Working Capital The Real Estate Podcast
Building a Real Estate Investing Business with Adam Batstone|EP57
Jun 9, 2021
In This Episode
Adam Batstone is an Entrepreneur with a principal focus on Finance, Adam brings nearly 20 years of progressive professional experience in the areas of Wealth Creation and Investment Management with specific expertise in Private Equity, Private Equity Real Estate, Venture Capital and Alternative Investments. And is also the Founder & CEO at Two Sevens Capital.
In this episode we talked about:
- Adam’s Background
- Transition between wealth management and Real Estate private equity
- Raising money for real estate
- Deal flow
- Starting Two Sevens Capital
- Open-ended and closed-ended funds
- Dilution protection
- Risk management
- Current Opportunities
- Geography and regulatory environment
- 2021-2022 tax perspective and inflation outlook
- Mentorship, Resources and Lessons Learned
Jesse (0s): Welcome to the working capital real estate podcast. My name is Jesse Fragale. And on this show, we discuss all things real estate with investors and experts in a variety of industries that impact real estate. Whether you’re looking at your first investment or raising your first fund, join me and let’s build that portfolio one square foot at a time. All right, ladies and gentlemen, my name is John for gala and you’re listening to working capital the real estate podcast as usual, a very special guest today.
Somebody I met not too long ago and is not too far from my hometown here in Toronto, his name’s Adam Batstone. He’s an entrepreneur with a principle focus on finance. Adam brings nearly 20 years of progressive professional experience in areas of wealth creation and investment management with specific expertise and private capital, private equity, real estate, venture capital and alternative investments. Adam is also the CEO and founder of two sevens capital Adam, how are you? Good.
Adam (59s): I’m doing well. Thank you. Yeah, thanks for having
Jesse (1m 1s): Me. Yeah, no problem. Thanks for coming on. Really appreciate you taking the time today. So I thought it would be really cool today is that, you know, we’ve have people on the show of all different stripes, whether, you know, you’re doing your first flip, you’re buying retail, you’re investing in multifamily, and I thought you had a, somewhat of a unique background in real estate. How you kind of went from the financial services industry and got into this industry, perhaps for the listeners. You could give a, you know, a little bit of a background of how you made your way to what you’re doing today at two sevens.
Adam (1m 35s): Sure. Well, first before we get into that, I just wanted to recognize you for creating a community around investing and, and education and insight knowledge. So kudos to you for doing that. Thank you, man. I appreciate it. Yeah. So I know that this is a real estate focused podcast and I kind of say that I backed my way into it and not to be dismissive about it, but yeah, so I was, I spent the first, nearly, nearly 20 years professionally in, in investments and finance at this point.
And I, I started in the very traditional sense. So traditional financial advisory, I mean, just to be, to be simple. And, and that was everything started on the insurance side of the business. So that’s, that’s protecting capital that’s protecting assets progressed my way through to the, to the full service side. So you’re very traditional wealth advisor, investment advisor type experience, and did that with one of the big bank. Brokerage firms grew a fairly significant practice and decided to vacate the practice in 2015.
So I sold my practice to a couple of different advisors in the firm and for a couple different reasons. So, so first the way the regulatory environment is kind of working in the traditional investment space, it’s getting constricted tougher to do things tougher, to be creative with how you might want to invest an investor’s money or a family’s money. And so, as I was progressing in, in my career, I was getting more sophisticated, I guess, in my capability and my understanding of, of financial markets and investing my, and that’s really because my clients were as well.
So they were, they were becoming wealthier, they were becoming more sophisticated. They were, they were demanding more from me as an advisor or somebody who was providing them access to investment. And as you work with these families, you get more and more integrated with their, not just their investing assets, but their business assets as well, and how their business assets kind of co-mingled and, and, and share space with their, with their investment portfolios. And so two things, two things were pretty clear to me when I was looking at my own balance sheet.
So my balance sheet of my, my, myself and my wife, our traditional portfolio, although there was something there where we were growing, all of our wealth on, on the, on the balance sheet was in our real estate and in the value of my wealth practice. So the business that I had, so my real estate and my business is where the true wealth was being created. That was in my, my own personal. But then when I looked at my clients, all of the wealth that they were creating was in their business and in their real estate holdings or private real estate holdings.
So yes, they had wealth and they were holding wealth in their traditional portfolios, but that’s not where their wealth was created. That just happened to be an enhancer to their, to their wealth creation. So their traditional portfolios were where they’re for tax purposes. Sometimes they were there for liquidity. They were there for diversification, but they weren’t there because that’s where their wealth was created. Their wealth was created and I couldn’t escape it. It was in their businesses and in the real estate. So that was so impactful to me that by 2015, I had a, I made the decision to leave the more traditional space.
And I progressed on to a large private equity real estate firm. So they were what we would call a captive dealer. They a couple large, very, very large real estate portfolios. The largest one was on the multi-family side. So nearly 20,000 units there. So quite, quite substantial. And they raised all their own capital. They raised all their own capital through a private individual retail investors. So they didn’t, they didn’t take on any capital, sorry, equity capital from any institutions.
They only did institutional capital from on the debt side. So their mortgages basically, and they had a fairly significant business that was just investor focused. And so I came there to, to run that business for them, that, that part of the business for them. And that was because of all of my time on the private wealth side. So I spent, spent a few years there and was a part of nearly a billion dollars worth of real estate transactions, principally from my angle on the capital raise side of things.
And then I was there for a few years, vacated the firm and in 2018 started this business. And what I like to say is this business now at this point, so it’s, it’s a boutique we’re, we’re still, I guess, quote unquote, a small business, but I believe that I’m, I’m building the, the firm that I want to be a client of for the rest of my life. So everything that I’ve learned on the traditional side, everything that I’ve learned on the private equity side now bundled bundled into one space and one shop and yes, a significant core focus of what we do is on the real estate specifically multi-family and specifically on the private equity or so we would call.
Jesse (6m 58s): So kind of through that process, you, you know, you go from your wealth management into a more traditional private equity with which gave you exposure to the real estate, private equity business, that transition between the two, were you raising or sorry, where you build in the wealth practice in the traditional sense of, you know, portfolio for wealthy individuals, maybe family offices, that type of thing. And then that, you know, that was the business that you were doing there prior to, to joining the PE firm.
Adam (7m 29s): So when you start out as a, as a retail advisor, you take on anybody who’s willing to provide their, their, their money to you, but yes, as you, as you get better and as you get more focused, typically those who survive and stay long and have longevity and are doing good business, there are typically dealing with wealthier and wealthier families. So yeah, I mean, your, your typical high net worth family, we would call had a couple of million dollars of investible assets across all of their accounts. If we’re looking at a traditional family relationship, you know, into I’ve dealt with families, who’ve had hundreds of millions of, of liquid capital to invest.
So, and kind of everything in between
Jesse (8m 10s): When you move over to the more traditional private equity firm at that point, were you identifying well, first of all, that was a solely or a private equity real estate business, or was it more diversified? And then if in that case, were you raising money specifically for real estate investments? And how did, how did that transition?
Adam (8m 30s): Yeah, so they, they, their, their technical structure was, it was a REIT. They had three reach portfolios, but they were not publicly traded REITs. So it was a private business. And so it’s, it’s what we would call, they were offered under offering memorandum, so private placement. And so, but through, through the registered dealer and, and I ran the, the, the exempt market dealer
Jesse (8m 56s): Right on. So that would differ slightly from, you know, moving to what you’re doing now, where you’re doing, what I would assume are Mo most of the time, if not all the time private placements where you’re finding whether it’s asset specific or it’s fund specific, whereas in the registered dealer side, that’s where you are not, I assume not using the same exemptions you would be using on the, on the private side. Is that the case?
Adam (9m 18s): Yeah. I mean, when, when you’re, so any issuer can create an offering memorandum. I mean, it’s just, it’s just a regulatory document. I mean, it’s, it’s basically almost like a prospectus, a prospectus is used for publicly traded offerings of some kind, whether that’s a fund or whether that’s a, a public company, you know, kind of the offering memorandum is, is call it one step down from that, or prospectus light, still tons of disclosure. It’s just, it doesn’t have to be approved by the regulators.
So that’s, that’s the next kind of step down. So a typical like hedge funds and private equity funds of, of any asset class are typically offered by an offering memorandum, and that can be done through the exempt market dealer or very traditional investment dealer, like your bank owned dealer.
Jesse (10m 6s): So when you moved into the real estate space more, you know, more specifically on the PE side, what were some of the, some of the deals, you know, for listeners on the real estate end that you were taking a look at, or you were getting exposure?
Adam (10m 18s): Well, because of the size of the firm that I was with, when I joined them there, their appetite was for portfolios of assets as opposed to individual assets. So you get a little bit spoiled in terms of the type of deal flow that you do see. And again, I was just a part of a big team there that the team was, was, was quite significant, large acquisitions team, large financing team, large operations team, large CapEx team, but across all markets.
And, but, but in particular, th this fund, they liked, they liked assets that were what you would call in the secondary and tertiary markets. So they didn’t want to deal in Toronto proper or Montreal, proper, or Vancouver, proper. They wanted to, they wanted to acquire assets or portfolio of assets where they might be the largest player in town. And w we’re, we’re happy to focus, focus on those. So by that nature, it was a, it was a lot of digging, a lot of, a lot of sifting and sorting.
And for the most part, the acquisitions that were done, where they were able to do so through their networks. And I think that’s an important thing. There’s not too many of things. These things get listed, especially at that size there. I mean, they’re, they’re, they’re always brokered, but they’re, they’re brokered off market or they’re brokered through an investment bank of some kind. So it’s, it’s a little bigger than, than what your, your traditional, maybe, you know, smaller investor might be used to, but said, it’s the asset class is the asset class.
You still still look at the same thing, still care about the same things and
Jesse (11m 59s): Just, yeah, yeah, yeah. I think, I think both like, you know, when you work for whether it’s a company like this, or a brokerage where we’re at, it’s nice to be able to see deals that you’re just like, you know, maybe one day we’ll be able to take something like that down, but there’s a lot of moving parts and these are large companies. So in that space, was it all a multi-residential that, that was kind of the focus.
Adam (12m 19s): Yeah. 80, I would say 80% of the, if you were to look at the three, three portfolios, but 80% of the assets were in the larger portfolio, which was an apartment rate, which was a multi-family REIT. They also held assets inside. The two other REITs, one was light industrial. And for those who know the geography around the Toronto area, they kind of liked the 400 things that were close to a 400 series highway. They, they liked something that, where they would have called the last mile or the last kilometer.
So you think about an Amazon type type program where a cross-docking and pick pack and ship and those types of things. So that was on the industrial side, but then of course they, they had quite a large retail portfolio. And again, there they were, they were interested in power centers that were anchored by national tenants, but where they would be the only power center in town. So it was not a small strip Plaza or grouping a small strip plazas. It wasn’t, it wasn’t the convenience stores and the pizzeria.
Yeah. It was, you know, Scotia bank was, the tenant was shoppers drug Mart and,
Jesse (13m 35s): You know, yeah. So you’re at a certain level there. So for, for the transition, Adam, from that to two sevens capital. So now it’s, I’m sure the day to day is, is a lot different. It’s your, it’s your baby? What was that process like from the point that you actually got the bug to say, you know, I really, I want to start my own firm. What was that transition like?
Adam (13m 56s): Well, I think, I mean, I think I’ve just always been an entrepreneur. I think now I’m finally actually an entrepreneur, although I may have had entrepreneurial pursuits. I mean, when I’m, when you’re an advisor at a large brokerage, and even, even as a, as a, as an agent or a broker on the real estate side, still connected into a larger infrastructure, you may do a lot of entrepreneurial things, but you still have this big behemoth behind you where you get their infrastructure and you get their, their branding and you get their, their balance sheet and all of these things that also help you along.
So I think the biggest thing here is everything. We don’t have a playbook for anything. We create the playbook and every day we’re iterating. So that’s, that’s certainly big. Now, some of the positives being that if we don’t want to do something, we don’t do it. I mean, we, we pursue specifically the things that we want to pursue, but getting practical as far as, as far as making acquisitions and we started acquiring and when it came down to the real estate and I’ll be Frank, when, when I started the business, I didn’t know exactly what we were going to focus on at the beginning, because just because you have an idea, it doesn’t mean people are going to support the idea.
So yeah, it, it was a lot of taking stock and talking to good friends and family and saying, well, you know, if you were, you’ve supported me in previous, previous worlds and in previous lives, what might that look like now? So what could you, what could you see me doing? You know, me quite well, what would you come to me for? What would you come? What type of advice would you be coming to me for? What, what type of access would you be coming to me for? And so all of my time at the larger PE firm on the, on the real estate side, one thing that happened is I was, I was approached by a couple of different, smaller funds to sit on their boards.
So I, I’m not necessarily intended on having a real estate focused initially here with this business. But because of my time, the, the recent time and the scale at which I was helping operate a larger business, lots of people were calling me about real estate. Lots of potential investors were calling me about real estate. And eventually you can’t ignore those things. So I said yes, to an opportunity on a, on a board, so a smaller fund, but a hundred million in assets, but aggressive, aggressive entrepreneur at the helm who’s young and, and very focused and, and wants to grow as fast as, as they can.
So that was, that was exciting to come in and, and, and contribute, I guess, that more higher level there and give specific advice whether it was not necessarily on transaction, but how they, how they run their business around building a real estate portfolio. And then finally for ourselves, because opportunities kept coming to us on the real estate side. And one thing that I learned working at the larger firm is that as an as investors intuitively understand real estate, whether they know how to buy it or not, whether they know how to manage it or not, they intuitively understand it.
It’s, it’s a simpler discussion to have with a potential investor, rather than saying like Bitcoin, for example, people understand Bitcoin only in the sense that they’ve heard it. Not many people understand it and or, or any, any other more traditional type portfolio stuff. It’s, it’s not, it’s not common that people understand the mechanics of a traditional portfolio because it’s, it’s somewhat nebulous. It’s it’s paper at the end of the day. I mean, you’re, you’re, you’re selling them some numbers on a computer screen, whereas something that’s backed by a real asset, people can drive by it.
People can look at it, people can point at it and intuitively, especially on the multi-family side, Hey, people live there and pay rent. That seems like a, there’s not a lot more that you have to, then you have to describe. Yeah. Now it’s not just that simple, but, but in some sense, it is where whereas many investment vehicles aren’t that simple. So that’s why we chose to have it as one of our core focuses. We have a distinct, distinct expertise in it, but, and, and that’s because we believe that people would rally around us if we brought great things forward with that.
And if they did that, then we may see some other great things that we might like to add to the portfolio, which is why we, why we say there are some other options with us now we aren’t, we aren’t currently building those out yet, but we’re building out the capabilities to have those and do those and see those.
Jesse (18m 37s): Yeah, for sure. And I assume kind of the philosophy that you have there from an investment standpoint, you know, will change over time and probably has changed since inception. One thing is we have people on the show all the time that are, you know, vertically integrated companies where, you know, they’re, they’re buying the assets, they’re raising the money, they have the property management company. And then some version of that, where, you know, you’re one of those aspects on the chain. It sounds like w what, you know, you had teamed, or you had partnered with these operators or operators that were, you know, taking down the real estate.
Were you raising capital, you know, in parallel with these operators or where you, you know, the, the sole arm. And is that something that going into the future of two sevens capital that you’re going to specify or, or get more granular with with the focus?
Adam (19m 27s): Yeah. Good, good question. So our very first offering, if you will, that we brought forward, it has our, it has our banner and our brand on it. Our first two were single asset solutions. So structures that are just for one specific acquisition, one specific asset, two of those, we, we did those with a, co-sponsor a, co-manager a, co-partner the reason we did that is because that allows us to still add a little bit of our own flavor to it.
Meaning we’ve got the we’ve, we’ve got the relationship with the capital provider, the capital source. So the investor investor group, but we’re able to use the resources of an experienced operator. Not that we don’t have the experience in terms of, you know, what do we know what to do when you acquire something like that, but being able to tap into an infrastructure that’s already there. So it’s worked really well, or the, the first couple assets that we were able to acquire.
They perform really well. They’re performing really well as we evolve. Now, we kind of get into the more vertically integrated components just to talk to that. So we continue to create internal capability across different parts of the investing spectrum. So our next fund of fund that we recently launched is a multi-asset fund is a multi-asset strategy is an open-ended fund that although it’s got a very, very precise investment thesis, there’s much more of what we’re doing ourselves, and we will continue to do that.
So we’re, although we are relying on outside service providers, not nearly the same, like we were when we first started, and I think that’s just prudent start or, or to start up. Right. So,
Jesse (21m 22s): So, so when you, when you go into that, so this model for those, I mean, just, just so people can kind of get a sense of, of what you mean by open-ended and closed-ended as opposed to, or, or just the distinction between the two, because like you said, the first ones you bought were asset specific. So you had a building, you had a piece of property that you knew you’re investing specifically in that your investors knew you’re investing specifically in that. And now as you grow into what you describe as open-ended, are we talking about a fund where, you know, there’s callable capital, where it could be used in a more, like you have a bit more latitude to use it on different purchases.
Could you talk a little bit to that?
Adam (22m 3s): Yeah. So the first, the first ones are, are, are, are simple, right? It’s it’s, it’s open acquisition is made closed up to new investment. That way nobody’s diluted, nobody is mistreated or anything like that. They will have a lifespan, meaning those have an end date because it’s got one thing. So you either carry out your investment thesis or you sell the property or sell the project. And everybody is, is made whole accordingly. And those are fairly simple. And anybody listening, who’s done a joint venture investment might be familiar with that type of an experience.
When I say open-ended on our next iteration, this, this has the ability, or is built right now to have the ability to acquire in perpetuity. Hmm. All right. So to now we have a focused investment mandate, meaning we only want this, you know, this type of a, of an asset in this type of an area, and we’re going to do this with it when we acquire it. So that the, the investment strategy isn’t isn’t any different. It’s just, we’re going to do it over and over and over again in the same structure.
So when I say open-ended, it just means that we’re, it’s not closed at a certain point, and it doesn’t have an end date. Now the assets underlying may have end dates. So each individual asset that gets acquired has its own micro strategy wrapped around it. So, you know, one, two, three main street, you know, we know we want to do a certain thing with it once it’s acquired, and it may run its life cycle, in which case you sell it, or whatever the case may be, but the proceeds go into the fund and get redeployed accordingly.
But it’s, that’s, that’s not, that’s not too, too strange for a larger, larger open-ended fund of any, not just realistic.
Jesse (23m 55s): Yeah. So it’s kind of like, if there’s the spectrum between, you know, the REIT and the, you know, the first deal you had where it’s like the single asset, and then you have everything along the spectrum, whereas I’ve always found it interesting that, you know, when you do say they’re private REITs, or even just a fund, you sell off assets, specific assets, but then like you said, the capital gets redeployed. You figure out, you know, what’s the best use of this capital. And it sounds like that’s kind of what you’re slowly going towards, or you’re, you’re doing the majority of your business. It looks like that’s the path that it’s taking.
Adam (24m 25s): That’s the path forward, at least for this particular fund that we’ve launched. That’s why we’ve that that’s the intention under which we’ve launched it is that it will be, be able to be open in perpetuity.
Jesse (24m 37s): Yeah. Sorry, go ahead, Adam. I was
Adam (24m 40s): Just gonna say, as long as that’s well understood for a potential investor, there’s lots of reasons why they might want to be a part of something like that. Diversification inside the portfolio, liquidity, smooth smoothing out of returns, expected returns. So there’s, there’s lots of reasons why something like that might be, might be a valuable experience for somebody as opposed to just a one off.
Jesse (25m 8s): So for those investing say, they, they invested with you on one of those first deals that you had. And, you know, you talked a little bit about this, the, you know, anti-dilution or dilution protection, where if you have this open fund, you know, the worry or somebody that’s investing is that more people can invest in. And then, you know, my per unit or per share is getting diluted. What type of protections are in place when you are investing in a fund? You know, for those that are being exposed to the fun world, where it is something like that, where it’s, it’s putting money into a pool rather than a specific asset.
Adam (25m 39s): Yeah. So go to the extreme. So we take a publicly traded REIT, the two problems that I have with publicly traded REITs aren’t their underlying portfolios, because there, there are, the portfolios themselves are, could, could be fantastic if you were to value them asset by asset, or look at the massive by asset or market by market. The two problems that I have are that they’re floated on an exchange, which has they look and act and feel just like all the other stocks on the exchange.
So just think of about a Canadian rate, for example, Canadian REITs, as far as the way, the, the way the unit prices go, they look, they look and act a lot more like a bank stock in terms of, so are you really in real estate when you do that, you’re more just in the financial sector of the Canadian marketplace as a, as kind of a proxy. That’s really what you’re, you’re kind of getting. So the, the issue of the volatility and the price of the units of the traded REITs, plus the ability that because it’s publicly traded and it’s offered under a prospectus money can just keep going in.
There’s no end to the amount of money. Now, the prospectus will have a cap, but if they reach their cap, they’ll just, re-issue a new prospectus. So there can be dilution and a lot of volatility in the price of your holdings. Now step that down to the private structure. It just means it’s not floated on an exchange. It’s offered under an offering memorandum. The good ones will only take money in for two reasons. They’ll take it in when they’ve got an acquisition or, or a series of acquisitions and or when they have CapEx to, to spend.
And, and so that means that a dollar that comes into the fund is, is being used in a creative way. So it’s either for an acquisition or for CapEx. If it’s not, then it’s diluting. If it’s just sitting there, then all it’s doing is, is that’s a dilute of action. So the question that you would maybe want to pose to any, any manager that you may be wanting to invest with is, you know, what do you do with the money when you get it? And if it’s, if it’s not for an accretive action, then you’re going to be diluted.
It’s just, that’s just, what’s going to happen. So now keep coming down the line here, ours, our new, our, our newest offering will look and act and feel a lot more like that. Private, private REIT. It’s just not classified as a REIT. And I’m not sure if people understand what that may or may not be. The classification is more of a tax classification, more so than anything. So you’ve got, but, but aside from that, it would, it would look and feel more, more like that, as opposed to the single asset, the single asset structure open and closed.
If you’re only making one acquisition and have, you know, one cap ex plan that you have to worry about, if you take more money and then you just dilute everybody. Yeah. And frankly speaking, I think, any, any manager or general partner who does that runs the risk of lawsuits?
Jesse (28m 51s): Yeah. So is it typical that when you do have follow along investments, say you are in this type of, you know, private investment and they are, there are acquisitions that you want to take down, or, you know, we purchase purchase a other, say a portfolio that you’re looking at when you do raise that additional cash, is that usually pegged at, at a book value or, you know, not, not necessarily what investors came in on and initially, and that new investors are at just a new level, a new price, and obviously that’ll have a factor into the diluted nature of it.
Adam (29m 22s): Yeah. So that’s the other thing that I like about a private structure is the stability of the union. I was just talking about, you know, most of these are done via limited partnership. So you’re, you’re buying, you’re buying limited partnership units. The private structure generally means that they’re not marked to market or the, the units aren’t valued on a frequent basis. So you’ve got a stability of the price of your unit value. So that’s good for a couple different reasons.
One it’s good for the investors experience. I mean, it’s just a nice, smooth experience. And, and th the ones that I’m familiar with typically only do evaluation once a year. So your unit value might change once a year. I mean, generally speaking, that that should be okay for the, for the investor, but it also means if you are going to be liquidating your position, you might, you might want to be waiting until the new valuation date. Cause it might be, there might be a bump in value there that you can, that you can use to your benefit, but a good manager with good governance.
It’s going to be very explicit when, when those intervals are the other time that the units might be, might be valued as is if there’s a large refinancing on the portfolio, which obviously changes the value underlying in the portfolio. But yeah. So on the, on the private structure, you can smooth out your returns with, within a fund or an offering that has less, less price change.
Whereas on the, on the private or the public REIT, you know, you have a price change, you could have it tick by tick or at least daily. Right? So
Jesse (31m 10s): Yeah, I mean, your volatility is it’s like you said, it’s, it’s acting more like a, a, a stock than, than traditional real estate. If you go down towards the operational aspect of the business, and I’m sure you get this, you know, thousands of times people ask you, cause you’re, you’re looking for investors when they pose to you, you know, what is the largest risk of a particular deal or out of a particular fund? You know, how do you go about answering that question?
Adam (31m 38s): Generally speaking, I believe it comes down to the manager. I think that’s the biggest risk now, are there other risks for an investor who’s coming into a private real estate structure of some kind of course, there are, you could, there could be interest rate risks. There could be market risk, like local market risk of, you know, wherever you may be acquiring something, but if you’re buying commercial assets, it’s probably more so the, the manager who’s overseeing the day-to-day, who’s actually operating that to me is the biggest risk.
I mean, when you, when you buy a piece of a real, a real asset, especially in our market, especially in Canada, the chance of loss is low. Like, I don’t want to suggest that these are low risk or that there isn’t some, some risk there, but you’ve got this physical thing, that’s doing something the chance of loss is low, but the chance of it not performing to the way that you thought it was going to, when you acquired that’s all on the manager and say, that’s I say, that’s the number one risk.
Jesse (32m 42s): When you are typically going with these investments, like, let’s just say in today’s context right now, you’re looking at assets. Is it still assets kind of in 18 hour markets or periphery markets, you know, in a specific geography, is it value? Add what is, what is the thesis right now? Or what are the assets that you’re trying to focus on?
Adam (33m 4s): Yeah, so right now, like for our, for our own portfolio, we are, we’re focused exclusively on acquiring an Ontario. Not because we don’t like other markets, but because I mean, we’re, we’re in the greater Toronto area, just outside of we, we understand. So, so first we’re, we’re Ontario specific second, we are looking at what we, what we call or what we’re defining as mid cap, mid cap assets.
So when we, when we say multi-family, we’re looking at anything from 20 to a hundred units, realistically speaking, probably more like 25 to 70 units, somewhere around there. And it’s for a couple of different reasons. First off, there’s lots of them in Ontario, our, our data suggests that there’s about $45 billion worth of those assets in that market banned in Ontario. We do like some markets better than others.
I mean, our first investments in our, our more recent acquisitions are Hamilton. We’ve got the portfolio building out in Kingston. We like parts of Southwestern Ontario, but in the markets that we’re looking at, one of the key key key indicators that we’re looking for is the ownership premium. So the amount of money that it costs somebody to own versus rent on a month to month basis. So where we can see larger dislocation there, we like that as a, as a rental market that we would like to be in the other reason, for in this, in this market band, it’s typically an asset band or an asset size that is too big for mom and pop investor to go out and buy or acquire on their own.
So these are generally about four to 5 million on the low end, up to the 20, 25 million on the higher end. But these are, these assets are typically too small for the larger institutional acquires. So whether that’s the pension funds or the REITs, you know, they, they, they want to be in 150 unit, 200 unit buildings portfolios at a time. So they’re, they’re, they’re not interested in all of these, all of these other assets. So we believe that, you know, we can be focused in this area.
We can acquire in this band and then finally the strategy around it is value add. There, there isn’t a lot of value in us in buying something that’s been stabilized. I mean, that’s nice for cashflow. It is, it’s great, but the REITs really like that, and that’s kind of where they want to want to play. We want the value add so that we can do two things. We can create some value really quickly over the first couple of years of owning it, then stabilize it, then provide a cash flow, which is also why we want to do this in an open-ended fund, because we can stagger that experience over time so we can get the growth and the income layering in over and over and over again, over time.
But for us in this case, it’s a sift and sort, finding, finding all of these, you know, unique gems. And, and I would say what we’ve been looking at is two thirds off market, one third marketed deals. So
Jesse (36m 21s): Yeah. And by that, it’s not necessarily that they’re on brokered. It’s a
Adam (36m 25s): Broker. Yeah. Sorry. They’re almost all brokered, but
Jesse (36m 29s): Yeah, I find it, you know, it’s, it’s, you probably see everything then in terms of, you know, the pool of buyers, especially on that, you know, for a lot of people, when they hear, especially say probably 60% of the podcast listeners are American. And it’s funny when you say 20 units or 25 units, they don’t realize that valuations going up four or five, 6 million plus, whereas on that high end, you know, especially if you’re in the main city city centers here, you know, you could be getting close to $30 million for these types of assets. So it’s, it’s not, it’s not a small, you know, it’s mid-market, but it’s not a, it’s not, they’re not small assets in terms
Adam (37m 3s): Of valuation. And this, this is part of the thesis where, especially in the Toronto area, the smaller, so 20 ish units, they were small cap units. They were micro cap. They were microcap assets a long time ago, but the way real estate commercial real estate has really, really boomed here. And there’s a finite amount of it. They’re not building a lot more of it right now. So the demand for the assets are huge. So the other reason we liked the asset that asset band is because it’s actually a new cap region that has been created because of valuation that is putting these out of touch for a lot of people.
I’ve got lots of, lots of American friends who are in real estate all across the country. And, you know, we kind of swap stories or what are you looking at? And they kind of laugh, you know, like, oh, you’re worried about something in the 25, you know, 35 units. And I’m like, well, we have to pay more for that than you do for that a hundred unit property. So yeah.
Jesse (38m 3s): Even with the exchange rate.
Adam (38m 4s): Yeah. So dollar for dollar though, if you’re, if your dollar can be put to work and you can get a multiple on it.
Jesse (38m 10s): Yeah. So, so one of the things where I was speaking with somebody on the podcast that while ago, when we were talking about just the different regulatory environments, as it comes to different states and different provinces, and I mean, I think it’s no surprise to anybody that most provinces are, are very, very tenant centric in the way the laws are, you know, for right or for wrong. I think a lot more, a lot of the states have more flexible laws when it comes to contracting and landlord and tenant relations.
How do you approach that? You know, obviously it’s something you have to keep in mind when you’re thinking about value add, because just by hearing that as a real estate person, it’s going to involve some type of dislocation when it comes to tenants. How do you approach that when, you know, investors are asking you to define an unknown where, you know, sometimes you just don’t know the way that the things will work out and that’s part of that operational piece.
Adam (39m 5s): Yeah. So first off, like w we recognize that we have to treat humans like humans. And, and I think we do now practically when, when we look at a potential acquisition, one of the things that we’re looking at is the rent roll and seeing what the historical turnover is on that. And if you can see a certain, a certain pattern at that, at that address, you kind of know what the, at least the low, the lowest level of turnover is going to be.
So we, so we set our expectations first on our, on our financial modeling on that low level. Then, then, then we would look at, you know, what might we be able to do? And of course there are incentives that can be done now in the last year, we haven’t, we haven’t incented anybody. I mean, we, here we are. We’re, we’re, we’re, we’re recording this and end of may of 2021, the last 15, 16 months, everybody’s been mandated to be at home, especially here in Ontario here, here on the Toronto area.
So we haven’t, we haven’t incented anybody. It just kind of, kind of let it be, it is what it is that said, there’s, there’s still turnover. It’s a question that we get from our investors all the time. Meaning, you know, do you kick these people out? Do you, you displace them in any way and we don’t, but there are, there are some operational things that, that I’ve seen done. I mean, you can be changing how common areas are used. You can like, so there’s, there’s things that you can do as a, as a manager. You can, you can start to become really professional about how you handle different things with, with, with a tenant or a group of tenants.
I know that what we see is if there’s a resident manager often that place, or that building, or that asset has had that resident manager for a long, long time, and they tend to be the glue for, you know, many, many tenants. And if you can change that up, sometimes that will, that will increase movement in the building. But again, we don’t like we don’t do anything forcefully that said there, there are ways to insent and, you know, I mean, you hear that you hear about cash for keys, right?
And so it’s, I’ll be honest though. It’s not something that we, we, we get aggressive with, especially in this market. But
Jesse (41m 36s): I think you kind of nailed it in terms of like, you treat humans, like just another person. And we’ve had with, you know, PR properties where we’ve bought where it’s, it’s not, as, it’s not like this, this crazy aggressive thing, you, you talk to people, you say, you know what, what’s your plan with the building? Here’s the plan. This is what we’re thinking. These are some of the options, but I think you’re right. Some of the things that, you know, go without saying, is that just running it more like a business, all of a sudden will, will create some percentage of dislocation because, you know, they’re used to, you know, the, the person that is a super kind of being the buddy and, you know, they could be laid on certain things and just tightening those things up.
Cause you can’t run a business professionally like that for too long. And, and, you know, we’ve had dislocation in the past or people moving out just as a result of that. So it’s, it’s not even us trying to do anything in particular. And then sometimes it’s a, we’ve added experience where renovation of common areas just aggravate somebody. So they just, you know, you didn’t do anything wrong. You’re doing everything above board, but they’re just, they don’t want to put up with it. So they, you know, they, they take off. But so I just want to be mindful of your time here. I want to talk a little bit about 20, 21, 2022.
You know, there’s been so much conversation about where people think commercial real estate is going. And that’s a huge question because all different verticals, but there’s also been a lot of talk about two other things. In my opinion, one of them is where we’re going to be from a tax perspective. See, you know, there’s been a lot of talk about capital gains. And then in addition to that, how inflation is going to play out. So when investors are talking to let’s, let’s start with kind of the inflation and the potential, you know, tax impact investors come to you, you know, they want to be in real estate for that inflation hedge, but they’re also hearing all this about how, you know, inflation is after all this money we’ve spent is going to be something that’s going to play a larger role than it has made in the last 20, you know, 15, 20 years.
How, how do you think about that kind of stuff?
Adam (43m 38s): Yeah. I mean, I hope we’re not headed towards hyperinflation. I don’t want to be speculative on that. Just like, so one thing that we know here in Canada on our research over the last couple of months, an access of nearly $200 billion in savings. So there’s about 1.4, $1.5 trillion worth of savings sitting in cash or cash equivalents in Canadian bank accounts. So I messaged to our, our investors isn’t about deals like, Hey, do you like that deal?
It’s like, like there’s cash sitting on the side. And I think that we can help. So we think that this is a good inflation inflation hedge. So that’s, I mean, that’s, that’s certainly the one thing is just getting some of that capital that’s sitting on the sidelines to work so that it’s, it’s not, there’s not more capital out there being eroded in value. Right. But as far as, yeah, I mean, I am, I am worried about it.
I actually am. I mean, I’m feeling the effects of inflation and just some of the stuff that we not, not necessarily in the business more than my personal, my personal life at this, at this point in that, I mean, yeah, that concerns me a little bit, but for us, it’s just, you know, trying to be prudent, making sure that when we’re acquiring or we’re doing it properly, but we’re, we’re getting money too. We’re getting money working. And I think that’s, that’s part of what we can contribute to preserving value.
So as far as the tax goes, were you, was there something in particular there?
Jesse (45m 19s): I, you know, I know the conversation, the national conversation in the U S and Canada has been, you know, the discussion of potentially raising the inclusion rate or the rate in the states for capital gains. And sometimes these things are, you know, nothing burgers, but you have investors and investors are real people. So, you know, I was just curious if, if that was a question, cause we see it on the brokerage side, we’ve, we’ve seen sales as a result of, you know, maybe not a hundred percent them thinking that capital gains is going up, but it is definitely a factor, you know, especially for owners that we’ve had that you know, of sale owned assets for 25 years and now they’re, you know, trying to factor in if they should sell or not sell.
I was just curious if it’s something that investors bring up. Is it, is it a topic right now or is it something that maybe it’s getting a little bit?
Adam (46m 9s): Well, as far as what may happen on the tax side or the capital gains side, we don’t spend a tremendous amount of energy on that only until something becomes material, but as acquirers. And so this is where I, where I maybe draw on my experience of having been on the wealth advisory side. So having dealt with many, many, you know, thousands of, of wealthy families, one of the reasons we, we believe that we’re a choice acquirer or, or of, of these mid mid cap assets, is that when it makes sense to do so, we can actually help would be seller to a degree with their tax situation.
And we can do that with equity swaps or, or, or something similar. We can work with their accountants and their lawyers and come up with something where, although the asset gets sold, we may be able to help them stave off some of their capital gains. At this point. It doesn’t mean it’s not going to get dealt with at some point, but we, we might be able to help them pace that out or stagger it out or create a succession plan for their, for their heirs that has, has tax mitigation as, as a part of that.
So it’s not just a straight real estate sale or, or acquisition. So it’s, frankly for me, it’s, it’s one of the that I go out and use. So I get proactive about that when I’m dealing with accountants and lawyers and saying, all right, who do you know that has an asset that looks like this, that maybe is dealing with a big capital gain or a potential capital gain. We might be able to prevent, provide a solution that could help at least mitigate some of that. So we, we use that very, very aggressively.
I mean, you see it on the brokerage side, but we see it as, as an opportunity to be not just an acquirer, but a partner.
Jesse (48m 2s): Yeah. Right on. All right, Adam, we have four questions. We ask everybody at the end of the show kind of a fire round, but if you’re game, I’ll get to those now. And then we can give listeners a little bit of information of how, how they can get in touch or reach out to you. Sure. Right on. What’s something that, you know, now that you wish you knew at the beginning of your career, whether that is, you know, business personal
Adam (48m 32s): It’s, it’s around risk and, and not, not in taking, not in not taking it. It’s actually the opposite. Like, especially as you’re younger, take, take the risk. I think younger people right now, they’re, they’re, they’re worried about being perfect at whatever they do. And the only way you can take the risk is actually taking the risk. You can’t theoretically take a risk. So take a risk when the, the implications of taking that risk are, are probably small or muted. And so that way, when you get older and more experienced, you get way better at taking the risk and kind of extension of that.
One of my first mentors, he, he said to me, and he, and he lived by this. This was something that he did every day, get out of your comfort zone every day. And I mean, I watched him do that, but I still, so he, I started working with him in the early two thousands. And I know for a fact that he still he’s still operating. He gets out of his comfort zone every day. And that’s, that’s something that stuck with me.
Jesse (49m 36s): I like it. Well, it’s perfect segue into, into our next question. And that is your view on mentorship for young people.
Adam (49m 43s): Yep. Yeah. Invaluable. It’s funny. When I was at my previous firm, I was asked at the local university to come and be speak at one of their F their fourth year classes. And the, so there’s about a hundred, a hundred students in the class. It was their fourth year of their graduating year. And I was towards the end of the semester that I was, that I was there. And one of the, one of the questions that I got was how did you, how did you know that you, you made it and it kind of, it kind of staggered me because I don’t, I don’t feel like I’ve made it at all.
Like when I’m like, I haven’t made anything, I’m just, I’m just maybe a little bit older than you, but, but I made it at all. And it was, it literally kind of stood me up for a second. And so me, I have mentors, I’ve been mentoring people, but I have mentors and I continue to, I bet three different mentoring resources that I go to depending some of it’s general business, some of it is technical like to our, to our industry.
And some of it is just life. And I’ve continued to find mentors. One of the things that made me have a good advisor, I think wasn’t wasn’t because I knew what to do with people’s money. It was because I was genuinely curious, curious about how they did what they did. I mean, if, if you’re a high net worth individual, you did something great to, to get there. It’s not by fluke. And so you have to seek out if there’s anybody in your life literally, or, or somebody that you aspire to be, you gotta find those people and figure out how to have them impart some of that knowledge and all the guys that I know who have done anything worth talking about, they’re all willing to, to share and help guide and mentor and educate.
Now, it doesn’t mean they can mentor everybody and help everybody, but I don’t know any, any of the good ones. They’re, they’re more than willing to, to offer that because they themselves are continuously looking and seeking it
Jesse (51m 56s): Right on what is one or two books or resources that you find yourself recommending time and time again,
Adam (52m 5s): Books or resources? Well, I think when I was in university, I was reading a lot of self-help or self-development and all of those. And I can remember my, my roommates in university, I guess, kind of poking fun at me, you know, like, w what do you, what are you doing? What are you, are you trying to become the next Tony Robbins? You know? And it wasn’t that at all. It’s just, I was, I was really, really wanting to, to get better and, and figure out where, where to get better from.
I like the, not, there’s not anyone in particular, but I like the, the autobiographies that different business people write about themselves, because generally they get, they get very, very open. They talk about their, their, their struggles. So I like those. And I read a lot, so I can’t necessarily point to one, cause I read at a rate of about one or two books a week. So it’s not one in particular, but the people that you, the people that you like it now, no one individual that has nothing to do with what we do, but I’m reading, whatever I can about, about him is his Musk.
I’ve just, I’m amazed with what SpaceX and Tesla are doing as, so I try to use people who are, are pushing boundaries and creating new new industries or evolving industries as, as ways to think creatively about the industries that I’m working.
Jesse (53m 39s): Yeah. Yeah. It’s really cool. I’ve when I was a kid I’d never really liked when I was younger. I never really liked autobiographies. And I found it not until you got older and you start realizing that it’s a really cool insight into, on the business side, for instance, into somebody’s life. Because you, you, a lot of the stuff that you don’t see, like, you know, whether it’s Lee Iacocca for, you know, whatever industry they’re in, you see like the, that you hear of the struggles you hear of the achievements, but you don’t see a lot of what’s happening in the background.
Last question, this is our layup first car make and model
Adam (54m 13s): First car. That was a, it was the 1985 Pontiac, 6,000 Ste maroon.
Jesse (54m 22s): I thought you were going to say fear or there, I was like pretty good. 85, right on. That’s a first, that’s a, that’s a first on the show. Yeah. Adam, for, for those that would like to reach out to you or if they want some more information on two sevens, w what would be the best aside from an easy Google search?
Adam (54m 41s): Yeah, well, LinkedIn of course is there and I connect with most, most there, but our, our corporate website is two sevens, capital.com, two S E V E N S S capital.com and happy, happy to there’s ways to contact us through there. So
Jesse (54m 59s): My guest today has been Adam Batson, Adam, thanks for being part of working capital. Thanks for having me, Jesse. Appreciate it. Thank you so much for listening to working capital the real estate podcast. I’m your host, Jesse Fragale. If you liked the episode, head on to iTunes and leave us a five-star review and share on social media, it really helps us out. If you have any questions, feel free to reach out to me on Instagram, Jesse for galley, F R a G a L E, have a good one take care.