Specialty Real Estate Finance in New England

Chris Johnson:

Thanks so much for having me.

Elana Margulies-Snyderman:

Absolutely. So, to kick off the conversation, tell us a little about the firm and how you got to where you are today.

Chris Johnson:

Sure. So, we're a specialty lender and our clients are really small and mid-sized real estate investors who specialize typically on sourcing assets either in a distressed manner or some other opportunistic channels. So, a lot of foreclosure auctions, estate sales, those types of things. So, in a nutshell, they're trying to buy a dollar for 50 cents and then maybe invest another 30 to turn it into something that's worth a $1.50, so to speak. And that's really the core business. And then another 25% or so of what we do is ground-up construction. We launched this business in 2020 in the middle of COVID with a little less than a million dollars of our own money for the most part. And now we're running close to $80 million, and we launched a REIT subsidiary in 2022. So, it's been a really exciting period to build and grow this business. And I originally found the space as an allocator actually. So, I, in 2016, came across a manager in this space and I had never seen anything quite like it. And I really liked the space and got to know the industry quite well. That's also how I got to know my Partners. My Partners up in Massachusetts are two long time distressed real estate investors who have borrowed tens of millions of dollars of this type of capital. And so, I would say in terms of what really made it work in a great way is that we have a super complimentary skill set within the firm. So, we have a Partner who does business development, we have two long time real estate experts. I'm more of a generalist, so I'm probably the most replaceable, but that's really how we've been building it.

Elana Margulies-Snyderman:

Chris, as a follow-up, love to hear your overall outlook for your segment of private real estate debt in New England.

Chris Johnson:

So, the broader overall market, the opportunity is almost endless because it is a component of residential mortgages and obviously that is just absolutely vast. Our specific segment, I expect to see strong demand for a long time. It very much feeds into the housing shortage and what we're really doing is helping renew existing housing stock or create new housing stock. And there's obviously definitely a shortage in the affordable space. New England specifically is very attractive because it's an area where prices are, by national average is a little higher. There's not a lot of vacant land, so new development is not a great source of tons of units and there's an older housing stock that needs constant renewal. So, that's where we started. It's still our biggest market. We like it very much, but we do expect to spread out over time. We currently also have a business in North Carolina.

Elana Margulies-Snyderman:

And Chris, more specifically, in your space, where do you see some of the greatest opportunities and why?

Chris Johnson:

So, the biggest opportunity at a very high level I think is that this is a very entrenched, very large market. There are a lot of big players, but a lot of the people actually making stuff happen are small or mid-sized local businesses. And so, there's a huge disconnect between huge amounts of monies that are funneled via Wall Street and large money managers. But then in the end of the day, you're working with small businesses. So, I think there's huge opportunities in just being a little bit more customer-friendly, a little more service-oriented. So, it's definitely a market that is ripe for some disruption. And in our specific segment, I think the biggest opportunity is actually to not optimize for scale. So, there's a lot of businesses, they look at this market, they see it's huge, and they say, "We want to be the biggest." We really think the sweet spot is to identify what's your sweet spot on the risk curve, where are you earning your best risk-adjusted return, and then figuring out how to replicate that in many, many markets. And you don't really want to be the biggest lender necessarily. You want to dominate the niche that you've decided you want to be in. So that's how we think about it.

Elana Margulies-Snyderman:

Chris, on the other hand, what are some of the greatest challenges you face in your space and why?

Chris Johnson:

So, other than it just being small business lending, so you're dealing with everybody's personal problems and all the other fun stuff that comes with it. I would say the biggest challenge is simply that it's a very operationally intensive industry. Our average loan is about $500,000. Our median loan is in the threes. The average effective maturity is around eight months. So, you're turning over capital at a very, very rapid rate. And there's constantly need for customization if you want to focus on customer service. So, it's definitely a space that you have to invest heavily in people and technology, and there's always something that needs some attention. But on the other hand, I certainly sometimes find myself wishing that I were being paid to sell Apple and buy Microsoft. But on the other hand, we don't really have an edge there, we do have an edge here. And I do think that the painful operational aspect is a big part of the extra return that you can earn in this space.

Elana Margulies-Snyderman:

Chris, since you're focused on the small business aspect, love to learn more about your borrowers.

Chris Johnson:

So, it really runs the gamut. So, we have some borrowers who have been doing this for a really long time and have become very wealthy doing it. So, very often they're vertically and horizontally integrated real estate businesses. So, our biggest borrower, for example, owns a big brokerage business, he has a construction company, he has a big rental portfolio, and he's constantly trying to add to his portfolio. So, that's definitely the established type. But then what's really cool in the space is that you get a lot of very young entrepreneurial borrowers who don't have a lot of fancy credentials. They're not pedigreed in the way that you're used to it on Wall Street, but they're talented, they have a skillset, and they have an appetite for risk. And probably the most impressive one that I've seen so far is a 34-year-old fellow who started out as an electrician and then realized that he was good at project management. And now suddenly 10 years later, he has 11 employees and he's probably going to complete 50 projects this year, which is pretty amazing. And then I also love seeing applications for loans and then I see the driver's licenses and I'm like, "Oh my God, I was in high school when these kids were born and I'm not that old yet." So, it's really a great industry that people with talent and ambition can really be successful here without coming from a prominent address.

Elana Margulies-Snyderman:

Chris, we've covered a lot of ground today and wanted to see if you have any final thoughts you would like to share with us.

Chris Johnson:

So, we definitely want to keep growing the business. It's been a lot of fun growing this from absolutely tiny to now somewhat of a still emerging manager, but respectable size. We don't really know what the perfect size is going to be. We definitely want to stop growing if we feel like it's going to stop being fun. And there's also going to be a lot of opportunity to build ancillary businesses because as I touched on before, this is one cog in the giant machine of residential mortgages, and there's a lot of opportunity to build ancillary lines, be it on the equity side or the debt side.

Elana Margulies-Snyderman:

Chris, I wanted to thank you so much for sharing your perspective with our listeners.

Chris Johnson:

Thank you so much for having me. I really appreciate it.

Elana Margulies-Snyderman:

And thank you for listening to the EisnerAmper podcast series. Visit EisnerAmper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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