Is Now the Time to Buy Apartments?

Steven: Hi and welcome back to another episode of The Wealth Clock Podcast. I'm Steven Weinstock. My guest today started out raising money to launch a music festival in Lake Tahoe, a festival that MTV later acquired. He went on to spend 7 years at Prudential's real estate investment arm, closing over a billion dollars in West Coast acquisitions. Today he is managing director at LaTerra Development, his family's firm, with a portfolio valued at over $3 billion in apartments and self storage. Last December, his firm went under contract on a $455 million Chicago apartment portfolio. I wanted to know how a kid who starts a festival ends up buying apartments by the thousands, and what he sees right now, where some people would say there's a generational opportunity. Stay with us. And welcome to the show, Chris Tourtellotte. Chris: Hey, thanks for having me. Thanks for the nice introduction. Steven: Okay. Chris, in 2011 you're helping to launch a 3 day music festival in Lake Tahoe, and you were the one raising the money. I've got a bunch of questions. How do you even start raising capital for something like that? Who said yes to you? What did the docs look like? What was the plan? What genre of music? Tell me, Chris. Chris: Yeah. Love it. I love that you've keyed in on this because I think it's an interesting story. I've always been a big fan of music. I did some live events in college, but this was big. It's sort of the top down approach. Why not start with a big music festival? We brought a level of sophistication to a sexy but unsophisticated business, whereas real estate might be more sophisticated but potentially not as sexy. During the capital raising process, people were certainly intrigued to invest in a music festival. What we put together was a very comprehensive business plan, a very sophisticated Excel model using what I learned on the real estate private equity side. I called it knowledge transfers, taking what I know in real estate and applying that to music festivals. For example, in a cash flow projection you have rents, which correspond to ticket sale revenue, and operating expenses, and we had sensitivity tables. We put together a pretty comprehensive business plan. Unfortunately, and I have to give a lot of credit to my partner, we partnered with somebody who really knew how to execute on the business plan and had put on a music festival before. South Lake Tahoe was just a prime market. People go up there for New Year's and don't really have anything to do, so we had a captive audience. We had the right market and the right partner with the operating expertise. We had a really good lineup. It was kind of Coachella esque. We had a lot of electronic artists like Rufus Du Sol, for example, and some hip hop. It worked out really well. I'm happy to say that year 1 was a success and it turned out to be a successful series of events. It was a winter music festival over New Year's, so it was a pretty cool concept. Steven: Wow. What did raising money for a festival like this teach you that you still use on partner deals today? Chris: It's a great question. Ultimately, one is having passion and conviction in what you're raising capital for. You really shouldn't be raising capital for something you don't have passion and conviction in. It is a spectrum, though. There are some things you're maybe more passionate and convicted about than others. But we knew to the core that this was going to be successful and we really believed in it, and I think that shows. When you're raising capital, you want to make sure that your excitement about it shines through. We had a good set of materials, a good business plan, good Excel modeling with our sensitivity tables. We were raising smaller checks for a music festival back then. I was 27 or whatever. But we pieced it together. Steven: So MTV ends up acquiring the festival. How does that happen? Do they come to you? Are you looking to sell out? Was that the initial plan, to build this into something that gets bought out? Talk to me about that, without giving any sensitive information or details. Chris: I appreciate that. The answer is yes. Any time you're launching a business, you want to think through the exit strategy. Ultimately, music festivals are acquired on a multiple of EBITDA, just like most businesses. So you want to create a business that has EBITDA and EBITDA growth, and the timing was good. Live events were successful, this was before COVID, and they are still very popular. So really we created an event that was an iconic brand. SnowGlobe was known around the country, and it turned out to be the biggest ticketed New Year's Eve event in the Western US. We had 50,000 people over the 3 days at its peak, so it was quite popular. It was a brand. MTV was getting back into live events and they wanted to stream live events, and there are live event private equity companies. MTV happened to be the right suitor. I think the timing was good, the event was good, and it helped them get their brand out there and refresh it among the target demo. So it just ended up being a win win. Steven: So you moved on to Prudential. They have an extensive real estate arm. What do institutional investors look at that maybe everyday investors skip? Chris: By the way, I did this while I was at Prudential. I was moonlighting. Steven: Wow, wow. Chris: I still got the job done at PGIM. I never worked on this during PGIM hours. I worked really hard and prioritized it, but it was more of a nights and weekends thing. At PGIM I gained some pretty valuable skills. I started as an analyst, so I got the analytical skill set, learned how to communicate, learned how to be polished, learned how to put together really good, compelling materials. When I left PGIM and came down to LaTerra, one of the most valuable skill sets I brought was how to present information in a way that is compelling to institutional capital, because I was on the institutional capital side. That skill set proved useful. I think starting out at a bigger company and institution and getting those skills is good for one's career. Steven: You closed over a billion dollars in acquisitions on the West Coast in about 5 years. Which one of those deals taught you the most, good or bad? Chris: It's a good question. What's interesting is in 2015 we acquired a 7 asset data center portfolio. We formed a joint venture with Digital Realty. I remember at the time nobody knew what data centers were. Maybe they knew what they were, but in 2015 it was a very niche investment. I learned a lot during that process. I did a little white paper and presentation to investment committee. I'm like, what the hell is a data center? We had a good and interesting joint venture structure. I've always found that buying and selling real estate assets gets interesting when you really get into the joint venture structures, the waterfalls and the mechanics of the JV, priority versus pari passu and promotes. I find that to be where I learned the most. It was a public company, it was data centers, it was a big JV. It was kind of cool. Steven: I have to ask you, and this is off script. The word data center today is controversial to a lot of people in a lot of places. You were at the forefront in 2015, when most people didn't even know what it was. What do you think people are getting wrong today when they think of data centers in a negative way? Do you see some of the people that were all for it 10 or 12 years ago all of a sudden against it? Do you think it's political? Do you think there's a real reason for all the outrage people have for these data centers? Tell me what you think. Chris: I think it's kind of a classic case of NIMBYism. We build a lot and we entitle a lot of real estate. We've entitled 37 properties in a row with a 100% success rate, so that's in our DNA at LaTerra. I feel like people don't want data centers near them. They don't create a ton of jobs, and they tax the grid. So I can see why folks who are anti development don't want data centers near them. At the end of the day, I think it's a little bit overinflated. We've seen it just in the last few days in the stock market, and I think the CapEx spending is just wild. We'll see where it goes. But generally speaking, the rush to control AI and to be the global leader in AI is something the US isn't going to give up, and China will keep trying. So I think it's important that we succeed in a smart way with some rules and guardrails in place, because it's probably inevitable, and data centers are a key component of that. So it's all about the location of the data centers. Where do they go, is there water, what's the grid like? Steven: I got it. I did some research, and you've joined the family firm. This is what I'm reading. Your dad said there was a time he thought about just selling the business, and when you joined he decided to build it into a generational business. What was that like? How did the two of you split the work? Chris: It's been great. Working with a parent is very rewarding. Time flies. I came down to LA to work at LaTerra 11 years ago and we've done a lot. I think a key to a good transition is one that's ideally slow and gradual, and people don't even notice and it feels organic and normal. The way we split work has evolved over the years. What I love is that my dad is still a deal junkie, and it keeps him sharp and in the game, and he likes that. I've tended to gravitate more towards capital markets and acquisitions. I did a lot of our entitlement and forward facing work and presentations to cities and city councils, but a lot of that I learned from him. It's been a good process. For folks who are considering joining the family business, I think getting a real institutional job out of college before you go to the family business is good, because you can prove yourself. It's not, did the apple fall really far from the tree, or is this person smart, or is it nepotism? It's good to prove yourself so that you can add value and be humble, but also bring value to the business. Steven: Okay, here's the next question. In case you want to deny it, I have a source. Your father gave an interview in the San Fernando Valley Business Journal. What was the first real disagreement you had about strategy? Chris: Oh my gosh. I look forward to hearing what he said, because I'm trying to remember what it was. There have been deals that he's wanted to pursue that I haven't, for one reason or another, dating back 10 years ago. But I'm trying to think of a strategic decision. You're going to have to jog my memory. Steven: I don't have it in front of me, but I have it in my show notes. So everybody out there, go Google that, the San Fernando Valley Business Journal. Chris, after the show I'm sure you'll take a look at that, and let's see if there was a real disagreement or maybe it was just clickbait. Chris: Yeah, exactly. Who knows? What I will say is that the father son dynamic is a net positive in most instances, and ours is one of them. With any father son relationship there's always a little of the boss talking to me like my dad, or this employee talking to me like my kid. I see a little bit of that in other dynamics, but generally it's a net positive in my opinion. It's fun. Steven: You call this a generational opportunity to buy existing apartments. Why? Chris: Sure. It's funny, because if you say generational to somebody who's in their 70s, they'll say, I don't know what you mean by generational. It's maybe once in a cycle, however you want to describe it. The reason is that values have declined, depending on the asset class, but let's say apartments, 30%, for example, since the interest rate hike cycle commenced. On top of that, we've seen big increases in operating expenses and insurance. So it's kind of the perfect storm. During COVID, costs escalated significantly in operating expenses, at the same time interest rates were so low that a significant amount of product came online following COVID. So you've got concessions, rents are down, supply is up, vacancy is up, operating expenses are up, interest rates are up, values are down. We think it's a really good time to buy existing multifamily and develop in some markets, because we think we'll see outsized rent growth in the coming years given the lack of new supply. Just to put it quite simply, I think you want to buy low, sell high, and I think we're in a trough right now. I think it's a phenomenal time to buy over the next couple of years, and there are going to be some forced sellers. Buying low right now makes a lot of sense, especially if you can be flexible with your hold periods and you're not over levering. Steven: Geographically, where do you focus? Is it West Coast? Is it California only? Chris: We started out as a Southern California firm and we've built about 3,000 multifamily units in our markets. We sold some and built some to hold. We've got 573 units in Burbank that's currently in lease up, and 200 unit deals in various locations in LA, a little bit in Orange County, San Diego and Riverside. We went sunbelting, to make it a verb, when COVID hit. We're in Dallas Fort Worth now, we're in Albuquerque, and we followed the opportunity, but within reason. We acquired Aimco's $455 million, 7 property, 1,500 unit portfolio in Chicago. We acquired that in March, so now we own a lot in Chicago. We've got a couple of interesting deals in the pipeline in other markets, but generally I think of us as Sunbelt in nature. Obviously Chicago is outside of that, but we focus on the Sunbelt, and in particular we've done a lot in the South. Steven: When you're purchasing these properties, are you raising funds from institutional investors, high net worth investors, family offices? What's your history and background on that? And what are you doing these days? Chris: Both. We've done a lot of it. We've raised a fair amount of capital from institutions, over a billion, and that's been big 90 10 joint ventures for apartment development opportunities, which has been interesting. On the Chicago deal, we launched LaTerra Capital Management, which is aimed more at high net worth individuals and family offices. What's interesting is we bought that property at a low 6 cap rate. The in place assumable agency debt is in the low 4s, so it generates an average of about a 10% cash on cash over the hold period. We've got about 5 years left of low cost fixed rate debt, so it's a really interesting opportunity. Chicago is a market that's seen tremendous rent growth, like 6, 7, 8% lease trade outs and high 90s occupancies, so it's a very strong market with very little supply. For those reasons we like it. Aimco used to be the largest apartment owner in the world. They're a great seller and they take great care of their assets, so it was a big, notable transaction. We closed on that with a billion dollar family office out of South Florida, and we're bringing in some investors post close to buy down the family office. They're happy to stay in for all of it, but we might buy them down a bit. That was always the structure we went out with. In that deal there are some high net worth investors, and we're available to talk about that in case any of your listeners are interested. It has opened us up more to that high net worth profile of investor. So it's a little bit of both over the years, and family offices too. It just depends on the deal. Steven: What are the questions that differ between institutional investors and family offices? Are their interests different? Do they have different goals? How do you determine what to go after? Chris: It's a good question. Some folks have the ability to raise $50 million in capital from individual investors based on emails and phone calls, and that's impressive. For us, generally, we don't, because that's not historically what we've done. The good thing about institutions is it's one counterparty. If you're doing a $100 million deal and the loan is 60 and you need 40 in equity, you do a 95 5 JV, and that's the source of the capital. I don't want to say the grass is always greener, because we've got some phenomenal relationships, but some of the negatives with institutions are that they're going to control major decisions, because they're 95% of the equity. They're going to want to control sale decisions, for example. The last thing you want is to be in a down market, and a portfolio manager in New York has a redemption in their core fund and says, let's sell that asset, and you're on the other end of that. That happens. With individual investors, the GP controls major decisions. That's one of the reasons people like the individual investor profile better. You can control decisions, and it's a bit friendlier. There are pros and cons to each, I suppose. Steven: Self storage. Why add self storage to your portfolio? Chris: It was a diversification tactic. We like multifamily. Self storage is an interesting asset class, with very sticky tenants. We're good at entitlements, so we were able to entitle some sites, but we also buy existing storage. The supply and demand fundamentals are good, in particular in Southern California, where the square feet per capita is attractive. Again, the tenants are sticky, rents adjust monthly, so it's a good inflation hedge. There are a lot of reasons to like it, low capex and low obsolescence. We're not going to do anything anywhere, of course not, but multifamily and storage is a reasonable and good combination. Steven: When you buy an existing building, do you ever underwrite any extra income, whether it's certain amenities, cable, internet agreements, parking, laundry? Chris: It depends on what the comps in the market are getting and what the building is getting. I'd say it's asset specific, but there's always other income. There's pet rent, there's oftentimes parking income, not always. Sometimes it's one space per bedroom free and if you get something beyond that you pay for it, like EV chargers, which is typically a revenue source. There are cable packages, there's RUBS. Yes, we do. You have to be thoughtful about it and be able to comp it out, and make sure it's supportable in the market, but we do it in a thoughtful way. Steven: Okay, I have to plug, I have a sponsor, CableNOI.com. They will look at your apartment building and what revenue you're missing out on. Go to CableNOI.com, let them know how many units you have, and they'll let you know what kind of check you could receive from the cable companies. Chris, it was great talking to you. What do you do for fun? Chris: For fun? Well, I've got two beautiful girls, a 4 year old and an almost 2 year old daughter who I love dearly. On the weekends I like to bike to the beach with them and hang out, so family is right up there. I like to travel when I can. It's hard to get away for too long too often, but I love to travel. That's probably my favorite thing to do, go to new places. I like food and wine, and I try to work out several days a week and stay healthy. We try to balance it all with the work and the kids at home, and just try to not let life pass by too quickly. Steven: Watching any good TV lately? Chris: Not as much as I would like, given I get home and I've got the kids. No, I haven't. Do you have any good recommendations? Steven: I'm in the room and my wife is watching anything on Netflix, so I'm not really paying attention. I'm on the phone, but I'm sitting there on the couch with her, spending time. She likes to watch a lot of network TV, so it's background noise for me. Chris: Me too. Nothing like kicking your feet up after a long day on the phone and catching up on emails. I get it. Steven: Chris, it was great having you. Tell our audience where they can reach out to you, any websites, emails, social media, we'll put it in the show notes. Chris: They can reach out to me on LinkedIn, Chris Tourtellotte, is probably the best. I look forward to maybe hearing from folks. It was great to meet you. I appreciate you having me on. Steven: Thank you, Chris. Thank you everyone for watching or listening to this episode of The Wealth Clock Podcast. I'm Steven Weinstock. Chris, thank you very much. Chris: Thank you.