Inside a New Private Credit Asset Class: Dog Boarding and Kennels

Steven Weinstock (00:00) And welcome back to another episode of the Wealth Clock with Steven Weinstock. I've been investing in real estate for almost 25 years. I started with single family homes, multifamily, and now I'm investing in private credit, firstly in positions. I love to speak to operators. I think this next guest is gonna teach us something pretty interesting. Before I start, we have a sponsor. This episode is sponsored by Cable NOI. NOI, Net Operating Income. Cable NOI helps multifamily owners uncover hidden income by renegotiating bulk cable and internet agreements. In many cases, the cable companies will pay an upfront fee and create an ongoing revenue share. There is no tenant billing, there's no tenant involvement, there's no disruption to operations. And sometimes they'll even give you a free account for your leasing office. If you own or manage multifamily and want Cable NOI to check your property to see if it's eligible, go to cablenoi.com. All they need is the address and the unit count. And they'll get back to you. Today we have Robert Capelli. He is the managing partner of Canine Capital Fund, a private credit platform lending into the fast growing pet hospitality and boarding kennel market. They give investors stable monthly income and operators fast, intelligent capital in an underserved niche. Niche or niche? I always say it twice because everybody says it differently. Robert, welcome to the show. Robert Capelli (01:36) Steven, thank you for having me. Steven Weinstock (01:38) Okay, Robert, I know you're in Boston at the time of recording. You guys saw a snowstorm just like us in New York. So I guess you've been shoveling the last few days. So I appreciate you coming on to the Zoom. Let me ask you, what pulled you into investing originally? Robert Capelli (01:55) Well, I was in real estate back in early 2000s, residential real estate with mortgage. We combined a service out in California, did that for six plus years and then moved into private credit for spec housing in and around the Bay Area. Was able to put 35 million together to build big houses in nice neighborhoods and then have our investors sell those and so that I've been a little bit a part of it since the beginning. Steven Weinstock (02:24) Interesting. So you have a company now called Canine Capital. That is not the letter K and 9. It's spelled C-A-N-I-N-E. Tell us about this. Robert Capelli (02:33) So Canine Capital is a private credit platform that lends specifically into the dog boarding or pet resort space. It's a space that takes up about 25 billion of $150 billion pet care space in the US on annual. And the only lender that we found in this space outside of us is really the SBA. And the SBA has a 7A loan or a 504 loan. And this is a loan that requires personal guarantees or three years of credit history or past operations. And so we found an underserved market or an underbanked market and then set about putting a private debt fund, private credit fund together where investors pool their money. And then we lend that out or we buy platform boarding kennels that fit our box. Steven Weinstock (03:22) Wow. So, when you're buying a house for yourself, there's tons of lenders out there, tons of banks, credit unions, funds, same thing with investment property, multifamily. When I think of alternative real estate, I think of self storage, parking lots, RV parks. But here we're talking about pet hospitality. This is really interesting. And I know nothing about owning a pet, but I love making money and the alternatives to making money. How did you even realize that this was a market to get into? Robert Capelli (03:57) So I've been around dogs my whole life. My grandmother raised, was a breeder of Great Danes. Famously or famously within our house, she sold two Great Danes to Rocky Marciano. She told that story over and over and over again. But I've been around dogs and dog people, if you will, for most of my life. I'll be 53 this year. So a half a century of being around dogs. And I knew that dogs specifically in the US is infrastructure to the family, right? 70 million households approximately own dogs, one and a half dogs per household. That's a lot of dogs, right? And so when we looked at getting into this space basically through pet resorts or boarding kennels, we looked at it like a motel. So you have underlying property, the real estate that the business sits on top of, and then the business rents doors, right, on a daily basis, 365 days. And so when we went into breaking down the space, we found that lending was the biggest obstacle. The SBA, like I just said a little bit earlier, is really the only credit facility and they have a cap. Each person can only borrow up to five million. And so average boarding kennel today across the US that has about 50 doors is a million and a half plus. They do great income, 800, 900,000, a million in some places with good EBITDA 38, 40%. So what we ended up looking at was, why don't we just go and start to be a lender as we're picking up these spaces and then dominate in that space. And so that's what lends us to where we're at today. Steven Weinstock (05:39) So what pushed you into the private credit instead of the equity portion of this business? Robert Capelli (05:45) Well, mainly because there's a fixed rate, fixed return, fixed term, right? We could promise what the interest rate would be based on us lending the money out and not worrying about equity on a sale down the road. And then it created a bridge, if you will, for the borrower. The borrower needs a couple years of experience to be able to get a better rate or a better package from the SBA. And so our deal was find the easiest way to get in, make the most noise, and then dominate that space. And so private credit, doing that as a fund or a debt fund with fixed term, fixed rate was the easiest, and then not worrying about having to exit anything. Steven Weinstock (06:26) Did you create this market? Has there been any other companies that are similar? I know you mentioned SBA was the only lender, but was there anything else available at all? Robert Capelli (06:39) Currently, no, outside of seller financing, seller carry, no. And that's where we found this space. We looked at the SBA does about 200 to 250 million in originations in this space annually, and there's nobody else. You may go and get a personal loan to do this, but at the dollar amount that the kennels are coming at now, that becomes much harder, right? And then you have personal guarantee, it's not really a business loan. So no, at this point, we're at the front of the table, but just like self storage, as you mentioned in the past, which has underlying real estate asset and then income, it's a dual asset property or business, we're at the beginning of it here. Steven Weinstock (07:24) So when you're lending on these kennels or pet hospitality businesses, you're also lending on the property underneath it. Robert Capelli (07:32) So we lend to businesses that have an underlying real estate asset, right? And so we want to de-risk as much as we can for our investors. And so we look for that underlying real estate asset and then that operating business sitting on top. And so we do one loan based on the business performance. And then we have step-in rights. So if for some reason they don't perform, then we can step in and operate the business and own the property underneath. Steven Weinstock (07:59) Has that ever happened? You had to step in and actually operate the business. Robert Capelli (08:02) No, not at this point. The operators in this business are really emotionally attached to the business. They know what they're doing. It's not something that you just kind of get into. And so they do really well. And then we created systems and processes to help them out, to exaggerate the revenue potential sitting at that kennel. If you think about a kennel, it has 50 doors like a motel. Then you can do extra services like grooming or training or some other services within that to increase the revenue per door. Steven Weinstock (08:36) How big is this market? Meaning I'm assuming you're lending across 50 states or 48 states. How big is this market? Is it growing? Robert Capelli (08:44) Yeah, it's growing 8% year over year. Currently about $25 billion. And then the overall pet care space is about $150 billion, projected to be $200 billion by 32. So this space is growing quite fast. Daily rates are up from $42.50 a night to plus $50. And so the dollar amount per door is increasing. And then EBITDA is, like we said, historically right around 40%. Steven Weinstock (09:14) Most of these businesses owned by mom and pops, any corporate entities own 50 kennels in three states and stuff like that. Robert Capelli (09:23) Yeah, so the majority, so there's about 10,000 units across the United States, right? And we can see this because they're commercially licensed, right? So we can get information on all of them per state. But right now you see the majority is mom and pop. I think private equity has tried to make their way into this space. But you're seeing numbers right around 30 to 40 units. And then they have hard penetration because they come in as bankers and then try to negotiate with mom and pops that don't really deal with bankers. And so they're really capped. The biggest, I guess, if you were to look at corporate would be franchising. So some of the franchises are up around 200 units now, but still a fragmented space that is prime for consolidation. Steven Weinstock (10:12) And why is it that traditional banking and credit unions have not entered into this space? Robert Capelli (10:17) Well, your credit unions and traditional banks will, and most all of them have an SBA department, right? They package up an SBA loan for business owners or such. And so they've relied on that. And it's a space that people don't really, the banks haven't really put their arms around leading up to this. We want to change that. That's why we're in this space. But we look at this as something that people know, right? There's ag banks that do cattle and crops and some of that other stuff, but you just haven't seen anybody step up and really create a product that rivals the SBA in this space. Steven Weinstock (10:55) Now if I own one of these kennels and I have a large property that's underneath the business, I could go to a regular bank and just get a traditional mortgage on the property itself. Robert Capelli (11:05) You could. I mean, you could mortgage the underlying asset, right? Say you have 10 acres, you go to the bank and whatever the value of that land is, you could borrow against that at your 70%, 80% loan to value and then roll that money in, if your loan allows for that, right? That use to build a business on top. And that would be your way of doing it, right? And then you're gonna get the terms of those loans there, but you're seeing a lot of people that don't traditionally work in that manner. And then so if you're bringing a business in, you're buying the land and then you're buying the business on top of that so you don't have that equity, if you will, to play that. Steven Weinstock (11:45) When the SBA does make loans on these types of businesses, are they also putting a lien on the property itself or is it strictly a business loan? Robert Capelli (11:53) Yeah, so they're packaging it together. They're evaluating the underlying real estate asset and then the business on top of that. You throw a business plan in there for your projections on what you're doing and then they'll lend 80%, 90% LTV. Steven Weinstock (12:07) So let's talk some numbers, I guess broad stroke numbers. The property is worth, I don't know, a million dollars and the person is doing, I guess, couple hundred thousand dollars a year in revenue and he wants to either cash out, let's say he owns it free and clear, he wants to either cash out or sell it to somebody else. When you guys lend on this asset, you're lending, I assume there's some sort of loan to value component on the property itself, and then some sort of loan to value on the business or the pro forma of the business. Is that the way it works? Robert Capelli (12:39) Yeah, so for us, we look at it a little bit different. So we try not to break them apart. The underlying real estate asset is really a backstop. We look at the business and see what the business is producing based on the amount of availability or occupancy, if you will. So it's a 50 run kennel. That's 50 doors, 365 days. You basically price that out like you would a motel and value those doors per. And then we look at the trailing 18 to 24 months that the business has produced before it changes hands. And then we create a value for that asset, the dual asset, if you will, the underlying real estate property, and then the business itself. And then we lend to that. Steven Weinstock (13:22) Do you guys lend to a new business, meaning I inherit a piece of land? I get the permits to create a kennel. I have tremendous business experience, but not necessarily in this market. And I come to Canine Capital and I call Robert on the phone and I say, hey, I got this property. It's worth a million dollars. I own it free and clear. I want to borrow X amount so I could, I guess, retrofit or build whatever I need to on top of it. And I have a feeling I could make X, Y, and Z over the next couple of years. Do you guys work with potential borrowers like that? Robert Capelli (13:58) Currently we don't. Currently you either have to be an owner-operator and then creating a multi-unit, right? So you're adding to your portfolio or you're buying an existing business. That's how we judge it based off of really the business and the cash flow that comes through there. Because then we know that our money is not at risk. Steven Weinstock (14:17) How do these borrowers find you? If this is such a new or niche product, how do they find you other than this podcast? Robert Capelli (14:26) No, this podcast is great. Word of mouth, really, because it's such a space that doesn't have a lot of traffic, if you will, right there. So there's not a lot of advertising or such into that space. We've done a couple of things with bringing people into our fund that have done a lot of origination with the SBA and have contacts throughout. But really, it's word of mouth. Once people know that there's a lender outside the SBA. So SBA probably turns down 60, 70% of loans in this space. And so you have that all floating and then you have about 200 million in originations annually. And so there's a good amount of traffic and that's where we're really starting to make our way is that word of mouth and that alternative. And people are starting to look at us as a bridge, if you will, right? So we do a three year interest only package and then that will give them enough time to really build up their credit and become a better borrower, if you will, for the SBA. And then they just roll that thing into a 25 year or 30 year loan. Steven Weinstock (15:34) Wow, I'm in this business 25 years and when I spoke to you a little while back, this was a totally new concept that I never even heard of. It's so interesting to speak to people and learn something new. Talk to me about how do you get your money to fund these loans? Are you raising capital from private equity funds? Do you have a rich uncle that just wants to make money and they love dogs. Robert Capelli (16:01) So, I mean, we have a Reg D 506C, and then we run through custodians, self-directed IRA custodians, right? And then that's where the bulk of our money comes from. A lot of them are dog owners, right? And so they didn't, just like you, didn't really know that this was a space. And then they look at rolling over their traditional IRAs or their Roths into our fund and then we lend that money out and they have a fixed return, right? A lot of those people, I would say 85% of them are dog owners and have experienced a kennel stay where they go away for a weekend and they write a check after the weekend and their dog got a bath and everybody's happy, great experience. And so they feel like they're investing in something that they know. We'll open up a Reg A here to non-accredited investors in the spring, and that'll bring on another 75 plus million on an annualized basis. Our team is based out of, came out of Boston, the traditional retirement houses, if you will, Fidelity, Merrill Lynch, Morgan Stanley. So we understand this space. We act as much as we can as an investment office and then an operations site. Steven Weinstock (17:13) So I run a private credit fund for real estate purchases. And we spoke about this offline, but I invest in first-lien positions on mostly one to four houses, one unit to four unit houses, mostly in New Jersey. And I come from an equity background where I've raised capital to buy multifamily in the past. I've raised capital to buy some retail and office space. And some of the feedback or pushback I get when I explain to them what investing in private credit is, they ask me questions like, what about the tax benefits? What about that big pop at the end when the property triples in value over the years? And here I have to explain to my investors or potential investors that we are the bank. We are lending just like the bank. And we have a set defined terms. We're getting 12 percent, 11 percent, 14 percent. We're getting paid monthly for the most part. And we distribute the returns to our investors that way. And we have nothing to do with really the operations. And if the person's renovation plan goes haywire, yes, we care. But at the end of the day, the mortgage is due on the first of the month. And do you ever run into these types of questions or pushback from potential investors who are maybe used to hearing about or investing on the equity side? Robert Capelli (18:44) We do. And we chose and we did this strategically to not offer equity because it takes a while. And then you need an exit. You need an event to be able to realize that. And who knows what the market's going to be like in a year, two years, three years, four years down the road. And so our investors look at us as like a fixed income fund. And so they give us their investment, that investment has a guaranteed rate of return that we offer back to them. And then we lend that money out at a higher rate and then live off the spread as a GP. And then for the majority of our investors, they come in and then they roll over their IRA into a self-directed IRA through one of our 15 custodians. And then that money has the tax benefits of a regular IRA. And so it's a, they understand it once they hear or they're educated through it. So it's not really new to them, right? In that sense, it's just pointing that IRA that they had with Fidelity or Vanguard or Betterment in a different direction, right? And then they get a return that they're happy with. Steven Weinstock (19:50) So, when I used to raise money for the equity side, most of the money that I would raise came from taxable dollars from the investors. Every once in a while, I'd have an investor that would write a check from a self-directed 401k or an IRA. And they never cared about any of the tax benefits of owning investments on the equity side. They never cared about, in fact, they never even cared about the K1s. I have some investors that are calling about the K1s on January 2nd of the year already. And it seems that these investors that were investing with their retirement fund didn't get the benefit as much as some of my other investors got. And now that I'm raising capital for my fund, which doesn't have equity, my retirement fund investors are, I guess, enjoying this a little more than my taxable monies that I raise. And are you focused on raising money from retirement funds because of this aspect? Robert Capelli (20:51) 100%. So we're, I mean, that's why our team was chosen out of Boston. Boston really is the hub of retirement accounts, right? Fidelity being the mainstay here. And so our Reg D is for accredited investors, allows us to advertise, right? And talk about our fund openly. But really it's a gateway into them rolling over their retirement savings into a custodian and into us. And that provides a fixed income, provides the tax benefits that are there, and then we don't have to worry about, again, an equity event to happen for them to return capital or their benefit of that investment. Steven Weinstock (21:30) Talk to me about AI. Everybody I speak to is using AI. Some people are just using it to help them write emails. Some people upload PDFs and ask for a quick summary. But tell me about Canine Capital, about Robert Capelli. How are you using AI in your business today? Robert Capelli (21:48) So I do have a background other than real estate in creating software for the public use. I did that in San Francisco as a director of business development for a real time technology company back in the early 2010s. And so when we looked at this, we look at AI in a manner of being another worker, another asset, another benefit to our company. We trademarked and built or are building a proprietary agentic AI, which is an AI that runs by subagents by itself, does multiple tasks, underwriting, values the property, has an understanding of what lending is like through the SBA, through the FOIA, right? So we can get access to every loan that runs through FOIA and we do a continuous understanding of the market. So we track customer sentiment through Facebook and through Instagram on these kennels that borrow from us and kennels that don't borrow from us to see what the customer is looking at. And so we call them Kenny, short for kennel. We trademarked them and it's basically an underwriting system. It's infrastructure for private lending into this space. And as moving forward, it really will do edge lending, underwriting for edge lending. So teaching it the new asset class, and then it will be able to underwrite and understand the borrower better than anybody else. And it allows for us to process very quickly. We're a seven day turnaround. As long as you have your paperwork in order and the business has been operating for 18 to 24 months, we can give you a decision and fund within seven days. And that's all because of AI. Steven Weinstock (23:23) When I raise money and I try to explain to my investors where their money is going and what securing it, for the most part, the biggest impact that I tell them is that it's a first lien position on the property and the loan to value is, let's say 60 or 65%. So, in the worst case scenario where we would have to foreclose, if it's a million dollar property with a $650,000 loan, I don't have to sell the property for a million dollars. I could fire sale it for the 650, maybe a little more to cover some mispayments and legal fees. But you're lending not just on the property, you're lending on the business. So when a potential investor is asking you what secures the investment, obviously part of that answer is the asset, the property, the land itself, but you have to explain to them the actual business model and the potentials of these kennels or pet hospitality. And do you have people who are asking tough questions and really get in the weeds of the business itself? Robert Capelli (24:31) So not as much, to be honest. So we take a first lien position, right? So we're not secondary or subordinate to anybody. We also have a daily sweep that we implement, right? And so these guys, so think about revenue-based lending, right? What used to be called factoring. We don't factor, it's not on there, but we create a daily sweep through their point of sale, because this is a 365, right? And so we cover ourselves a little bit in that. And then every lending package that we put forward has step-in rights, right? And so when some traditional loans would not perform, you would foreclose and maybe sell and recoup, right? So LTV is really important. Our deal is we, because we understand and we have an operational side of our business, we just step in and take over the business and own the property. And don't have to sell that and then we just keep servicing the loan that was on that property like it was the original borrower. Steven Weinstock (25:34) Tell me about cash sweep. I'm familiar with factoring, these days some call it cash advance, where you have access to their, like you said, the point of sale. So just to make numbers a little easier, let's just say their payment to you guys is a thousand dollars a month. And after three days you're able to sweep the thousand dollars. What happens after that? Do you just stop sweeping for the month or do you hold on to all the revenue and then give them back the change? Robert Capelli (26:02) So depending on what loan, so if they have a three-year term, right? So that's our larger loan where they're buying an operating business, underlying real estate asset. That loan will be anywhere between a million and a half to up to two and a half million on average. Or if they're doing some refurb, right, they're doing HVAC or they're adding occupancy to the existing building, that loan would probably be somewhere around 150, 200. We'll space it out. If we take our $1,000 in this example in the first three days, then we'll pick it back up once the note recycles for the next month. So we're taking a percentage. So if they make $100, we'll take 35 of that dollars every day until our monthly is met. And then we'll pick it up starting the next month. Steven Weinstock (26:55) That's very interesting. So you really have control over their cash flow and really securing your investment to keep your investors secure. That's very interesting. What kind of returns can investors make when they invest with you? If you could share that. Robert Capelli (27:09) Yeah, so right now we offer a 14% return on monies in, and then we charge a 1.5% management fee on top of that. Depending on where you come in and the amount you come in, we have some preferred status on those management fees. But it's a standard 14%. We ask for a three-year hold and then you can recycle that money. We pay out monthly on that 14%. And then at the end of the three year term, you can either reinvest that money or cash out. Steven Weinstock (27:41) What most excites you about this niche long term? Robert Capelli (27:45) The 70 million households that own dogs, to be honest with you, right? 70 million households, 10,000 units across the country that service these households. We're probably six hundred, seven hundred fifty thousand doors behind to service this market. So the growth is there. The humanization of dogs, right, people thinking their dogs are their kids is just growing. It's above 90 percentile now. On average they spend about $2,500 a year on those dogs at minimum, right? And so the money is much more infrastructure, the spend if you will, is much more infrastructure than choice. Nobody goes to a motel to stay. They use a motel because it's a service, right? They're traveling, it's late night, they have to do something. You go to a hotel to have an experience. Same with dogs. Dog kennel is a service. You go away for the weekend. It's not pet friendly where you're going. You have a death in the family. You have to go. You have a work trip. You have to go. If you don't have somebody that can take care of your dog, you're going to bring them to the kennel. And it's a service. The service is 70 million households. And we think that that's strong business to build around, create infrastructure around that. Be a preferred borrower or preferred lender to the borrowers. If they choose not to use the SBA or don't qualify for the SBA, we pick up that and we look at doing 200 to 250 million in originations a year moving forward. We'll probably do 75 this year. 27, we'll hit that 200, 250 mark. Steven Weinstock (29:23) In your experience, what is the fastest way that some of these loans can go bad? Not necessarily with your fund, of course, but just from your experience in this market. Robert Capelli (29:34) I would say the fastest way for money to go bad is not understanding what you're lending into. And that's why our investment in AI or into Kenny is so valuable to us. We can see it and then it's a continuous monitoring of that. So if things are changing in the market or sentiment is changing into that business through Facebook or Instagram as we follow what the customers are saying about that business, we kind of shield ourselves from that risk. But really it's not knowing what you're lending into or thinking that you, I guess the best way to say that is knowing what you don't know, right? That's where we're at. Our biggest deal is to know what we don't know and then get smarter at it, create technology in and around it, and then build a team that can facilitate that on both sides, can bring in capital and then can deploy that capital. Steven Weinstock (30:25) Robert, this was great. I really learned a lot, but mostly you taught me and everybody listening about this new asset class that exists. Tell everybody here how they can reach you, your social media, phone numbers, whatever it is. I'll put it in the show notes, but let's hear it. Robert Capelli (30:42) Yeah, no, I appreciate it. Thank you for the time. And again, we look at this as what self storage and trailer RV parks were a little while ago, even multifamily. It's just another real estate asset class that's now coming to market. And so you can look at us or come visit us at canineinvestments.com, read about our fund. If you're a borrower in need of a loan in this space, you can visit us there. We're on LinkedIn at Canine Capital. And then we're at Facebook at Canine Capital Fund as well. We post some information. We try to educate the space. But it's a growing space. If you love dogs or you know somebody else that loves dogs, it's a great space to invest into. It's perfect for self-directed IRA. As you move forward, it's fixed income. So we encourage anybody that's interested in that to reach out to us. And at worst, we'll give you a conversation and you'll walk away a little more educated than you were before that. Steven Weinstock (31:38) Okay, Robert, this was a great conversation. What I like most about this is that it's not necessarily chasing yield, but predictable outcomes. And for a lot of investors, that's what they want. Yes, that big pop at the end sometimes when a property does double or triple in value is great. Some of the tax benefits are great over time, but we have lots of investors on my fund that really just want a predictable outcome. And investing in private credit definitely helps with that. Robert, it was great having you on the episode. Another episode of the Wealth Clock podcast with Steven Weinstock. We are all over YouTube, Spotify, Apple Podcast. Please like, subscribe, share. And if you know anybody who can be a great guest on the podcast, please leave a comment or reach out to me. Robert, thank you so much. Robert Capelli (32:34) Steven, have a great day. Thank you for having us.