EQUITYMULTIPLE CEO & Co-Founder Charles Clinton discusses the company’s history, value proposition to investors, and track record to date. We also take a look ahead at our product roadmap and philosophy regarding deal flow going forward.
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Quarterly Update Webinar Transcript (Q1 2017)
Soren: Hi everyone, thanks for joining us today. I know everyone is likely pretty busy, so we really appreciate everyone taking time out of their day to join us. My name is Soren Godbersen, I head up customer communications efforts at EquityMultiple and today’s webinar is a quarterly update for our investors and prospective investors. Transparency is very important to us, so our aim today is to provide some info on EquityMultiple’s history and track record as well as take a look at our plans for the future. And your speaker today of course is Charles Clinton. Charles, want to say hi?
Charles: HI everyone, you know, thanks Soren and thanks everyone for joining us. As Soren mentioned, I’m Charles Clinton, the CEO of EquityMultiple. I do want to reiterate what he already said, which is thanks for taking time out of your busy schedules to join us or to listen to the recording of this. Just to outline a little bit of what we are going to talk today before we dive in. We’ll start with a brief overview of EquityMultiple and really what we try to provide to investors. Next, we’ll walk through our diligence process and the types of returns we are trying to target. We’ll transition into discussion of our track record to date. And we’ll end with a brief look at what’s ahead of us and hopefully save a few minutes for questions at the end, if there’s time.
Soren: So, quick housekeeping item on that. You should have a questions tab within your webinar software here. So go ahead and ask a question at anytime during the presentation. I’ll make note of it and ask Charles at the end. And if we do run out of time, we’ll be sure to follow-up individually on your questions. Back to you Charles.
Charles: Great, thanks. So let’s just dive right in here. Why EquityMultiple? I imagine most people listening are familiar with EquityMultiple already, but I want to give a brief overview before we kick things off. We’re really an online investment firm that helps connect investors to pre-vetted commercial real estate projects. We see ourselves as similar to eTrade in the ‘90s, or Betterment more recently. Fundamentally, we are trying to take an old fashion, offline industry and bring it online. By doing that, we can expose individual investors to direct commercial real estate projects that they really didn’t have the opportunity to get into more efficiently and transparently as recently as a few years ago. So why does this matter? Why is direct real estate investing good for investors to consider? I think first and foremost is the historically good returns. I mean you see here that it performs well compared to other benchmarks – stocks, bonds, or savings accounts. I think the big thing we also look at to is what we see as a fundamental underallocation by individual investors into real estate compared to big institutions and endowments. Famously, the Yale endowment has been a big proponent of allocating into rea estate and alternatives and they hold about 20% of their total portfolio in real estate and alternatives. Individuals on the other hand tend to have near 0 exposure outside of their home. Under 3% on average. There are a lot of reasons for this. One of them is the types of real estate products that are currently available to investors. Public and private REITs are probably the most famous. Public REITs are great products, there is certainly room for those in any investors’ portfolio. The problem there is if you are looking for the diversification benefits of real estate, public REITs suffer from the fact that they are public. They have a correlation to the public markets, so when there is market volatility, they tend to rise and fall also, which undercuts some of the benefits of being in an asset class like real estate, which should be a hedge against market volatility. Private REITs really are pretty fairly lambasted for their high fees. Often times, for every dollar invested, on day 1 of your investment, you will be down 85 cents already. And it is truly hard to climb out of that hole. That leaves investors really with the option to buying a building themselves, which sure comes with its own share of headaches and personal ownership is hard and involves management. It also undercuts your ability to diversify across real estate. So our goal is to make it easier to invest across a range of real estate projects, really create diversification within the real estate portion of your overall portfolio.
Let me tell you a little bit about who we are and how we came to be. So I was a real estate lawyer at a firm called Simpson Thatcher, I mostly worked for big private equity clients such as Blackstone and KKR, multibillion dollar transaction. My partner in the business and cofounder Marious Sjulsen, came from the other side – the buy side of real estate. He worked on a variety of positions, but for the last decade or so, he was a VP of acquisitions at a private equity firm called Brickman, where he did, you know, range of value add and core-plus sort of investing all over the country, but with a focus on the northeast. When we founded the business, we really wanted to go out and partner with an established real estate firm, so that we were growing our business strategically. We partnered up with a firm called Mission Capital right at the outset. Broadly speaking, Mission Capital is a real estate capital markets company. They have done over $70bn in transactions in 15 years since they were founded. And really what they provide to us besides experience and know-how is the ability to tap into a national network of sponsors and deal flow and ultimately that means we can surface better deals for you as the investor.
So speaking of how we surface deals, let me walk through the diligence process a little bit. Before any investment reaches our platform and you see it as investors, its passed multiple layers of due diligence. We really start by vetting the real estate company, the Sponsors we call it. And that is important because ultimately they will be doing the heavy lifting on these projects. The review there starts with their track record. We do background checks, we have calls, meetings, we talk to people in the industry to see what their local reputation is. Really we need to get comfortable there, before we get to proceed to looking at the actual deal. The next step for us is just looking at the markets. Typically we are looking at primary and secondary markets, with good demographic trends, good employment. We will look at tertiary market on occasion, but there really needs to be a compelling story for that to be the case. You know, finally, we actually get to underwriting the deal. There we do a full financial re-underwriting of the projects. We stress tests assumptions that the Sponsor may have. May that’s lowering the projected occupancy rates, or lowering the growth rates of rents, just to see what happens to this project if things don’t perform as we originally hoped they’d do. Once we get through that, we go into all the details of looking at the legal documents, the 3rd party reports, and making sure that there’s no major issues that come up during that kind of review. So, ultimately by the time you get a project, you see it on our platform, it’s gone through all of this and really about 5% of the projects that we’ve reviewed to date have actually made it in front of you as investors.
In terms of what we’re trying to target, we offer 3 different products, I guess ill call them. Equity deals, preferred equity deals, and syndicated debt deals. The goal here is those 3 structures have different risk, returns, and duration profiles. Not only can we cater to different type of investor goals, but you can also create some diversification again within the real estate part of your portfolio. And we have this information right on our front page of our site. So don’t feel like you have to jot down the numbers or anything. You see here equity deals are basically we’re targeting 14+ on the total return and those tend to be a little longer term: 3 to as high as 7 years. Preferred equity 10-14% total return. Some of that paid currently, some of that paid on a refinance or sale, generally a 1-3 year term. All syndicated debt tends to be short term, less than 18 months, and high single digit returns into the low double digits.
Let’s talk a little bit about our track record to date because I know that is important for a lot of our investors, it’s a question we get all the time. We see our high level stats here on this slides, we’ve done 23 projects so far, across 15 different markets. We have here over $300m in total project value across those 23 projects. That stat is actually a little dated already, from the beginning of the year, it’s closer to $400m at this point. So far, we’ve only had 3 deals that have gone through full cycle and repaid investors in full. Those were all debt deals which, as we kind of talked about on the previous slides, the equity deals and pref. equity deals tend to be a little longer term so we won’t have any full cycle investments still for a few years. We are seeing very good returns through across our portfolio. We’ve had 0 loss of investor principal to date. And for those deals that are cash-flowing to investors, or have been fully realized, we’re averaging just under a 10% total return. So, while almost all our yields are performing on schedule and performing well, I do want to tell you some of the road bumps we’ve hit, because that is a realistic part of this business. We define a road bump essentially as a project that is more than a quarter behind schedule. We’ve had 2 projects out of our 23 so far that has hit some bumps. The first is our first deal ever, it’s suffered some construction delays, it really was a big construction lift and it’s just taken longer for our Sponsor than anticipated because there are some issues that they couldn’t foresee. They are working diligently and the project is going to be completed. It will open in the next few months. Ultimately, it still looks like it going to be a good investment for investors.
The next is a project that has been cash-flowing, but it did miss a quarterly distribution in Q4. What we’ve done is gone ahead and set ahead weekly asset management calls between us and the Sponsor. We make sure we know what’s going on. We can offer help, we can offer advice. We can really try to push that project back on track. The good news there too is that they’ve been working on a refinance and it looks like that is going to proceed soon and really put this project back on schedule and resume normal payments to investors as anticipated. Speaking of track record, just want to pause for a second here and mention the Detroit project that we just launched yesterday. Very excited about this deal. It fits into well with the track record thing because this will be the third project from the Sponsor on that project – Millennial Partners. The first 2 deals we did with them – one ins Milwaukee and one in Santa Monica – are both looking like they are heading into extremely good results for our investors. So we have a lot a faith in them. Really, we have a lot of excitement about the Detroit market as well. In the real estate community, it’s one of these markets that people discuss a lot and it really has turned a corner. I think in mine and many investors, including our own, we’ve been looking at the market for a while. We’ve had a several Sponsors pitch us on projects there, but we’ve been waiting for the right one. The Midtown area, where the building is located, is really the heart of the urban revitalization of the city. If you haven’t had a chance yet to look, please take a couple minutes to check it out. Of course, let us know if you have any questions after you do.
We threw this slide in here – we thought it was a cool one. We put this together recently. It shows a heat map of everywhere we’ve funded deals, where we’ve passed on deals, are things where we are looking at deals that are currently in the pipeline. It gives you a sense of the geographic range that we’re looking at – kind of a coastal concentration and down in Texas and Utah as well. Also a few projects in Chicago, mid-west area. The number here that doesn’t across in the heat map is the just how many projects we’ve passed on. I mentioned that 5% acceptance rate, so we’ve looked at close to 500 deals in total to get to where we are to get to 23 live, so hopefully that provides some comfort to the kind of screening we are doing at the outset.
I just want to make a little bit of a plug here for referrals. Referrals are really the lifeblood of our business. Many of our new investors come from our existing investors and I just want you to know that is something we truly truly appreciate. And as a sign of our appreciation, we do have a program in place where we reduce fees, increase your yield and whoever you invite on our next investment. Please if you haven’t already, we’d really appreciate it if you’d invite a friend or colleague to check us out and introduce themselves and ask questions.
I wanted to give you a little sense before we transition over to questions. What’s ahead for EquityMultiple? What’s on our product roadmap? I know we get requests for particular features, things that investors want improved about our website/platform. And I want you to know that we are listening. Our CEO, Peter Shankar, loves that kind of feedback. Any thoughts you have about things that would improve our experience, particularly on the web. Please don’t hesitate to reach out and tell us. Here’s just a few that are on our immediate pipeline. First is improvements to asset management and recording. As the number of deals that we’ve done to continues to grow, we really want to make sure that we’re providing information to you as the investor about your investments clearly and efficiently. We are working on improvement to showing the flow of your cash flow distributions going in and out and then moving a lot of those asset management reports that right now we are sending to you offline by e-mail onto the platform. You can have almost an activity feed for all your deals, like you would almost on Facebook. The next is a more efficient streamlined investment process. I think that the process right now is pretty good, but we always want to improve it. Make it easy for you to – once you decide to invest to actually go through that transaction in as little time as possible with as few clicks, just make it a little bit more pleasant for everybody.
Next is trying to personalize the onboarding experience for investors. What I mean by this is collecting information about your preferences, what you’re looking to invest, your goals and really using that to make sure that the investments that are most relevant to you are the ones you are receiving information about. Ultimately I know you don’t want to be barraged by a million things you are not interested in. we are hearing that feedback and we really want to tailor that experience and personalize it to you a little bit more. Lastly, we have a pre-launch program that we mentioned on a prior e-mail that we’re working on. This is essentially to give our most active investors a chance to look at projects a day sooner so that they have a little bit more time to do due diligence. We’re also working on some other benefits to reward the investors who have invested in us and through us at EquityMultiple.
Before we turn over to questions, the last thing that I want to do is give you a little bit of a general update. I will send out another quarterly investor letter that will dive into a little bit more detail on our thoughts on the market and what lies ahead for us as a business. I just wanted to touch on a couple quick things. The first is the pace of our deal flow. I know that a few are registered on other sites. You may see particularly the single-family fix and flip lending sites that have a lot more transaction volume than we do. 10 projects a month, I’m not even sure. For us, we’re more in the 2-3 projects per month. That’s really where we see our sweet spot in the foreseeable future. The reason for this is that we are focused on more complex commercial real estate projects. Our focus is on quality over quantity. That’s how we want to build our business and that’s how we’re ultimately going to provide the best value to you as investors. The other piece we get questions on is the fundraising part of our company, how we plant to grow. We are in a process of finalizing kind of a further investment into our company. Like we did initially with Mission Capital, this is going to the form into a strategic partnership than raising money from a venture capital firm. I think that ultimately we want to partner with someone in the real estate industry, within the finance community, who can help grow our business and can help provide value to you guys – investors. So anyway that’s my speal – thanks for listening. Now let’s turn over to questions for a few minutes.
Soren: Thanks Charles – good stuff. We have a number of good ones here. We do have 8 minutes until the half hour. So if you’re still on, definitely keep them coming if you have burning questions. Charles you already touched on this a little bit, but here’s a good question. It’s great to understand your vetting process and acceptance rate. Could you please talk a little bit about how you compare to other investment platforms – CrowdStreet as one example.
Charles: Yeah, absolutely. So CrowdStreet operates a bit differently. I don’t ofcourse don’t understand their business as well as they do – so that’s a caveat. But fundamentally, they are more a technology service firm for both investors and real estate companies, where we see ourselves more as a diligence provider for investors. So, what I mean there is that CrowdStreet is that the way they’re making money is a real estate company comes and says “Hey, can I post a deal using your technology platform?”. For that they will pay them a flat fee. I believe they do do some customer vetting. But fundamentally, they’re not re-underwriting individual projects, they are not doing asset level due diligence, that’s just not their business model. That is why they don’t have ongoing fees like we do. We do have an asset management fee because their role is just really at the beginning of the deal as a technology intermediary between an investor and a Sponsor. We really want to be a value-add for investors from diligence all the way through sale.
Soren: Great. Kind of in the same vain – does EquityMultiple have any plans to get into single family fix and flips anytime in the future.
Charles: No. We don’t. We feel like that is a market that is very well compared to our competitors. There is certainty some strengths to that – they are short-term investments. I think that what we like about Commercial real estate as an asset class is just that there’s a little bit more long-term stability. These projects to have cash-flow, leases, so in the event that there is macroeconomic volatility, they have some core strengths that helps them sustain that. Our worry in the single-family space is that if there is a dip in the market, then all of the exits that those investments are relying on may not be there. Really we are sticking to our knitting. We are commercial real estate people. That’s what we know and that’s really what we want to invest in and what we want our investors to invest with us.
Soren: Great. Here’s a further question – regarding the underlying assets that we invest in. Are you accepting ground construction transactions or condominiums.
Charles: So that’s a good question. In general, we shy away from ground-up. We have done 2 ground-up construction projects. One in Santa Monica and one in Seattle and I think the markets there are illustrative to one of the core things we are looking in for a ground-up project. It really has to be in a strong market where we feel like the underlying value of the property and the land is good enough that if anything goes wrong, there is really is some downside protection there. In general, constructions just harder, takes longer there is more variability, so we are more focused on cash flowing assets.
Soren: Great. So here’s a great question. Without referring to a specific deal, is there a fee structure, that is typical for EquityMultiple’s offerings and what is the EquityMultiple component of the fee structure?
Charles: Yeah, yeah, absolutely. It will vary by our product type. So for the syndicated debt or for preferred equity, the rate that you see as the investor is the rate that you will receive. We are making our interest typically about 1% on the spread on the rate. So if you receive a 10% return, we are receiving an 11% on the underlying investment. If we only end up receiving a 10% return, then we get nothing and you get all 10%. If we end up receiving an 11% return, which is what we’re owed, we’ll keep 1% and you get 10%. On equity projects, we are typically taking an ongoing fee of anywhere of 0.5% to 1% and then we’re taking 10% of investor profits. That 10% does not apply until investors have been repaid their full principal investment. If you invest $30,000, that does not kick in until you get all of your $30,000 back.
Soren: Great. Next question: has EquityMultiple ever considered funds, where we would invest in pre-vetted properties, as opposed to in distinct, single Properties or projects.
Charles: Yes, absolutely. We do things funds are a fundamentally different type of investment vehicle, but are one that many investors would like. What we think we give through offering deal by deal is the option for investors to really build their own fund of a sort, they can create their own portfolio, but I think a lot of investors want to just invest in something, a strategy, and leave it up to the real estate professionals who run that fund to pick the individual investments, and that is totally valid. We are exploring a number of avenues and we will ultimately offer some kind of pooled investment vehicle over the coming 6-12 months I would expect.
Soren: Great, we are getting a sort of flood of questions as we are closing up the half hour. If we don’t get to yours right now, don’t be offended, we will follow up individually. Let’s take one more to close out here. What is the background of the team members who underwrite EquityMultiple’s deals.
Charles: Yeah – that’s a great question. I’ve touched on this a little bit earlier. At the end of the day, a lot of decision making flows ultimately up to me and my partner. My experience is as a lawyer, so I am the guy who spots risk. I worked on tens of billions of dollars in transactions in my time as a lawyer mostly for the biggest giants of private equity like Blackstone. Really on the hardcore numbers on the underwriting side, my partner Marious has over 10 years of experience in the industry, comes across as an asset management and acquisitions role. Could both give a quick good read on the deal by looking at its underwriting, but also really stress test and see if something is worth investing in if it doesn’t go quite as planned. The other person who really does a lot of the heavy lifting initially especially is Jonathan Lesser, who’s our Associate on the team. He is just a rock star, comes from a real estate valuation background, and now is a transitioning into this more acquisition and analysis role that we have him doing at EquityMultiple. We feel like we have a good kind of core team there. We are also by virtue of our partnership with Mission Capital able to leverage their wealth of experience. That starts with a whole team of very experienced analysts and then that ranges all the way up to their senior executives, who have decades of real estate experience and 2 of which sit on our Board of Directors and help us with final investment decision-making.
Soren: Great. So we are going to wrap for now. Again, we have a number of questions here that we will be following up with individually on. We will certainly make a recording of this session available to everyone who attended and those who weren’t able to attend today. Thanks again very much for taking the time to attend today. We hope that you found this useful. We’ll be doing it again a quarter from now.
Charles: Thanks everyone.