FULL TRANSCRIPT

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Eric Cantor (00:00)

Welcome to what slice of the real estate stack should you own? This is our discussion of real estate. We're gonna cover a number of asset classes within real estate at a very interesting time for many of them with a great set of panelists who are sponsors in different asset classes with a lot of experience. We're gonna try to share that with the investors who are in attendance. So let's start with you, the investor audience, and take a look at who is here. We've got a majority of accredited investors.

is good. Many of the opportunities are for credit investors, but not all. We've got a good bit of real estate experience. like everybody's most of the crowd is at least in the intermediate range. We don't have a lot of professional real estate folks, but that's okay. We're going to do some education as we go. And then last, we've got quite a few people who do plan to invest in real estate in the next year. Seems like good timing after a few challenging years in the space. And we've got a whole host of people who are open-minded.

Let's see how they feel after we complete this discussion. My name's Eric Cantor. I'm the CEO of Vincent. I'll be your moderator today. At Vincent, we help investors navigate private markets, including real estate, venture capital, and a number of other asset classes. You can find us at www.withvincent.com. Let's get to our panel. We've got some great sponsors here. Why don't we do very quick intros. Just tell us who you are, what your kind of product is, and what your

experience in these real estate markets has been. Why don't we start with Jesse from Homeshares.

Jesse Stein (01:31)

Hey, everyone. Thanks for joining today. I'm Jesse Stein. I'm the Chief Investment Officer at Homeshares. Homeshares is an originator and investor of home equity investments, sometimes referred to as shared appreciation products. These are investments made into single-family residential homes in exchange for a percentage of the home's future value.

Eric Cantor (01:55)

Awesome. Jonathan from Lightstone Direct.

Jonathan Spitz (02:00)

Yeah, good morning everyone. My name is Jonathan Spitz and I head up the capital formation team here at Lightstone Direct.

Lightstone, we were actually one of the largest privately held real estate companies in the country. I've been around since 1986, so almost 40 years. And we invest across a number of different asset classes from multifamily to warehouses or industrial, life sciences, retail, hotels, et cetera. And what we provide or what we offer is an opportunity for individuals to co-invest alongside Lightstone in the same deals that we're pursuing with our own capital. So we're the largest investors in every deal that we

So look forward to talking today about just the broader real estate market and what we do at the company.

Eric Cantor (02:45)

Right. Last but certainly not least, Brian from Ground Floor.

Brian Dally (02:50)

Yeah, hey, Brian Dally, co-founder and CEO of GroundFloor. We started 13 years ago with a mission to open up private markets to individual retail investors. And we found ourselves into real estate. I'm really grateful for that. It's been a good category. Specifically, we operate in residential real estate that is being developed by an investor. So we will make a business purpose loan to an investor who's going to renovate aging housing stock or

build a new house and that makes them pretty short-term high-yield loans in first position with a lien underneath it. So good to be here with you all and look forward to the discussion.

Eric Cantor (03:29)

Great. Looking forward to it as well. Before we get into the meat of this, just want to comment as we always do. Nothing you're about to hear is financial advice. Everything here is for educational and entertainment purposes and just introducing some opportunities. Anything you do should be in consultation with your advisor or your own plan. Great. So we're going to have a discussion here. We're going to go deep. We're going to go wide. We're going to ask the hard questions.

Before we do that, let's start with where we are in the real estate market today. It's been an interesting decade and a half since the financial crisis, but let me just sum it up where we've been. Residential has really been flat. We had this big run up and then COVID when everything went a little bit crazy with super low rates. And we've really essentially been flat since then. And we're gonna talk about...

where that's been, where that's going and how that factors into all the opportunities at hand here. Commercials and other asset class that's had its own trajectory. Obviously office was highly affected by COVID. People change the way that they work in offices. Seems to have hit bottom, but that took a really big hit. mean, relative to residential, it's really been flat. Commercials really dropped in terms of price and value.

Mortgage rates obviously are critical to this. I'm sure that interest rates mortgage is going to come up in our discussion today. And those are slightly down over the last couple quarters, but really still high relative to where people kind of got mentally used to them during the post COVID period. Now, if those rates do drop, which there's a lot of talk about the feds going to cut, it's been there for a while. We'll see what happens. It does feel like that the residential market could pop.

you know, pretty substantially from a move there. And again, this is the type of thing we want to dig into today. Last ⁓ pieces like industrial retail that are critical to general function of the economy have held up quite well as people keep buying spending and there's been production of goods, services, AI, et cetera. So let's get to our panel and your commentary on just kind of where we are. So actually, before we do that, let me ask the audience first, because I don't want to...

Let them hear your thoughts and be swayed. Let's do a quick poll for the audience. Which of these real estate asset classes do you, the investors out there, think will be the top performers over, let's call it next three years, 36 months. Pick one of residential, commercial, industrial, office, retail, multifam, or other.

So let's give them like 10 seconds to do that. Pick one. And let's see where we net it out.

Okay, looks like residential is the favorite. I was gonna vote for that one, but I was not allowed to vote. we got residential industrial looks pretty good too, 46 % each. So those seem to be the favorites. Great, well, let's go to our panel. Where are we at in the evolution of this real estate market and all these moving parts? Feel free to comment on just the asset class you know well or what the audience said or multiple asset classes in here. Why don't we start with Jonathan? Where do you think we are?

and where's this cycle headed?

Jonathan Spitz (06:30)

Yeah. and Eric, think you did a good job sort of setting the table. mean, really, it's been kind of a tale of two markets over the last couple of years. mean, and it's, think it's important to understand what's been driving, a lot of the dislocation that we've seen, right? We've saw whether it was industrial or whether it was multifamily, you really saw multi-decade highs in new supply get delivered across.

predominantly Sunbelt markets, it really was something that was happening across the country. And so the market really over the last three years has been hit with this one, two punch. You had a four to 500 basis point increase in interest rates coupled with a multi-decade high in new supply, which ultimately impacted rents. And so what you've seen, especially across the class A segment of multifamily and industrial is

rents falling, valuations starting, and valuations falling somewhat in lockstep. So, you you've seen values fall, you know, in industrial it's been less severe. You've seen valuations fall maybe 15%, plus or minus. And multifamily, it's been pretty severe depending on the market where you're seeing values falling where between, you know, 20 and 40%, depending on the quality spectrum, depending on the market, et cetera.

And so what, what we've seen though is again, is the markets that are getting hit the hardest are the markets that are the highest supplied. So it's actually somewhat counterintuitive. You would think that the markets that are growing the fastest would actually be your best performers. And that actually couldn't be farther from the truth. What we've experienced over the last couple of years, right? Austin, Phoenix, Nashville, Tennessee, like these are the fastest growing markets in the country. And when it comes to multifamily or even industrial, you've actually seen

the some of the largest pullbacks and valuations because there's been so much supply following these markets now. We still think these markets are going to do fine because now it's what we talk about where we are today. We do think we are in not even the first inning of this real estate market recovery, right? You're still seeing elevated distress and this has been a bit more prolonged than what we saw in the in 2007 and 2008 because

banks and lending institutions have been much more willing to work with sponsors on troubled properties, right? But we do think if you look at the backdrop, the macro backdrop going forward and just supply demand fundamentals, higher interest rates have also made the development activity virtually non-existent across most asset classes. no matter what asset class, there's really no new supply coming for the most part.

For the next 3 to 4 years, and I'm not sure when development activity will really pick up. So, you we think it's a great opportunity now to be selective about, you know, we are at Lightstone We are incredibly selective about the markets that we're participating in as an example. We don't think the sun belt is very well priced when it comes to, you know, buying new apartment deals. We think it still makes some sense for industrial.

Generally speaking, we've been focusing mostly on the Midwest, where you just have better supply fundamentals, better pricing, less competition. But industrially, you can still cast a little bit of a wider net. And so we think, again, all the problems that have created all this impairment in real estate values over the last several years is really now in the rear view mirror. Interest rate policy is still

We're not certainly making a directional bet on interest rates, we would definitely say that it's moderating. And obviously the supply picture looks far more favorable. we think now is, I think anytime you see a big pullback of 20 to 30 % values, you wanna be on offense and that's what we believe at Lightstone.

Eric Cantor (10:11)

Great. Jesse, what's your take on all these swirling winds here?

Jesse Stein (10:17)

I'll start with a very high level macro level. ⁓ I think it's interesting that 23 to 25 is defined as the high rate era. I think that's telling because you had a number of years, call it post COVID, where the entire real estate market has been saying, when rates come back down, when rates come back down. And I think a lot of people are giving up on that story.

Right? We haven't seen rates come down noticeably. And I think the expectation that rates will ultimately come down has lessened. And what will happen when everybody potentially comes to the realization, OK, hey, this is the new normal for rates or rates could go either direction, is you are going to see an increase in liquidity.

transaction market has been relatively muted over the past few years, whether it's people unable to refinance debt, extending, pretending, or waiting for interest rates to come down in order to do so, or waiting for interest rates to come down for property values to increase and for them to make a sale. There is a significant gap and has been for some time between the buyer and the seller, and that really happens.

when you're kind of in between in between market cycles and there's this unknown of where the next move is going to be. So, you know, I don't know where interest rates are going in the future. I don't think anybody really does. There's so much geopolitical aspects, you know, that will ultimately, you know, make that decision for the market. But I do think that you have to transact and you have to operate under the assumption that

rates today are the new normal and they can go either way. And I think that has a differing impact on different asset classes. But what I also think is that we haven't seen a market like today where there's such a disparity between geographic locations. And I agree with what Jonathan was saying about having to be extremely careful about which markets you're investing in if you are choosing to select.

you know, specific properties or specific markets to go into. And this especially holds true, you know, with commercial type properties, office, retail, less so industrial and less so residential. But I think you have some markets, you know, that, you know, even if the overall property market does well, are just going to have a lot of trouble attracting demand, whether it's for office or for retail.

And then you're going to have other markets where, you know, what, what, COVID showed, what technology is showing is that corporations, you know, are a lot more mobile than they used to be. And you're going to have migration, not only for individuals, but also for corporations. And that's going to have a real impact on commercial real estate prices because it takes so long to build new office properties, takes so long to build.

the infrastructure that's required when these companies move. So in the commercial space, you have to be extremely careful about which markets you're choosing to invest in.

Eric Cantor (13:26)

Gotcha. We're going to come back to that point later. There's a few investor questions that came in or about geographic specificity, let's stay at the high level for one more answer. Brian, your take on where we're at.

Brian Dally (13:38)

Yeah, I appreciate those comments. think in the residential market in particular, it is. This is a stock picker's market, to be clear. This is a market in which not only the geography that you're picking or the asset class that you're picking, if we go even higher than that, but specifically within residential, which segment you're operating in. Are you operating in the luxury segment, in the starter home segment?

⁓ in the median house price segment. Those are very different dynamics in different markets for different reasons. Now, I will say it's sort of astounding that mortgage rates could increase. This line, this red dotted line shows how quickly mortgage rates escalated. They are not historically high, but they feel high from a consumer perception standpoint. And I think Jesse's right that

This environment is wearing out the people who are waiting for lower rates to move. people, here's the thing about the residential market that I've learned to appreciate. I wasn't in residential real estate when I started the company 13 years ago. But one of the things I've learned to love about it is that we have been systemically underbuilt nationwide. And it's not true in certain pockets that got overbuilt during the Zirp era.

But we have been overall, and the main part of the secular story is that we've been underbuilt for over a decade. And that's why you see the price stability, even though mortgage rates are increasing very high. So that makes affordability more challenged. But in a supply challenged market, you can really sort of depend on sort of price stability. Now for us as a debt product, that's favorable.

because all we need is prices to hold. As long as we don't take on too much leverage, then there are not so many transaction costs. I think if you are investing in equity, it's really important, as Jesse was saying, to be smart about looking at where home price appreciation is happening, is likely to continue happening, might be due for a fall. I'm aware of certain markets where HPA declined peak to trough 20 % or 25 % in some segments.

It's not, you don't have to look hard to find those and they're hot markets, they're markets that people really very crowded trades, especially in the 2021 and 2022 vintages. Those are very challenged situations. Even we as a lender are very careful about those types of drawdowns because that can start to eat into our safety margins. So I think the market remains relatively benign from a lender's perspective.

And institutional investors are really moving into the residential real estate debt stack for investment property because of that. They're seeking it as a price stable segment.

Eric Cantor (16:35)

You just define HPA for our audience. Okay, got it. Great. So that's a perfect segue into our next topic, our next slide, which is really what we promised to deliver on here. What are the different layers of the real estate stack? Why does it matter? So you talked about debt, talked about equity, we have home equity agreements. Let's just give each of you a minute or two to talk about your product, what its implications are from a risk reward perspective, and frankly, why you...

Brian Dally (16:38)

yeah, home price appreciation.

Eric Cantor (17:03)

are operating at that point on the curve. Why don't we start this one with Brian.

Brian Dally (17:09)

Well, sure. mean, when we started GroundFloor, I think, and found our way into this sort of asset class and into this use case within the asset class, what we really learned to love about it is that with GroundFloor, you get to be the bank. You're in the same position as a bank, right? And people really resented banks when they, during the great financial crisis, foreclosed on a lot of people and maybe did shady mortgage deals. so getting to, you know, it's good to be the bank. As the bank, you're loaning money.

for somebody to acquire property, renovate it, and then sell it, and maybe they refinance it into a rental portfolio. That's one of the trends that we've noticed in this rate environment is they tend to trade it into a rental portfolio more frequently. But fundamentally, you are owed the money back within a certain amount of time. And the amount of time in this category is very short. It's about 12 months on average. The coupons are quite high. They can be 10, 12, maybe even 14%.

On a net basis, you would expect to make about 8 to 10 % net of losses and accounting for time to resolve properties that don't get finished on time and the like. So those are very attractive yields relative to the risk because there's not a high proportion of these that lose capital. So return of capital is sort of the standard. And then the yields above that are pretty attractive, especially in that timeline. And it gives investors a lot of liquidity because these assets are

constantly turning. So you get to be the bank. If the property doesn't get completed or gets completed and is sold, you get paid first when it's liquidated or when it's sold. And if there's enough money to go around for equity investors or the flipper who's flipping the property or the builder who's building it, then they can earn their profit. And their profits, by the way, they expect to make between 15 and 45 % return on equity.

on their investment. And those are good enough returns that the debt is relatively cheap for them. So a lot of them utilize debt for that.

Eric Cantor (19:14)

Got it. Okay. Let's go to Jesse on this one. Just explain your product a little bit and where it sits on this.

Brian Dally (19:21)

Yeah,

I'll...

Jesse Stein (19:22)

First, I'll assume most of our audience have not heard of ⁓ home equity agreements as an investment class. I'll start with an explanation of what a home equity agreement is. As I stated earlier, we invest in people's homes. We provide them with liquidity. This is a way for homeowners to unlock some of the home equity that they've built over years, over decades. And the major benefit for them

is that they get to pull out this cash from their property and there's no monthly payment. So this is not technically a debt product. It is an equity investment. It doesn't impact a homeowner's credit. And it allows them to use these proceeds for whatever they want, whether that is home improvement, like installing solar or a new pool. It can be debt elimination or consolidation.

⁓ or could be for any type of life event, to pay for a wedding, a dream, vacation, et cetera. The benefit for us is that we sit in a secured position. In most cases, it's a second position. So we're one level up from where GroundFloor is. However, on average, we are typically at around mid 50 on a combined loan to value basis.

So there's still a significant amount of equity in the homes that we invest in. But these are structured products so that we can participate in the long-term appreciation of these homes. These are 10-year contracts. So even though we are sitting in a secured position and have the downside protection that you would see in a debt-type product, we also participate in the upside.

and our targeted returns are very much in line with what you see on the real estate equity side. So that's why, you know, in this chart, we're right there in the middle. We have some of the attributes of a debt product and also some of the attributes of an equity product.

Eric Cantor (21:19)

Great. Jonathan at the equity side want to give us a little.

Jonathan Spitz (21:24)

Yeah. So I think the, the, the easiest analogy to, to talk about here is, is publicly traded equities, right? When, when you invest in one of our deals, you are investing in common equity. So it's the same thing as common stock. If you think about the publicly traded markets. So what that means is you have unlimited upside and unlimited downside, right? You are participating, pari passu pro rata in the profits and losses in one of our deals. Right. And so

I think the biggest thing that we like to emphasize at Lightstone is number one, we are generally investing in institutional quality real estate. So what does that mean? That means we are investing in apartment units that are 300 plus units, anywhere between 50 and a hundred million dollars. We're also investing in warehouse space, same thing, 20 to $75 million type of properties, right? I think anytime we're speaking with investors that are new to the space,

What we want to make sure that people understand is because people, I say, when I say, when I talk about unlimited loss, that's the part that people want to focus on and for good reason. Right. And so part of the way that we mitigate risks are number one is the asset quality. Number two, we're generally only investing in asset classes or property subtypes where we have a lot of experience in. So we own 25,000 apartment units in 20, you know, in 26 states across the country. We own over

12 million square feet of industrial space. Those are really the two main food groups that we work with specifically within our Lightstone Direct platform. So number, we're also vertically integrated. So we, and what that means specifically is that we have in-house property management, asset management, acquisitions, et cetera. So all of that is all under the Lightstone umbrella. But then the second is leverage. Real estate is a game or a business of leverage. So

That means that we are always taking out a loan, no different than if you're buying a house, right? Like most people, you use a mortgage to acquire their residential home. It's not much different than an investment property. We're usually going out to a Freddie Mac or a bank and getting a first lien loan. And where most people, or most managers in commercial real estate get into trouble is taking on too much debt.

right, is leveraging their properties anywhere between 75 and 85 % loan to cost, right? Because leverage has this way of magnifying returns in both directions. And so people will often look at, you know, bring a deal to me and they'll say, they'll see a deal with a 20 or 30 % IRR and they'll say, wow, this is amazing deal. And I'll start to pull back the look at the OEM and it's okay. Well, they're leveraged at 80, 85 % and people, think,

don't appreciate the amount of risk that that brings into a deal on commercial property. And so, you we like to be pretty conservative on the leverage front. We're generally in the 55 to 65 % total loan to cost range. And we're also generally acquiring deals that have in-place cashflow. So we don't do ground up development or generally not doing some very valid, some...

very opportunistic type of business plan where we're buying a vacant building and expect to lease it up. We're usually buying properties that produce six, seven, 8 % cashflow day one with the abilities to increase that cashflow over a four to five year period. So we're not taking as much speculative risk in our underlying business plan. Now as a result of that, we're generally shooting for low to mid teens type of IRRs with mid.

monthly distribution yields. People, when they look at other syndicators or other managers, maybe they'll say that our returns look low, but on a risk adjusted basis. And that's the point I really like to always emphasize when you're in equity is that you like how you think about things on a risk adjusted basis. How much leverage are you taking? What is, what are the risks in the underlying business plan? How are you underlying rent growth? Right? Like all of these things matter.

And we think we take a very conservative lens. And that's why if you look at our 40 plus year track record, we've been incredibly consistent and we've done incredibly well. And what we like to say too is, and this is one of the benefits of investing in equity, is that yes, we have a projected underwriting of whatever, 12, 15%, but you can outperform that. And if you look at our historical track record, I we've generated on average a 28 % IRR plus or minus.

we were never underwriting to a 28 % internal rate of return, right? Like we're always underwriting generally to a 15 to 17, 18 IRR. But the beauty of being in equity is that you can also outperform. You can underperform as well. But over time, we generally have outperformed. And that comes from everything I just talked about coupled with the fact that we like to be the largest investor in every deal. So we are very much aligned with our investors from that standpoint.

Also, so.

Eric Cantor (26:33)

All right. So think we're at that part of the discussion where we're kind of rolling up our sleeves and getting in the weeds. So let's do some selling. I'm going to, let's say I'm an investor. I've created some liquidity, $50,000. want to get real estate exposure. I'm going to ask you a few questions to try to guide me through that. The first one is just we're in an elevator on the, getting in on the lobby and I want to go to the 10th floor. I just need you to tell me before this elevator hits 10, like, why are you the best? Why should I invest?

my hard earned funds with your platform or your product versus all my other options. Let's start with Jonathan.

Jonathan Spitz (27:07)

Yeah. I I sort of just touched on these points as well, but look, we've been investing in private real estate for over 40 years. I think that's one of the biggest differentiators about us is we invest at least 20 % of our own capital in every single deal that we bring onto the Lightstone Direct platform. And we've been doing this for 40 plus years. Now, why does that matter? Why does longevity matter? It's because we've invested across multiple market cycles. And I think that's a big differentiator for us versus many of our competitors.

in the commercial real estate space is a lot of our competitors has only been around since 2012, 2013, and they're kind of navigating a challenging environment for the first time. But for us, we've been doing this for a really long time. And we also invest across a number of different property types. Now, why that's important is because we can be much more objective about where we want to position capital. As an example, we like to sum up for multifamily, but pricing doesn't make sense there right now. So we like, we'll invest in the Midwest.

Multifamily more broadly speaking is a pretty challenging place to invest right now. So we can allocate our investment dollars to industrial, right? Or if the timing comes to hotels, retail, we have in-house expertise across a number of different property types, which means we are going to be much more objective about where we're putting our own money, which means that's going, we're going to be much more objective about the types of investments that you, the investor can invest in.

Eric Cantor (28:29)

All right, Brian pitch me.

Brian Dally (28:31)

Uniquely, among many companies in our space and platforms in our space, GroundFloor did the work to submit to the regulatory disclosures under regulation A, which gives investors the benefit of public company level disclosure about the company and about the investments. That matters because not only does it matter because if you're a non-accredited investor, you can invest as well, but it matters for a less

obvious reason, which is GroundFloor has to commit to underwriting standards, asset management standards. We're vertically integrated as well. We have our own origination platform. We do our own underwriting. We do our own asset management. We have to commit to that and put it through rigorous review in our offerings with the SEC. And then we have to live up to it. And we file audited financials, for example, as one of many requirements that we have to live up to.

That gives investors a lot of confidence because to be honest with most, many accredited investor offerings, it's kind of the wild west. can format that, it's a lot of flexibility. You can format the deal many different ways. You got to look deal by deal to really understand it. But with something that has a consistent format under something under a regulatory regime like regulation A,

Investors know what they're getting. It's very, very efficient to build a very broad portfolio. I'd say the other reason that GroundFloor merits top consideration is we are not just feeding retail investors. We are also now institutionalized. We've deployed about $2 billion across 10,000 projects over 10 years. And now we are an active securitizer in the bond market.

We forward flow to other institutional buyers and so you know you're getting you don't have to wonder you know You're getting institutional grade product that GroundFloor can stand behind with its tracker group

Eric Cantor (30:27)

right, Jesse.

Jesse Stein (30:29)

I'm glad I get to go last because I'm really a hybrid of the two products that, ⁓ know, Brian and Jonathan, you know, have are offering home investment, home equity investments. It's a very unique product within the real estate space. It's the only one that I'm aware of that has the downside protection that you have with a debt product, but then the ups potential upside with an equity product and.

In today's market, that is becoming even more attractive, especially to institutional investors. You've had billions and billions of dollars from some of the top private equity companies flow into this asset class over the last few years. We are the only fund that's open to individual accredited investors that are focused on this product. And our job as a fund manager

is to build a portfolio of these assets that we originate so that we are not only buying these products, but we are in front of the homeowner. We are underwriting each of these assets. We are connected to the property directly. And if this is a product that sounds interesting, HomeShares is ⁓ at this time the only place for investors to ⁓ participate.

Eric Cantor (31:42)

Got it. Let's turn this around actually and think about like worst cases on some of these deals. you know, if I'm an investor coming in, how could you be wrong? Like what's the super bear case? And, you know, it requires a little bit of candor, but like, what are the assumptions I'm making or the realities of the market or the historicals or the black swan that could really like blow up an investment in one of these asset classes just to help me think through, you know, how my predictions match, you know,

what the characteristics of this are going to be. We'll just go the opposite direction when we start with Jesse.

Jesse Stein (32:18)

Are there two risks really associated with our product? The first is a principal risk and that would be impacted if you had something similar or worse to the great financial crisis of 07, 08, where home prices across the board just completely tanked. You know, as I mentioned earlier, we're typically sitting in the 50-ish percent loan to value. So for our investments to be impaired, you you really need a significant drawdown in principle.

⁓ value of a home. The second risk is not necessarily a principal risk, but it is a risk to what is the ultimate return on that investment would be, and that is the pace at which our homeowners repay our contracts. industry-wide, over the past five or six years, between 10 and 15 percent of a pool of assets get repaid each year.

If for some reason, you know, that had a reduction, you know, down to the 5 % range, it would just mean that our cash flow from the settlement of these contracts would be delayed. And ultimately the total return would be greater, but your annualized IRR on this investment would be less than what it would be otherwise.

Eric Cantor (33:36)

Just adding onto that, one of the investors put a question in the Q &A, so let me just tag that in here. Is inflation a ⁓ risk? Is it our friend? Is it neutral? How would that affect this type of deal?

Jesse Stein (33:52)

I mean, for us, it's really, you know, what is inflation due to and what does it impact? Do housing prices rise with inflation? If so, you know, it's a positive for us. Do mortgage rates rise with inflation? And if so, does that mean that there's less property sales and less refinances, which is a negative?

It's not just inflation on its own. It's, you know, what does it do to do from and, what what other impacts does it have on the housing market?

Eric Cantor (34:26)

got it. Jonathan, what's your kind of bear case for the one or two things that could really put some of these deals at risk?

Jonathan Spitz (34:34)

Yeah, I would say the two big ones are, it's really the labor market and interest rate risk. And I'll talk about the latter first as it dovetails into sort of the inflation concerns. Obviously, valuations in commercial real estate are largely correlated to a certain extent to interest rate movements, right?

As I talked about at the beginning, the massive spike in interest rates was a big contributing factor to what led to, you know, impairment or the beginning of the drawdown in valuations and commercial real estate. So I think if you were to see a reacceleration and or, you know, a change in stance regarding interest rate policy that could could now again, I wouldn't say that, you know, I Jesse was sort of alluding to this as well. It's kind of just a you have to think about why interest rates would actually increase.

If you go back to when interest rates were going up in 2021 and inflation CPI was a nine, you have to remember, shelter is one of the biggest inputs into CPI. so at that time, rents were running at 10 to 15 % annualized growth every year. it's tough to imagine a world where you see interest rates really spike meaningfully from here.

without a corresponding move in rent growth. Because in order to have inflation, you really have to have wage growth, which means rents are likely increasing as well. So again, that is a risk, but I do think that you are somewhat hedged to a certain extent by how rents could potentially move in that scenario. But again, it's pretty complex. As we're seeing right now, you're seeing oil spike. I oil is at 110 this morning. And like that.

may have a downturn implication to what the Fed can do with interest rates. it's a pretty, it's a complex topic, but now ⁓ from the standpoint of labor market, I think that's one that obviously people are thinking more and more about as people talk about things like AI risk and we'll see how real any of that ultimately ends up being. But obviously if you saw a major shock to employment, that can have

downstream implications to, I think, not just real estate, think that this would have downstream implications to everything, right? I think that's been the biggest difference between what we're seeing now, because I get the question a lot, like, is the difference between 07 and 08 versus now? And it's like, well, this has been a very real estate focused recession because you haven't really seen corresponding deterioration in the labor market or employment.

It's been really more about capital structure. But if you saw a corresponding move and you see, you see the labor unemployment shoot, you know, six, 7%, 8 % unemployment, like, you know, like we could have a problem. But again, I think that would be, that would not be isolated to real estate specifically. So those are the two that we think about. the way that we try to manage that risk is obviously what markets we're investing in is a big one, kind of back to the original point.

what types of properties are we investing in? Like generally speaking, we like to play in what we would consider like class B industrial and multifamily. So we're generally playing at the more affordable point in the spectrum. So we're not like top of the market rents. not, you know, we're not bottom, you know, the bottom tier as well. We like to sit like right in the middle for that very reason. So if businesses want to downsize or pay less than rent, like they have an option, you know,

buying functional buildings that are more at an affordable price point and stable markets, right? So to kind of piggyback on that last point, like we don't want too much exposure in markets like a Florida, right? Where that's heavily indexed to tourism. We like to play in more tier two markets like a Grand Rapids or a Greenville where you have a number of different employment drivers that are supporting that demand and that can better weather.

any type of that type of disruption that we're talking about.

Eric Cantor (38:40)

you. Brian, I don't think you've got this one yet. What's the bear case for you?

Brian Dally (38:47)

The bear case

is twofold. And I think I have a slightly different take in the second part of this, but I'll cover the first piece first. We really haven't seen a very deep or long recession with high unemployment since the great financial crisis. And so I think the question on a lot of people's minds is how will these markets respond to that?

And these guys are sort of saying that as well. I think in our case, the boogeyman that we used to fear was a rapid increase in the rate environment, freezing up liquidity, meaning the amount of trades that happen. Because we're dependent on an exit, right? We need, at the end of 12 months, we need the property to change hands, right? Or to be refinanced. And so if refinancing markets freeze up for rental properties or

⁓ Mortgage rates make further depressed transaction volumes for selling to sort of primary homeowners. Well, that's a problem, right? And so we watched that, but I got to say the impact on our portfolio's performance was underwhelming. We were sort of stress testing all kinds of cases to see what would happen. And I think this supply shortage that I started off by talking about and being underbuilt has been the big protector against that.

But we're always on the lookout for is there a threshold where that changes? And I think the big unknown that we all have, the known unknown that we all have to reckon with is this specter of unemployment and what the second and third-order effects might be of that. Are we going to get that? I don't know. I look out for signs of it. It doesn't seem to materialize. And I do think the point was made that if unemployment does skyrocket and we do find ourselves in a recession,

Well, that's going impact a lot of investment categories, right? So then you're making a relative bet, sort of where am I weighted? How much is this one down versus that one, this other one? The second point that I want to make that is maybe a little different from what other people might highlight in this is a structural risk. So you're seeing it right now in private credit. So there are a lot of headlines. There's something like 54 private credit funds that have now announced that they're limiting

⁓ redemptions. these credit funds are now, this is going to sound very familiar to anybody who is stuck in a non-traded REIT back in 20, 2006, 2008. these funds cannot meet their own liquidity standards, you know, sort of redemption standards. And they're built on a, on a, on a business model that marks to model. That means when you're invested in a fund,

The share price that you pay as you enter the fund, and I don't care who it is, is marked to the issuers best assessment of what the properties in the portfolio are worth, their valuation of the components of the portfolio. That is not the same thing as being marked to market. And when liquidity becomes constrained, we find out not only where the market is,

but you also have to pay a liquidity tax or if you're an investor on the long side of that, you get the benefit of liquidity discount. So the risk that I think no one is really thinking about enough is the structural risk. Funds don't have to be built the way that these interval funds are built. One of the things Ground Floor is doing is sort of experimenting and innovating in that area to sort of build a better mousetrap so that our investors don't get stuck.

in that kind of a structural risk. But I think those are hidden risks that some people who are investing in private credit funds are now seeing. They're feeling it. They're feeling the impact of that. And I think if capital markets continue to encounter upheaval and uncertainty, if the spread between 30-year mortgages and 10-year treasuries continues to widen, if the credit markets

continue to call bullshit on the Fed, I think structure is your biggest downside risk.

Eric Cantor (42:59)

Interesting. So you all talked a lot about geo and how the supply demand in different markets is distinct. You're really investing in a market, not in an asset class per se. Let's take a couple of questions from the audience and just kind of merge them into one, which is, I'd love a discussion on geo markets to watch and to avoid. So why don't we just ask you, like, give me three markets you like and three that you don't, just to kind of shorthand that.

And then ⁓ somebody else asked about residential conversion. So people are hearing about office space no longer needed being turned into residential homes. Maybe just working that into the answer. Is that something that's going to impact supplier demand at a noticeable scale in any of the markets that you like or don't like? Or is that something that could lower prices by increasing supply or is that kind of a non-factor?

to the extent that you are aware of or have seen that happening. Why don't we start with Jesse on those questions?

Jesse Stein (43:54)

Sure. I'll just say that for our product, we don't target specific markets. Our goal is really to build as diversified a portfolio as possible from a geographic basis. So we don't necessarily go out and say, hey, we think home price appreciation is going to be greater in this region and that let's originate more products here.

And the securitization market that we participate in actually limits the concentration in specific areas all the way down to the zip code. So for us, developing a portfolio is all about risk mitigation and that includes diversifying from a geographic perspective. But as far as the markets that I personally think will do well over the next few years and some that I don't, I think

You know, it's interesting. It's hard not to bring politics into this. But, you know, if you kind of read the headlines and you know which which mayors, which governors, you know, are being business friendly and which are not right. I think, you know, as I mentioned earlier, it's a lot easier for a company to move today than it was 10 years ago, 20 years ago. And we are seeing that. All right, we're seeing.

You know a lot of movement out of California out in New York out of Chicago you know most companies are moving down south Texas which was you know the bell of the ball say five years ago and you know kind of you know got too hot and then has pulled back you know fairly significant in some markets on a long-term basis you know you're still going to see migration there from northern cities you're still going to see companies moving there and creating jobs.

There's a lot of geography. So, you know, there's not necessarily supply constraint in certain markets. But, you know, even in a market like New York, what you've seen is even as office demand has declined, that top product, that class A product has increased in price because the finance companies that are leasing those office buildings, they don't care if it's $100 a foot or $200 a foot. makes no impact to their bottom line.

And you might start to see that in some of the cities that these companies are moving to where very high-end product across all asset classes are going to do very well when you have a lot of wealth moving to those markets. That won't necessarily bring up the bottom of the market, but the Florida markets, the Carolina markets, Texas markets.

that were hot five, 10 years ago and kind of pulled back a little just because they overheated. I think there's more wind behind the backs of those markets and then the markets that are kind of like slowly losing people and jobs. I would expect that trend to continue unless there's a real change in government policy in some of those markets.

Eric Cantor (46:40)

Okay. Jonathan, top three, bottom three, and do you see residential conversion as a factor?

Jonathan Spitz (46:47)

Yeah. Um, so on, I mean, it just, it's kind of dovetailed in what Jesse said, cause I think it's a great point. mean, when you're thinking about market selection, it's almost, you want to think about, think in general, a weighted average between, um, you know, how business friendly the state is and what the supply and demand fundamentals are, right. As it relates to that specific product. Cause to your point, if you relied slowly solely on supply and demand,

California would look incredibly attractive because you can't build anything there, but that's a, it's not the greatest place in our view to invest. What we, and I alluded to this a little bit earlier is we generally like more tier two markets. So these are markets, for instance, you know, like I said, Greenville, Spartanburg, South Carolina, like we very like that's where BMW is located. You know, if you think about for industrial specifically, like what we invest in,

You know, you're about you can access 31 % of the US population in a day's drive. You got good connectivity to Charlotte, Atlanta to the port in Charleston. But in look, it's it's no secret, right? It's been the cats kind of out of the bag there. People understand it's a hot market now, but it's still not doesn't quite have. It's not Atlanta. It's not it's not Charlotte. Like it's not some of these other hot markets and you can still find.

You know, pretty attractive deals there, you know, on the flip side, a market like Grand Rapids, Michigan, we really like for multi-family. We actually own a lot of markets and properties in Detroit. It's funny if you actually look at performance over the last couple of years, the top performing markets for rent growth have been markets you would not think, you know, Chicago, Detroit, know, Columbus, Ohio.

Why? Because there hasn't been any supply there. And if you think about from our perspective, if you had to isolate, if you had to try to isolate, you know, what is the best predictor of future expected value in real estate? It's really rent growth at the end of the day. Now there's some, obviously some variables to that as well. But so if you're generally speaking, if you go to markets that have really strong rent growth, you will generally do well, you know, less some of what Jesse said, right? Because, you know, I don't think

Most for the most part, investing in markets like New York and California have not performed that well. Now on the office to Rezzi component, it's come, it's really complex. I know it's a hot topic right now. I think there are lot of managers out there really selling that type of strategy. Remember it's, it's, it's really tough to find a building that can be de-converted into residential for several, one, it's not cost efficient to do so. So in order for you to do it, you're going to need some type of tax subsidy from

the local municipality to make that work. So Chicago is actually doing this in a big way right now, but it's also just really complex to do ⁓ from a construction standpoint. And so, and often, just in my experience, looking at, seeing these is that the juice generally isn't worth the squeeze, but I'm sure there are managers out there that specialize in this and maybe do it very selectively. But as far as that impacting supply, I don't think that that's.

⁓ a viable solution really in many markets, except for like Chicago or parts of Manhattan where it makes a lot of sense.

Eric Cantor (50:02)

Brian, top through bottom three.

Brian Dally (50:04)

Well, I think Jesse and Jonathan make great points about taking supply and demand into consideration and thinking about business friendly environments and the mobility of companies. I see it the same way that they do. I think one factor that I'll add that we like to look at, and you look at our portfolio where we're investing, we're investing less in Florida than we used to because

⁓ Insurance costs have spiraled out of control if properties are insurable at all. There are markets where property taxes are spiraling out of control and where, and that goes to sort of part of the issue about being business friendly, sort of what's the tax base like. But those are really minor modifications that we're tuning. We love sort of Midwestern markets right now.

We're doing a lot of expansion in places like Arkansas and Kansas and places where they were probably under-invested. I think this point Jonathan made well. I think the one factor that maybe we think about that others may not is where is there aging housing stock as an overlay on that? Because when we started the company, the average age of a US single-family house in the States was in the mid-20s, 23, 24, 25 years old.

It's now presently coming up on 33 or 34 years old as an average, which just tells you that the housing stock continues to age. And for a platform like GroundFloor, that's a lot of opportunity, right? That's when you have aging housing stock where you have a lot of demand coming in, where's the demand going to go? It can't all go an hour outside the city or 90 minutes outside the city. Like that happens a lot in Atlanta. Some of it has got to funnel into the core or at least, you know, the

perimeter around the core. And when it does, you're talking about replacing aging housing stock. You're either doing a teardown or a big renovation. And that's what we've seen. We've seen a lot of teardowns and heavy, what we call heavy run out. And we like those because those are great value added opportunities where our borrowers are going in there, building a product that people want in a place where they want it and taking advantage of that aging housing stock with the supply and demand imbalance. gives us a lot of price.

assurance and investor a lot of equity upside right on their on their project.

Eric Cantor (52:20)

Got it. So we're just about at the of the hour. And one more question, but I want you guys to answer is bullet points. And this is going back, zooming back out to the investors in the audience who we started with. And by the way, I'm going to just drop a link in here to the next real estate event. A couple of weeks, we're going to tear apart a multifamily property, who, which you should all join, but, just tell me, know, okay, I've listened to you. think your pitch is great. I'm very aligned. I want to move forward. Like just give me three bullet points. What do I do? And I want you to just address, you know,

Do I need to do more research? Do I pick a portfolio or a specific project? How do I allocate? And again, we probably have about 30 seconds each on this. So let's start with Jonathan here.

Jonathan Spitz (53:02)

Yeah, so if it's something that you're interested in, I could say you go to our website, lightstonedirect com register for sign up for our dashboard. You'll see all of our open offerings there. You also see a link where you can schedule a call with someone from our capital formations team. You can also just email me directly. jspitz@lightstonedirect.com

happy to walk you through the details of our investment. I think that is a big differentiator about us is we want that to provide that white glove service, which means you do have a single point of contact that walks with you every step of the way. So walk you through the details of the investment, outline the risks, the opportunities, et cetera, because we want to make sure this is ultimately something that you're comfortable with as it is a four to five year investment.

Eric Cantor (53:44)

Brian next steps.

Brian Dally (53:46)

Yeah, I

would say with GroundFloor, we've dimensioned the product to make it pretty easy to test it. So the minimums are low. The minimums depending on the product, usually about $100, sometimes $10, sometimes $1. And so it's pretty easy to test out some products. But the product that I think is most approachable for most people is our GroundFloor notes product. And what GroundFloor notes allows you to do is lend money on a

pool of asset of loans that we've originated that are in the first three months of their life at the lowest risk time of their life. Now that yields less, right? The yields are depending on the term you pick. You pick one month, three months or a year, sometimes six months. Their yields are going to be lower than if you invested directly in the full term of the projects themselves. But it's a good entry point for a lot of people to put a hundred bucks or a thousand bucks to work. You can also deploy much more than that if you wish.

But it's a product where we've never had a late payment, never had a default. It's a monthly payment product. So a lot of people like.

Eric Cantor (54:52)

Jesse, last word.

Jesse Stein (54:55)

Our

website is homeshares.co. We have a single fund that's ⁓ open today, US Home Equity Fund 1. It's a $25,000 minimum investment accredited investors only. You could also sign up for a new investor webinar that we offer every month and always happy to speak to investors directly as well.

Eric Cantor (55:16)

Awesome. Thanks to each of you for chiming in here on everything and answering with lot of honesty and transparency. And thanks for everyone sticking around with us for the hour. It's been a great conversation and we'll see you on the next one. Have a great

Jesse Stein (55:29)

Thanks, everyone. Thanks, everybody.

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