Everybody.
I am really excited to have the one and only Bobby Ball on.
Thanks, Ken. Yeah. So where you guys are? Don't know.
Bobby's been with us a while, but he has a tremendous amount of experience.
So Bobby scours the globe and looks for deals.
And each and every week, every Tuesday, we have an investment committee call,
and it's all based on all of his findings, and he's got a team under him.
What are some of the things that we do at the investment committee level?
Call it a round one. Answer questions about the underwriting.
Yeah, what's our underwriting? What's our capital stack?
Yeah.
Where, what are we seeing for debt. Yep.
What type of interest rates.
Loan to value for capital work.
Capital work.
The more sophisticated sellers will have a It's actually a questionnaire.
Yes. And Bobby Phil's our buyer questionnaire
and that could be one page every five pages.
You're a five or six page buyer.
Buyer or questionnaire.
Right. Right. So that gets submitted.
The chances even of you doing something in that point are long.
Yeah.
So you also got what we
you know, we have a very technical term called leave some meat on the bone.
Right.
You know, so if it's a $60 million offer, we might come in at 5075.
So then what's the next process on that one deal?
Well, so I'd like to add to that.
When we were going through this, remember when the interest rates were moving,
there had to be some spread. Correct.
And good point because interest rates were moving up.
And did we leave some room? Yes, you know.
Yeah. Book and budget.
Yeah. For does increase. Yeah.
So when you guys well what are we seeing Worst case scenario.
Best case scenario.
Yeah.
So like let's say let's say that 250 unit deal in Austin
at 60 million, we got a call at 3%.
Yeah.
Well if rates were moving, you know, we had to, we had a No. One.
Our number was a three.
Let's say three quarter three, three, five. Yeah.
And sometimes up to 150 basis points. Yeah.
Higher. Right.
And that was killing deal.
All of those things were. Yeah. The round over there.
So first are 50 offers,
then there's the best of five around or what does that mean.
So they pick the top five or six
top offers based on price and terms and relationship and relationship.
That's where barbeque and credibility.
So we're usually the best of buyer out.
Yeah. I would say is most of the 50.
We were always in the top five or top six.
So now you imagine what the seller had like majority of the seller,
you've got 50 offer, some are really high, some are too low.
There's a whole bunch usually clustered in the middle. Right, Right.
Pretty common.
So oddly enough, a lot of times the seller and the broker will
just throw the top way and not always, but in most cases it's a truth.
These are new people trying to get deals at a higher number
and then just, you know, maybe they have access to capital, maybe they don't.
You know, if you're invited to a phone call, they filter down to the phone call.
Correct.
And then that's where they you go through your questionnaire
and then they ask you at the end, you know, do you have any
you know, is there any gas in the tank for you to come up on price?
Yeah. And we already do that. It was coming.
We know that's coming. Yeah.
And they asked you sharpen your pencil.
So all of that stuff happens and then, you know, we have to prepare for that.
So we've already underwritten all that.
We've underwritten debt for different kinds of debt.
We've other written different kinds of pricing, you know, and of course,
as you, as you raise your price,
you know, that changes your returns.
There's all kinds of scenarios, right? Yes.
So now let's let's go back to June of 2022,
which is not very long, but five or six months.
So the Fed comes out with their first rate increase.
We're at 9.1% inflation buyers now have a different debt pricing
and also loan to value is can you speak to that about how you know
so we went from 75% loan value to like 55 or 5050.
What are some of the capital markets say?
So, you know, you've got the agency financing Fannie Mae and Freddie Mac.
Yeah. And then you've also got the bridge. Yep.
And the bridge loans right now, that's pretty much dried up.
The fact is that was your higher leverage.
You're 70, 75% loan to value.
And those were only those were short term loans, you know, the 3 to 5 year loans.
And you do those for like renovations. Yeah.
And those are for renovation drive but the Fannie Mae and Freddie Mac loans.
So thankfully God bless it we're in the humble day family life
industry because if we were in office
or retail or industrial,
we wouldn't have the benefits of having Fannie Mae and Freddie Mac.
The other side of that is it's still a 50% loan to value right market.
And so everybody's pretty much playing the same roles right now except for, say,
pension funds or any high, you know, high net worth families, institutional
investors that can pay all cash.
Right.
For example, there is a deal in San Antonio that we looked at.
It was 2015 construction buyer.
Those selected had a 40 day closed
and all cash
with an access agreement.
There were 21 offers. Yeah, a deal. Right.
And that was the most we've seen in like, you.
Know, I am right, a couple months.
I wanted to just explain that to you guys and kind of see why things are drying up.
But what's really happening at the broker level at the capital markets level.
So we're seeing lower loan to value, We're seeing
higher interest rates and then we're seeing less offers.
And you're also seeing, you know, refinancings are.
Yeah, done prohibitive.
Yeah. Ted, is the higher interest rates right?
Because cash flows don't meet the requirements.
Yeah.
Service coverage or income is coming down a little bit.
You know, we're seeing some negative negative rent, however.
Yeah, but it did you know, for example, like Phenix,
you know, we're seeing 30 to 40% rental increases.
It's crusted.
Yeah.
So the one thing I want you guys to know, the three big things
that have changed in the last six months are low values.
Got 475 to 50 interest rates have gone from say, mid threes to, you know.
Just prior six, five and a half.
So five.
And a half six that's eliminated at least half, half of the people that want to.
Normally bet. Yeah.
I'd also add that, you know, we're in a fog of uncertainty right now
and unpredictability on interest rates because rates are going to go up again
probably next month.
I don't so.
So that's what I want to talk about why there's a three of to.
Be a lot of opportunities because there's a lot of owners
are going to be underwater too there
I'm starting to see quasi distressed deals already.
Can you believe that already.
A lot of deal that are 30% below replacement cost
or equity partners forcing a sale because they're spooked about the market?
We're facing more interest rate increases.
Yes. Right.
And if you're a buyer, that means
that your cost of debt goes up or your your borrowing costs goes up,
you know, and that also means that your cash flow,
if if you have a property that's cash flowing, let's say in
October, September, October, November, December of last, let's say 2022,
it's really that change that much in the first six months of 2023.
But the big variable is going to be debt.
So going into 2023, you know, are you expecting that
we'll have a lot of listings hit the market in the first quarter? Yes.
And what what for what reason? So
so already starting to see lately there's been some news
about Blackstone and Starwood
receiving requests for redemptions.
I saw what I would want to be pulled out of there, Phil, and tell.
Them what that means.
So the redemption queue is basically
we've you know, investors will invest with Blackstone and they want their money.
They want their money that there's deals like that happening
right now where
equity partners want their money back
or other people want their money back.
And that gives really that I'm seeing.
You know, owners
that say, I want to sell now
because I think the market's going to go down even more.
So I'd rather take today's price versus the future price.
Right. Of, say, next month when rates go up.
Let's circle back because that's going to be very eye opening. Yes.