EP324 : Why Physicians Are Co-Investing in $55M Deals with a $12B Real Estate Giant

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Hey guys, this is Dr. Mike Wuang. Welcome to another edition of Bootstrap MD, the podcast for physician and healthc care entrepreneurs. And I'm super excited to have on the program a gentleman from a large US real estate firm.

has been around for decades on there and they recently launched a new direct to investor platform that's designed to give individual accredited investors access to institutional grade CR deals and he's going to talk all about it. We're going to talk about entrepreneurship. We're going to talk about investing and I'm just excited to have on the program his name is Jonathan Spitz. He's the head of capital formation at Lightstone Direct where he leads investor education and outreach for the company's direct access commercial real estate platform.

He has more than a decade of experience in private real estate. And John has worked extensively with financial adviserss, family offices, and highincome professionals, i.e. physicians to make institutional grade real estate more understandable and accessible. So I'd like to welcome you to the program, John, and thanks for coming on.

>> Oh, thanks for having me on, Mike. I appreciate it. So, let let's talk about it because some people have heard about Lightstone, but they've not heard about this new platform called Light Stone Direct. Maybe we can just kind of talk about Lightstone in general.

You know, what got you started in the company and why should be physicians be interested in your company? >> Yeah, so Lightstone, we've been around now for going on 40 years. We started in 1986. So, our founder actually bought a duplex in Lakewood, New Jersey using credit card debt back in the 80s when that was something that was actually possible to do.

>> Don't advise to do that now. >> Yeah, I don't think you can do that now. But, you know, since then, we've grown into a 12 billion private equity real estate company based in New York City. We are a fully diversified, vertically integrated platform.

We invest across a number of different asset classes. We own about 25,000 apartments, about 12 million square feet of industrial space. We own about 5,000 hotel keys. So, you know, we've really been doing this for a long time.

And what's unique about Lightstone, though, is we're really more of a family office. And what that means is that of the 12 billion in assets that we manage, most of that has been capitalized using our own balance sheet. So, we haven't really spent a ton of our time raising outside capital. Yes, we've raised institutional capital doing joint venture deals.

We raised some private non-traded REITs in the early 2000s, but by and large, most of our AUM is been investing our own capital. So, our founder, David Likenstein, bought that duplex. And we are the largest shareholder in every single deal that we do. And we think that's a really important distinction to make in the real estate environment today because over the last couple years, look, I'm not going to sugarcoat it.

It's been a challenging time to invest in real estate. And we've all, I think, heard the stories or maybe been a part of deals that haven't worked out as planned. And, you know, when we look by and large at what our core differentiators are and what led to a lot of those deals going south, it's really one of two things or both most of the time. Usually dealing with managers that maybe aren't as experienced, haven't invested across multiple market cycles, or managers that didn't have any of their own money in the deals or just very little of their own money in the deals.

And that's really why we decided to launch this platform is because we know that we can provide a better offering in that we have a very experienced team that's invested across multiple market cycles. We have a very strong track record and we put our money where our mouth is. We invest a minimum 20% of the equity into every deal that we do. So that's anywhere between five and 10 times the amount a normal manager invests alongside their LPs.

And so I always think back to this Charlie Mer quote. It's show me the incentives and I'll show you the outcome. And again, that's why you want an alignment of interest with the managers that you're investing alongside. And that's really, I think, our core distinctions that we bring to the table.

I think now is just a really good time to be thinking about real estate allocations as an investor and just a really good time to bring this type of product to the market. Yeah, that's a great So, you know, I've worked with physicians. Many of them are investors and when they think about real estate, you know, the first thing they think about, well, I own my own home.

I can rent it out or I can buy a multif family. But when it comes time to commercial real estate, you know, they may not have much experience about that. So, how should they be looking at maybe they have their own practice, but now they're starting to think about these kind of things. What kind of advice do you have for a physician who knows that they need to diversify their income?

They're looking into real estate, but they're not really sure about commercial real estate, especially as you mentioned over the last few years where we're seeing some challenges in that space. >> Yeah. So, I've been working with physicians for six years and investors that own their own businesses, some that still works. And I think the first decision that any whether you're a physician that owns your own business or not is one, do you have the time, do do you want to own real estate directly or do you want to own it passively?

And some people just really want to be able to touch and feel and want that element of control over an investment. And if that's you and you have the time and you want to get your hands dirty, like go for it, right? There are opportunities. I would just say also just when it relates to commercial real estate specifically, that's a very broad term.

I won't throw multif family in that category for now. But when we're talking about commercial real estate, it's are you investing in retail? Are you investing in office buildings? Are you investing in industrial?

And depending on which if you look at the performance of each of those asset classes under commercial real estate over the last decade, they've been wildly different. Like if you've invested in office, you've probably lost money, right? If you've invested in industrial, you've probably done very well. And if you've invested in retail, you've probably started to do really well over the last couple of years.

And so your outcomes can largely depend on what asset you're investing in and at what point in time you decided to invest in that asset class, right? And so now back to your original question, which is, you know, how to think about these one, one, do I want to do this directly or passively? And but if you're doing it directly, commercial real estate is a much different animal as opposed to owning a maybe a forplex or multif family building from in terms of how you manage it as ter terms of how you source the tenants in terms of what the risks are.

In commercial real estate, there's you generally no matter what are going to have some type of concentration risk across tenants. Meaning let's say you own a 100 unit apartment building, right? Each tenant makes up 1% of your rent roll generally speaking, right? So if you have some vacancy, you know, a little bit, it's not going to necessarily impair your cash flows.

The difference in commercial real estate is that usually you have concentration risk among tenants. So as an example, I'll just use a deal that we're doing right now. We have a six tenant industrial park in Greenville, South Carolina. Well, each of those tenants make up between 10 and 20% of the rent roll.

So if you're not strategizing one, how do you keep that tenant? So, what we call tenant retention or how you're planning to replace that tenant if you expect them to leave and you're not doing so well in advance, that can significantly impact your cash flow, potentially the value of that building. And again, if you're not well capitalized, your ability to hang on to that building. So that's why in commercial real estate, if you do decide to invest passively, you want to be looking at managers who've done this before multiple times, have a successful track record of execution in whatever strategy they're doing.

And what's important about that specifically is that they've done that exact strategy that they've invested in before. As an example, what we saw a lot in the last cycle was people that yeah, they've invested in multif family before, but maybe all they had been doing is value ad and now they're venturing off into development. totally different beast. Or maybe they only invested in class A and now they wanted to do workforce housing.

Totally different beast. So there's nuances to all of these various strategies. So I would just say that, you know, make sure if a manager is showing you a deal, not only do you want to understand their track record, you want to understand their track record within that specific strategy, maybe even within that specific market. because sometimes there are nuances to maybe they've only been investing in Texas and now they're venturing to invest in California, which is a totally different animal in and of itself.

So these are just the nuances that you want to be cognizant of as you're evaluating managers if you're doing so on the passive side. >> Yeah. And not to mention access being involved in these projects. Physicians make a good chunk of income on there, but you know, a lot of these projects are out of reach for most individual investors.

So let's talk about CRA and you mentioned you guys have the experience and knowledge. What are you forecasting over the next decade? What should we be looking at in terms of potential investments areas? >> Yeah, I mean I think what we expect is really we do think that we are starting to enter the beginning of the next real estate cycle.

I think the big difference between what we experienced from let's call it 2012 to 2022 and what the market will be like going forward is what will create that outperformance. What we saw the previous decade was a time of structurally lower interest rates. So interest rates just kind of going down perpetually over 10 years. What that ultimately led to was lower cap rates or higher values for real estate more broadly.

Regardless of what you were doing to execute it or add value to a specific project, you saw a lot of capital pouring into the space as interest rates went lower, which pushed up valuations. What that did during that period was even if managers tended to make mistakes, they would be largely mass over by just the tailwinds that the market was providing, that market driven appreciation. We think we will continue to see a little bit of that in this next cycle, but we do think that this is going to be really a stealing this phrase from chief economist over at BGO.

His name is Ryan Severino. You know, he calls this the golden age of asset management. And I think what he means by that is what's going to separate managers in this next cycle are those that know how to add value throughout the process. So, how are you making money on the buy?

How are you making money in the ways that you can use creative financing? How are you asset managing? So, we talked about that a little bit. What leasing strategies are you employing to be able to raise rents to market?

How are you securing really strong quality tenants? And then ultimately, how are you thinking about your exit strategy? Because interest rates are already still pretty low when you look at from a historical perspective, right? You know, the 10-year Treasury yield, which is what we benchmarked largely is where cap rates are benchmarked to in a way, that's been hovering around 4%, which over the long term is still relatively low.

The Fed's starting to get a bit more doubbish and we're taping this on December 11th of 25 and the Fed cut interest rates 25 basis points. So there's definitely more liquidity coming back into the overall system which should be favorable for interest rates, but I wouldn't expect interest rates to be they can't go significantly lower from here, right? They maybe go 50 100 basis points. So what that's going to mean is it's got to be active management is where that value is going to come from.

Now what we do have is a much more favorable backdrop for supply demand across certain asset classes. So what that means is that this recovery that we're starting to experience is going to be probably pretty uneven. Meaning as an example, we've already seen multifamily and industrial valuations pull back 20 to 30% depending on the market and depending on the quality of that asset. And largely what created that pullback was yes higher interest rates going up but we also saw a lot of supply in both of these asset classes which put pressure on fundamentals meaning rents stopped going up like they had been right and or in many cases they were falling.

So you had higher interest rates and falling rents. That's not a good recipe for valuations. But valuations have now largely reset to this environment of higher interest rates. And so at the same time, the backdrop of supply now looking ahead is very favorable because higher interest rates resulted in less construction and development over the last three years.

And so you have less supply. Demand has been really really persistent across both multif family and industrial. Which means if you have strong demand, falling supply, that means rents will grow. And so we think that is going to be sort of the tailwind for the market over the next, let's call it, five to six years as opposed to multiples expanding because cap rates are falling.

And again, I know that's a a lot to understand as far as what's going on there, but we just think that we're going to have growing revenues and investors entering today are starting at entry points of higher cap rates and and better going in yields and cash flow day one that you could get two, three years ago. So as I mentioned you know our audience are physicians they might be new to the game. What are some missteps or maybe misconception of doctors when it comes to commercial investing?

>> I think the biggest misconception is when especially when we're looking at we focus predominantly in what we would call class B industrial real estate. So these are buildings that were generally built in the 80s 90s early 2000s. These buildings are not occupied by the Amazon of the world or these big massive credit tenants that you've heard of. Like when I think of industrial real estate, most people think about the big Amazon fulfillment facilities or you know the Targets of Walmarts of the world of these massive warehouses.

And yes, that is one big part of the story, but there's also these older warehouses. When you look at the rent role, they're businesses that most people have never heard of. And I think the biggest assumption that people make and rightfully so I get it is well I've never heard of these businesses which means they must not be good businesses and that this deal is inherently more risky and that can be true right and that's ultimately why we like this space so much is because the market generally prices it as more risky than let's say an Amazon fulfillment for facility but that's really where we add value again when we're looking at the rent role of a specific building when we look at these business along A lot of these businesses have been around a long time.

We get access to tenant financials. They're very healthy businesses, strong revenues, very diversified customer bases. They're just not businesses you've necessarily heard of. Some of them may sit at the backbone of the supply chain or maybe just more serve the local economy as opposed to the national economy.

But that doesn't make them subpar or lowquality businesses. And again, that's where we think the edge is. the market may view that as more risky, but again, we view that as opportunity. That takes some conversations and again because it's new.

Most physicians maybe they're more used to multifamily where this is just not part of their typical evaluation process is having to think about the stability of a tenant of a business they've never heard of. And so that's usually where we need to talk about what that due diligence process is on our end to ensure that these are tenants that we see as potential long-term fits for a business or if they're not, why we think we would be able to lease that space in a quick manner that would still make the investment a good one. >> I like to now focus on Light Stone Direct.

What is that? Some I don't know how much experience doctors have with direct platforms. Maybe you can explain how that all works and what can they expect when they reach out to you? How does that look?

>> Yeah, so Whit Stone Group is the parent company. It's the company that we talked about. It's a 12 billion organization. While Direct is our platform that enables individuals to co-invest in the same deals that we are pursuing with our own capital.

So, what's unique about the way a typical asset manager or a syndicator works is they find a deal, they go out and they raise all of the capital, and then they close on that deal. Right? At Lightstone Direct, what's really unique is all we're really doing is opening up our deal pipeline and enabling individuals to co-invest in the same deals that we are going to do regardless.

As an example, our Abernathy multi-tenant industrial project, we closed on this deal three weeks ago. was a $55 million deal. We wrote a roughly $25 million equity check and now we'll go out to raise that capital, but we don't know how much we're going to raise. And so that just tells you the type of conviction we have in the deals that we bring to investors.

And the difference that we have is that unlike whether if you are accessing private real estate through maybe your advisor or a crowdfunding platform, the big difference with us is that you have direct access to the manager. So you are dealing directly with Lightstone. I work for the company. I'm not paid a commission or anything like that.

So our job and our team's job at Lightstone Direct is make sure that we are providing that education for investors that are considering private real estate because I think the challenge that I see most investors encounter is whether you're a physician or an entrepreneur, most people have day jobs. And so when we provide a private placement memorandum or an operating agreement or investment deck, that's a lot of information to digest. And so you have the ability to access our team directly to walk you through the details, answer any questions you have, understand what are the real risks in this deal so that you can make really an informed decision.

And I because at the end of the day, if you decide to invest with us or any private real estate manager, you know, it's a long-term partnership, right? you're going to be invested with that manager, whether it's us or someone else, for generally three, five, six, seven years. And so you want to know what you're getting into that you can so you can feel good about the investment, sleep well at night.

And for us, that also means that you have direct access throughout the investment period. So for us, it's really about building a long-term partnership with our clients and investors and being able to talk to the people making the decisions on their behalf. So I think that's a big difference with a direct firm like Lightstone and there's others out there. We're not the only one in the space versus maybe going through a third party.

>> So what can they expect when they reach out to you? How does that work? How do you assess the investor? What are the steps that they should be aware of?

>> Yeah. So I mean the first step is you can go to our website. It's lightsirect.com or you can contact myself. My email is J Spitz first initial last namestonirect.com and do you qualify to invest in our offerings.

So we are what's called a regggd506c and all that means is that we can work directly with accredited investors. So that's someone that makes at least $200,000 a year in income individually, $300,000 a year jointly or has over a million dollar in net worth excluding your primary residence. So if you qualify for that and most physicians and entrepreneurs do that's kind of the first step and then from there we would provide our offering documents.

So it would be our investment deck our private placement memorandum the operating agreement and then usually we set up a discovery call and through that discovery call it'll be myself or my colleague Storm Murphy and in addition to you asking us questions we're usually asking you a lot of questions as well. We want to understand what are your goals? Are you looking for income? Are you looking for appreciation?

How important is liquidity to you? What is your investment time horizon? Like all of these things are important for us helping assess whether this is a good fit for you. Because sometimes when people say, "Look, I'm not comfortable with my money being locked up for more than a couple months.

Like this isn't going to be the right fit for you." Because our investments are generally pretty ill liquid. We're generally our investments are anywhere from three, four to five years. During that time, we pay distributions of usually six to eight percent. But if you wanted to redeem your investment, it's not possible until we sell the investment, you know, again, three to four years out.

So, and then it's understanding, are you looking for cash flow or are you looking to take a lot of risk? So, what I've learned for doing this for so long is everybody is different in this regard as far as what your personal preferences are. really that's what we want to make sure that we are aligned on is what the expectations are as far as how the investment works and what the risks are and then whether it's a good fit for you but then also you know like we're there to answer any questions you have and some people are really detailed in this regard and if you provide detailed answers we want to provide detailed feedback as well.

So that's the process. And then if you decide that this is an investment that you're interested in doing, you fill out a subscription agreement. We take funds immediately. And in fact, right now, we're offering an early funding incentive where investors can earn almost 6% on their money because our actual deal won't be closing for several months.

And so there's a really interesting opportunity which I'm happy to talk about with anybody individually. But that's the basic process and how it works usually. >> Awesome. Is there anything else you'd like to mention before we end the call today that they should know?

>> Yeah, I think the most important thing investors can do if you are thinking about investing passively, you want to evaluate the manager probably more than you do the actual underlying real estate deal. So, you should look at both and through a very detailed lens. I can't emphasize enough how important it is that you understand who you're investing with, what their track record is, how much are they investing alongside you, how are they structuring this investment as far as how much debt are they putting on the property?

Because I see a lot of people get, you know, they'll send like, "Hey, your deal is only doing a 15 IRR. I'm looking at this deal. It's going to do a 20 plus irra." and I'll look at the deal, they'll send it to me and I'm like, well, look, they're they're borrowing 85% of the purchase price or 75%. That's a lot of leverage.

And so, understanding what the risks are in the deal, how they're mitigating those risks, what are their risk management practices. So, I can't emphasize that enough. And even if you decide to set up some time with us, like please ask the hard questions because I think it's really important that whether you're a physician or an entrepreneur or any investor that you really understand who it is you're investing and how qualified they are to be managing your money.

>> Jonathan, I thank you for your time today. This really opened our eyes to commercial real estate. And for those who want to reach out to them, we actually have a special link. Go to lightsstone.comdpn.

that lets us know that you heard about us through my podcast and through the Dr. Podcast Network. They are a sponsor of our program. So, please check this out if you're thinking about commercial real estate.

I think these would be a perfect opportunity for you. So, Jonathan, thank you so much and thank you for your time today. >> Yeah, thank you Mike. This was fun.

>> Awesome.