Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - A Deep Dive Into Multifamily

Marcia Cuenca
October 26, 2022
Podcast - A Deep Dive Into Multifamily
We own an asset that people need. If you look at the 1, 2, and 3 things people will make sure that they pay. It's their rent, car payment, and probably getting their new iPhone."

- Jon Venetos, Founder & CEO of LURIN

In this episode, Jon Venetos shares his transition from the hedge fund world to real estate and the founding of LURIN. He shares his approach to increasing interest rates and optimism in the current market.

About Jon Venetos

Jon founded LURIN in 2016 and serves as CEO and General Partner of LURIN. Previously, Jon was Senior Managing Director and Head of Surveyor Capital Ltd at Citadel LLC. Surveyor Capital is a global equity, long/short multi-manager strategy. From 2009 to 2016, Jon was a member of Citadel’s Investment Committee.

About LURIN

LURIN, a real estate investment firm headquartered in Dallas, Texas, acquires stressed and distressed Class B and C multifamily assets, along with Class A first generation, value-add opportunities in growth markets in the Southeast. LURIN typically targets markets that benefit from strong employment growth, limited supply, and a favorable economic and political environment with a growing population and good quality of life.

Links

Jon Veneto's Linkedin - Click here

Learn more LURIN - Click here

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Transcript

Adam Hooper (00:03) Hello and welcome, I’m RealCrowd CEO Adam Hooper, and this is the Real Estate Investing For Your Future podcast. Here we explore the latest in commercial real estate trends, insights, and investment strategies that passive investors can use to build real estate portfolios that last.

Disclaimer (00:21) All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions to gain a better understanding of the risks associated with commercial real estate investing. Please consult your advisors.

Adam Hooper (00:42) Our guest today is Jon Venetos, founder and CEO at LURIN. In today's conversation, Jon discusses his transition from the hedge fund world to real estate, his approach to hedging rising interest rates and what he looks for in a multi-family market. Be sure to check the show notes for links to learn more about Jon and what he's up to at LURIN. We hope you enjoy today's episode with Jon Venetos.

Adam Hooper (01:10) Well, Jon, thank you so much for jumping on the show today. We've, worked with you guys for a number of years and we appreciate you taking the time to talk to our listeners a little bit about LURIN and your take on the current real estate market. So why don't we jump in and tell us a little bit about, what you guys are up to at LURIN and how you got into the real estate space.

Jon Venetos (01:28) Sure. Yeah. So, we started LURIN in 2016, I spent the first part of my career not in real estate, but actually in finance. Specifically, the last 10 years at a large multi-strategy hedge fund called Citadel, where I ran a business in focus on fundamental equities. And so, it's a bit of a pivot to end up in real estate today. And I got to that position because my family's been in the multi-family real estate business for 60 years. And so, I grew up around that and was forwarded the opportunity of kind of seeing my family build their real estate business and was pretty interested in it and actually felt like, 20, 25 years in finance, I'd accomplished a lot of the things I wanted to accomplish and was looking for a new challenge. And that culminated with kind of starting LURIN initially with the concept of more of a family office. But then really quickly shifted towards focusing purely on real estate and even within real estate, focusing on distress and stress, value add opportunities in the multi-family space.

Jon Venetos (02:53) And so from my perspective when I kind of looked at the opportunity set. I saw a really inefficient market in real estate and specifically in the multi-family space and felt like there was a significant amount of what we would define in the fundamental equity business is alpha. And so, the opportunity to extract, outsize returns with. Relatively, manageable amount of risk was far greater in real estate than it was in say, public equities or other asset classes. So, for me it was a bit of an interest since I was a kid, to also just the investment opportunities that really resonated with me and kind of demonstrated there were a lot of inefficiencies that could still be gleamed out of the market.

Adam Hooper (03:59) And I'm curious, what are some of the lessons learned in your career on the hedge fund side of the world that you've carried over into what you're doing with LURIN and what's different or what didn't you expect when you made the switch into the real este.

Jon Venetos (04:16) That's a really good question actually, and one that I think is like a cornerstone of what we're trying to do here at LURIN. There are a number of things that I was exposed to during my kind of what I would call first chapter of my career, that are extremely applicable to real estate and candidly just aren't taking advantage of in the real estate space and a couple of those things, are on the data side. From an analytical perspective, the vast majority of how people make decisions. Whether you're talking about setting rents to acquiring properties, to understanding the competitive landscape, to servicing your residents. And your clients, data's just not at the forefront of what people do in the real estate space. And to me, what I did in my first chapter of my career, that was paramount to what we did. And we really tried to take some of those lessons learned and apply them to the real estate space.

Jon Venetos (05:40) And I think on top of that from a capital markets perspective, which is very relevant right now, again, in an industry like real estate, there hasn't been as much focus in my opinion, as there has been say in the hedge fund space on kind of asset liability mismatches and thinking about structuring your, investments  with more of a capital markets focus than it is purely just a, I want to buy this apartment complex and I want to value add renovation, that that's the simple business plan. But then you've got to actually structure, the financing around that. And, and when you look at things like very relevant today, interest rate caps, something that we were very focused on, 2, 3, 4, 5 years ago when we started. Was making sure that we, even though we had floating rate debt and rates were going one way, which were lower, that at some point rates were going to go higher. And so, we were very focused on capping our interest rate risk. Something that was super surprised to hear was an exception versus a rule. I think a lot of our competitors bought way out of the money interest rate caps that today are getting close to being in the money. But we were fortunate that we bought much tighter strike rate, interest rate caps that pretty much locked in our financing over the foreseeable future. Now it's not in perpetuity because we don't have financing that's in perpetuity. But at least for the term of our investment, we've got a pretty good, structure in place in terms of financing risk. I think that's one. Another example. I think the other piece is just lack of investment in the real estate space in what we call human capital or people operations. And so, when you look at the competitive landscape, just not the same level of investment in the development, education, career progression of individuals.

Jon Venetos (08:08) In the real estate space like there is in finance or in the hedge fund space. Obviously, you hear this term all the time, right? Your single biggest asset in finance is the people that go up and down the elevators every day. I think that is probably not to the same extent true in real estate, but it's a pretty close second, right? Like you obviously have an asset that's got a value to it. It's got brick, it's got land value and it's got infrastructure and things associated that create its asset value. But both the people who operate your property, the people who support your properties, the people who reside in your property, the community, are all paramount to the success of that asset. And I think, again, as being an outsider in the first part of my career and then becoming now an insider. It's one where you look and say, wow, this is a hugely inefficient space. If you invest in your people, and you develop them and you think about career progression and ultimate, sources of success both monetarily and non monetarily, like ultimately that's a huge competitive advantage. So, I think those are some things that we've tried to gleam and apply into the real estate space.

Adam Hooper (09:32) Yeah, and let's maybe take a step back to talk about the interest rate caps for listeners out there that are relatively new to the space, a lot of us have been used to this environment that's a very low-rate environment, right? And as you said, kind of trending downwards. And now we are recording this here in the middle of October. That's absolutely not the case anymore. So maybe talk a little bit more about what does that mean interest rate cap, how does that factor into the financing of a property and then generally, how the financing landscape has changed in the environment today. What are your thoughts there? And we'll maybe ask you to crystal ball a little bit. Where do you see that going?

Jon Venetos (10:14) Yeah, so, there's two ways that you can, generically speaking, there's two ways that you can finance a project. You can do it through floating rate, debt, or fixed rate. The vast majority I would say this cycle has been through initially, through floating rate debt and then rolling into, either a floating or a fixed rate agency product to refinance your asset or dispose of it if you decide to sell it. But I would say a lot of the participants have done floating rate debt given what you just said, which we've been in a super cycle of monetary easing for the better part of 14 years. And that's created a tailwind in the real estate industry and specifically the multifamily space. And so, if you're looking at a fixed rate, it's pretty straightforward, right? You have an interest rate that you're paying on a monthly basis, but on the floating side, you're tied to historically was lib o and now shifted to. and you have now exposure to good and bad, to rates going down and rates going higher. And lenders have, put some interest rate floors in place so that they ultimately have at least a minimum of a spread that they're going to SOFR rate that they're gonna capture plus the spread. And so, all these transactions that you've seen, and again, just focusing in a multi-family, lenders have required interest rate caps, right? So, in essence, you're capping your total, interest rate that you have to pay, on a specific project. And so when SOFR, for example, started the year at a zero to 25 basis points, or maybe it was 25 basis points and today's SOFR 300 basis points, you in theory required by the lender to buy an interest rate cap when you close the transaction. So, let's just take for example, you bought a deal last summer. So, 2021 in the summer rates SOFR was 25 basis points. Fed rates were zero to 25 basis points. The fed hadn't started its tightening cycle yet inflation was transitory according to the Fed and treasury officials.

Jon Venetos (12:43) And you went to lender xyz and you got a loan. And they said at closing you have to buy a three year interest rate cap with a minimum strike of, let's just say 300 basis points. So, you're required to buy a 300 basis point cap. It probably costs you, tens of thousands of dollars. And for three years, if interest rates go above 3% and you have your spread that you're paying on top of that, you're not exposed to any further interest rate moves above at or above 3%. That's what most people did. You can, kind of see why people would do that and it was a relatively diminish amount of money to tens of thousands of dollars depending on the loan size you had. What we chose to do was, at that time we bought 75 basis points or a hundred basis points cap because, and strikes because we viewed the incremental cost of capital as a hedge, that we knew that rates were going to go higher at some point during the life of that three years that we were going to have our structure in place, and so it cost us, say, like a hundred thousand dollars while it cost other people tens of thousands dollars. The difference being we're hedged for all interest rate movements above 75 or a hundred basis. And so, you're just cost of capital. It's all this is, right? It's a simple equation of what's the cost of capital. Now, what also changed when the Fed started raising rates is volatility went higher. So, volatility is an input into the calculation of what that interest rate cap hedge costs.

Jon Venetos (14:26) And so you've had VUL go higher and you've had absolute rates go higher, which has made the interest rate cap market super expensive.  And so, certain people chose to have wider strikes and certain people chose to have tighter strikes. We happen to be in the tighter strike camp. And today if you ask me if I was buying a deal today, would I buy a at the money strike or would I buy something further out? I think right now, because this dovetails into like where are we. We think the terminal rate for where the Fed is going is higher than the 4 25, the 4 75 that are currently in the dot pattern. Don't know where that is, I mean, I think ultimately rates need to go higher than 5%. Do I think they need to go to six or seven? I don't think they do. Do I think the Fed might go there? I think they might only because the Fed is, this fed has been behind the curve, on inflation and they will probably be behind the curve as it relates to the impact on the economy. And obviously, shifts in monetary policy have big delays. Some are instantaneous when you look at your credit card bill. Others take longer to happen. CEO behavior,lending those take longer. I think the Fed will overshoot cause a deeper recession. And so, I do think we're headed for a recession. I think I just saw a Bloomberg article that said a hundred percent of economists now think we'll be in a recession in 12 months. I think it'll be faster than that, and I think it'll be a bit more protracted than people anticipate.

Adam Hooper (16:24) And now stepping back to your foresight in buying those caps was that to your prior comment around data? How did you come to that determination that the upfront cost of paying more for that lower cap at origination was going to be a good bet?

Jon Venetos (16:45) Yeah. So first the math just showed that the incremental dollars to spend, you were, in essence, you weren't getting it for free, but it was pretty close. Vaul wasn't pricing in, I'm talking last summer, right? Like last year, the year before that you, all the way through the end of the year, you could have bought, tight interest rate caps at strikes that were, within 50 or a hundred basis points of spot rate. So, from a mathematical perspective, most people could have done that. I think the other piece is more of an art than it is a science, which is just that the Fed can't keep rates at zero in perpetuity. There are countries that have had monetary policy that have kept it at zero, but I don't think we want to kind of go down the path of Japan. Right. So, I would say that's the one country that has systemically since its, biggest recession, in the late eighties, early nineties, has systemically kept interest rates at zero. I don't think we want to emulate that monetary policy. So, I think from the art perspective. When you look at a three-year investment or a five year investment and you've got a three year, our arch structures are three years with two one year extensions, so a five year total duration.

Jon Venetos (18:08) I think it's a pretty good assumption to think that rates may be higher than zero during that five. I'm not trying to be, but meaning they could have go from zero to 2% back to zero. And you look at the terminal value at the end of the fifth year and you're like, Oh, you're back at zero. But you had to sustain a 200 basis point. Now in this case, we're at 300 plus basis point increase on our way to maybe 425 or 475 or 500 or 550 basis points you'll be pretty cautious. Yeah, it's a bit of art and a bit of science. Like, we could look at it and say, this is really cheap. And when someone's willing to let you buy something really cheap that gives you a ton of optionality. Like, I mean, just to give you context, we have a deal where we paid, sub $300,000 for an interest rate cap. It's not really relevant becasue you don't understand the size of the loan. But today that's worth $4 million, right? Market to market, again, everyone's going to say. Well, what's the notional amount of that strike? It's not really relevant. It's more to illustrate the magnitude of something that's six months later or nine months later, has increased in value because its terminal value is now worth $4 million plus.

Adam Hooper (19:41) And then now how have you seen those? We're obviously in an inflationary environment. I think there's a lot of investor concern around rising interest rates around how that's going to impact certainly the multifamily space. How have you guys seen that filter through into your operations or in terms of your approach to acquisitions now, Are you. Net buyers, net sellers, like, just kind of give us a picture on where you're at generally in terms of the market these days.

Jon Venetos (20:11) Another great question. It's kind of, it's multifaceted, right? So, from an operations perspective, we've seen very little impact on the negative side from rising rates or inflationary pressures, if anything, obvious. Shelter and housing has been a big contributor of the inflation numbers, right? So, that's been a tailwind for us, and we haven't seen yet any impact from a slowing economy on our residents meaning less hours worked or layoffs or desire to not impair their savings and instead move to a situation where they're trying to become debt savers again, meaning downgrade their apartment to a less expensive apartment. We haven't seen any of that. So, on the micro level, from an operations perspective, it's been pretty much steady as you go in the markets, we're in now, again, LURIN is a beacon or a sample set that represents the entire market. We have very focused exposure. So, I would not use this as the index. There are other competitors that have much broader portfolios. We're in a couple handfuls of MSAs, and I don't think you should extrapolate that statement. I think it's about us, which is, it's very idiosyncratic. It's not macro on the macro side, not on operations, but on the capital market side, it's challenging both from an acquisition’s perspective, from a dispositions perspective. From a refinancing perspective. It's challenging. It's challenging because, capital is not flowing freely and lenders are relatively skittish. They seem to be more, impacted by economic data. A jobs number, a CPI number, a PPI number, than they are by underlying fundamentals. And everyone wants to go to the numbers and talk entry caps and exit rate caps and I couldn't agree more. And so, what I say to people is, look, when we're acquiring an asset. It's gone from a tailwind to either kind of neutral or a headwind when you look at the macro for acquiring or disposing of assets. But we always kind of go back to this simple concept of just look at the numbers. And that's kind of takes us back to the operation side and it takes us back to where can we take rents? Where are we getting rents in similar assets, in the same markets? How can we manage expenses? What are the controllable expenses we can optimize, try, and push down without seeing any degradation in service?

Jon Venetos (23:43) The expenses we can't control. What are some of the levers that we can maybe offset or we can engage consultants to help us optimize those. And when you get down to it, we just want to look at the NOI. So, what's in that operating income of this property and can we get there? And anyone who tells me, because it's my favorite when I talk to investors and lenders and just market practitioners, I think in five years, I don't think that's going to be a 5% exit cap rate. and I say, Okay, well give me the data that that tells you that, well, I don't have any data. I just don't think it's going to be there. And I said, Okay, well, let's just go through and let's say you're right. It's not a 5% exit cap market, but instead I can grow my NOI, say eight or 9% year over year during the next five years. And then I could tell you, well, I mean, maybe I'll hold it for five more years, or I'll  refinance it and get you back all your equity. And I still have an assets that's generating free cash flow in the high single digits or teens numbers. And to me, what I would say to it is there are things I can control and there's things that I can't control. And when we find an asset that we like, and why do we like it? Well, because the numbers prove the case. Meaning rents are below where we know we can achieve rents today and in the near future. We have boots on the ground so we can effectuate change through our operations, meaning we have similar assets in the same market and we know we can attract talent and we can, effectuate change that way. And then we have boots on the ground as it relates to construction. So, we own our own construction company and so can we renovate units, improving amenities and renovate exteriors, and can we do that in a cost effective manner? If the answer's yes, and we know we can get the rents, I kind of say, I don't have a crystal ball.

Jon Venetos (25:51) I wish I knew where interest rates were going to be in two years, three years, four years, five where years where exit cap rates were going to be, where investor sediment was going to be at the end of the day, you need a buyer of your asset. But what I can do is I can create a financing structure that gets my asset tied to my liabilities, and then ultimately cash flow that asset, then I can refinance it again. Obviously, there are periods in time. I don't have a crystal ball. Like if we go through another 2008 and the capital market's completely shut down, that's a risk. I mean, anyone who's investing with us or in this space know that there is no such thing as a risk-free return. Even in the fixed income market, right? I think everyone thought that treasuries are a risk-free return. Well guess what? There's mark to market risk. And so as long as we're getting compensated at an appropriate level for that risk, can we then put a liability with an asset and then ultimately roll that liability, get cash back to our investors, Do that again, do that again. And maybe we need to hold it for longer. So, I think when we look at the market at the top level, financing, disposition, acquisition. Iy doesn't feel great right now on the micro level at the operations and the construction and just the demand for an affordable kind of multi-family shelter.

Jon Venetos (27:23) It hasn't been higher because the thing I always also point to people is the affordability. Was the big killer during the last two or three years for single family, ownership, right? Or even condo ownership. Now it's flipped on its head. Now you're seeing prices come down, but mortgage rates are at 7%. And so, single family or ownership in general of shelter, there's a very small window of what I would call the sweet spot. Where you can really take advantage of it. In multi-family, when you're talking about for rent, there are much longer periods where our asset class is a lot more attractive than say, owning. And that's because the affordability component, the interest rate component, those things really hamper the competition of leaving our asset to go, buy your own asset. And then we're not even talking about the piece of owning your own home or owning a condo. Anything from a hot water heater to air conditioning units, to taxes, to maintenance. I mean, it's when you add all that up and insurance, its, very cost prohibited for most people. And so, we have a natural buyer or pool, I call it kind of buyer pool, but renter pool for what we do. And that to me, even when the headwinds are strongest, it feels like we're in a neutral position versus other asset classes where you're, feeling like you got 50nhundred mile scale force winds on your bow.

Adam Hooper (29:07)  And now, it sounds like there two general operating models when volatility or uncertainty markets happen. One is to just kind of sit on your hands and wait and see and not be proactive, but what I'm hearing is based on your boots on the ground operational level. There are deals to be had in any market, right? It more than just, we're going to wait, market's not favorable right now, or are there areas at which, Because I mean, you guys are still actively pursuing deals right now and I think we've seen some hesitation, right? Certainly, from the investor side, right? Some, kind of waiting and seeing and letting some of these macro factors play out. Has the current environment changed your strategy or are you still bullish on acquiring new properties? How does that look?

Jon Venetos (29:58) Yeah, so, I think that does summarize how most people feel. I think we try and let the numbers kind of dictate what we're going to do. So, we just try not to create selection bias and I think when you say, hey, I'm just going to put my pencil down and I'm not going to underwrite any deals, or I'm not going to acquire anything until the Fed gets to a terminal rate, or at least shows some willingness to kind of slow down rate hikes. I think that's a mistake. And again, I think some people will listen to this and be like, no, Jon this is where you just, batten down the hatches and you just ride out the storm with what you have. And I think this is one where we can both be right. I don't think there has to be someone who has to be right, and someone has to be wrong.

Jon Venetos (30:53) What we do instead is we underwrite every deal that comes across our desk. We do it in the current market conditions with some forecasting of the future. And the difference about us is we are just not super aggressive on the four or five levers that we can pull, whether that be rent growth, exit cat rates, expenses,  operating occupancy and vacancy and bad debt. We try and be relatively conservative across all of those metrics, and we don't want to be max on any of them. Max assumption meaning everything needs to go right for us to be successful, and I think that's afforded as a great opportunity set in the past, and I think it helps us today. And what I mean by that is, is you hear of people who say, Oh, when this is all over, I'm going to buy everything I can find.

Jon Venetos (31:45) And most of those people never buy a single thing because they've already missed that opportunity. Because when there's blood in the water is when you want to start buying. And I think for us, are we buying at the same rate that we were two years ago? Of course not. Are we disposing and refinancing at the same rate? Of course not, but are we still underwriting deals and looking at opportunities? A hundred percent. The team is still as active. They're still on the road, they're still in the markets, they're still doing their work. And yes, I mean, we have a couple deals that we're raising capital for now, and it is harder, I think because people are uncertainty in their minds. Causes them to be more cautious. For me, uncertainty. When you can guide yourself to the outcome you want, it's not uncertainty to me. To me it's opportunity. And so, we try and take advantage of that. And our biggest thing that we tell all of our teams on the ground is just give us real data.

Jon Venetos (32:50) Are we getting the rents? Are we getting the qualified traffic. Are we able to turn units? Are we able to renovate, all the things that make our business go, just give us real data and don't tell us what we want to hear. And of course, we're in all these markets. Not every market is performing the same today as it was six months ago, or nine months ago, or 12 months ago. Some are performing better, some are performing behind, some are at market. And so, you got to underwrite it and, and let the numbers kind of dictate where you should go. And then I think, again the last piece I would just say to it is, we own a hard asset, right? We own an asset that people need. If you look at what are the 1, 2, and 3 things that people are going to make sure that they pay. It's their rent, car payment, and probably getting their new iPhone. I mean some people might substitute the iPhone for Air Jordans or sneakers or clothes or something. But we tend to fall in one, two, or three. And our asset has another great advantage is it's got a depreciable value and it's got a great tax benefit to it. And so, when you take all those things, it's got store value to it. You don't want to have cash right now. You're losing 8% a year right now, eight and a half percent of the value of your purchasing power, in cash. And again, some people will say, Well, it's better than the stock. Of course, yes, I'd rather lose 8% than 25% than the stock market. But we're trying to preserve and grow capital and I think owning this hard asset allows you to do that. And there are other hard assets you can do that with. It's not just real estate, it's not just multi-family real estate. So that how we kind of look at every day.

Adam Hooper (34:54) And then you'd mentioned also earlier you're in a select few MSAs that you guys focus on. What are some of the higher-level metrics or factors that you look at when you're either choosing the market that you're currently in or if you're looking to expand into new markets? How do you guys look at that in terms of both expanding into new markets and what has attracted you to the markets that you're currently in?

Jon Venetos (35:16) Yeah, so to add new markets is a huge hurdle for us. So, in the past three years, we added one market. And that's because it goes back to what I said earlier that this concept of boots on the ground. So, we got to be able to effectuate change from an operations perspective and a constructions perspective. And the only way we can do that is boots on the ground. And so, it's super hard to build construction capabilities overnight in a market and to create operations capabilities in a market overnight. And so that's a super high hurdle for us. So, if we enter a new market one every two years, I think that's been about what we've done. That's probably what we'll be go forward in terms of what we're looking for. It starts with the economic drivers. So, we want job growth. so, we want employers to want to relocate or allow their workers or their employees to base out of there. We like to have diversification if we can in our economic drivers. So, we don't want to have one employer be the entire market. I mean, there are markets where we have concentration, absolutely. For those investors who've been with us before. We are in northwest Arkansas, and so yes, Walmart is a large employer there, but so is JB Hunt and Tyson Foods and all the hospitals and education and all the service-related industries that support that.

Jon Venetos (36:52) But that's just one example. And so, we want to have those economic drivers. We want to have, a government, municipality, local and state. That’s pro-business, pro, long, well, I'd say short and medium and long term, tax friendly. We want to make sure that we have a good education system, a good, infrastructure, service center around where we are investing. And then the biggest thing is there's got to be a quality-of-life factor to it. So, there's got to be a demand to want to live, in this market and in this MSA. So, for us, it can be as simple as, again, to go back to that Northwest Arkansas number one outdoor biking community, mountain biking in like the country. Right? It's got huge demand for that. People love the outdoors there. Everything from the Ozarks across, that's a great story for us. We like to have that. It could also be in Dallas where we're located, right? Metropolitan city with great schools and easy quality of life. those are things that we're looking for. So, I would put those things a little bit more on the qualitative factors and much more on the economic drivers, the employment drivers, the governmental municipality, drivers. Those are all things that I think ultimately are important to us. And the last thing I would just add, becasue people ask us all the time, you need to be in an MSA that can actually handle the influx of what we're trying to forecast or hope happens.

Jon Venetos (38:49) Right? And I think, there are certain MSAs that we're not in that have a huge amount of demand, but they don't have the infrastructure. And the ability to accommodate that growth. And I think those are where you can get into trouble. And so, it's not just as simple, it's like go to the zero tax states that are all on the coast that, are seeing kind of covid population growth. There are some markets in there where, they haven't built the infrastructure or created the right environment for both, residents, but also, companies to afford a long term sustainable growth model.

Adam Hooper (39:33) And then given the environment that we're in. Do any of those fundamentals change or are you looking at any different factors? Where we're at today in terms of new markets you might be looking at. Or those are pretty fundamental analyses that when you're looking at markets

Jon Venetos (39:55) Yeah. They're pretty like long tailed, right? They're not hyper volatile. I think there are instances which we haven't participated in, but I could see like a post 2008 kind of Arizona, Las Vegas snap back right where you could have that opportunity. For us, because we are so focused on this, boots on the ground on operations and construction. We're making much longer-term investments than just a macro that was overdone. We can, extract a 25 or 30% price appreciation. Instead, we're saying, Okay, let's effectuate this longer term changes on these properties. And that requires a longer term investment and one where we're hoping that, states like Texas and Florida and, Alabama and Arkansas will remain kind of lower tax zero tax states and have this, 10, 20 year, economic boom from where we are today.

Adam Hooper (41:14) And then now switching. A lot of the listeners of this show are passive investors in this asset class. Maybe putting your investor hat on, what are some of the questions that you might encourage investors to ask of sponsors of managers when they're looking at investing with somebody new? or they're looking at a deal in a new market, maybe they're not familiar with. Are there some kind of high level questions to get some comfort or get some experience or exposure to some of those bigger metrics and kind of the mind of the sponsor and they're looking at those markets?

Jon Venetos (41:44)  Sure. I mean, this is truly relevant to whether you're a couple of these are, whether you're talking in real estate in the multi-family side, or you're talking about any real investment, you want to make sure there's an alignment of interest. I think that's all the way from, physical dollars being contributed all the way to, how does compensation get divided up and what are the real economic drivers of the deal for the sponsor, and I think for the limited partners. But I think that goes to, are you being treated as a partner and then when things don't go right? What's your partner's track record for supporting the deal? And because anyone who tells you that the business plan is perfectly written and there's never any hiccups, it’s just either not invested in a lot of deals or kind of sticking their head in the sand and doesn't want to admit stuff. We're very transparent. I mean, I wish every deal went to business plan. It doesn't, it usually gets to its business plan, but the path on which it gets there is can be one that's slightly different than what you originally underwrote, and you've got to be a sponsor, willing to stand behind that. And ultimately, we haven't done capital calls, but other people may do that and there's nothing wrong with capital calls. Just ultimately what's your business plan? I think on the top level additionally, like, what's your asset liability? I talked about this earlier match, and not just with your debt lenders, but with your partners.

Jon Venetos (43:29) And so, if you're underwriting, a three-year hold, you obviously have to be prepared that you may have to exit that asset before or after that three-year period. And so, you want to make sure investors are aligned with you on that. And that can be a point where you don't know what's going to happen. And so, you want to make sure that you haven't put yourself into a position where a fair number of the deals we've bought that have been hugely successful for us, even not even during this, what I would call more choppier period. Here, we've bought assets from sponsors who were forced sellers. They were forced sellers because they, had a maturity on their fund or their asset. And so, they needed more time to realize the full benefit that we were able to realize. So I think those are, alignment of interest, the asset liability mismatch, both at the partner level but also the lender level.

Jon Venetos (44:33) I think on the technical side, I think it's a little bit of what I said before. How many things need to go right for this to be at or above business plan to be within a standard deviation of the business plan to be within 50% of the business plan. And I would just say if you need everything to get to the business plan. That to me is as a personal investment. If I was making, that would make me a little less comfortable or less comfortable.  But if you've got some levers to pull, okay, well we can be more aggressive on the rents because we were wrong. We underwrote 6% or 7% rent growth and the market's getting 20. Of course, we knew they were getting 20. It's not like we didn't know that. It's just a, do you need to write underwrite 20% to make the deal work? Or are there cost savings that you could get in construction if you value engineer abc, that type of stuff. So, I would tell people to dive down into that. I think the other big thing is tell me about your mistakes you've made. Tell me about the lessons learned, how that shaped you as an investor, how that has shaped you as a sponsor, as an operator. Those I think, are super important things.

Adam Hooper (45:53) Yeah, I agree. Well, Jon, that's a fantastic overview of what you guys are seeing right now on the markets. As we wrap up here, why don't you tell us a couple questions, I always ask when you're thinking about the multifamily space or just generally real estate right now, what are some of the things that keep you up at night?

Jon Venetos (46:11) Yeah, so I mean, part of being the CEO,  I'm also the head risk person, right? So, in this industry we don't have like a chief risk officer, but that's, that's my job, right? I'm supposed to have the sleepless nights because I'm supposed to think of the things that could go wrong. And so, I think my list of things that I think about are no different today or the length is no different today than it would've been a year ago. Right? A year ago. I'm sitting there saying rates can't be this low forever or I'm saying our competition for talent on the construction side and the operation side is so fierce. That we can't actually get the boots on the ground we want. And now you fast forward 12 months and rates are higher. So now I'm thinking, well, what is the terminal rate? Our terminal rates, going to be in the high single digits, or the low teens or terminal rate's going to get somewhere above five, and then we're going to be in a recession. And then, how do we think about operating our assets in a recessionary environment versus an economic growth environment?

Jon Venetos (47:29) Also, knowing that we operated our assets in a pandemic, which is far worse than any recession, I've ever been a part. And that includes 08. So, I think there are lots of things I think about today, like I said, the terminal rate of rates, the buyer of assets, the ability of lenders to continue to want to provide capital. Those are all things I think about. But at the same time, I'm also a half glass, a half full guy, not a half empty guy. And so, I also think like, wow, this is a great opportunity for us to go and acquire more talent. And grow our ranks in operations and in construction and on the acquisition side and the capital market side and technology. Right? Because, as you hear Goldman Sachs laying off X number of people and Blackstone doing this, everyone, no one wants to be the last person to lay people off. We don't look at the world that way. I think we look at it as do we always have the right people sitting in the right seats, on the bus?

Jon Venetos (48:36) And ultimately, can we upgrade our talent pool, or expand our talent pool. And so those are the things I spend most of my time thinking about. So, some are risks, some are opportunities. Are there asset classes we're not in that we could take advantage of, ground up development or value add on office space? I mean, there's so many things that I think about, I try and get a good night's sleep, but ultimately it is one of those things where you can control it, you can control, and then you can prepare yourself as best you can, and then you got to ultimately kind of play the cards you've been given.

Adam Hooper (49:20) Yeah. I think to your list of things not really ever changing, that's been my personal mantras and one of my learnings as CEO as well. It doesn't ever get any easier. It just gets different right there. There's always going to be a list of concerns. But I agree with you completely, control what you can and try to have best information you can to make decisions on those that you can't. So, you kind of touched on some of the optimistic, points there. Anything else that you're looking forward to or where you maybe see some opportunities, giving given current market conditions and where you see things going?

Jon Venetos (49:54)  Yeah, I think the last thing I would say is I think we truly do believe there will be an opportunity to take advantage of other people's, missteps, but we don't hope that on anyone. But ultimately, want to be prepared. And I think that's again, where we're investing our capital in terms of our team's development continue to just kind of pay it forward so that we are prepared. If in six months the terminal rate is 6% and people can't meet their debt payments, we want to be in a position to take advantage of those. I think it'll be hard at that point because people will say like, oh, you're a six cap here and rates are at 6%, is that really? But maybe before that asset was a four cap, so now it's, 50% cheaper in theory. It's always hard to convince people in that storm to step up. But I think other than that, we're kind of keeping our heads down and making sure we're taking care of our business and kind of see what pitches get thrown at our way and what we're going to swing at.

Adam Hooper (51:03)  Perfect. Well, that's a great spot to wrap up. Jon, why don't you let the listeners know how they can learn more about what you're up to about LURIN?

Jon Venetos (51:09) Sure. Yeah. So, obviously encourage you to take a look at our website. It's, LURIN.com and then obviously, we are active in the market, on a number of different platforms and so, encourage people to take a look at our progress as we kind of go through this next period in the multi-family market.

Adam Hooper (51:35) Perfect. Well, Jon, thank you again for, for sharing your thoughts with us today, really appreciate you coming on the show.

Jon Venetos (51:42) Thank you. Appreciate it.

Adam Hooper (51:43)  All right, listeners, as always, if you have any comments or questions, please send us a note to podcast@realcrowd.com. And with that, we'll catch you on the next.

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