, upgrading the appliances, you know, things like that, without doing too much structural work.

Adam Gower: And what of, you mentioned operational efficiencies. Tell me what you've seen this guy isn't doing right that you can do that you can add value to it.

Charlie Rushton: Well, it's not that he's doing anything wrong but we see that, for example, payroll, we've slashed our payroll by $80,000. That's a big chunk of a change. You know, we will drive the rubs far more aggressively than some other people or, you know, than the developer has done so far. So, it's not that he's not doing certain things or doing anything wrong. It's just that we see that, you know, with the management team and the company that we're using, you know, they're very familiar with the area in Houston. I forgot to mention that this is based on the western corridor of Houston. So it's in a very affluent area in the submarket of Briar Forest.

 

Adam Gower: And what is the - give me some high level numbers. You told 300 units but how much - are you buying the asset for, how much are you raising, what are the projected returns? Kind of give me the rundown on the numbers.

 

Charlie Rushton: So, the contract price is $45.6 million. We've got an 80% LTC cost. We're raising there about $11 million. Eleven and a quarter. The expected returns are an 8% Pref return to the investors and then anything past that is an 80/20 split. We're not 70/30, we're 80/20 so we're looking after the investors a lot more. We're expecting a 21.5% IRR - Internal Rate of Return over the life of the investment. And, the investment cycle, we're looking at 3-5 years. More than likely, well, not more than likely, but hopefully we'll be refinancing around year 2, 2.5 and exiting probably around year 4.5-5.

 

Adam Gower: And what cap rate are you buying it at?

 

Charlie Rushton: Well, this is very interesting. This is a great point because we're actually buying it at 5.1 but the market valuation is around 4.2. So, we're actually buying it at about $29,000 a unit, under market value.

 

Adam Gower: So, why is he selling it below market? Why would he - I presume it's an off-market deal.

 

Charlie Rushton: It is completely off-market. Relationships. You know - the NOI is... You know, we know where the valuation is there and we know where we can drive it. So, you know, it comes down to negotiations and relationships. He's got a large portfolio and we see a much longer term relationship evolving from this as well.

 

Adam Gower: Charlie, what are the - what is everybody's role in this? Like what's what's your job and how does everybody, kind of, what are their roles? Like, what's your management team going forward and what are their roles?

 

Charlie Rushton: So, besides Jorge and Ian, who essentially are co-sponsors and signatories on the loan and so on and so forth. We have Brem Group, which is made up of Megan and her husband, Carson. They're going to be the asset management side, along with us, since we are Texas-based as well. I'm based in Dallas. And our group has been, along with another group, Jay Duarah. He's been -  we've been charged with the money raising side of it.

 

Adam Gower: Ok, and so going forward, what are the main things that, or the main functions that are going to be critical to adding value? Presumably you're doing some upgrades, aren't you? If you can break that - you talked about back splashes, but let's, kind of, really drill down on this. It's a brand new property. You're going to be adding - I saw that you're going to be increasing rents, a projected $100.

 

Charlie Rushton: We've got about $100-$125 a unit, per month, in room to drive the rents currently. And that's really against market comparisons that we don't really need to do too much rehabs to. But, we do want to bring it up to a comparative level to what the market is doing. The other good thing about the area right now is, that there's no new builds within a 9-mile radius. And so, we've got a pretty - within a 1-mile radius, we've got a $92,000 average household income, which is pretty extraordinary. So, that's where we know that we've got the the quality of tenant that we can, you know, we can definitely achieve the projected rents that we're looking for. Go ahead.

 

Adam Gower: And the upgrades. You talked about back splashes, but there's some other things as well. Just small things to make a big difference. Tell me about those.

 

Charlie Rushton: So, a lot of the units have got little study areas. So, we're going to implement and put in granite tops in those areas as well as the bathrooms to match the kitchens. It's literally back splashes and appliance upgrades. And there's one area of green, untouched green land within the complex area that we're going to convert into a more amenable, attractive, communal meeting area that is, you know, is kind of what we're feeling and hearing what the current tenants are looking for so that they can bring their friends and kind of enjoy that relaxed atmosphere to meet them in.

 

Adam Gower: Exactly. And then you also talk about pets as well, don't you - , people. Some of the current residents walk their pets in this area. That's an interesting angle, actually. I'm going to share with you something that I've learned from another sponsor who is in a completely different part of the world, or the country. So, I'm not going to be sharing secrets that he would be upset with me sharing with you. But, tell me more about that pet area and I'll share with you....

 

Charlie Rushton: So a partial area of what I'm talking about, we're going to convert into a pet area as well. We're going to have a wash station for the dogs and just make it, you know, amenable to the community on site.

 

Adam Gower: And do you charge more for tenants who have pets?

 

Charlie Rushton: Yes, we do. We charge it in two different ways. We charge it, if they come to us and say, you know, I've got a pet, then we charge them a "pet rental fee" - a one of fee, just like a deposit, but it's non-refundable. And then we charge them, a $20 a month rent fee to have the pet in their unit.

 

Adam Gower: Interesting. And do you - I know this is - I promised you there won't be any gotchas. So this is so out there, this question. I'm going to ask anyway. Don't worry if you don't know. I wouldn't expect you to. But out of 300 units, do you know how many people have pets currently?

 

Charlie Rushton: I don't. I would be lying if I tried to say yes, but.

 

Adam Gower: If you tried to bluff it. So, the reason I ask that - it's quite interesting. So what these guys do and again, I'm not going to share names or locations or anything. It is is noncompetitive. So we're all good. Is they actually really positively encourage pet ownership. And what they found, is that they can get up to 30% of tenants have pets, and that would be 100 units for you.

 

Charlie Rushton: Yeah.

 

Adam Gower: That's not a huge difference but at a 5 cap. You know, everything drops to the bottom line and they have up-sells as well. So they sell other stuff to tenants as well, pet-related.

 

Charlie Rushton: Well, you know, I mean, so, the walk the dog station, the washing station, isn't a free utility. There's a fee to be using it. Call it a  convenience fee, if you like. But there aren't a lot of places that provide pet-washing facilities. And as you probably know, if you're a dog owner, it's not easy to wash your dog, you know, in a complex. So, that kind of thing, and that level of amenity that we're providing, these kind of guests and tenants, is kind of what they expect. But, they are revenue-generating opportunities that we can't miss.

 

Adam Gower: Yeah, and that's actually not trivial either. It can add up. Yeah. Alright so, exit plan. OK, go on. You were going to tell me something.

 

Charlie Rushton: Well, I haven't mentioned. When you asked me about the investment and what have you. So it's $50,000 to get into the investment which we think is, and it is for accredited investors only.

 

Adam Gower: Right.

 

Charlie Rushton: So it's a Reg D 506(c) and we are offering it through our fund, Saber Equity Fund, which is a new fund that we just launched. This property is available through it. And the beauty of that fund, is that it allows you to buy tranches of a deal that you might not otherwise be able to get access to because either through barriers of entry from the limitation of the price or from being -  not knowing the sponsors behind it.

 

Adam Gower: Charlie, that's. Okay, so, I didn't know that you were bringing this through a fund. So, this is not a direct investment in Parkway Flats. This is through....

 

Charlie Rushton: It can be. It can be. So, it can be approached in both ways. It can be a direct investment or it can be done through our fund as well.

 

Adam Gower: And do you have other assets in the fund or is this a new.. this is a de novo fund.

 

Charlie Rushton: We already have 3 different assets. We've got 2 different assets. We've got a 4th one. We've got Parkway Flats and we've got a 4th one, on the horizon, shall we say.

 

Adam Gower: Ah, that's interesting. So talk to me about - gosh, I want to focus on Parkway Flats because that's the deal of the day. But tell me something about the fund as well - because, or make the case for one or the other. Like, which would you prefer? To go into the fund or you want investors ideally to go directly into the deal and what are the pros and cons of both?

 

Charlie Rushton: So, what I would prefer is that they go through the fund. And the main reason is, is because what it does is it allows the investor - let's just say you've only got $50,000. Do you put it into one deal or do you look to diversify and put it into multiple? OK? I think most people would prefer to diversify and spread their risk. So, by putting that same $50,000 into our fund, you can buy into this deal at a different level, entry level, as well as perhaps if you like, look at the other deals like the RV/boat storage property that we have or conversion from a motel into a multifamily. Those returns are slightly different based on their risk profiles, as well as what the intrinsic deal is like itself. And it gives the ability for the investors to pick and choose their own, and design, create their own portfolio. Now, when you do single direct investments, you're now going to be dealing with multiple different people, multiple different K-1s, multiple different updates and what have you. Whereas doing this through the fund, you get one K-1 for all of your investments. Everything is tracked on a daily basis with our, from the back end of the platform and you get all of your information in one location. So, there's a lot more pros and cons to the fund.

 

Adam Gower: Okay and, you already have assets in the fund, so you've already got some diversification. Are they all in Houston, Charlie?

 

Charlie Rushton: No. One of them is in Sierra Vista, in Arizona. The RV/boat storage property we're doing is a new construction and that is down in - just north of Galveston, in Santa Fe. And, we have about - there's one other component. We're moving into the Airbnb sector as well. We buy single family or very small, 5-8 unit properties that the investors can come into and benefit from those. We have our own management company that is already up and running, but we've got several Airbnbs that we do, mostly corporate rentals. That's where we focus. Which is where the higher level of returns is.

 

Adam Gower: Ok. So that's an interesting range of different kinds of assets. And now you're bringing a value add multifamily to the table. Tell me, what's the overall investment philosophy of Saber Equity which is your company, isn't it?

 

Charlie Rushton: Well, we like to diversifying our offerings, but we also like to know mostly it's the people first and then the product. That's my philosophy. OK? Get to know the people. Know who you're dealing with nd invariably those deals will be strong deals because of the people behind them. And that's why we make a big focus on who we do business with and who we co-sponsor with because it's the people behind it.

 

Speaker1: Interesting. And so Saber Equity. So what you do is you look for sponsors that have deals that need capital and then you provide the capital. Is that right?

 

Charlie Rushton: That's one element of it, yes. We are also GP of our own deals. OK? So, for example, the Airbnb scenario, we are the sole general partners in those deals. We don't look for sponsors and currently we've not co-sponsored any of those kind of deals. But we are also actively looking for different projects like the RV storage. That is our deal. OK? So, that's not a cosponsoring deal. These larger projects that bring more stability to, and underpin the foundation of the fund, like the 300 unit, we are not big enough or capitalized enough to take on something of that size right now, but we are able to assist in bringing capital to other parties.

 

Adam Gower: That's really interesting. So, how much of your time is spent looking for deals for Saber Equity to GP and how much you spend trying to find developers who you can invest with?

 

Charlie Rushton: Great question. So, there's 3 of us that make up Saber Equity. Myself - I focus more on finding the deal flow. When I've found them and I've, kind of, initially underwritten them to see that they are worth further consideration and exploration. I pass it on to my partner Kyle. He's a licensed SEC investment advisor and he does all of our underwriting. And, when we have our own deals that we look for our own loan terms and what have you, he does all that negotiating. And then finally, the last piece of the puzzle, most important piece is Sabrina. And she does a lot of our equity raising and capital raising through her connections, both on the West Coast and on the East Coast.

 

Adam Gower: And how does she do that? Is that through personal connections?

 

Charlie Rushton: Personal connections and work connections. And she's got a - she's  based in Pheonix. So, that's why one of our market focuses is in Arizona. And, she is a licensed commercial broker as well. And so, she has a lot of reach both in the deal flow and capital raising fraternities.

 

Adam Gower: So, what comes first, Charlie? Does the deal come first or the sponsor, when you're looking at...

 

Charlie Rushton: The relationship. To me, it's the investor who always comes first. But for us, it's the deal because depending on the deal is how we then look at structuring it and decide what elements we need or are missing and how we're going to fill that void, in that particular deal.

 

Adam Gower: So you find a deal, like for example, Parkway Flats. Can you describe the, kind of, the journey from discovering that to where we are.

 

Charlie Rushton: This one is slightly more unique and as far as - I had a relationship with Megan Banks, who is one of the co-sponsors. And through having a chat with her, she told me that she'd gotten hold of this deal and it was with Ian and Jorge and I said, well, we'd love to be on it if we can and help you raise some of the money. And through that, that's how we came to be a part of the deal. We underwrote it. She sent me all the information. We underwrote it, as we would do any due diligence and formed any due diligence that we would do in any other circumstance. And we realized that obviously, it was a very, very strong deal. You know, 10% - 11% cash-on-cash returns, you know, annualized, for a class A product is pretty, pretty spectacular. And so, you know, that's what we look for is, are these different types of investments that, you know, they're not the "run of the mill" 7% pref and 15% IRR. We look for something much higher than that. And that's, certainly with the multi-family arena getting heated up as it is right now, it's forcing us to look outside of that to see it to maintain the level of returns that we're looking for.

 

Adam Gower: And due diligence on Park Place, sorry, Parkway Flats. Let's get back to Parkway Flats. So the due diligence, what was the - what were the most important aspects of the due diligence that you did on Parkway Flats?

 

Charlie Rushton: Really, just verifying the rent in place and the rent roll. Because, you know, the 2017 build, there's not really going to be too much wrong with anything of the buildings and foundation and what have you. It just hasn't been long enough. So, it's really more ensuring that the rents are what the rents are and where they are, we can push them and ensure that we can generate additional income through that. And, like we've talked about - just trying to find what we can do to value add rather than just buying a 96% occupied property and running it as it is. You know, there's no real juice on there for the investors. So, we have to, you know, look for something to make it worth our while as well as worth their while.

 

Adam Gower: And what is the capital stack on this deal? What's the full capital stack?

 

Charlie Rushton: So, it's 80% LTV. We've got the investors - we're raising, like say,  about 11 million. The co-sponsors are putting in $1 million and they're prepared to cover any shortfalls that may happen besides that.

 

Adam Gower: And the 80% is bank financed.

 

Charlie Rushton: Correct? It's on an original bridge loan. We've got a - I think it was 3.65 on the rate and it's a 211 and we'll be refinancing in year 2. At the end of year 2 is our projected timeline to refinance.

 

Adam Gower: And that's because the bridge loan was used for what exactly? How did that - because usually you have a construction then a permanent finance right?

 

Charlie Rushton: Sure. Because we wanted to have the ability to refinance after driving some of the valuation and return some of the capital back to the investors.

 

Adam Gower: And what do you - how much are you projecting to return in 2 years?

 

Charlie Rushton: About 45%.

 

Adam Gower: Interesting. OK. Then of course your returns spike dramatically because you got so little money left in.

 

Charlie Rushton: Correct.

 

Adam Gower: Alright. Let's start wrapping up. I don't want to take up too much time.

 

Charlie Rushton: I'm enjoying our chat.

 

Adam Gower: Charlie, we're not quite finished yet. A couple more questions. Unless you're ready to go on.

 

Charlie Rushton: I'm free.

 

Adam Gower: Alright good. So tell me what is - it sounds a little "gotcha like" but it isn't. What is Saber Equity's secret sauce that makes you different from the other guys out there?

 

Charlie Rushton: That's a great question. And I think - I was talking about this with Sabrina this morning, funnily enough. We look at things from, not just the investors, from a normal syndication side, point of view, we look at things differently. We come from a hospitality side. Yes, that's my background. OK, but we look at - we very much focus on the hospitality side, for not just for the assets, for tenants, but how can we make the investors part of the family truly. So, we're now giving away too many of our little secrets away. But we look after our investors in a different way to, I think, many other syndicators do.

 

Adam Gower: You've got to give me one example. Yeah.

 

Charlie Rushton: So, we own and operate Airbnb properties in Texas and Arizona, OK? We offer to our investors. If they invest with us, they get a little package or parcel. A thank you. And in there, there is a couple of goodies and so on and so forth. And one of them is, that they get a couple of free nights on us staying in the Airbnb of their choice, at whatever point of time in the future. And, you know, it's our way of saying, hey, you know, go and experience Arizona or come to Dallas and stay in a nice cute place down on Bishop Arts District.

 

Adam Gower: How nice. What a nice idea.

 

Charlie Rushton: You know, I think that, you know, to me, that's just a bit of a different angle and it comes from the heart of hospitality. And that's where, you know, I come from and that's where Sabrina comes from and and that's where Kyle comes from. So, and that's kind of why we all meshed so, so very well and so, so quickly when we met.

 

Adam Gower: Very cool. Alright so, let me ask you this as we wrap up. What are the - I'm going to start with. Let's talk about strengths and weaknesses. Let's start with weaknesses. One are your biggest challenges? Let's put it that way. For Saber Equity, biggest challenges today.

 

Charlie Rushton: Oh, that's a great one. Ok. Our biggest challenges. I think, probably getting our name out there. You know, we know what we're good at and we also know what we're not good at. And, you know, while we like to think we know a lot of people. Getting our message out there and getting people to know about us - right now, that's probably our biggest challenge. You're going to change all that for us, Adam.

 

Adam Gower: You know, of course, in the back of my mind, I'm thinking, gosh, I need to dive into your website and your social media channels intensively. We can chat about that briefly. I'll give you some pointers - when we finish.

 

Charlie Rushton: We can take this conversation offline, absolutely.

 

Adam Gower: Aright, so, what are your biggest strengths, Charlie?

 

Charlie Rushton: I think our biggest strengths are that the team that we have - we're very cohesive, we're very supportive of one another. And I think most importantly, we all have different skill sets that, you know, we don't trample on each other's toes. I know that Kyle can underwrite things far better and far more concisely and conservatively than I can. I'm in a better position to find deal flow than Kyle is. And so I think, you know, and Sabrina is a very well articulated lady that, you know, she does a phenomenal job with handling the investors. And people just love her. You know, she's easy to work with and easy to get on with. And so, when you put all that together as a package that, I think, makes us a pretty formidable team.

 

Adam Gower: One last question. So, I like to set it up this way. So for everybody that keeps hearing me say the same thing, I apologize for that. But you've not heard it. You might if you've listened to a podcast. Imagine this was radio, in the good old days when you had to tune in to a specific time. Not a podcast that is listened to on demand and the ideal investor is tuning in right now and the only thing that they hear are the last few sentences that you're about to say, what would you want them to hear and take away?

 

Charlie Rushton: We would love for you to come and invest with us on the 300 unit property in Parkway Flats that we've got in Houston. We've got several options for you to invest your money and more over than that, we've got other options to help you diversify and create passive income for a long time to come.

 

Adam Gower: Charlie Rushton, Saber Equity from West Texas. Such a pleasure. Thanks so much for joining me.

 

Charlie Rushton: Likewise Adam. Thank you sir. God bless.