Animal Spirits Podcast - Talk Your Book: No Bank Runs in Commercial Real Estate

Episode Date: April 3, 2023

On today's show, we spoke with Tom Miller, CEO and CIO of USQ to discuss real estate in Manhattan, the hottest sectors of commercial real estate, office space investing in the next few years, and much more! Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   (Wealthcast Media, an affiliate of Ritholtz Wealth Management, received compensation from the sponsor of this advertisement. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information.) Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's show is brought to by USQ. To learn more about the risks and opportunities of investing in commercial real estate, visit usq.com. To download a white paper on private core commercial real estate written exclusively for animal spirits listeners, visit usq.com slash animal spirits. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Batnik and Ben Carlson work for Ritt Holtz Wealth Management.

All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Rit Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rit Holt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. You know, Michael, one of the things people like to say after we're in the midst of a crisis is here's the next shoot-a-drop. I mean, not that it's wrong, but that is something people say because it seems like, I don't

know, people have these things happen in threes or there's more dominoes, whatever it is. But the next shoot-a-drop, people do start to think about what the next crisis is going to be because a lot of times these things do happen in succession with one another. So commercial real estate, specifically office real estate, which is only a sliver of commercial real estate, has been in the news, as to Ben's point, the next shoot-a-drop. Is anybody unaware of the potential challenges that office, real estate has going forward? I mean, for goodness, stakes, S.L. Green, a prominent player here in New York City, the stock is down 82%. You know how much these stocks were down in GFC? This was down 94%. So I know there's a giant gap between

82 and 94. But my point is, we know, the market knows. And guess who else probably knows? I'm pretty sure management knows. What do you think? And the banks know. And maybe the idea is, well, there's nothing they can do to stop the bleeding at this point. But to your point, a lot of the pain has already been taken probably. My point is not we want to go all in here. I only say that, yeah, we know that there's risks and so does the market. It's down 82%. It is one of those things where because a lot of people in the world of finance live on the East Coast and live in New York, those types of things, you see the signs or you hear the stories about people, you know, the subway stuff is still 60% below peak or whatever.

no one's going back downtown, I think you assume, okay, that means commercial real estate is dead at the moment and something really bad is going to happen. Unless you have a 2008-like event where everything sort of happens at once and all these risks that build up for the years really just come to the forefront at once, I feel like in a space like private real estate, it's the kind of thing where even if there is a secular headwind, it's not the kind of thing that happens at once. It's not an event. It's a process that slowly, happens over time and the pain is taken in bits and pieces, not all at once. So I agree with you there, secular headwind. I do agree. I think that there is before and after

COVID. I think there will be less demand for office space going forward. But how do you measure that against the fact that these stocks already got killed? Is there an opportunity? Is it at the bottom? Is it going to get worse? We don't know. But we spoke to Tom Miller from USQ, who is an expert on commercial real estate. And I hope you enjoy the conversation. The one point I thought he made that was interesting is people looking at, well, rates are up, so that means investing in real estate, you're screwed because of refinancing risk. If you have to roll your debt over at some point, that's staring you in the face. His offset to that was, yeah, but people have been able to raise rents 15 to 20 percent in multi-family housing, which I just want to have

him, you know, I talked to our producer, Duncan, about this a few weeks ago. Winnie the Pooh Meme. Apartments, regular Winnie the Pooh. Winnie the Pooh with a monocle, multi-family housing, multifamily housing. Fair? I know townhouses are in there, too, but don't you think multi-family housing is a really good way of seeing apartments? Are there the same thing, though? I feel like multifamily housing is like a two-family home. I think most commercial real estate in multi-family housing is apartments. Sorry, no, no. I'm a big proponent to winnie the poo meme. It's cute. But apartments are apartments. And multifamily housing is multi-family housing. I'm sorry. You think that's two different things? Those are two

different things, yes. Maybe multifamily housing could be like townhouses then and rentals, you think? Yeah, yeah. I thought that people called the park. Not condos. I'm sorry. Townhouses. Townhouses, yeah, sure. I thought the apartments were lumped in with multifamily housing. Okay. Meme off the table. Anyway, but he was saying that, yes, these higher rates are going to hurt at some point, but they've also been able to raise rents higher than a rate of inflation. So there is some back and forth there. Anyway, yes, it is the space where a lot of people are concerned and in many cases for the right reasons. What if the shoe doesn't drop? This is their glass half full side of me, right? So anyway, interesting conversation with Tom. No, no, no. What if the glass is only

a third full, but the market thinks it's 80% empty? Maybe the glass just has a really big square ice cube in it, like all the bars you go to in Manhattan and it's less liquidity than you think, I don't know. All right, here's our conversation with Tom Miller from USQ. All right, we're joined today by Tom Miller. Tom is the CEO and CIO at USQ. Tom, welcome to the show. Yeah, thanks for having me, guys. I'm a big fan. Thanks for coming on. All right. So, real estate, what is it? That's me doing my best allergy impersonation. I like it. There's a lot of negativity around in the press right now, but it's not like that. We're in a couple of real estate today. I know obviously real estate

is not monolithic. There are several different variations of it. It's been in the news lately. Why? Obviously, COVID upended everything, interest rates, office, vacancies. So let's start out talking today about commercial real estate. When I think of commercial real estate, I may be unfairly think about the office and how potentially F'd it is going forward. But you tell me, why should I think broader than just the office? Commercial real estate is really so much more. It's industrial properties. It's multifamily properties. It's retail. And retail is more than just malls, too. It's grocery anchored, necessity-based retail. As a matter of fact, The index that we follow is the NFI Odyssey Index. Office makes up less than 20% of it.

And so when you look at it in that context, yes, we understand and we see that office has some challenges. People haven't returned to the office quite as quickly. That said, even within office, class A office is doing just fine. You're seeing leasing activity in class A office. You're even seeing some of the big headlines of reading where people are walking away from office buildings. they are deploying new capital into highly desirable state-of-the-art class A office that's highly amenitized. And so it's a tale of two cities here in that class B and class C office, but I want to be there? No, there's definitely some challenges in the short term. But I think in the longer term, as people get back to work and we're seeing those headlines emerge right now, people are coming

back to the office. So it's not as doom and gloom, and it's certainly not as big of a part of the commercial real estate markets as many of the articles in the journal would lead you to believe. I think part of this is Michael is a coastal elitist, and he's in New York all the time, but is a place like New York really screwed in terms of course real estate, or are they going to be fine? No, they're going to be fine. They're coming back. Listen, this isn't the first time that office has taken it on the chin. Not to bring up bad times in New York's past, but you look at, there's been things that have happened to New York where people said, oh, there's never going to be a return to the office again. That has obviously since waned and people are back. I would also say

that the local economy of cities and the infrastructure that having a downtown community supports is very real. And so what I think you'll see in time, you'll see incentives for people to get back down into downtown office space. And when you think about all of that having office workers come in every day supports, it's all the local restaurants. It's the local pubs, bars, whatever it may be, local industry. It's very real that office workers drive that. Not to mention real estate taxes support things like infrastructure in the major cities and schools. And so when you're saying that commercial real estate is dead in a city like Manhattan, I don't buy it. I think there's definitely short-term headwinds ahead, but Class A, I think is still doing well. And like I said, you're seeing

at least up even in this environment right now. All right. So a few things there. I will take the other side of it a little bit in that yes, Manhattan has had challenges in the past, but not like this. I do think that COVID was a watershed moment. I am never going back to work five days a week. and I think that there's a lot of people that are in that category. So I think that company's footprints will shrink. Now, that being said, this is not news to anybody. I'm looking at S.L. Green. The stock is down 82%. You're not going to surprise anybody by saying commercial real estate is challenged or office space is challenge. If you look at the bonds, I'm sure that trading just as bad as the equities. So is there, and maybe I'm asking a barber if they need a haircut

and credit to you, you're bald as am I, is the fear is overblown. I mean, an 82% drawdown is not nothing. I think there's definitely the paranoia of the public markets. If you think public markets don't overreact. I have some data I can share with you. Public markets overreact almost every time. And that's to the upside and to the downside. And so, you know, Michael, the interesting thing, and I'm just looking at my note here, nobody was screaming for private real estate or real estate publicly traded reeds in 2019 were up 30%. And that was overdone. And then they came back in 2020. And then 2021, again, explosive return. So public markets overreact.

We know that. There's been a Nobel Prize for the gentleman, Richard Baylor, that proved markets overreact. So I don't think you can just draw all of your conclusions from how a stock is trading on any given day, week, month, or even year. Sure. Markets are crazy. No doubt about that. And they overshoot in both directions.

But how do you see this playing out? Because it's not as if all of the debt matures at once where it did in the GFC, where when the teaser rates, went away, everybody woke up and realized that the music stopped playing. Are we going to have like a rolling set of mini blowups for the next eight years as these leases come out? Or again, are those fears overblown? I think they're overblown. And I think commercial real estate owners and operators knew this. COVID happened at 2020 and rates were still very low. So you've seen a lot of borrowers that needed to borrow in commercial real estate take on debt and push it out as far as they can at

low interest rates. When we look at what we're tracking the NFI Odyssey, the amount of of debt is almost, I mean, it's de minimis that's going to actually mature in 2023. And so I think you have to give some credit to the commercial real estate operators. Some of the office buildings they've moved to multi-use. They've also been very smart about taking debt when they took it and tried to push it out at five, seven, 10-year terms where it was available. And so I think with that being said, you really have to think about it. And I think to some extent, it's overblown. Obviously, you don't want rates to go, if your tenure goes up to five and a half percent, I think you have more problems than just commercial real estate. You have other companies that are taking on debt,

regular publicly traded companies taking on debt at huge levels and that have taken on debt at huge levels. If that all came due tomorrow, you'd have a calamity on your hands across the United States, probably across the world, but certainly within the United States. So I think right now you're still seeing the overreactions, and I think over time you'll see that come back. We are seeing, I think the last workers remaining to come back to the office have been information services, and you're starting to see that reemerge as well. Well, Chad GBT is going to get them back in the office. That's exactly right.

And a fear of a recession, too. When the employee has all of the power and says, you know what, I'm not coming in and there's nothing you can do, well, put a recession in the mix there and have mass level. Joshua said that paradoxically a recession would be the best thing for New York real estate. Ironically, that's probably the truth. I was thinking through the refinancing risk. You mentioned that sometimes they push the terms out to five, seven, ten years. So obviously this is not in commercial risk. It's not like a regular homeowner taking out a 30-year mortgage. Are the rates pretty similar to if for the places that do have to refinance? So I don't know, it's six and a half percent on a 30-year mortgage right now. Is it pretty similar when you're borrowing in this space or does it a little different? The last time I looked at it. So spreads were about 200 basis points. So it's your 10-year plus call to spread. And this is all office. It's actually much more attractive in multifamily. and industrial. So if you think about it today, office, and this is not highly levered. So again,

you have to be careful of what real estate you're talking about. But if you're in that less than 60% LTV, you're probably at 550, 600 basis points. Can you explain for the audience who might not know what you're talking about? What does that mean? For the spreads and the tenure? Yeah. And the LTV. Oh, sorry. Loan to value ratio. So how much debt you have relative to the value of the property. And so why that matters is low LTV, what that means is you're still secure, even if the price of the property were to drop, you still have more equity than you do debt in the building. What you really don't want to happen is you don't want an LTV of 80 percent and then your real estate value to take a hit by 30 to 40 percent. That's what you saw in the GFC. And that's when real estate

owners have no incentive to stay in. They literally can hand the keys back to the bank and walk away from that. But as long as you're in that lower leveraged, good real estate that is amenitized, I think, again, the fears might be a bit overblown. All right. I promise we're not going to spend the entire episode talking about commercial real estate. But I have one more question on how this works. So, all right, I'm in a building. I'm Brian Park. Is the building owned by a company or financed by a company that has a relationship with the bank? They take out a loan. And then they're trying to fill this and make sure that the office is fully occupied. Can you explain the dynamics of that? So,

let's say that we choose to leave after our lease is up in 2028, and they can't find people to replace it? Like, how do those dynamics between, and often cases regional banks with commercial landlords and their tenants? What does that triangle look like? I think what you have to remember, Michael, especially in the higher quality commercial real estate, it's not all banks. And I know you see the headlines of commercial real estate makes up 70% of these regional banks books. And that is true to some extent. But oftentimes, your bigger buildings, your highest quality real estate, has plenty of financing options. So it's not just the banks. And if it is the banks, it's generally the larger banks. Insurance companies, it's a prime example of insurance companies,

their general accounts. They love to lend on core commercial real estate that's highly stabilized because it's better yields than they can get in the market. And it's backed by really good core assets. And so I think the media paints this picture of, oh, the only place that commercial real estate owners have to go for refinancing are these small regional banks that seem to be blowing up right now. And it's just not the case. There are other levers to pull. Will it have ripple effects when the regional banks tighten down? Absolutely. But when you're the highest quality core, I think you're still going to be okay because you have other levers to pull on where to take that debt and get that debt refinanced. Everyone pays attention to the bad stuff because that's what we do

in finance. So people have been hammering on the offices and that stuff. What are the portions of the commercial real estate market that are actually holding up pretty well and looking good in this environment. Industrial is the biggest sector, about 40% of the NFI Odyssey, and it's red hot, and it continues to be. It's because the dynamics, we all want things delivered to our doors within an hour. And those dynamics, that means you need industrial space for logistics to get there. So Amazon has to put your good that before they get it to your door, it's probably going through three or four logistics buildings. And so that insatiable demand for people that just want our stuff, we're all guilty of it. We all want to put our order in on Amazon and have the product within an hour at this

point, we get jumpy if it's going to take 24 hours. So I think certainly rent growth is going to be moderating in the space, but it's been very, very attractive. And it's probably been the darling of commercial real estate for the last 10 years. Second area that's doing very well is multifamily. Again, rank growth is starting to moderate there. You're not seeing double-digit rent growth anymore. That said, I'm sure you guys have covered this. We haven't built enough homes in the United States. We have a problem. We are probably 10 million homes too short for the current situation that we're in. And new home builders are just not bringing that much new supply to market, nor should they. They see their models and they're saying, hey, at a 30-year fixed rate

mortgage of six and a half, seven percent, nobody's going to be buying. And so multifamily has a place for the next decade here as we try to fix this supply shortage in homes. So when you think about it, you may see some headlines short term, a lot of multifamily supply coming online, but I think again, that's overblown, rent growth moderating, but people need a place to live, and multifamily's going to fill that gap, at least for the foreseeable future. Who are the players in the multifamily space? Is that the usual suspects of home builders, or is it somebody else? That's typically others. I mean, so a lot of private developers and multifamily, your big firms, obviously, that you know, love in private equity real estate are big owners of multifamily, NFI Odyssey. So by the way,

the Odyssey represents about 300 billion of commercial real estate and about 30% of that is in multifamily. So I think those two are definitely your sectors that you want to be in. And believe it or not, retail is finally starting to come back. Michael, I can almost replace malls with what you were saying about offices five years ago. The mall is dead. The mall is dead. Everybody hates But the mall is dead. Is it the mall dead? Class B, class C malls again are dead, sure. But go to a Class A mall.

And again, the largest publicly tried to read for mall operators is Simon Property Group. Well, they owned Roosevelt. I went there the other day. I had to go to Dix to get my kids some sporting equipment. And I couldn't believe it. Absolutely slammed. Like slam, slam, slam, slammed. I live outside of Philadelphia.

We have the King of Prussia Mall. And the other day, I went there and there was security directing traffic. Part of me wants to take a picture and send that in to say, once everybody said that malls were dead. By the way, we're a name for a mall. King of Prussia? Yeah. No?

It's just the town that the mall's in. It's the only mall I think we have left in the Philadelphia. No, my bad. We're named for a town. Yeah, we're a near for a town. I like it. So you mentioned the dichotomy between private marks and public marks. And Michael and I talked about this a few months ago.

So if you look at just like the Vanguard-Reed index, a lot of people use that as like an index fund proxy, it's not necessarily. But to your point, in 2021, it was up more than 40%. And then in 2022, it was down 26%. A lot of people were saying last year, well, REITs are getting slaughtered this year. How come private marks haven't come down?

And my answer was they're probably both a little right and a little wrong. To your point, things go too high and too low. And so you can't say that private stuff should be marked down to 30% in 2022 if it wasn't being marked up 40% in 2021. So is it just that in a transaction like real estate, it's not like the stock market where millions and millions of shares are trading hands every day, it's hard to get a good sense of what the actual prices are from either public or private listings. Tom, sorry, before you answer, just put some meat on this. So we haven't even spoken about your product yet, which we're going to,

but you guys launched us in late 2017. So since then, VNQ has had six down quarters. You guys have only had two. VNQ has had three down years since 2018. You have none. So I'm sure this question comes up all the time. What do you say? It just prices differently, Michael, and bet you hit the nail on the head. There are a lot of factors that drive prices of commercial real estate. And we actually have a paper coming out on that that after this podcast, you can get at USQ.com slash animal spirits. It talks about this exact dichotomy. And the bottom line is public markets overreact and private markets, you need transactions to happen. You haven't seen a lot of transactions happening. So things have definitely slowed down. But that doesn't mean marks aren't being.

taken. Marks are certainly being taken, and there's some negative marks in there. But rent growth has been so strong. So rent growth has been so strong that it naturally yields a higher cap rate. And that cap rate is nothing more than NOI over purchase price. So NOI is net operating income over purchase price. So it's like the earnings yield for stocks. Correct. And everybody loves to compare that to the 10 year and say, oh, there should be a 200 basis point premium. Okay. To some extent, that's true. It doesn't holding the short term, but over the longer term, I think that's fair. But that cap rate changes for two reasons. The media loves to paint this picture that cap rates must go up, meaning prices must come down. And that's just not the case. If NOI is going up, and that's what we're seeing,

and this is talking about an inflation hedge, when you see inflation take hold, rents push, period. I mean, multifamily rents were up double digits in 2022 heading into the, well, the beginning of 2022, basically through the year, you saw 15% rent growth. Industrial was even better than that. There were certain parts of the market that were up 25%. And so if you're growing your NOI, you're naturally taking your cap rate out anyway. And so there's more dynamics at play than just simply, oh, cap rates need to go up so prices must come down. That's where it kind of gets sideways as people don't understand the dynamics between the two markets. Now, to your point, Ben, is it certainly true that both public and private probably are imperfect mechanisms?

Sure. You could definitely argue that, which is why we say there's no one perfect solution. If you're going to make a real estate allocation, you shouldn't put it all in private and you shouldn't put it all in public, that you put it together and you get a much better risk-adjusted return over time. And that's what we're talking about. I think to the point last year, our strategies were up about 6% last year when everything else was down. And I think that is true diversification. That helps you guys as advisors to have assets going up when other things are going down because everybody talks about correlation benefits until everything goes bad and then everything comes to one and you have no diversifiers left. So that's what's different about this and you

need to be given access to private real estate. So can you talk about the structure of the way that you run this portfolio? It's an interval fund which some listeners might not be familiar with. There was big headlines over the last couple of months as one of the largest private estate investors have this vehicle that's not all too liquid as it should not be. This is private real estate. It's not publicly traded. It shouldn't be that liquid. But there was some maybe confusion or people wanted their money and they couldn't get it because there are clear rules about how much money you could. Anyway, how does that differ between your structure? Can I just talk about one second on that? They did exactly what they should have done. They should have gained. They did exactly

what they should have done. And it actually helps the commercial real estate markets not have to draw down in a period when you don't need to. You don't want to fire sale in that market. So when you buy these products, you have to understand there's limited liquidity. The Interval Fund is different that we look and feel much like a 1940 Act open-end mutual fund. As a matter of fact, we are regulated under the 1940 Act. So we have the audits and the SEC exams and everything else that comes along with being a 1940 Act mutual fund. We have to deliver 5% liquidity per quarter, so not too dissimilar than some of the other products with interval funds in general, but certainly with us, the ease of use is really what makes the Interval Fund a really nice vehicle.

Daily NAVs, daily subscription so we can take money in daily, no accreditation, 1099 tax reporting, and we're available on all the major RIA platforms, just like a regular mutual fund would be. So in terms of getting access to private markets, the Interval Fund is a much easier solution for the advisor to actually take advantage of. Why? Key point here. Some of those other structures, Michael, you have subdocs, you have to get your client signatures. So in terms of as you have discretion as an advisor and you want to make the investment, the interval fund looks and appears just like everything else does in their book if you're

allocating to mutual funds already anyway. There's no additional work. Maybe on a firm level, you have to go get client signatures, but in terms of the actual regulatory perspective, you don't. And so many RIAs, advisors can buy into these interval funds with their discretion, of course, as long as they have discretion over the account. There's a daily nav, but there's not daily liquidity if you want to get out. If you want to get out, the redemption process is 5%. Like I said, you have to offer that quarterly. And there's a quarterly redemption window. So every quarter after the quarter end, about 30 days, I should say for about three weeks, we open a redemption window. And basically, we take everybody's orders to say, okay, who wants to get out? And then from there,

on that last day of the redemption window, you press sell in the system and it sells just like a regular mutual fund would. But I have a question on that. Where are you getting the money from? So if people want to sell, it's not as if you're then turning around and selling a building that day. So where does the liquidity come from? We manage these portfolios pretty conservatively. So two strategies, one of them we always keep at least 5%. In the current environment, I have about 9% cash. And then in the other strategy, we have a line of credit that we can certainly get liquidity if we need it. But again, I want to be fair to your listeners, Michael. If we receive redemption requests for greater than 5%, we can gate the strategies, just like you've seen other

structures do. And that's really for the protection of shareholders. That's actually a good thing. You don't want your company to be forced to sell in a period of distress. I would argue it's a great thing. And if you want to talk about the behavioral biases that go in, I mean, we all do it, even professional money managers. Guilty. There are biases. You sell at the wrong time. You buy it the wrong time. And so when you have a structure that prevents you from doing that, again, do your homework, get educated about the space before you make the allocation. But once you make that allocation, You have to view that as a long-term strategic hold that you're not going to trade around. The 5% liquidity, again, makes your life easier because as an advisor, you do need to rebalance.

You're going to do a quarterly or an annual rebalance. That 5% liquidity is really there for that. We understand you lose clients for a number of reasons, but you lose clients, you need some liquidity. And that, again, that 5% should really be used for those purposes. So no bank runs in commercial real estate. Correct. No bank runs in commercial real estate. Not yet.

Not yet. What does the underlying investment process look? You mentioned this NFI index. Are you trying to follow that to a certain degree within parameters? How do you all invest? So two strategies. One of them is NFI Odyssey funds only. That's 26 actively managed private real estate funds run by some of the biggest real estate

managers in the world is what makes up the Odyssey. So the Odyssey is really think of it as 26 private funds that are actively managed. And so one of our strategies, USQIX, we are 100% Auditians. only. So we only invest in Odyssey funds. And we diversify across a number of them today. We have about 20 in the portfolio. Wait, hang on. What's an Odyssey fund? Maybe I missed that. NFI Odyssey. So the NFI Odyssey is an index that's published by NACRIF, National Council of Real Estate Investment fiduciaries. And it's 26 private funds. So 26 general partnerships that are private funds. And so what we do is we allocate the assets to those 26 private funds,

generally in an equal weight fashion, but that does veer off a little bit because of private markets and capital calls and things like that. So in USQIX, we are diversified across about 20 of the Odyssey funds. And then our second strategy, Tom, before we get to the second strategy, so how does this work? So you have your fees. Are there fees on top of the fees? How does that work for the end investor? There are. And we're actually the lowest cost real estate interval fund on the market. I have to put that in there. So we are very cost conscious at the top level. And at the underlying level, the NFI Odyssey funds certainly have expenses as well. That said, most of them are large funds. The Odyssey is the first place that pensions and foundations and endowments go to when they want

private real estate exposure. So a lot of the consultants have been scrutinizing Odyssey funds. And Odyssey dates back to 1978. So this is not a new fad. This has been here a long time. So a lot of your consultants go to NFI Odyssey funds as their first stop for private real estate. So fees there have really been scrutinized as well. Very little performance fee. I mean, de minimis, it rounds to maybe a basis point, very limited performance fees and pretty straightforward. There are certainly two aspects of fees, but I think we manage them very well. Got to end the second strategy? Sure, but let me go back to that for one second. We actually compared what the Odyssey Funds charged to what publicly traded REITs charge in the general and administrative

expenses. So publicly traded REITs have management teams too. They're buying and selling properties. They're doing financing decisions. And so we compared what their general and administrative expenses, and it's pretty comparable. So there's a cost of doing business in real estate for the management teams to operate real estate. So I would just put that note in there. Our second strategy is PREDX, PRDEX is the ticker. It's, again, rooted in core. So by prospectus, we have to have at least 50% in the NFI Odyssey funds. But that other 50% allows us to take some more discretion with the assets, and we can use other underlying funds that are outside of the Odyssey. And today we have three standalone industrial-only funds, which, as I mentioned earlier in the

podcast, industrial has been the property type to be in. It allows us to, again, have some more discretion about the property types and the geographies we want to be in. Speaking of geographies, I see in the first vehicle that you mentioned, you've got around 44% of the portfolios in the west, 24% is in the southeast and Texas, and another 27% is all the way from, is that what state is? What's above Georgia? Was that South Carolina? South Carolina, North Carolina. Yeah. Not to brag. I know my geography. All the way up to the East Coast through Maine and only 6% in the Midwest area. Why are you so bearish on the Midwest? Not bearish on the Midwest. I know where you live, Ben. I love the Midwest. No, it's just

commercial real estate market. So institutionalized commercial real estate, it's coastal heavy. Let's be honest. That's where the population growth is. That's where the job growth is. And really, the allocation for the Odyssey to the Midwest is effectively Chicago and a little bit in Minneapolis. But two markets that can have some job growth, which ultimately leads to population growth, which is where you want to be. Ben, any thoughts? Unfortunately, I have to side with Michael on this one, Ben. Flyover states, how often do you actually pull the levers here and change the sector or geographic jurisdiction? Is that going to be a slow-moving thing? Or are there times where you will say, listen, something seriously has changed here. We have to take this one down and bring

this one back up or whatever it is. We just try to be well-diversified access points to the space, so we're not going to change too much once we make our decisions. In the pre-dex strategy, certainly we let those decisions play out. And remember, these funds at the underlying level are actively managed. So they're some of the best real estate operators in the world that are making the decisions on what property types to get into and what markets to go into. And so, therefore, we really feel good about that fact that we're bringing you exposure to a broad-based diversified pool of actively managed commercial real estate operators. Are most of your clients, advisors or is this retail base primarily?

We're really focused on the RIA community, the cost efficiency that we bring, the ease of use that we bring, the like-minded investment nature of RIAs, long-term investors that can understand our sales cycles pretty long. So we generally spend three to six months with advisors, before they make an allocation so they understand. But yes, we're RIA-centric. We don't want to be too broad. When you get too broad, that's when you get the headline risk of everybody wants their money out. And really, that's not the case. Maybe a particular channel wants their money out or maybe a particular investor, a foreign investor needs some money or some capital. And so when you limit that and you try to say, okay, we're really just focused on the RIA community and that's

it. That's really where this is sold. I mean, if you went into your personal Schwab account, you would not be able to buy it. So interval funds, you can't buy it in your retail account. You have to have an advisor account. If advisors listening want to learn more, where do they go? How do they find you? Yeah, so we're at us, us both of our strategies. I think we're very, very accessible.

We're always happy to have a conversation. Whether you're interested in actually investing or not, we just love to talk about the space. It's so dynamic. And so, yeah, feel free. Again, usq.com. All of our information is out there. And please feel free to reach out. And I should say, Michael, one quick.

them. If an individual wants to buy the fund, they can. They just have to go and go through an application process. So we want to kind of know our clients. It's not this mass, everybody try to buy the fund. One caveat that I missed earlier. Got it. All right, Tom, this is great. Thank you so much for coming on. You got it. Thank you guys. Thanks to Tom. Thanks to USQ. Remember, if you want to read their new research on public market and private market pricing of real estate, go to usq.com slash animals. Spirits. Send us an email Animal Spiritspot at gmail.com.