Latest / Real Investor Radio Podcast / EP44 | Dennis Cisterna - Commercial Real Estate, Undervalued Opportunities, Investment Strategy

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EP44 | Dennis Cisterna - Commercial Real Estate, Undervalued Opportunities, Investment Strategy · Real Investor Radio Podcast

• Craig Fuhr (00:12) Hey, welcome back everyone to the real investor radio podcast. I'm Craig fewer joined by a whole host of characters today, including my good friend, Jack, but via Jack, it's good to see you. Jack BeVier (00:24) Yeah, you too, man. Good morning. Good morning. Looks like you're in a nice, nice, pleasant weather experience having there. Where are you at? Craig Fuhr (00:31) I'm not gonna lie. There's a reason why I never vacation in April and I'm in the midst of that right now I don't like to come to Myrtle Beach, South Carolina and have to wear the heaviest sweater in my closet But today it's windy and chilly for a great day of softball For mount to sales to see if they can eke out a win. They're o and two right now So we'll see if they can I got two games today. My daughter's a starting pitcher sophomore, so she's been having a great series, but unfortunately lots of unforced errors by the team, Jack. So it's been a, it's been a cavalcade, but anyway, uh, Jack, so, uh, I'm so excited today. We've got Dennis back. We've got Fred, uh, the, uh, the not often seen on the podcast Fred, but when he's here, you know, it's important. So welcome guys. Welcome back to the show. Dennis is stern and Fred Lewis. Um, guys, it's great to have you. Fred Lewis (01:24) It's a pleasure to be here with you boys. Dennis Cisterna III (01:26) Thanks, Craig. Good to see you, Jack. Craig Fuhr (01:29) So Jack, why don't you go ahead and start us off with a little overview of Sentinel and then we'll get rolling on the conversation here. Jack BeVier (01:36) Yeah. So, um, we were probably eight months ago had, uh, these guys on to talk about Sentinel net lease, which is, uh, real estate, private equity, uh, fund and group that invests in net lease projects, including some office, uh, they've done a fair number of office deals during the COVID timeframe and they've continued to buy though. I think, uh, more, more, um, you know, with greater scrutiny as 2023 letter part of 2022 and 2023 happened. Um, but they're still been still finding deals and they're great. Um, kind of insight into what's going on in the office market and they've pivoted their approach a little bit as well. So we wanted to dig into that, kind of find out a little bit about the good, bad and the ugly of how, of what's going on in office and net lease these days. And if you think that there's any, uh, interesting opportunities. So that's the stuff I wanted to, uh, kind of dig in with today and get a, get a market update from them. Dennis Cisterna III (02:33) You know, I'm going to jump in and let you know that Fred will tell you we have always highly scrutinized every deal we've ever acquired. So as market conditions have changed, our approach and our diligence remains as important as ever. Jack BeVier (02:47) that fast absolutely absolutely yes sir what Craig Fuhr (02:51) Dennis, obviously we are a lot of residential and multi -family listeners in the podcast, but I've spoken to quite a few listeners since you've come on and folks were sort of blown away by your business. And maybe you could just explain quickly for those who are new to the podcast what Sentinel does in terms of net lease. your platform and sort of how that works and then we can jump into what you guys have done over the last eight months and where the company is heading now. Dennis Cisterna III (03:26) Absolutely. So our focus is on office, retail and industrial with an emphasis on the office portion. And the vast majority of our portfolio and what we continue to acquire are these single tenant net lease deals. And so single tenant, just one tenant occupies the entire building. And then the net lease aspect of this means the majority of the operating costs. Um, and responsibilities fall on the tenant, not the landlord. So it's a way to grow a commercial portfolio without having a massive infrastructure. Um, because a lot of those, uh, asset management and in property management, uh, related activities are passed down to the tenant instead of, uh, to the owner. So that, that's certainly helpful. And, um, you know, I would tell you the, the, The theme behind what we're doing is pretty simple. We're looking for mission critical real estate that is secured by long -term leases. And the general thesis we've had, although it's shifted slightly, has always been, can we produce a solid risk adjusted return where the in -place cash on cash on an annual basis exceeds what you can find elsewhere in the marketplace? And so... As you might imagine, when interest rates were low, we were buying things at like a seven or an 8 % cap rate and we were buying at three and a half. We were producing, you know, on average through our whole portfolio, almost a 12 % cash on cash return. Now that the interest rates are so much higher, you know, generally six and a half to seven and a half percent on most commercial real estate term loans. Well, now we've got to buy at a, you know, a nine to a 12 cap. And, Luckily, because we are not a multi -billion dollar private equity firm that has a gun to our head to deploy capital, we can be very strategic on what we buy. And I think the biggest thing that we can talk about as it relates to offices are the office macro fundamentals. Great. No, but because conventional wisdom has thrown the baby out with the bathwater in terms of that entire sector, there's a lot of... what we think are really undervalued opportunities in the office sector, where we can buy something with 10, 15, 20 years of lease term with a very solid tenant in tow and know that by doing that, we're gonna get a accretive debt, which is very hard to do in every asset class right now, because cap rates have not adjusted to the current lending cycle, but also get a... significant, if not entire return of capital from just contractual lease income. So it puts us in a really good spot to, you know, be able to outperform our high yield savings accounts, which I think is a tough, tough and tall order for a lot of the multifamily and industrial opportunities right now, because the cap rates are still tighter than the actual cost of borrow. Jack BeVier (06:37) Yeah, you've you've we've had had that experience as well in the residential side, just buying single family houses two years ago, 80 % of what we were buying, we were keeping as rentals today, 10 % of what we're buying, we're keeping as rentals. And it's because of that accretive debt issue that you're talking about, like, I don't want to have negative debt service coverage, even if you know, even with you know, even with a long term outlook, you know, servicing the debt and making them, you know, making the bills. matters, right? In the short, in the short term, it is a reality. And so, uh, we've not been able to keep as many properties. Now you mentioned, you mentioned that you're finding deals that have a creative debt. I would have thought that the past, you know, a year ago, there wasn't a whole lot of deal volume happening period, right? Like there wasn't yet there was, there was a bid, but there wasn't a, a taker from the seller side of things. You, do you guys feel that that has, that that has started to adjust to realistic expectations on the seller side. Dennis Cisterna III (07:38) Yeah, I think that, and I think we were starting to see a little bit of it last time we were on the podcast that some sellers were starting to understand that, hey, this doesn't seem to be reversing itself quickly. I think a lot of people were very interested in Powell's lip service early on as it relates to rate cuts. And then as the economy kind of kept humming along, inflation stayed up. job growth was still there. There was no real reason to necessarily lower those interest rates. And so the reality became this hire for longer mantra. And I think now you're seeing, even as Powell says, you know, during a briefing that, you know, they think they're gonna, they still have three rate cuts this year. You listen to the other members of the Federal Reserve saying, maybe we'll get one this year, you know, or we're not quite sure. So it just seems to us that these elevated interest rates are gonna remain for a while. And let's be honest, a 25 or 50 basis point cut in the current rates isn't gonna do much for anyone because the bid -ask spread, to your point, is still significantly wider than that for most asset types. And I think with Office, because the macro view on it is that it has weak fundamentals, people have been... quicker to reset the pricing for that sector quicker. And so we've seen more opportunities start to free up over the, really since the beginning of the year. It's been pretty dramatic. I think last time we spoke to you guys, we just closed in our second deal and we only bought two deals in all of 2023. Right now we have four deals under contract and it's April. And everything that we're buying now is. longer duration and a higher cap rate, which kind of we need to check off the boxes to get that accretive debt and that projected return of capital from contractual lease income. Jack BeVier (09:45) So you've seen cap rate expansion over the, you know, over the past six months, you'd say you'd see you've seen significant cap rate compassion, cap rate expansion. How much? 100 basis points, 200 basis points? Dennis Cisterna III (09:56) Yeah, I would say very easily in the office sector, you're seeing, you know, the, the actual completed deal starting to move at least a hundred basis points, if not more. And what's happening in this environment that is where Fred and I think we have a nice runway going forward is with each new closed deal at these elevated cap rates, it really starts to make that number more of the baseline. So if a broker is going to go out to market right now, and they're going to say, I'm representing a market seller, then great. We give them an army of closed properties that are nine and 10 caps, not seven and eight caps. And so it's really at this point where anybody that's either buying or selling in this market, unless they can catch a 1031 buyer that's desperate, there's not a huge universe of office buyers right now in general. And we are all... pretty darn tight on where we think the pricing should be on these assets. And so even when we don't win a deal, we're probably only 5 % off of the winning bid. Whereas before, when interest rates were still moving all over the place, it was the wild wild west, somebody might win a bid by being $5 million or 25 % higher than the next bidder, but then they found out they couldn't get financing the way they thought they would. the deal would unwind and then it would go kind of to the next guy in the queue. In fact, for three of the four deals that we have under contract, we are the third buyer for those. And it's something where it's just part of the discipline we have as buyers. We always stay interested. Our price goes down each time that it comes back to us. So with no disrespect to the sellers we're working with, we feel very, comfortable with our basis at this point. And we never say, I told you so you should have just sold this to us the first time. But I think our certainty of execution has started to provide very valuable opportunities to us because we have a reputation to do what we say we're going to do. And that is a, it shouldn't be a tall order as a real estate operator, but it is. So we've, we benefited from that as sellers get fatigue in the market from folks that aren't able to close. Craig Fuhr (12:19) The last time you were on the show, go ahead, Fred. Fred Lewis (12:19) Jack, I had one thought to what Dennis just said as far as the kind of seller mentality. So we have one deal of that, worth the very last deal of that is a tenant that's publicly traded. We bid on this deal three times last year, three different times last year. And each time we weren't even second, we were probably third or fourth and it kept coming back. And it came back three or four times. And just a couple of weeks ago, Dennis sent over a new bid that was worse than our other bids. And they agreed to the price. Right. So it's a lot. Dennis Cisterna III (13:02) by a wide margin. Jack BeVier (13:04) So why do you let me press you on that a little bit? Why do you think that you're not catching a falling knife here, right? If everybody else isn't executing and all of a sudden you're winning the bid, how do you guys feel comfortable that you're not just the sucker coming in a little early, you know, coming in early and prices are going to continue to slide. Like there's nothing about the office fundamental, you know, at least psychology that's changed. So why is all of a sudden now a good time to be getting back in? Dennis Cisterna III (13:31) Well, I would disagree that the psychology has changed. I think if you look at most Fortune 500 executives, they want their employees back in the office. And now that we're starting to see employment growth slow down and earnings not be as spectacular as they were previously, there's going to be a tipping point where we've had this labor force shortage for the last several years. Craig Fuhr (13:40) Yeah, but they're not coming though. Dennis Cisterna III (14:00) because boomers have exited the workplace and we've been growing the economy at a pretty great clip. Well, as that economy slows down and jobs, there are less jobs and there is actual demand for those jobs, the leverage is gonna go back into the employer's hands and they're gonna be able to start moving back towards that four to five days in the office. You're already seeing that with a number of firms that have kind of put their foot down on it early. and have worked through it. I think you also have where companies have spent the last several years, right sizing their, their office footprint. So I think that helps as well. Um, and then the last point from a macro perspective is, you know, you look at this vacant office buildings that are kind of eighties and 90 early nineties vintage. Those businesses are functionally, those buildings are functionally obsolete. Nobody is buying those and putting $200 a square foot of improvements to them. Most of them are buying them for the residual land value or looking at repurposing them in some areas, depending on the floor plate and the layout and everything else. But that's already a huge percentage of the overall supply that's actually not coming back. So if you look at the macro vacancy rate in this country for office, it's like, 18 or 19 % right now is the overall vacancy rate, which is 30 % higher than the historical average, even close to 40 % higher. If you start taking away all those office buildings that are counted in the overall inventory number, but realize that those aren't coming back, well, guess what? Now we're under 15%. Now we're only 15 to 20 % off the historical norm. And so that alone gives us some confidence that over the next five to 10 years, we're gonna right size the office sector. And with that, where we're protected is we're not buying deals that have two years of lease term left, we're buying deals that are 15 years, 20 years of lease term remaining. So it allows us to kind of ride the market and catching the falling knife is interesting because I have yet to meet an investor who has caught it right at the bottom perfectly. But. What I will tell you is we think that with the duration we're buying and at the basis we're buying at, which is a diff, you know, a fraction of replacement cost that combined with it being able to clip a double digit cash on cash return in this environment, that, that kind of adjusts that adjust our risk perspective on why we think this is a good deal because if interest rates do come inside in the next 24, 36, 48 months, and there are active buyers in the office sector, guess what? It's not like just one sector compresses on cap rates when interest rates go down, they all do. So things that we're buying that are a 10 or an 11, maybe they become a nine or an eight, but that 200 bips of spread is more than enough to beat the pants off of any other sector right now, because you're gonna factor in the cash on cash that we're able to generate right now that is double or triple the other, the other strategies right now, like multifamily industrial, you know, those guys are lucky if they get to a five cash on cash with leverage. So if we're gonna do a 10 to a 15, we're generating a substantial amount of potential profit just from the in -place contractual lease income. And then if cap rate compression happens in the future at some period of time, we're gonna benefit the same way the other sectors do. And so that's why I think we're able to generate an IRR that is a lot higher than those other strategies without taking lease up risk, without taking construction risk, and really just buying at the right price. That is 90 % of this game, whether people want to admit it or not. If you buy at the right time, you can do a lot of things. It saved a lot of multifamily investors' butts over the last 10 decades by the fact that that market was red hot and only went up. There are some... Very questionable operators that made a ton of money over that time because the market saved them, not because they knew how to buy at the right price. Jack BeVier (18:21) What do you think? I've heard, I've heard different theses about, Hey, if you're going to do office, here's the segments you want to do. Like, do you know, do a, do healthcare and education office because that's safe. Cause that's got tailwinds to it or, you know, special specialty office for, for healthcare, for example, or a class C is dead and go to class a, you know, the classic like flight to quality in a down market thesis. What do you guys think? matters and what do you guys think doesn't matter in terms of long -term risk adjusted return for office? Dennis Cisterna III (18:57) Well, that's great. Craig Fuhr (18:58) I'd be interested if you could just tag on to that if there's any specific markets as well that you think are sort of shining out better than others. Dennis Cisterna III (19:07) Two great questions. And I think Fred and I are very aligned here, so I'm sure he'll want to add some, I'm going to miss something in my answer here, I'm sure. So I would tell you, number one, geographically, we love the Midwest and the Southeast. The Midwest is, it's known as the flyover states, but when it comes to private equity and institutional investors, it's really the flyover states because, They are attracted to the hyper growth of New York and LA and Miami and San Francisco. And obviously you see that hasn't worked out too well for San Francisco or LA for that matter and parts of New York. Miami is doing okay. But what we're looking for is stability and value. And we think there are a lot of very attractive markets in the Midwest that actually are producing, you know, They actually are having job growth, population growth, and offer an extremely high quality of life. And we think that's really important when you're buying an office property, because you want to be in places that people want to live. So we are generally within those metro areas. We're in the nicer suburbs that have the best schools, best commercial services, generally in the top income thresholds. And... So we're looking at this from a point of view of saying, look, this is gonna be a consistently in demand area. And if we can buy it at the right price, we're protecting ourselves against new competition because if there is gonna be growth in that market, it would probably be in the well -to -do areas. It's also important to note that this is all suburban. We do not touch downtowns. I would probably say things that are overly negative. that are not fit for this podcast about what I think the future of downtowns are for the next five to 10 years. But I really think it's this doom loop of homelessness, lack of safety, just no real incentive for people to go to a downtown environment anymore, especially as the suburbs have become the new cultural hubs for a lot of these metro areas. If you look at where the... You go to Orange County, California, you know, there is no downtown. It's just all suburbs and you know, that's where the nice restaurants are populated. And if you go into places like Houston, you know, in Houston, you're going up to the Woodlands where the nicest restaurants are being open, not downtown. So it's this flight to quality from a location standpoint. And then Jack, to answer your question from a... an asset type, yeah, we're looking for generally, you know, 2000 or newer construction on our office properties. And we want a company that has generally been in this building for a little while and is going to continue to be in this building for a little while. And we think that's a good way for us to, to play in this space. We do agree with you that 80s vintage, unless it's been like totally retrofit is just not a great investment. We also don't like, um, a huge multi -tenant buildings where, you know, let's say it's a 100 ,000 square foot building, but it's got 30 tenants in it. Like that's, we're not interested in the turnover of that. We don't think that those types of buildings weather the storm very quickly because those tenant bases can be very reactive to the economy. Whereas the buildings we're buying have a single tenant that generally are credit rated. So the default risk is very low and it's, um, putting us in a good spot by being in one of the nicest buildings in the nicest sub markets and what we consider our good value oriented metro areas. Jack BeVier (22:56) So who are these? Craig Fuhr (22:57) So Dennis, is it always single tenant only or do you take? Dennis Cisterna III (23:01) No, we have a we have a few deals where we have two tenants in there. And then we have one building that has seven tenants. But like, we don't have a rule of thumb for how many is too many. But generally speaking, we're not looking for anything that has more than five tenants. And if it does have more than five, it's got to be a really exceptional deal for us where we we love the real estate. And our goal in all of these. is to really consolidate the smaller tenants into bigger tenants over time. So, and conversely, if we have a single tenant that has too much space and maybe they wanna move down, then we're gonna be good stewards of the property and work with them and then maybe bring in another tenant if that's helpful to the long -term goal of the company. That's really, I think what sets us apart from a lot of other institutional operators that are just kind of so yield focused. They don't think about the relationship with the tenant. And in this environment, in office, really in any asset type, you've got to be thoughtful about what the wants and needs of your tenants are so that you can retain them as long as possible. Craig Fuhr (24:13) Is there always at least one tenant that is sort of that long -term lease that you're looking for? Like the anchor tenant, let's say. Dennis Cisterna III (24:19) Yeah. So, so even on a deal that would have more than one tenant, the weighted average lease term needs to be at least eight years right now for us. So it is a substantial amount of duration. And I, and of the four deals we have under contract, um, two of them are retail deals. Actually, those have a single tenant, uh, fitness centers. Those have a decade of lease term remaining. And then the two office properties requiring, uh, 11 years of lease term and 20 years of lease term. So we really are focused right now where we think the biggest benefit for us is we're able to buy at a better price per square foot, at a higher cap rate, and with more duration in place. And so by checking off those boxes, that's really where we're getting to a very comfortable place for a risk adjusted return. Craig Fuhr (25:09) You know, it's funny that you mentioned the Midwest. Sorry, Jack. Jack sent over a housing report done by Burns Consulting to me a few days ago, and I was actually surprised to see that net sales growth is the highest right now for home sales in the Midwest and home starts as well. Everyone thinks Florida, you know, sort of the smile states. But in fact, Florida was actually last and the Midwest is growing most rapidly right now. So. Dennis Cisterna III (25:37) You want to know what's crazy? The fastest growing state from 2022 to 2023 was Kansas. Their gross state product, which is like the GDP for the state level, 9 .7 % year -over -year growth. Jack BeVier (25:50) So who are these? So who are these sellers though? Like, like, you know, who's the seller that's capitulating from a pricing point of view who, but, but who also wants to stay in this place for a long period of time and still has some credit, you know, like that's a, there's a, those, those three don't often overlap and you're, you know, and you're putting the good market overlook, you know, overlay on it. Like, are you, let me ask two questions. Yeah. Who are these talent? tenants or sorry, who are these sellers and what's their motivation? Like how are you getting, why, why are you getting deals done? Right? Like what's the thesis from the seller's point of view as to why they want their willing seller right now. And then also like, how are you logistically like attacking these? Like, are you choosing a market and then looking for all the deals within that market or are you using, Hey, I need a certain, you tell them brokers, Hey, I see need a certain cap rate and then running it through the, the, the aforementioned filters. Dennis Cisterna III (26:43) Yeah, so we do it a couple different ways. And I think there's two, basically there's two types of sellers in this market. So there's the, the existing owners that need to sell for some reason, maybe it's the end of life of a fund. Maybe it's through M and A activity. Maybe it's through strategic dispositions as they reallocate their portfolio, but there are sellers that need to sell in this market. And that's where we are finding common ground right now. Um, the folks that said, I'll go test the market. They get a pretty rude slap in the face because they realized that what, what buyers want to pay in this environment is nowhere close to what, um, they would like to sell at. So it's not a huge universe of, of active deals that are out there, but because of our size, it's enough for us. You know, we don't need to buy more than four or five deals a year. And obviously we're okay buying just two or zero. If, if nothing makes sense. Um, So not having a $10 billion fund, not having that gun to our head to deploy capital is the best thing for us because it allows us to be very strategic. And so that's one arm of the seller universe. The other arm of the seller universe are actually sale leasebacks that are occurring from privately held companies or even publicly traded companies that are... that are just looking to raise more cash. And they are finding that, as you might know, the corporate bond world is not relatively cheap right now. So they'd rather sell the real estate to raise cash than necessarily go try to get corporate bonds. And so that's been a nice avenue for us as well, where companies, they like the real estate, it has utility. And in these situations, we're not talking about something like... Jack BeVier (28:26) That's interesting. Yeah. Dennis Cisterna III (28:35) regional hub office for these guys. Remember they're corporate headquarters. Like they, if they're not there, they're not anywhere. So. Fred Lewis (28:44) Yeah, we're not trying to expose our secrets here about position, but I think, uh, I think those last two that Dennis mentioned are things that we lean in on from the standpoint of the cell lease back of a, of a headquartered building because you get, you get duration, you get interest, you get capacity because they want to be there. And then, and then simply just the strategic disposition part, you have, you have big, big real estate funds. Jack BeVier (28:58) Yeah, we're. Fred Lewis (29:14) that look at it behind a desk in New York somewhere and they say, well, geez, you know, our waiting in office is 5 % too high. So tell our disposition guys to sell an office building. And so they tend to sell an office building that they can get a bid on, that tends to be one of the things that are more productive or make sense. Jack BeVier (29:38) Yeah. And they're not going to do that. Like the, the, the stuff that you're got, you guys are buying is the easier to finance. Um, you know, the, you know, the, the, the more, the longer term, you know, it more investible, right? So like, they're just not even going to get a bid on that multi -tenant property. That's got like 20 % existing vacancy. Like they're getting no bid, right? Like, so that, that stuff's not even in the market, right? Fred Lewis (29:50) Yeah. Dennis Cisterna III (29:57) Yeah, those those deals tend to go out on the auction site as lender assisted sales. Jack BeVier (30:02) Yeah, yeah, yeah, exactly. Fred Lewis (30:06) Well, and let's be clear about when people think about the word office, they immediately think about everything's the same and everything's just not the same. You know, when Dennis referred to kind of the multi -tenant office building in the urban area or even in the gateway cities, that's not at all what we do. That has zero interest. We're as nervous about that as the market is nervous about that. Our business is completely different from that. on the Sentinel point is that suburban, good demographics, good inflows, economic growth, and it's where people are gravitating. It's where the newer economic activity is. And, you know, for example, we have a large building with a telecommunications tenant that just invested several million dollars in their space. And they demanded every culturally, they demanded a year ago or so to have everyone come back to work and they succeeded. And that building is not only 100 % occupied, but they're booming and they're trying to add to it. And so it's a tale of two completely different stories when you think about kind of the headquartered mission critical suburban economic growth story versus the multi -tenant urban center going dark world of office. Jack BeVier (31:20) Mm -hmm. Dennis Cisterna III (31:33) Yeah, we're looking for the successes in office as opposed to the distresses in office. And there's opportunities in the distress side too, but we think the risk for that is just, we do not have the appetite for it right now because if you're looking for an area that doesn't, we're not quite certain where the bottom is. It's those urban downtown centers where I don't know where the light of day comes from. Whereas, you know, we're in a spot where we. Craig Fuhr (31:34) I. Dennis Cisterna III (32:01) We're just totally different. And I'll tell you a very good parallel to that, Jack and Craig, is if you look in Los Angeles, right? Los Angeles has one of the worst urban office markets in the country. The downtown is literally like a war zone in a lot of spots. Homeless out of control. One of the premier office buildings, historically in downtown LA, the Aon building, just sold for like $155 a square foot. You couldn't rebuild this thing for $800 a square foot now, but it sold for a fraction of that. And at the same time, and that building is, is obviously got a lot of distress and does not produce positive cash flow today. And in that same vein, if you go 12 miles to the West to Century City, a group just got a $700 million office construction loan approved because that market is. super high income, very well policed, high earners, high education quality, and able to get the top of the market rents in California, despite it being in the same metro area. It is a tale of two cities, even within the same city. So that shows you the difference in how you can play in two different sandboxes in the same sector. Craig Fuhr (33:17) You know, I... Jack BeVier (33:24) You mentioned throwing the baby out with the bathwater. So speaking of that, how were you financing this? Because all news reports would lead you to indicate that banks are hard off. The regulators, everyone's overexposed in CRE. Losses are unquantified and the regulators don't want to see any new CRE on lenders' books. so much so that it's actually even bled over into the residential side of things where everyone's really positive on the tailwinds. So how do you get who's who's financing this? You taking this stuff down cash? What's that look? Dennis Cisterna III (34:00) I'm letting Fred just sign personal guarantees on everything. Jack BeVier (34:02) Heheheheh Dennis Cisterna III (34:04) I'm kidding. I'm kidding. We actually, we actually are pretty, we are pretty fortunate in the sense that we are, we are very stringent. We only do non -recourse debt, which is, is makes things even tougher now because a lot of the banks that are open for business, for office, want that personal guarantee. But that's obviously the way we're structured. That doesn't make a lot of sense with having, you know, a ton of investors behind us. We're not going to obviously put them on the hook. Jack BeVier (34:30) first night yet. Dennis Cisterna III (34:33) nor would we take overweight exposure ourselves on that risk. So our process has been the same. It helps that obviously, you know, Fred owns a lending company. I've been a lender in the past and a capital markets guy. So our lending process is robust. You know, we go out to 140, 150 lending institutions, every single deal. And in the office space, if you have duration and the tenant is decent quality, you can get CNBS debt. that you can go to the securitized market and get 50 % leverage, 45 % leverage on what I would consider to be not great deals and then up to 60 or even 65 on great long -term stabilized deals. So that market exists. Life co's are open for business for some office, tend to be more interested in industrial and retail. but they're a very active participant because they love putting money out at low leverage at, you know, 7 % right now. And then from the regional bank credit union perspective, it is knock on as many doors as possible and see who's open for business. And you're right, Jack, a lot of them are shut right now. It's a war of attrition on that front where we learn a lot about banks though and how they're set up. to know whether they're capable of being good partners for us. We're a very relationship oriented borrower, so we don't wanna do just one deal with someone, we wanna do 10 deals with someone. And so we just had a great conversation with a regional bank that we're gonna use for a deal in Tennessee. And they're entrepreneurial in nature, they've expanded very quickly, they've been intelligent about what they've lent on, and so they're not in that level of... of distress that a lot of the other banks are in. But it's a needle in a haystack. You know, we like I said, you know, we go to 150 people, we're hoping we can get five term sheets out of that. Luckily, we've perfected that process of outreach and, and kind of filtering down quickly. But it's, it's a lot of work. It's certainly much more work than it's ever been. But it's, it's still there if you're diligent enough, if you have a good deal, and you have a credit officer that, you know, has an IQ over 100. Jack BeVier (36:39) Mm -hmm. Dennis Cisterna III (36:58) As long as you walk them through it, it has some teeth to it because these guys don't necessarily want to be closed to new lending opportunities right now. There's just some different hooks that are now involved that weren't before. Maybe it's a depository relationship. Maybe it's prepayment penalties, lower leverage, shorter am, things like that that they feel protect them, but they know they're in for an incredible basis. So let's go do it. Craig Fuhr (37:27) Is that literally you or someone on your team calling out to each one of these lenders to explain the deal, see if you can get it underwritten or is that what it looks like? Jack BeVier (37:27) Yeah, gotcha. Dennis Cisterna III (37:37) Yeah, so we do our process is very quick. And I think, I think, you know, a lot of operators that listen to your show should should try to emulate something similar. It's we put together a little one page teaser on the debt opportunity. And so we put just kind of the key metrics in there. You know, say where the property is and what we're looking for. And we send that out via email and say, you know, let's set up a time to talk if this is something you're interested in. If not, let us know. And and so we just start filtering that list down. Craig Fuhr (37:47) That's why I asked. Dennis Cisterna III (38:06) And if we don't get a response back, then someone from the team will call that and make sure we're sending this to the right person. And so what happens is we start to have a very good idea about who's active in particular markets. So it helps because now that we're buying properties in multiple states, we have this kind of curated list already for certain markets that makes it a lot easier. Craig Fuhr (38:32) That's great. That's a great tip. Jack BeVier (38:33) So I know I got an email a couple of weeks ago, a week ago that, um, you know, from, from you guys, cause I've, you know, I've, I've invested in Sentinel deals in the past and, um, you guys announced that you are doing something a little bit different from a structural point of view in the past. You've always found a deal, went out and raised the money, a lot of friends and family money in there. Um, what, uh, but you, but you announced that you guys are now doing a fund. So, uh, what's, what's that going to look like? Why are you changing? Like, why are you doing that now? What's, what's, what's been, what doesn't work now about the, the deal on, you know, raise at a time approach. Why the pivot? Dennis Cisterna III (39:12) I actually have a question for you Jack. Were you smart enough to get into the JP Morgan deal that we did? Jack BeVier (39:18) I don't know. I don't know. I was I got into I was in a bunch of them. I heard but I heard you heard you. I talked to Fred about you guys exits. So I've heard you've had some some good exits actually. Craig Fuhr (39:19) I'll see. Jack, I don't. Dennis Cisterna III (39:29) Yeah. Craig Fuhr (39:29) Jake jacket jackets the smart enough part that he threw in there that really I thought was a you gotta go digging back on that you can't let that one pass jack come on. Fred Lewis (39:33) Thank you. Dennis Cisterna III (39:34) ZING Jack BeVier (39:37) You Dennis Cisterna III (39:39) Hey, Jack is one of the best real estate guys I know. So when he doesn't invest into one of our deals, I'm assuming it just got stuck in his spam filter. Fred Lewis (39:39) I just like to look. Jack BeVier (39:47) Yeah, so yeah, I mean, talking about talking about some of the exits that you guys have and and about what you're pivoting to now. Craig Fuhr (39:47) Hahaha! Dennis Cisterna III (39:56) Yeah, so I just want to highlight that real quickly because I think it's important because if you go talk to the average person on Wall Street or the average guy on the street in general and you say, you know, I'm going to invest in office in 2022, they probably think you're crazy. Now that's because they're not really doing any of the research behind what makes a good deal versus a bad deal. And so if you're just going to... Jack BeVier (40:16) Yes. They ask you how much you're reserving for losses on each of those deals, based on the vintage only. Dennis Cisterna III (40:26) Right. Exactly. Yeah. So, so on that, on that deal, we bought it, it's in Springfield, Missouri, which is not a big market. It's half million people. It's the home of Missouri state university. Um, but JP Morgan, their largest call center in the U S almost 300 ,000 square feet. We bought it for effectively, uh, about like $85 a square foot after, um, after credits from the, from the seller and, um, Uh, JP Morgan wanted to reduce their footprint a little bit, which they were contractually allowed to do. We thought they would do it. Um, so we were taking that, that small piece out to the market to lease and we had, uh, a healthcare operator come to us and say, that's who we actually thought would be the tenant. And they said, you know what? Uh, we, we did, we had 30 acres. We were going to develop a new campus on, but we'll, we'll just buy your building if you're okay with it. And, um, You know, we are not sellers in this market unless somebody wants to pay us a number. It's like the Zillow, the make me move. Give me the make me move number. And we were able to get the make me move number done. And so we generated a one nine equity multiple. That means, you know, 190 % of return on investment in 23 months. So our investors netted an IRR of 36%. Jack BeVier (41:32) ss ss ss ss Dennis Cisterna III (41:52) ended up making 70 % on their money in less than two years. And I challenge anybody that listens to this to go find a deal that was bought in 2022 and sold in 2024 and yielded that type of return. And obviously those results are not typical. It wasn't what our business plan is, but one of the benefits of being entrepreneurial the way Fred and I are is... We're going to look at each opportunity as it comes up and see if that's the right decision. We're not going to sell because it's the time it's, it's the wrong time to sell because we're governed by some exterior force. Um, this just made sense for us, um, to do rather than just hold it on longer term. This was essentially exceeding our projected returns in a fraction of the time. So why wouldn't you? Um, and so, um, and so with that, because. Because that deal was such a home run and we only had probably about 25 % of our investors, we have about 330 investors in our platform overall, they missed out. And Fred and I were looking at doing something that would not only allow us to make sure investors didn't miss those good opportunities, but also just naturally diversify what they're doing. And so that's why we created what's called Sentinel Opportunity Fund One, which literally just launched. And so it's, it's a hundred million dollar commercial real estate fund only focused on long -term stabilized office industrial retail. And so in that as an investor, you know, the benefits are pretty simple, right? You're getting institutional caliber assets, a highly diversified portfolio. The tax benefits are great. It's just a simplified form K one for the whole fund. We use accelerated depreciation the way we did before. So economically, it looks and feels a lot like the one -by -one deals, but our advantage as an operator in having a fund means that we can go out and buy a property cash if we need to and go refinance later. And having that heft behind us is essential right now because that desire for certainty of execution by sellers is really what is getting you to win deals in this environment. So we look at it as a win -win for the investors where, hey, we're gonna be able to keep doing what we've been doing with a better risk adjusted return profile because of how we're adapting to the market. And it allows us an ability to scale the platform intelligently by getting better opportunities because we have this war chest of cash in addition to. being able to go out to a larger universe of investors to share what our investment strategy is. That's really one of the things that has been interesting is we grew our platform. We would do deal by deals and we would start raising money and we would raise money in like four days and we wouldn't have an opportunity to go market it to anybody outside of our existing investor base. And so we thought with the fund, you know, we've got an 18 month fundraising window to raise a hundred million bucks. It gives us the time to actually go share our platform, share our successes, share all this great infrastructure that we've built as really a Wall Street caliber investment shop that's really geared towards smaller investors that are, you know, investing $100 ,000, $200 ,000 at a time, not tens of millions. Jack BeVier (45:28) That's really interesting. So you'll be able to, you'll be able to, you know, as you mentioned, you've gotten some of your best deals by being the, the third bid in line, fourth bit in line, wait for the other one to fall out because their credit unions loan, you know, loan committee got nervous. That was last week because there was something was written in the wall street journal. That deal falls apart. And now you're there with the broker being like, Hey, I'm, I'm the certainty of execution bid, and you should get paid for being the certainty of execution bid and in a liquid market. So that makes a, Dennis Cisterna III (45:56) That's exactly right. That's how this last deal that we got the headquarters was. We had a track record with this broker and the broker vouchers and said, these guys are going to get the deal done. So if you want to stop screwing around with groups, yeah, you're going to pay a little less. But if you do another group and those guys don't perform, your next bid is going to be lower anyway. And I think that's what a lot of these sellers are starting to understand is, Jack BeVier (46:21) Mm -hmm. Dennis Cisterna III (46:26) at some point, you know, the buck has to stop and you just got to pick an actual operator that can do what they say they're going to do. Jack BeVier (46:35) Yeah, super interesting. Craig Fuhr (46:37) So from an investment standpoint, you said you're looking at like an 18 month window to raise the 100 million, 100 ,000, 200 ,000 or more that someone wants to invest. How long would that money, how long would they have to keep the money in the fund? Dennis Cisterna III (46:53) Yeah. So the fund, so the basic timeline is the fund is we have up to 18 months to, to raise the a hundred million. We literally launched. Officially two days ago, uh, we gave some of our existing investors a free look, but we've already, we've already got commitments of close to 20 million already. So we're on the right path early on. Um, and then, so we're going to have up to that 18 month window. Once we get commitments for the full, um, a hundred million. Then we go into what's considered the acquisition phase, which we've actually technically already started because we have deals that when we do the first closing of the fund, there will be either one or three deals that are part of that closing. And so some of that capital will be called immediately. And when you commit to the fund, it's not as if we take all the money and it just sits in an account. We call it as it's needed over time because... The last thing we want to do is tie up your money and have it not going anywhere. Nor as investors, do we want to pay a preferred rate of return for something we can go invest on. So that money is called over time, but we basically have a 36 month window to acquire assets for the full fund. And we think with leverage, that'll end up being somewhere between 220 and 250 million worth of assets. And then once we've acquired all those assets, the fund life itself is seven years long. And then we have a couple extension options in there. So again, we're not stuck with a timing option, a timing issue in terms of when we dispose on the assets. But the general thesis here is we've got a two or three year window to buy at these elevated cap rates with long duration. At some point over the next half decade or so, interest rates go back down to a very attractive level where cap rates compress. And at that point we move on from the portfolio. But if that doesn't happen, we want to make sure we have the flexibility to. have our investors get the majority of their capital back from the contractual lease income of the properties we're acquiring. So, you know, there is no secondary market for fund investments, just like there's not for syndications. But if people need to liquidate for any reason, what we do is we take out those positions back to our existing investor base and see if anybody wants to take those positions. But that's really kind of the best thing we can do for folks in that environment, because it's not that liquid. Jack BeVier (49:17) I've talked to Fred about this that I think that this is going to lead to, I think this is going to be a really good example when we're looking back 20 years from now of the inefficiency of real estate in that we had a disruption COVID which caused a significant dislocation in a particular sector and that sector is taking a nosedive. We'll find a bottom. at some point and to your point, you know, calling market bottoms is not a thing that anyone has any track record of doing successfully. So just, you know, buying it's, you know, being a little bit early is also is okay, you know, and frankly, a lot better than being a little late as you're riding it back up. Because you want to deploy capital, you know, having deployed capital at the bottom, whether that was your, you know, your Dennis Cisterna III (49:54) Right. Jack BeVier (50:13) first deal or fifth deal is great, right? Like that's the win is buying well. So I think that that's a really interesting or really important part of this thesis. And then it's not as if the American economy is shrinking, right? Like we've got a still expanding population. We're going towards 400 million people population. And we know what we're not, we're under building residential real estate. you know, other than maybe Century City, I don't know of any office going up from 2020 to 2030, right? Or 2028, right? Like who the hell's building new buildings? Dennis Cisterna III (50:44) That's. That's a big part of our thesis is, you know, right now we think we're buying between 30 and 40 % off of historical norm pricing. And that is akin to the discounts you bought at the floor of residential opportunities after the recession. And then looking at the supply going forward, it's funny, you know, we have new tenants coming into a couple of our spaces. And you know, they're like, oh, well, we've downsized from a hundred thousand square feet to 40. I'm like, okay, cool. That makes sense. And they're like, by the way, we would like an option to expand an extra 40 ,000 square feet. And I'm like, okay, so you, right. Cause we're, cause, cause we don't plan on being the same size five or 10 years from now. So we want to know that if we do grow, we have a place to grow. And I'm like, of course. Yeah. We'd be more than happy for you to take more space over time. Jack BeVier (51:25) we're because we're hiring because we're hiring like crazy because job growth is Dennis Cisterna III (51:39) But it just goes to show you that even as people right size today, they have an eye on the future and whatever that growth is. Because I think if you're finding a company that wants to be stagnant, that's probably not a company you want as a tenant anyway. Jack BeVier (51:52) Yeah. And you guys are buying it like, you know, half of replacement cost, right? On what actually to put these things back into the ground. Dennis Cisterna III (51:57) Yeah, less usually. So our basis on most of our deals right now is between $100 and $150 a square foot. And for these type of office buildings, you can't touch them for under $350 in this environment. Jack BeVier (52:13) Yeah. So all the, all the inventory built prior to, you know, pick a pick a date, 1995, 2000 is going to continue to depreciate, continue to be less and less attractive. Um, you guys have the most recently built building and you own it at, you know, 35 % of what it costs to replace that. By the way, that was the thesis in 2011, right? Like, The concern was that we've built more houses than we'll ever occupy. Well, you know, we may have overbuilt for a generation and we're never going to occupy these things. And as a result, they're selling at 35 cents of replacement cost and they were built in 2010 or, you know, they're built in 2005 and we're buying them in 2010. And we're like, you're kidding me. It's, it's five years old. Like this is a brand new house. If, if, if we ever build houses in America again, this thing's going up by three and we love, we, I would just. we've, we loved that when we started buying houses in Atlanta. And that was, I'm like, that's the same thesis, right? Like it's a period in time where people think it may never be occupied again. That, that thesis is a bet against the American economy, which I just, I just fundamentally disagree with. And you're making a replacement cost argument and you've got, and even better, you've got long -term income in the meantime, you don't even have to worry about, um, you don't even have to worry about. annual mark to market leases, you can lock in an income stream for a long, you know, long, long duration. And while you're writing that out, I do think you guys have, you know, you know, I think you guys have in coming up with your thesis mitigated a lot of the real risks and that are associated with the sector right now in the approach. Dennis Cisterna III (53:53) Yeah, many, many late, late night phone calls between Fred and I to figure out if, if, you know, what, what to kind of trim away from the edges on, on what's too much risk and too much concentration in one thing, but it's, um, it's, it's been pretty good so far for sure. And I think that predictability has, has really helped our investors from the contractual lease income, right? Like our, since we started, you know, we've, we've, we've had, you know, over a thousand distributions to our investors across all our assets. We've. We've paid 99 .2 % of what we projected. Like that's, that's hard to thread the needle on a lot of other asset types. But when you have these net leases with contractual income, it's, it's, it is a lot more like advanced coupon clipping. Um, when it comes to what the, um, what those distributions look like, but I will caveat that was saying, cause I know what's going to come out of Fred's mouth is, you know, we also do a ton of diligence to make sure that we've already accounted for and reserved for. some of those unexpected things that may occur when it is our responsibility or some other change in the market occurs. Fred Lewis (55:06) Well, yeah, I think the economic approach is different. When you think about net lease, stabilized real estate when you acquire day one, a lot of it is about the diligence you do upfront and the reconciliation of what the expenses really are, what they're not, to make sure that you got it down. But once you take it over, you're dealing with something stabilized. So you're projecting what you already know you're receiving. Compare that to multifamily. We invested, Domingan invested in a number of multifamily deals a couple of years ago. And we were just looking at them the other day with Linda and their 50 % off projection. Jack BeVier (55:49) In terms of distributions rent rent rent rents were projected, you know, falsely high expenses were projected falsely low. Yeah. Fred Lewis (55:50) in terms of distributions. Exactly. And that is a fact across so many of these multifamily investment platforms is that in the fine print of the assumptions, many of those assumptions did not bear out because that's how they get paid for them to bear out because they're buying at a cap rate as it relates to the debt structure that that's what they convince themselves of. So, I think we're smart investors and we're 50 % off our investments and they were multifamily. So that's just as a comparison, it's again, very different. And then one other point I wanted to make that Dennis alluded to is that when you have new tenants that come in or downsizing and hopefully they upsize at some point, you also have the owner user market. that no longer can just to the extent they want to go build something in the next five years. Why would they? Why would they build anything? If they want something beautiful, the cost to build is so high and the construction development fees are so high, they can go buy a building from a Sentinel company and say, well, I'll just make it the way I want to make it because I'm going to get a basis so much lower. than if I had to go build that delta, that spread could not be more significant right now than it's been probably for a decade or so. Craig Fuhr (57:35) Great point. Jack BeVier (57:36) Cool, well, super interesting. It's great to have you guys on. Thanks for talking out the thesis and where you guys think the real risks and the opportunities are. How do folks, if they're interested in the fund and get in learning more about that, how do they get in touch with you guys? Dennis Cisterna III (57:55) Yeah, so the fund has its own website. It's sentinelopfund .com. So that's sentinelopfund .com. And you can download the investment summary for the fund from that page. And it'll kind of give you a much more detailed overview of our strategy, our track record, the fund's terms. Uh, as well as our pipeline of deals, you know, I think that's an important thing when you're talking about a fund investment is can the people actually execute or can the firm actually execute on, on their business plan? Well, you know, that's why Fred and I wanted to have deals in hand when we started this. So, you know, like I said, we, we're not going to do our first closing for the fund until the end of May. And we've already got four properties under contract. So, um, you know, Yeah, we give ourselves 18 months to raise those funds and then another three years to go out and buy the properties. But we hope we can do both in a very expeditious manner and get the cashflow pumping for those investors early and often. And then after you've reviewed that, all the contact information's on the SentinelOpFund .com website. And you can reach out to us with questions. We do webinars. We have one -on -one meetings. Any which way you want to learn about what we're doing and how to participate, we're available for you. I stopped putting Fred's cell phone number up there because he got a lot of late night calls from very excited investors. But, you know. Fred Lewis (59:25) I'll see you in a minute. Well, if you go to SentinelOpFun .com, there's a two minute video of just Dennis talking like he likes to about how great the fund is. So, and he's got a brand new blue blazer with a nice little pocket square. So check it out. It's a pretty cool video. Craig Fuhr (59:48) So there's that, there's that Jack. Dennis Cisterna III (59:50) That will be used as fodder for the next 10 years. And the worst part is there's like five of them that we're finishing right now that each highlight a different aspect of the fund. So Fred's gonna have some fun with that for a while. Craig Fuhr (59:59) Different blazer? Same blazer, different blazer. It's important. Jack BeVier (1:00:01) Nice. Dennis Cisterna III (1:00:04) Well, we recorded it all in one day, so it's just one blazer in the entire video. But it is a very nice jacket, high quality Italian thread. Fred Lewis (1:00:11) You went good. Jack BeVier (1:00:12) You gotta amortize that jacket, yeah. Dennis Cisterna III (1:00:14) That's right. Jack BeVier (1:00:17) All right, guys. Hey, thanks. Thanks a ton for having for coming on. It's been a pleasure to speak with you guys and get an update on this. It's always, always really interesting to hear you guys perspective. Uh, you know, we do it, we cover a lot of Rezzi topics, but you know, always very interesting commercial real estate. And certainly from an opportunities point of view, what you guys are focused on with Sentinel, I think is the most interesting and potentially lucrative thing that's going on right now in real estate investing. So really appreciate your, uh, giving us your, your insights on that, that segment. Thank you. Craig Fuhr (1:00:17) Well guys, uh... Dennis Cisterna III (1:00:47) Yeah, awesome. Thanks Jack and Craig for having us both. And Fred, thanks for starting both these companies so that we all have something to do. Fred Lewis (1:00:49) Boom. Appreciate it. Craig Fuhr (1:00:55) Hey, so for our listeners who want to go back and listen to the episode with Dennis that we recorded very early on in the podcast, I'd invite you to go to realinvestorradio .com and go back and listen to really a great episode with Dennis where we talked at length about the deals that you were doing at the time, the due diligence that you would go through in the deals, a lot of what we covered today, but just in far greater detail. So I'd encourage folks to go back and listen to that. Dennis, thank you again for your time. Really appreciate it. Fred, always good to see you. Always good. All right, that's the episode for today, folks. Thanks for tuning in. We'll talk to you next time. Fred Lewis (1:01:33) of it. Great. Appreciate this. Dennis Cisterna III (1:01:36) Thanks guys.