It’s been often said that “you can make money in any market.” So where’s the opportunity in 2023 commercial real estate, given the current economic headwinds?
Daniel Farber, CEO of HLC Equity, joins Andy Hagans to discuss how his firm’s longevity helps to inform their unique real estate investment strategy.
Episode Highlights
- Background on HLC Equity, and the firm’s origin as a single family office.
- How the firm’s 70-year history helps them to maintain a patient, long-term investment philosophy.
- Why long-tenured employees can be a unique asset when determining things such as a company’s “core values.”
- Daniel’s thoughts on inflation, interest rates, and where the economy may go from here.
- Why Daniel is bullish on CRE opportunities in the year ahead, and how HLC Equity plans to take advantage of the opportunities that may arise.
Today’s Guest: Daniel Farber, HLC Equity
About The Alternative Investment Podcast
The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.
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Show Transcript
Andy: Welcome to the show. I’m Andy Hagans, and today we’re talking about commercial real estate opportunities in the 2023 market. Very interesting times. And joining me today is a very interesting family office and asset management firm, with a unique strategy. I’m speaking with Daniel Farber, who is CEO at HLC Equity. Daniel, welcome to the show.
Daniel: Thanks a lot, Andy. It’s great to be here, and it’s great to meet your crowd.
Andy: Yeah, absolutely. And so, we’re gonna be talking about a lot today. You know, I wanna get kind of a macro landscape-type update, you know, because I know you’re involved with a lot of CRE investments and assets. But before that, you know, I’d like to get your backstory, because we’ve had several different family offices on the show, and you know what they say, if you know one family office, you know one family office. So, you all have grown from being a family office into being an active GP/operator/sponsor. So, could you tell us a little bit about HLC Equity and how you’ve evolved over time?
Daniel: Yeah, sure. Definitely, with pleasure. And you’re right. That saying is very true, and it’s very true with us. So, the quick kinda history and story of our firm is, you know, basically it wasn’t the situation where it was a family office and you just kinda knew that it was a family office. Basically, my grandfather was a very ambitious individual, who ended up having some success in business, and with that success in business, ended up building out a real estate portfolio. And for a long period of time, it was essentially kinda like a real estate portfolio of family holdings.
And at a certain point in time, I, growing up, did not ever have in mind that I was joining any sort of family business, or necessarily that that’s even what I was gonna do. I was on my own track. I actually became a journalist at the age of 16, as an intern, and then later kept on doing that. But, you know, life takes in all kinds of different directions, and after working in both journalism and in politics, I kinda really realized that my passion was in business. And so, then it was a matter, well, how am I gonna build out my world in business? And just by chance, at that point in time, and in the family holdings that they were kind of, like, trying to figure out what they were gonna do, and they asked me if I would join the firm.
And basically, you know, the idea was if I’m gonna join the firm, we’re gonna build this out into something, you know, bigger than what it is today. And that’s going back to, like, kinda 2008, 2009, and that’s what we’ve been working on, and that’s what we’ve been doing ever since. So, we went from being just a pure kind of family office, family holding, very kinda, you know, management, but also not managing a lot of investors and stuff of that sort, to now being a proper sponsor, where we have hundreds of investors that we serve. And, you know, we have a whole management team built out, with over 50 employees. And so, yeah.
Andy: Yeah, it’s interesting, you know, every family office is unique, but that’s actually a story, kind of a similar path that I’ve heard from a couple of guests that we’ve had on this show, which is, you know, you have a patriarch that builds a fortune, if I can use the term, builds a fortune in whatever. I mean, it could be anything, right? It could be plumbing supplies or whatever.
Daniel: Sure.
Andy: So, they, you know, build a fortune, and then they basically start the single-family office, start investing in real estate. And then, it’s the nature, at least in my experience, the nature of family offices, they’re very cooperative. You know, sometimes they’ll tend to do deals together. So, it ends up being, you know, a family office, then maybe starts working with a couple partners, couple other family offices. And then next thing you know, it’s like, “Well, we are kind of doing investor relations, we are kind of doing all of these things that an asset manager would do,” so it’s almost as logical to take that next step.
Daniel: Yeah, 100%. And it’s very… I mean, like, you’re right on, and that’s exactly what’s kinda happened within our family. It started out, like, we just had partnerships with some people that we felt very close with, where it was kinda like pari-passu in going into deals. You know, and then that developed into, “Okay. Well, we’re doing this.” And so, you know, and then it’s also, well, what do you do? Do you continue to do that, and just, like, kinda sit there and, you know, manage what you have, or do you try and grow? And I think that especially, you know, people who are brought up with a certain value system, it’s not necessarily what you have, but it’s what you have and what you do with it.
And so, you say, “Okay, well, how are we gonna grow what we have?” And that’s just, like, kind of a natural progression. And it comes with its own challenges, right? Like, you know, you hear sponsors who put together their own portfolio, coming from nothing, and that’s amazing and a huge challenge in and of itself. And, you know, but when you’re trying to build out, kinda, like, you have a certain system, and a lot of times there’s certain challenges that you can’t even imagine because it has to do with family dynamics, politics, what’s the strategy? You can’t take nearly the risk that other people would take, right? Which can bind you in a lot of ways. So, it’s just, it’s a different dynamic, but it’s definitely kinda, like, a natural progression that we’ve taken, and it doesn’t surprise me that there’s a lot of other businesses that have, you know, gone a similar route.
Andy: But, to be clear, I’m not saying it’s, like, the well-trodden path of family offices, because, to your point about family dynamics and, you know, the relationship aspect, I think, you know, to go from, like, a single-family office to then being a sponsor, and to having, let’s say, hundreds of LPs, or dozens, or hundreds, or whatever, maybe thousands of LPs someday in deals, you have to professionalize, right? Because, let’s be honest. Like, a lot of family offices, like, just aren’t very professional. Would you say that’s accurate?
Daniel: Oh, yeah. Yeah. Oh, yeah. When I brought this strategy to kinda, like, the management within the family, and a lot of them are attorneys, and the first reaction is, like, “A, why would we wanna share all of these great investments we’re doing? B, why would we want the liability of all of these investors on our back?” Right? And then there was a whole alphabet of other issues. So, the mindset of, like, “Okay, why are we doing this? Why do you do this? It doesn’t make sense.” Is a big shift. There’s a big, major shift that needs to take place, that took place in our company, of being one of kind of the holding versus the growth.
And, you know, it’s funny because I used to get invited to these family office events, and a lot of them were like, “Okay, well, you know, you can only come to our event if you’re, like, a single-family office, or if you’re just investing capital, right? That’s the only way you can come.” So, I used to get invited to all these events, and then I guess some of… And honestly, I didn’t find a ton of value out of the certain ones that I went to, but, you know, I basically got put in a position where, now they said, “Oh, well, you’re raising capital now for your deals.” And I was like, “Yeah.” And they’re like, “So, you can’t come to our events anymore because you’re raising capital.” And I was like, “So, you basically want only family offices where there’s, like, a bunch of people and they’re not working, they’re just writing checks all day. You don’t really want entrepreneurial-like people that are going out there and trying to develop and grow things.” So, it was kind of disenchanting to hear that, but such is the world.
Andy: Yeah. It’s almost, you know, the difference between, you know, the former kind of family office that you referenced, it’s almost just like a really, really big LP, right? Just like an LP writing really big checks. But to me, I mean, even a smaller family office, in my experience, you know, not always, you know, experts at everything. Like, I think sometimes there are knowledge gaps in smaller family offices, but I think you do see a lot of entrepreneurialism, like, looking for GP, LP, or co-GP deals.
Daniel: Sure. Yeah. I mean, it’s like you said. Every family is different, right? And it really has a lot to do with the values that are brought in. And so, you know, like, my grandfather, when he was 90…he must have been 94, and he was just a, you know, 24/7, on-the-clock, working type of person, child of The Depression. That’s just what he did. And I remember, I said, “Hey, you know, you’ve done well for yourself. Why don’t you go down to Florida and enjoy yourself?” And he could not even believe that I was saying that. And basically, his response, having grown up during The Depression, was, “Are you joking me? I have seen people go from having everything to having nothing in a matter of days, and there’s no way that I can’t work,” right? Now, that’s an extreme, but I’m just saying, like, I think that those values and that work ethic is definitely, you know, it’s in some groups, and others may have slipped or not had. I can’t speak to others. I just know that within us, that’s kind of where the entrepreneurial drive comes from.
Andy: Yeah. You know, it’s interesting, Jimmy and I, my co-founder here at WealthChannel, we talk about, we call ’em the three phases of wealth. You know, there’s kinda that initial accumulation stage, to kind of, where a person saves their nest egg. And then there’s that stage two, phase two, where, you know, you switch from becoming, you have to work all the time to now you’re becoming a more passive investor, because at some point, your assets begin to have more earning power than you do, you know, if you’ve been successful and if you’ve invested well. But it’s that third stage, to me, that’s the most interesting, which is where you’re creating a legacy, and your wealth is now, you know, it’s going to live on beyond you, and I think that’s kinda the heart and soul of a family office, is the idea of legacy.
But I think it’s a real, it’s a challenge, you know, where, you know, kinda to your point of a patriarch had a very different upbringing, and even a different mindset than the second generation or third generation. And you’re not gonna be able to replicate that exact mindset, right? I’m thinking of, like, you know, maybe not so much anymore, but, like, patriarchs who started family offices, who went through World War II or something. It’s like, you’re not gonna replicate that mindset in a millennial, or Gen Z or something. It’s just not possible.
So, in your experience, when you have multi-generational family offices and you’re trying to transmit those values, where do you see that succeed, or maybe not succeed with ultra-high-net-worth families that are able to imbue that family philosophy and the philosophy of hard work and thinking long-term to the subsequent generations?
Daniel: Sure. Well, so, first and foremost, seeing is believing, and things aren’t taught, they’re caught, right? So, first and foremost, it’s whatever is seen, you know, within the actions that leadership show, right? And then, you know, when you speak about legacy, I mean, like, that can mean so many things. For me, it’s more about values and what you’re trying to, you know, give over to your children. Now, you know, I have children, and what type of values are you trying to give to your children? But I definitely think that when it comes to work ethic, it’s something, you know, that you see. And then, for us, I mean, our purpose, it’s, you know, built on legacy, creating thriving communities. And a lot of things that we do are community-oriented, both in business and in the philanthropic world. And so, I think that kinda, like, when you have those things, and they’re spoken about and acted upon on a regular basis, that it kind of, you know, hopefully sinks in.
Another really important thing, I think, is that people understand that just because it worked for one person doesn’t mean it’s gonna work for another one, and then everybody’s gonna have their own ways. And, you know, so, people shouldn’t necessarily be working in a certain business, because it’s maybe not what’s the best fit for them. They should be doing what they wanna do in life and what they feel their calling is in life. And just because one person did, you know, ran a business one way, doesn’t mean that it should have been run the other way by the next generation or by, you know, and vice versa. So, I think that there’s a lot of nuance and dynamics that goes into here. I don’t think that there’s set rules, and honestly, I don’t think that anybody has the exact code. I think that some groups have been able to do a good job, and whether that’s, you know, everything they did, and pure intention, or a mixture of intention and luck, you know, we’ll never know. But I think it’s a mixture at the end of the day of both of those, I think.
Andy: Yeah. No. Well, personally, I’m gonna discount the luck portion of it. You hit on two themes that I thought were really interesting. The first one was just kind of that holistic, I don’t know if you used the word mission, but just, like, you talked about how your businesses and philanthropy are community-oriented. And I think when a family, this is any family, not just ultra-high-net-worth family, but when a family has a shared mission and a shared purpose, that’s, you know, external to the family, and like you said, more is caught than taught. And I think then that’s, you know, being part of a family, “Well, what’s our mission? This is what we do,” you kinda learn that growing up, and it kinda gives you something, you know, even with a father and a son, or with brothers, something that you’re doing together. You know, or siblings. You know, I should say brothers and sisters. So, I think that mission-oriented component of it is really important.
And then the other thing you mentioned to me was flexibility. You know, and again, I think this applies to any sort of family, not just family office, but just, not every child is gonna be the same, not every adult is gonna be the same. Different businesses are different. And then also there can be different management styles or different valid ways of running a business, and you don’t always have to look at it like black or white, my way or the highway. And probably if you do, you’re probably just setting yourself up, you know, for failure. And, you know, your company is over 70 years old. I mean, and in commercial real estate, I mean, even for family offices, commercial real estate, private equity, that’s pretty old. I mean, there aren’t a lot of firms that, you know, like, we’ve had Inland on this show, and I can’t remember if they’re 40 years old or 50. And to me, that’s like, that’s a venerable private equity company, being 40 or 50. So, 70 years old, you know, that’s very rare. How does that longevity change the culture, the work culture or the philosophy in the family office at the company?
Daniel: Sure. Yeah. And it’s changed, right, throughout that period of time. So, like, we’re very much a people-oriented organization now, where I think that that was less of a focus once upon a time. And that also goes into, like, I’m just a very… Like, I recognize I need, you know, great people on the team to do some great things, and that’s what we’ve done. That wasn’t necessarily the prior approach, you know, just in terms of growth. And so, I think that it’s a mixture of, you know, kind of, like, understanding that you’re in a new reality. And again, you know, those values do transform through the very different generations.
And so, nowadays, what we’ve done, actually, and what drives our company today, is our employees have actually, some of them have been around for a very long time, they have actually defined our core values within the company, right? Not necessarily, like, the entire purpose, but within the company, where they came and they said, “Hey, these are what we actually live by day by day,” right? So, it was less like, “Hey, guys, this is our values because I think this is important,” but it was like, “No. Daniel, and family, this is what we live by,” right? So, it’s caring, owning it, integrity, and ingenuity.
Andy: Wow. So, you guys did that bottom up, so that wasn’t, like, a top-down, CEO dictates to everyone, “Hey, here’s what our values are.” This was a collaborative, bottom-up approach. That’s really interesting.
Daniel: A hundred percent. Right. And, like, a 10 or 15-year-old company couldn’t really do that, right? Because, I mean, they’re gonna have people coming and going, and then… So, we were able to sit down with our team and say, “Okay, guys, we’re doing this now as, like, a strategic growth where we’re bringing in more, better people practices. And so, let’s sit around the table, and let’s talk about what our values are,” and I was quiet. And these are what they came up with after going through a bunch of different stuff. So, this is our team speaking, which I think is very powerful. And you can only have, in an organization that goes across decades, we have a woman who works in our company who has been at the company for as long as I’ve been alive.
And then we also, what’s very, you know, like, interesting at that is our relationships are very deep, right? We’ve had groups we’ve done deals with for over 50 years, but, so, when I first got in the business, certain people that I used to deal with, they’re no longer here because some of those people used to deal with kind of, like, older generation of the family, right? So, I’ve actually seen, like, cycles of people going in and out of the business. So, I think it’s very informative from a industry standpoint, and also just from a life standpoint, to realize, like, we’re here, and that we do our work, and we do as well as we can, and, you know, it ends at a certain point.
Andy: Yeah. I mean, even that, actually, is really interesting to me because so many startup companies, and let’s use the word startup loosely, it could be a 15-year-old company, the founder has been there the longest. You know, I founded it, and for the life of the company, until either, you know, I pass away, or I retire, or whatever, founder and CEO-led companies. Whereas you, you’re a CEO, but, in a way, you know, you’re not junior in the organizational chart, but in seniority, you have other people there who actually are senior to you in seniority. And so, I think that that also speaks of you. I think that’s, you know, very wise to, you know, listen to people who have been there a long time. And it’s refreshing, too, because I think, you know, this might be a cultural thing. I think in America, we have a tendency to, people are in the workforce, they hit a certain age, and it’s kinda like, “Well, you’re old. You don’t understand how mobile phones work, or whatever.” Shove ’em out the door unceremoniously. It’s very refreshing for me to hear a totally different attitude of, like, “We respect your time, and, you know, teach us what you think, you know, what you’ve seen in the past several decades.”
Daniel: Yeah. No, 100%. Also, some of the, I mean, the people who have been around for a long time, whether they’re the most technologically savvy or not, doesn’t compare to some of the historical information, or just stuff that we come across. And we, you know, being kind of like a family office and family enterprise, you have a lot of structuring and bureaucratic stuff you have to deal with, and it’s very valuable to have some of those data points just come, like, “Oh, yeah. I remember, in, you know, 1965 when this was done.” And it’s like, “Okay, thanks. I wasn’t alive yet.”
Andy: That’s amazing.
Daniel: Yeah. Yeah.
Andy: I love that. Yeah. You know, all these Gen Z or whatever kids who are poking fun at baby boomers or whoever, struggling to use technology, it’s like, “Okay. You know what? In defense of the baby boomers or older generations, they knew how to ask people on a date and socialize, okay?” The younger generation are, socially, they’re, like, totally non-functional. So, let’s just respect every generation.
Daniel: A hundred percent.
Andy: Weak points, strong points. Well, let’s shift a little bit. This is so interesting. Thank you for sharing that about the family office. I always love to hear…
Daniel: Definitely.
Andy: …about that. Very refreshing. I wanna shift to, you know, some of your research and some of your content that I’ve reviewed, and just the CRA… CRE, excuse me, landscape in general. First of all, I should ask, is commercial real estate and real estate investments, are those the main focus of…?
Daniel: Yeah. That is our primary business, and also the primary weight of our portfolio, yes.
Andy: Understood. So, you said last year, and I have this in my notes, “The period of easy money during the cycle has officially ended.”
Daniel: Yep.
Andy: So, you know, I guess, I’m curious what this cycle means to you. Like, is this the foreseeable future? Is this three years, five years, seven years?
Daniel: Yeah. Well, I think that… So, first of all, that came from a CEO letter that I write. And I, you know, would love anybody who’s interested, you can read the CEO letter on our website, and feel free to reach out. I love getting people’s opinions and their thoughts because, you know, this is just, for me, life is about a conversation. So, there is no, you know, I think that I’m right. It’s just the way I view things. And I have no idea, honestly, because it’s very hard to predict what the Fed is gonna do, right? And it all has to do with the Fed. So, you know, during COVID, I was not able to predict that the Fed was gonna raise, or lower rates to such an extreme extent. You know, it was pretty easy to predict what would happen as a result, i.e., inflation. So, now, they’re in a very tough, you know, point. And, you know, it’s very hard to see a scenario where they’re able to tame inflation without keeping interest rates at least where they are, which, historically, is not so high. Compared to the last 10 years, it’s high.
Andy: Well, you know, it is and it isn’t. I mean, here’s what I would say with interest rates. It all depends to me their relationship with what bonds are paying, you know, 10, 20, 30-year treasuries. Because when people reference, you know, ’60s, ’70s, or ’80s, I’m like, “Okay, interest rates were higher, but what were bond yields?” You know, or it’s like when people talk about interest rates being, you know, X in the ’60s or ’70s when they purchased a home. And I’m like, “Yeah, but, and the nominal price of a home, you know, what percentage of the median salary was a home then?” So, I think when the prices of these other assets, you know, that, in reference to the interest rates change, it does… I guess, that’s kind of what I’m getting at is are we indefinitely in a cycle of financial repression? Like, is that going to last for the foreseeable future?
Daniel: Yeah. So, and just so I understand, you’re saying that kind of, like, the incremental difference between what you could, like, just to use a simple example, what you could borrow at and what you could get a home for, because homes were much cheaper back then in comparison to where the debt is, was much different than it is today. Is that what you’re saying?
Andy: Yeah.
Daniel: And that also relates to all assets, right? Bonds and so on and so forth.
Andy: Yeah. And just the idea that bonds, you know, yields are up, and yields on treasuries are up, but they’re still significantly generally below the inflation rate, so it’s still a negative real yield. And that, to me, it’s always seemed a little bit strange. It’s pretty much been the case. It feels like it’s been the case for my whole professional lifetime. I mean, maybe I need to, like, get the stats up. But so, it seems to me, you know, kinda like interest rates aren’t that high historically, that’s true. But it seems like they’re kind of high given where bond yields are…
Daniel: Right. I hear you.
Andy: …I guess, is what I would say.
Daniel: So, you’re saying that it’s hard for you to see rates not going down? Is that what you’re saying?
Andy: I don’t know what I’m saying. Yeah, I guess I’m saying that I don’t even know what normal is anymore. You know, like, if interest rates are gonna be higher, why aren’t prices settling? Like, it seems like, well, then prices should be getting swatted down, but we’re not seeing that too much in the bond market. You know, to me, yields aren’t as high as they should be. And so, it’s just hard. I guess, yeah, I don’t know exactly what I’m asking, except…
Daniel: So, this is the real question, and this is why I say it’s so hard to know because it’s impossible to know how the Fed will respond. If we want prices to come down, right, and I’m talking about, like, asset prices to come down, then you have to get all the liquidity out of the market, obviously, right? That’s what they’re trying to do. That’s gonna take a lot of time, given all of the liquidity that went into the market. And then the question becomes, and this is what I mean by what is the Fed gonna do? You know, we just saw them save banks, right? Whether that’s right or wrong or whatever, that’s what happened, right?
So, we know that there’s trillions of dollars of loan maturities coming up, both on the corporate debt side and on the real estate side. Now, are they gonna let those just all default? And if so, then, like, asset prices are gonna come down, and, you know, they’re gonna have to bring down… You know, and eventually everything will come back, and they’ll go back to easing, and so on and so forth, right? The question is, they’ve propped up prices so much artificially, are they also gonna kinda, like, save things artificially once they start cracking?
Andy: Yeah, they are. I mean, they are, right? I guess, that is kind of my question, is how do you even tamp inflation down when you signal to everyone that you’re not really willing to drain liquidity from the market, not if it’s, like, serious pain, right?
Daniel: Right. Yep. Yep. A hundred percent, right. So, our overall outlook, basically, what we’re investing on, right? So, because I don’t view my job as, like, I don’t need to predict, I just need to, you know, kind of have my thesis of where things could go, and then also protect if they go the other way because, you know, we could be wrong, right? So, our overall outlook right now is that we’re investing in real estate. That’s what we invest in. That’s what we’ve always done. And the reason we do it is when numbers make sense. So, we have not been huge buyers over the last four years. You know, we bought some deals, but we have not grown our portfolio the way that we would’ve wanted to, simply because prices didn’t make sense to us.
We see, and I’m not talking about Armageddon here, we see prices are starting to make sense. They’re not amazing. They’re not, you know, uber-attractive. But we’re looking at deals now where we can assume loans at, call it 3.5%. We’re able to get some sort of, call it a 5% to 6% cap rate, nothing amazing. We’re not buying those right now, but we’re definitely looking at them, and we have our hat in the ring. And so that’s kinda like our overall outlook because the way we see it is, yes, we could buy it and the asset prices could go way down, but we would be able to weather the storm. And on the flip side, this may be a buying opportunity right now, and things may go back, and cap rates might, you know, go back down to, you know, levels that we couldn’t imagine.
I don’t think that’s gonna happen, but it could. And that’s how we’re looking… And also, I think it’s important to note that, like, so, this goes into our story of our firm. Our overall strategy of investing, I tell people that I have a very short-term horizon of 30 years, right? So, not really 30 years, but the point is, is that, you know, you gotta look at this stuff over the long term. We can get into kinda, like, private equity and the whole short-term hold, and why that, you know, is good for some…
Andy: Yeah. Well, Daniel, I have to say, I love the 30-year mindset, but that kind of brings back my point about financial repression. It’s like, I have just learned that the markets can stay crazy for so long, and it’s like you might need 30 years to wait it out. But you mentioned one thing, which is, you know, it’s beginning to make sense, maybe, to buy. You’re not necessarily doing these deals yet, but if there’s, like, a 5.5% cap, and you’re able to assume debt at 3.5% or whatever, those sorts of deals, though, they’re dependent on the ability to assume debt, right? Because you’re not able to get new debt at 3.5%, obviously.
Daniel: A hundred percent. Yeah, yeah. So, the deals that we’re looking at, they generally would have at least six or seven years remaining on their loan, until they mature. Yeah.
Andy: Got it. Okay. So, basically, you know, for you to find value, you’re looking at value in both components. To me, that’s almost built-in value, just in the debt piece. Like, just having attractive debt is like its own form of value creation. And then a 5.5% cap, that sounds pretty… I guess I’m curious, like, are you seeing that with, like, high-quality multi-family, or what sectors would you be seeing those sorts of economics in right now?
Daniel: Yeah. So, we currently have two LOIs in the multi-family space for those exact types of deals, both, you know, pretty high-quality, multi-family, not necessarily, like, uber-class-A, but kinda class B to class A deals. And the reasons for sales are not necessarily distressed. You know, there are groups that come out and they have to sell because a lot of funds, they have a five-year hold, and they have to get out now. And, you know, so they’re getting out.
Andy: Well, it just, that sounds strange to me, Daniel. It just, it sounds strange to liquidate when you have 3.5% debt though. So, you’re saying it’s just…
Daniel: Exactly.
Andy: …it’s more on, like, the fund structures forcing that liquidation, not some sort of liquidity crisis or debt problem?
Daniel: Yeah, exactly. And that’s why, that goes into the long-term outlook, right? Like, if you sold in 2022, great. If you didn’t, and you have to sell because you have LPs and all kinds of institutions that have to get their redemptions or whatever, as opposed to just doing what our family’s done forever, which is, if it makes sense to sell, then you sell once in a while, but in general, you do way better when you hold on and, you know, you don’t have tax events, and you keep on appreciating and depreciating, right? So, that goes into our overall philosophy of being, you know, more longer-term. And I don’t, you know, everybody says that, and, “Oh, we’re so long-term-minded,” but we actually have, like, the track record of investments that can show that that is really what we believe in, and we’ve gotten much better results as a whole because of it.
Andy: So, how do you then structure, so, like, presuming… Let’s talk about your LPs now, broadly. I mean, we don’t necessarily need to discuss a specific product, but how do you then structure your offerings to allow LPs to come in and kind of, I presume you almost wanna, like, set their expectations, obviously, that this isn’t, like, a five-year DST or whatever. This is very different. Then how do you structure the product though, to align, you know, the LPs to have that same long-term philosophy and time horizon as you do?
Daniel: Yeah, sure. So, first of all, it’s important, like, we serve, now… So, there’s our overall, how we’ve been, you know, been able to build up a portfolio, and then there’s right now what we do and what we’re able to do, and so on and so forth. So, we serve a wide range of investor base. We have family offices, ultra-high-net-worth individuals, high-net-worth individuals, and then we have a couple private equity groups and wealth management groups that we work with. So, depending on the project, obviously, if we have private equity and some wealth management groups, they wanna know their exact time horizon. And so, if it’s a deal that we think, “Okay, yes, we can make it a five-year deal,” worst-case scenario, if they want out, we wanna stay in, we figure out some sort of buyout with them, so they can get out, right?
Andy: Sure.
Daniel: So, we do have that, on certain deals, but we also have some investors who are also long-term, mainly wealthy families, that they say, you know, like, “You are our arm of real estate investors, or investment group, that you are our real estate arm, and we wanna place our capital with you. And when you feel that it’s the right time to sell, we’ll sell, and maybe we’ll exchange and get into a different property, maybe we won’t. But for the meantime, we’re there, we’ll, refi when it makes sense.” And generally, our terms are set between 5 to 10 years, just depending on the deal, but we have investors who we bought properties, and we thought that it was gonna be a 6% cash-on-cash, and now they’re getting 10% on equity, and they’re saying, “Don’t sell. Let’s just stay in this,” right? So, it really depends on the deal and the investor base that comes in, but very, you know, high-level, we do like to keep things long-term, which is not necessarily to the benefit of the GP, right? Generally, it benefits LPs more than it benefits the GP, because usually we build up the GP value within the first three years.
Andy: Yeah. And, you know, and a lot of GPs will have, you know, acquisition fees, financing, you know, a lot of those fees are transactional. So, like, the more offerings you have, the more activity there is, there’s more fee generation. But I think it’s really interesting though, just, products aside, just the culture of your family office, and, you know, partnering with other families, I think it can be one of those things that like attracts like. So, you know, if you have LPs coming into your funnel, kinda learning about who you are and what you do, again, I think it’s all about expectations.
On that note, you know, because you guys are at this end of the, illiquid end of the spectrum, and you’re almost, like, proud of it, which I respect. And actually, that’s a point I’ve been making a lot lately. There’s all these intermittent liquidity products now, or these private REITs that have monthly, quarterly redemptions, you have interval funds, all these products. To me, they’re neutral. Like, I think product innovation can be a great thing. Liquid to illiquid can be neutral, although I might almost argue it the other way, where I think illiquidity can be a feature, not a bug sometimes, because of behavioral traps that investors can get in and things like that. But I’m kind of increasingly annoyed at these intermittent liquidity products or these intermittent liquidity REITs, because, to me, they’re, like, half-pregnant, that they are… It’s like, you’re either illiquid or you’re not. You’re either pregnant, if you’re not. There’s no half illiquid and, you know, I guess, do you have any opinion on that or, you know, throw your hat in the ring on that concept?
Daniel: Yeah, I mean, look, if it works, like, the whole secondaries market, if it works, then that’s great. For people to depend on it, I think it’s very challenging, especially now. Like, you know, I don’t know. Like, let’s just say, I mean, open-ended funds, they make sense, right? If you can get in and out, that makes sense. Up until now. Like, I don’t know what… I really don’t know the apparatus that open-ended funds are gonna do if they have to mark to market now what they bought in 2021, and how people are gonna get out, right? So, it could potentially get messy. So, I think that… I don’t think about it that much, because I think that, in our eyes, I’m not the type of person that sits there with a stock portfolio and says, “Okay, is the stock up today? Is the stock up today?” I’m more of a person that says, like, “Oh, quarterly, I have cash flow hitting my bank account. I like that,” right? Like, that helps me.
Andy: No, totally.
Daniel: Yeah. So, I mean, I get it. You know, I’m also kinda neutral on the whole secondary thing. You know, like, we’re not opposed to working with secondary groups if they can make it work, but I think, you know, it’s very hard to make any promises, like, oh yeah, you’ll be liquid because we have this secondary product. I think that’s a very hard thing to promise people, or to, you know, even make any representation towards.
Andy: Yeah, totally. You know, well, I do think one thing is interesting right now though, that you mentioned. You know, if some of these private funds or sponsors that are offering redemptions, if they had to mark to market right now, or maybe six months from now, presuming the asset prices might fall, that would be a serious problem. And I’ve had David Auerbach on the show. We talked about this some, and even Michael Episcope, who, you know, he runs a family office, and they have private funds. I appreciated Michael’s honesty about it, running a private investment firm, and he basically told me, “We’re looking at publicly-traded REITs real hard, because they offer very strong value on a relative basis.”
So, I mean, at what point, if… You know, you mentioned private deals, or, like, multi-family deals, they’re beginning to make sense. It’s not like you’re being teed up for a fat pitch though, right? But it’s, like, beginning to make sense. But at what point do you look at publicly-traded REITs and say, “With this discount to book value, it’s weird. It’s almost like there’s a liquidity penalty right now in commercial real estate?”
Daniel: Right. Right. Yeah. No, I hear you. I look at REITs as just two different animals. Like, I know the underlying asset that it’s priced to is supposed to be reflective of whatever, you know, the stock price is, but I think that there’s such a big disconnect between the two. Theoretically, sure. Like, if you’re an opportunistic buyer and you wanna own stock, and maybe build up, like, a portfolio on REITS, there probably is a discount to the inherent value. But, you know, it’s not something, honestly, that I think about that much because, you know, when I see… If there is a company that I like, like, there are certain companies’ REITs that have a lot of respect, in the industry, for what they’re doing, and I see, oh, their stock is pretty cheap right now, so then maybe I’ll go and just buy it, just because, you know, I, usually, if something, it’s in a kind of vertical that we’re not active in. But I don’t have, like, a real opinion in terms of, oh, we should build up a whole REIT portfolio within kinda, like, the office. I don’t view it that way. I just see them as so different. Like, they’re such different animals, you know. Like, the liquidity, but also the volatility from the stocks, from the market, and then also the ability, the benefits you have when you’re invested in private real estate from a tax perspective, and…
Andy: Do you think that control is a big element for families too, who are, you know, they might be looking at REITs for real estate exposure, but then they’re also looking, you know, co-investing with a firm like yours? Do you think it’s the lack of control that might kinda scare ’em away from REITs? It’s just, they’re just more comfortable going with a private operator?
Daniel: I think so. I mean, we’re relationship-driven, and I don’t mean that in, like, our investors, they text us. And you can’t text the CEO of the REIT and say, “Hey, are you guys selling that property?” And so, our investors, especially our large ones, they become real partners in these deals, and you can’t get that in the public markets. I mean, first of all, I don’t even know… You know, they’re probably prohibited from speaking to you.
Andy: Well, yeah, that’s a good point. Okay. Well, I know we’ve been talking for a while. I wanna be respectful of your time, but, you know, you mentioned you’re not really in the business of making predictions, but I would be curious, you know. Maybe you’re more like a captain of a ship, and you have to be prepared for different types of weather or something. What do you expect in the second half of this year? Do you think that, especially in multi-family or another kind of, you know, the bigger sectors of CRE, do you expect asset prices to be a little more attractive later in the year? Do you think you’ll be more active later on in the year?
Daniel: Yeah. So, well, let me just answer it by saying this. We are looking very seriously at raising our first fund. We’ve done, you know, tons of deals, and private syndications, and we’re looking at doing our first fund right now, because we are saying, basically, if there will be opportunity within the next 20 years, it’s gonna be right now. And, you know, I don’t know that I’m… You know, I don’t know about this blood on the streets and distress and all that stuff. It would make a ton of sense, because it looks like, you know, it’s coming. But we do know that right now, numbers are looking much more attractive than they have for a very long time. And so, we are in acquisition mode, and we will continue to look at stuff. And I think that there will be opportunities for people who are on the ground, with the right relationship.
You know, I mean, you know, we have people calling and speaking to every broker, and all the owners in our markets, all the time, because I don’t know that it’s gonna be this huge 2008 event, but I think that whenever there’s some sort of disruption, there’s these dislocations, that all of a sudden, interesting things happen. By the way, the last time this happened was in COVID. Even though prices shot up, in April, you know, in May, after COVID hit, is when we did some really interesting deals, because nobody else was playing. And so, we had some interesting things happen, and it wasn’t that there was this major distress. It’s just, little dislocations, if you’re in the market and you have boots on the ground, you’re able to find those dislocations. So, we do expect those. You know, we think that that’s gonna happen, and we think we’re gonna be able to buy some stuff.
Andy: That’s awesome. I just love talking with a family office, talking about we have dry powder, we’re teeing up to do deals, because there’s been so much dry powder on the sidelines with family offices. And I remember talking about it, you know, we were at a family office conference… This would’ve been October, I think, of last year, and we were talking about the dry powder. And it’s just like, I think we’re gonna be waiting, but we’re not gonna be waiting five years, obviously. You know. So, it’s more into 2023. So, you know, I really respect that. And, you know, the fact that, you know, again, that long-term philosophy, you’re willing to be patient, and let the right deal come along, because those are the best deals, you know, when you wait for the truly good deal, rather than reaching. You know, “I just gotta do a deal,” you know?
Daniel: Sure. Right.
Andy: So, that being said, I understand you’re teeing up to launch a fund at some point soon. Where can our audience of high-net-worth investors and family offices go to learn more about HLC Equity?
Daniel: Sure, definitely. So, we would love to connect with anybody. First of all, on our website, there’s tons of information. You can just go to hlcequity.com. There’s a place to sign up there. We will, if somebody, you know, wants to send a note there, we will get back to you very quickly. That’s another thing is, you know, we try to be as prompt as possible in all of our response times, especially with our LPs. And then I’m, you know, happy to connect with people on social media, primarily on LinkedIn. So, look me on LinkedIn, Daniel Farber, and, you know, more than happy to connect with everybody. And, yeah.
Andy: Thanks, Daniel. We’ll be sure to link to those, the website and your LinkedIn in our show notes as well, to make it easy…
Daniel: Perfect.
Andy: …for our users. And thanks again for coming on the show today.
Daniel: All right. Thank you. Thanks a lot.
