Income Over Yield with Patrick Nessenthaler

Josh (00:00:02) - Good day, everybody. Welcome to the deal, Scout. On today's show, we're going to have a conversation with a professor of commercial real estate finance. He runs his own consultancy. He's building some cool stuff for the future. And man, he's done $4 billion worth of deals as I'm looking through his, you know, complex deals and complex debt throughout some of his journey. And I wanted to capture some of his wisdom. So Mr. Patrick, welcome to the show.

Patrick (00:00:29) - Thank you so much, Josh. Thanks for having me.

Josh (00:00:31) - Holy moly. You've got you've got a lot going on, right? We're your family's growing and expanding. You're running multiple businesses. You're teaching people how to do it. If I met you in a coffee shop and I go, hey, man, I'm Josh, who are you and what do you do? What would how would you respond to that?

Patrick (00:00:51) - Well, I'd respond just how to how you how you how you framed it mean I got a lot going on.

Patrick (00:00:56) - But it's all it's all synergistic. It all kind of plays off each other. I'm up at 530. I'm in bed at 930, unless I have to keep going and then crash. But every day it's a it's a grind. And every day I'm always doing something different. So but that's the real estate business. The real estate business is just one giant hustle. So, you know, and I've been in the business for about two decades. And, you know, I've built a lot of, you know, a lot of background from an academic standpoint, but obviously, you know, had built a pretty healthy Rolodex. So that's all turned into a hustle where it just becomes fun. Every day is fun. Everything is every day is different. New deal comes across. You know, I have the ability to kind of pick up the phone or shoot out an email and probably get some good feedback pretty quickly. So I would say just, you know, she came into a coffee shop, coffee shop, um, you know, I'm just out there hustling just like every other commercial real estate individual.

Josh (00:01:50) - Yeah, yeah, I kind of think of the world in buckets or umbrellas, right? Like someone's like, what do you do? I build business and they're like, oh, really? What kind? Then I'm like, oh gosh, this is going to take a minute, right? We're in media. We're in commercial real estate. We're in finance, we're in this, we're in that like pick a day and what what my grind is going to be. But I like, you know, one big hustle right. So tell us about getting the start in in commercial real estate. Like getting into it. How did you get into it. Because it's it's not an easy field to kick in.

Patrick (00:02:21) - Yeah. And I'll kind of tell you a little bit my I'll tell you my story. Right. Because I always kind of provide this. And I always look at this from the view of division. Right. And I always look at it from the standpoint of finances. Just from a simplistic standpoint.

Patrick (00:02:36) - Right. It's income over yield. Right. And how I started in the business was really in the numerator. And what I mean by that is, you know, I started out in the consulting and valuation world right before the GFC market crashed. However, you know somebody needed a value. Other values are going up and down. So I was super busy during that time period, but I was mastering the numerator, right? I was going through a bunch of different property types office, multifamily, retail, industrial, but did some nation esoteric type stuff, skilled nursing, assisted living facilities, marinas, cold self storage. But at the same time, I mean, all that was just kind of understanding how to put together a pro forma in each of those doing market studies, doing feasibility studies, and just kind of mastering the numerator. Realized I didn't want to be a full time appraiser, at least on the fee side of the business, and had the ability to go back to graduate school. And graduate school took me from Dallas, Texas, all the way to upstate New York, up at Cornell University, did that from 2010 to 2012, had an opportunity to do capital advisory down in the city.

Patrick (00:03:40) - I never thought I was going to be a New York guy, but that's where I met my wife. That's where we had our first child. But point is, is I mastered the numerator, went back to graduate school. I was exposed from a denominator standpoint. Right. So I need to understand how to put debt and equity together. So I did that you know, down when I was in New York. And so the master of the numerator master the denominator. Now you've kind of mastered the division. And it took a little while to get to that point. But I've become very, very lethal from that perspective. And my wife's born and raised in Louisville, Kentucky. So pandemic hit. We had a five month old packed up, went to Louisville, and I guess the rest is history. But it's obviously turned into, you know, I'd say the most ideal role of my expertise is developing a real estate program, and that's what we're doing at University of Louisville. So a lot of fun stuff that's happened between there a lot of successes, a lot of failures.

Patrick (00:04:35) - But that's life.

Josh (00:04:36) - Yeah. I've never seen it put this way. Right. Like income over yield. Got it right. But you look at as it like you looked at your life journey like through a mathematical lens numerator over denominator. Right. Like here's how we're going to approach this I mastered the numerator right. We got the the idea of you know the income side. Now we've got to figure out the yield side. So that's really interesting I've never heard that. It shows me how your brain works. So you graduate school allowed you to really focus on the yield side of the life if you when you're looking at a deal. Oh my gosh. Okay. When you're looking at a deal through this lens, what are some of the things on each side or, you know, top and bottom that you look at that are the most important that maybe other people don't look at.

Patrick (00:05:29) - So that's a fantastic question because there's a deal I'm looking at right now. It's it's you know, it's in the recreational vehicle world.

Patrick (00:05:38) - It's in kind of campgrounds and stuff like that, which is a whole nother business. And there's actually routes that focus on this type of stuff. And yeah, I didn't know that 48 hours ago, but now I'm kind of diving into it. And, you know, somebody had come to me and said, hey, we're looking to do this, this RV park here in, in Kentucky. And I said, okay, well, that's interesting. And the first thing I said was first, first I went through the numerator. I said, okay, well, what's highest and best use. You're out there shopping for dirt. You know, you got to make sure that it's legally permissible, right? So you got to check the zoning code and then, you know, you want to be tertiary, but you don't want to be too tertiary. We don't have utilities. So I approached it first from kind of the numerator perspective and just understanding highest and best use and finding the appropriate site that would fit, you know, an RV park.

Patrick (00:06:22) - And then the next thing is, okay, well, you know, you got to buy this thing correctly. You have to satisfy both the debt capital as well as the equity capital. Who are the investors in this? So I guess, you know, sometimes I approach the denominator first and then I attack the numerator. But those are kind of the first things that kind of popped into my head was just what site can you find? Can you build it. And after that where can you raise the money? So we still got a lot, a lot more boxes to check, but I've already blasted out several emails. I already have a few phone calls lined up, and that's kind of the beauty of where I sit now is I can get these questions answered. So, um, so that's kind of my process. But I guess just to go back to your point on, you know, I summarize my life. I still have my my career, but I tell you, my personal life is a little bit more of a free spirit because, you know, I started in I started in Dallas, Texas.

Patrick (00:07:13) - My father worked for fidelity for 20 years. Fidelity took us up to Boston. I was in New England for kind of the back half of my youthful year, and then we went back down to Texas, and then I go back to New York, and all of a sudden I'm here in Louisville, Kentucky. So people hear about my life story and they're like, and I didn't plan it, you know what I mean? And I'm as happy as can be. And sometimes you just got to kind of roll with the punches. But I definitely knew my career. That's kind of how I wanted to approach. It was just mastering the division.

Josh (00:07:40) - You went from cowboy boots in Dallas to to Boston galleys, to back to Dallas, to New York and sports coats, now to Louisville, back to to cowboy boots. Man, your wardrobe must be very unique with all those different changes.

Patrick (00:07:58) - Yeah. Not not as not as bipolar as you would think. But after the pandemic, now it's just a white blue shirt, a jacket which I got hanging back here in just some khakis, you know.

Patrick (00:08:09) - There you go.

Josh (00:08:11) - So you have your consultancy. Tell me about what your consultancy focuses on. Like with with your expertise. Like what problem are you solving?

Patrick (00:08:22) - Um, well, I think you just put it in the vacuum that it's an extremely turbulent time for me, for the world in general. But you start you see more volatility right now in the Treasury market than you do in the equity market. So something's goofy. Something is just not working correctly in the financial markets. And I think that kind of gets into a point where it's just like, well how do you where's the price discovery happen when you don't know how to build up a discount rate? You don't know what the real risk rate is. You know, you don't know what the Fed's going to do in a month from now. Right? Is it going to increase rates, decrease rates, and then we don't know what the expected inflation premium is going to be. So there's so much volatility that's happening. So why I say that to say this is just an opportunity that kind of came to my we're still kind of negotiating the engagement and whatnot.

Patrick (00:09:09) - But they need some some some counseling on just underwriting certain deals. And I can't tell you about the portfolio, but, you know, it's a high price. I mean, it's it's a very legitimate portfolio by a very legitimate owner. Operator. But the question is, is, you know, for some of these assets, it's just what does the cash flow look like in six and seven years? You know, what do I discount that at. You know, and there's appraisals that are floating around that I have to review. But you know, appraisal business it has its shortfalls, you know. So I have a tool that I just bought that I actually used during my graduate studies called At Risk, which kind of you use assumptions, empirical data to kind of perform the Monte Carlo simulation. And you can sensitize rents, vacancies. I'd say one other thing that people really aren't talking about. It's starting to become more vogue. But climate change is having a significant impact on insurance, right? It's impacting the residential market, but now it's starting to really impact commercial assets.

Patrick (00:10:09) - So, you know, if you're in, if you're in in places where you're below sea level, right. What does your insurance premium look like in five years, you know, or if you're in California, right? I mean, obviously with the wildfires. So my point is, is in my consultancy, those are the kind of things that I attack, you know, and I'm having conversations with insurance companies and and then I quantify it and put it into a pro forma build out a DCF run through a monte Carlo simulation. Here's the things you can expect. And, you know, try to provide counsel on what your your bid strategy should be. And then, you know, we they make the acquisition. They recapitalize whatever they need to recapitalize. And then it's like, okay, well let's go out and raise some capital and try and expand this portfolio. So I'd say it's two pronged is, you know, how can I help you understand the real estate in a very volatile time. And, you know, there's plenty of dry powder that's out there.

Patrick (00:10:59) - I think it's just, you know, as we move to this new equilibrium value, I think there's going to be a lot of headache, but there's a lot of capital out there to kind of solve that. And, you know, spending time in Dallas and New York, I'd say they're a little bit more sophisticated marketplaces, obviously, in New York is is the hub of finance. You come to other markets, middle America and, you know, it's it's traditional banks. It's, you know, high net worth club deals. It's not that sophisticated structured credit that I'm used to. So I think there's a lot of folks that kind of need that type of counsel and that type of those type of connections. So.

Josh (00:11:32) - So when you talk about the dry powder out there, are you are you referring to like in 2007, 2008? You know, everybody is freaking out. Everybody's selling. Prices were dropping and such like that. The people who were sitting on some money waiting for something like that to happen accelerated their wealth, and their buying power was massive.

Josh (00:11:49) - Do you think that that dry powder is waiting for any type of massive change in the marketplace, in terms of price drops?

Patrick (00:11:57) - Yeah. Yes. I don't have I don't have the data points in front of me. But I've given this speech before and we talked about just the surge in private credit. Right. So obviously the GFC changed the banking industry. You had Dodd-Frank and you kind of had some changes that happened for regulated institutions, but you also had this flood of private credit that came from private equity companies, etcetera, and that hasn't gone down at all. It's actually increased, but they can think a little bit more outside the box. They can do things that regulated institutions cannot do. So I'd say that a lot of folks that are raising distressed funds, if you will. Yeah. You know, and I'm talking to folks that are bidding on kind of the the signature bank portfolio that's out to market. I know folks that used to work at Capital One, you know, and fortress just bought their whole loan book.

Patrick (00:12:49) - So nobody, you know, everybody's everything's very confidential. So nobody really knows what what price discovery is looking like. But you know, you're there's going to be some recapitalization because there has to be just the spike in interest rates. People just can't they can't cover their shares anymore if they're on floating rate debt, you know. Or maybe they bought some sort of hedge that's just way too expensive. There's going to be have to be some sort of transactions that happen, that kind of bring in that fresh capital, but it's not gonna be cheap debt or excuse me, it's going to be cheap capital, you know, and that's kind of one of the things that we're doing on the consultancy side. So we're thinking about raising a fund. We're thinking about clubbing together some some high net worth. And, you know, maybe finding a strategic LP that we can promote off of, etcetera. Um, you know, and we're finding those opportunities where there's a maturity wall, you can't retire at par based off cash flow, given where rates are today, and you need some sort of equity infusion, whether it's on the common or the preferred, to kind of help get you past this massive spike in interest rates, because at some point the fed is going to have to cut rates.

Patrick (00:13:49) - And, you know, I'd say the theme right now is survive to 2025 is what I've heard from some old school guys, but there's capital out there to help you get through it. Um, so again, you know, but but if you're a vulture, if you're one of those distressed guys, you know, there's a lot of folks out there that are looking to buy, you know, NPLs, non-performing loans. And, you know, we're not coming from that aggressive standpoint. We believe there's definitely solutions to kind of solve the. You know, the capital stack, you know, because there's still assets that are performing. You know, they're just having capital asset issues. So we're trying to target those type of type of deals. And you know so there's capital out there. You know there's ability out there to to kind of get through this time just to have the ability to access it. Right. Yeah.

Josh (00:14:34) - How neat. What made you decide to get into the academic world. So you're, you know, your question deals.

Josh (00:14:40) - You're taking down big you know, big opportunities. You go back to Louisville, you put on a sports coat, and now you're you're jumping into the academic world. Why?

Patrick (00:14:50) - You know, I started, um, another long winded answer.

Josh (00:14:55) - Go for it, man.

Patrick (00:14:56) - Um, when we decided to commit to Louisville. It's a town where everybody knows everybody, which is a good thing. A lot of smart folks. But, you know, I'm an expat. I have the New York twang, like, got, you know, I want to make friends here, you know what I mean? Like, we want to we want to build a family. So I knew that I had to kind of tap the community from different perspective. I had to have, you know, I had to be. You know, I had to contribute, right? And I had to kind of just kind of wave my flag in a different way. My father in law actually has been teaching at the law school for decades.

Patrick (00:15:27) - And I said, Joe, I said, let me see if I can't teach the class either. Undergrads, folks, whatever. And he put me in and he put me in touch with the assistant dean. I kind of pitched him the class I wanted to teach, and he kind of made it happen. And I initially started teaching a real estate finance and investments course part time. And, you know, I started teaching the class. It helped me with my public speaking and helped me kind of hold the floor, which kind of helped me, you know, on my professional side. But I really enjoyed it. I enjoyed it reinforced some of the things that I had learned. But I was influencing lives, too. I mean, I was shocked at I was shocked initially at just, you know, kids was like, that was one of the best classes I've ever taken. You know, you gave me so much wisdom, etcetera. And I was getting that feedback frequently. So it definitely impacted me from a personal standpoint where I, you know, I was giving back to the community, but I was also giving back to I was inspiring students, you know, and I thought that was just exceptional.

Patrick (00:16:27) - So it became a part of my life where I enjoyed it, doing it part time. And now it came to a point where it's just like, I can make a lasting impact and some sort of legacy of teaching full time, you know? And I keep dropping you of L obviously you of l is my my my my my day business or my day job, but I also taught at Rutgers University too. And U of L you know, it got out in the system and I'm a CFA charter holder and CFA society in New York had a relationship with Rutgers. And then I kind of did my thing at Rutgers and, you know, taught at Rutgers for a couple class sessions and really had the same, same type of impact. So, you know, this is academia. I will never consider myself an academic, but I love the ability to just kind of go out there and influence lives. And, you know, now I'm looking for students that, you know, had no idea what real estate was, but now they're inspired.

Patrick (00:17:25) - I can help them get that internship. I get that full time role. And what I'd like to see in ten years is they come back to me and said, you're such an inspiration to me. So I think it's it's from a personal standpoint. It really kind of touches my soul to really have that type of influence. But, you know, it reinforces it. It not only that, it kind of raises my standard where, you know, folks come to me and they say, hey, you know, you got your consulting, your consultancy business. They want to look at me as an expert. And I think having the I can get in front of a classroom and teach and drive a program, I think it kind of really solidifies my expertise in the industry. So that's a that's a bonus too. But at the core, it touches my soul. I have the ability to really influence lives, and I think that's pretty exceptional. And, you know, other other teachers out there that don't get the same acknowledgement.

Patrick (00:18:14) - I mean, there's teachers out there to do this, you know, since they were, you know, went to college, they've been teaching. I mean, it's such an underrated profession. And there's a lot of folks out there that influence lives. So it's not we should acknowledge them too, right?

Josh (00:18:29) - For sure. Absolutely. Before I became a firefighter. So when the market crashed in oh, it started for me in oh seven, I built I was on spec, so I was on the very early stages of the failure. I had to go get a real job. I got a government job, firefighter, medic, and I did that for a while before I became a medic. I watched some movies to see and could I do it. So I watched Backdraft and I did all that. Before you became an instructor, did you watch good Will hunting, Dead Poets Society? What's another one? You mean like catch me if you like? Did you watch these movies to go? Do I have what it takes to be a professor?

Patrick (00:19:04) - Um.

Patrick (00:19:06) - So those movies you're talking about, you know, Dead Poets Society, I mean, Robin Williams is tremendous in that. Again, goodwill hunting. I guess you're a Robin Williams guy, but am. You know, good Will hunting, one of my favorite movies. So I don't know if it's, um, I didn't watch him to kind of get inspired. Um, you know, I did it because just how I explained why I did it. Um, but it's it's. Uh, you know, and there's other I guess there's other movies that they have, you know, professors. I think it was that movie 21. We had Kevin Spacey, who, you know. Yeah.

Josh (00:19:42) - He taught blackjack. Yeah.

Patrick (00:19:44) - He can. Well, I mean, he he was an MIT professor, too, but yeah, you can, you know, and I've had good professors that really do a good job of holding the room, you know, and, and you bring that to the professional world, you bring that to a negotiation table.

Patrick (00:19:59) - Can you obviously can you are you agile enough? But can you hold the room. Can you make that sale. So there's a lot of things that that these professors do that just, you know, hold the room with delivery and can teach a topic, you know, and then you understand it. So, so yeah, I mean, there's not a specific movie, but I've definitely looked at professors that are influential that should say, man, that guy really holds room. So, you know, I try to get up there and hold a room. You know.

Josh (00:20:30) - You got to watch one more movie, Dangerous Minds, with Michelle Pfeiffer back in the day. If you want to, you look like Michelle Pfeiffer. You're going to hold the room's attention for a while, especially if you're teaching commercial finance. Right. There you go. Yeah. All right, so I'm sorry back there deals as you guys are working through. You got your consultancy I think man you are positioned beautifully for, you know, the what the world's going through because I think we need you know, anybody could look at simulations or spreadsheets and kind of get a feel.

Josh (00:20:58) - And if you're buying stuff 2013 through maybe 2020, right. An Excel spreadsheet could give you a lot of information. But you're there has to be a lot of what ifs that didn't come planned like Covid, like like maybe, you know, the Force majeure tours, the acts of gods that are happening in the world through the consultancy lens. How how are you thinking about those things? Like, how do you even know to bring those kind of risk to the table? And how do you prepare for those?

Patrick (00:21:32) - Well, just going back to the software at risk, right. It's it's and the things you're talking about from a statistical standpoint is kind of tail risk. Right? Those are things that, you know, we had 100 year pandemic, right. We call it a hunger pandemic because the last one was a Spanish flu that had such a significant impact on the world. And then, you know, obviously we go back to like 911 and these these type of issues that are not part of a cycle, you know what I mean? And it's it's that tail risk event.

Patrick (00:22:00) - So if you have the empirical data to kind of capture those terrorist events, and you have a tool such as like a monte Carlo simulation that can give you a statistical output and move you to a situation where your decisions are no longer subjective, they're more objective because they're based off a situation of 10,000 scenarios that that bracket that tail risk. And then you can look at, okay, well through these different confidence intervals, here's the most likely situation that can happen. But I've also captured the tail risk output as well. Right. So I think it's um I think you have to approach and real estate's not a statistical business just because you want to have it from a trade standpoint. Um, but you now we are accumulating the data that we need from an empirical standpoint to project rents, to project vacancies. We can do that with certain like a time series, but also that I think the business has become a little bit smarter, where a lot of big data analytics are, are. You know, starting to be quantified.

Patrick (00:22:58) - And real estate investors, real estate investment managers, folks are really starting to look at data and how it impacts real estate a little bit more holistically. And and that's what we're doing. That's some of the research that we're doing at Rutgers is how many more variables can we incorporate. Not so much just in in income and cap rate. But, you know, and one of our data partners is Trap. And they went to publish an article that talked about, obviously a relationship, a potential statistical relationship between crime rates and rents. Obviously that's that, that that's something that there would be a relationship obviously is going to have a negative impact. But the data, nobody's ever actually proven that correlation. Nobody's actually ever shown that lag effect. That's some of the research that we're doing now is just showing what some of these big data analytics and how it impacts rents, vacancies, transactions, etcetera. So I guess, again, a long winded answer just to kind of say we're thinking outside the box, you know, and we're bringing in tools that, you know, at risk is something that we did academically.

Patrick (00:24:00) - I do know, I don't know any, any folks that were in my or kind of have the same credentials that I do that are using it in their daily practice. But now when things are so volatile, I don't know how you could not use it in your daily practice. Right? Because your opinion of value is going to change to tomorrow, especially if this, this, this war in Israel, you know, or this the, the Israel Hamas war, you know, escalates. It could change the markets overnight. So are you capturing that tail risk in your decision making? Are you often that to your clientele? That's what we're doing, you know, and we're we're we're embracing the volatility in a, you know, providing solutions to help capture it.

Josh (00:24:38) - What is the opportunity in volatility. Where should we be paying attention as dealmakers?

Patrick (00:24:46) - Um. I'm not sure how to answer on the volatility standpoint, but I'll go back to what we're doing for, you know, we're going to go to market on a fundraise and we're clubbing together some money.

Patrick (00:24:58) - But it's this maturity wall, right? It's this maturity wall that's happening not only in corporates, but it's definitely happening in commercial real estate. Barry Stern like Scott Reckless Scott, Rutgers, the CEO of Arkansas Realty, big owner operator up in New York. He was the one that was most vocal earlier this year. And he said, this maturity wall is going to be gruesome and what he means by gruesome, but it's going to there's a massive maturity wall that's coming. And all that debt was financed at, you know, super low rates when values were at their peaks. And now that's all coming due when the exact opposite is happening. And he said 1.5 trillion. It's we actually have the data. It's 1.4 trillion. So that data is showing that that he's correct. And we've done the analysis where we actually grow the noise from loan origination to maturity. We've actually done the amortization schedules, and we've actually quantified the equity gap for certain markets. And there's a significant significant equity gap. It's in the billions.

Patrick (00:25:56) - We can't attack all of that. And the markets I'm talking about aren't even in the top 20 markets. You know what I mean. So this volatility I think is going to create some some distress. I think if you're on the back side of that to help provide a capital solution, I wouldn't say you're capturing the volatility but you're being a little bit contrarian. You're saying listen there's a stress coming. I got to be on the other side of it to kind of help provide a solution. Yeah. So.

Josh (00:26:23) - So explain for, you know, you're teaching at a master's level and you're talking at a master's level, and I'm having to step up my game as a podcast host because I'm like, oh man, I have to. My job as a podcast host is to ask the questions my audience has. But I have so many of my own questions, and I'm having to like really deep, deeply think about these questions. So I say that when, when I, when I hear the maturity wall, right.

Josh (00:26:49) - When people were doing deals in 20 1718, prices were much lower, interest rates were lower. Now, on the flip side, these these loans are coming due. You got to pay the piper. Interest rates are high. Prices have dropped. So there's a gap right. That to keep operating these operators are going to have to come up with some capital. Is that where the what you're explaining in this opportunity potential opportunity is or did I miss did I misread this.

Patrick (00:27:17) - Mean there's a lot of there's a lot of grease that goes into all that. But you just get into a situation where you're sizing a cash flow. Yeah, right. And if you if you don't know the mechanics of sizing a cash flow, I'm sure your audience that's been on the banking side kind of knows what I'm talking about. But we have certain metrics TVs, DSLRs, debt yields on how you size cash flow and how you size a loan relative to value. And now as values are going down, right, and you're applying that same type of LTV, well, that leaves tightening up because banks aren't on the marketplace anymore.

Patrick (00:27:47) - They're all pulling back. They're anticipating this distress. So TVs are getting smaller and they're getting smaller off of lower values. Right. So just by just I mean just throwing some numbers out there. Right? I mean, you can just see how that constrain is happening, both from a value standpoint standpoint and a cash flow standpoint. And, you know, DSLs are kind of quantified by dividing, you know, what you can get on a like a debt service or along those lines, and it kind of sizes up the loan. So you have two constraints that's really impacting the ability to retire all that cheap debt at par. And it's values coming down. And it's rates going up. They're impacting the sizes and loans to kind of retire at those par values. Um so again have all the math I fly in Excel. It actually took me weeks to put the math all together. But we have the math, you know, and it's true, you know, mean I kind of approached it from a thesis standpoint.

Patrick (00:28:42) - I said, okay, I want to see if this equity gap really exists. So we bought the loans, we bought the data, I ran it through my machine. I was as unbiased as possible, meaning that when I go to size out these loans, the only thing that I'm really shocking is the reference rate. So it's that ten year treasury, ten year treasury during zero was mean zero interest rate policy. Right? It was. It was nothing. Right. Now that reference rate is I don't know what it is now. 4849. Almost a five handle. That was think it breached five earlier this week. So that impacts the way that you size your debt.

Josh (00:29:18) - So with with an acquisition mindset for the the investment group out there, maybe the club money, maybe the funds out there who have been waiting for a good opportunity like this equity gap really could produce some interesting returns for them, right? But they got to know where should I be focusing on. Right. So you're looking at these notes and you're looking at the equity gap and you're looking at the opportunity empirically.

Josh (00:29:45) - Right. And you're saying you're seeing some things pop up. What are you seeing where my people who are salivating for, you know, good opportunities because it's been it's been a winter for a little bit of a deal for deal makers.

Patrick (00:29:59) - Right. And I think I'm sorry. Go ahead.

Josh (00:30:02) - No no no no no. You go. You're the guest.

Patrick (00:30:05) - So. And I won't say who the companies are, but I'm out there talking a lot of folks in the private equity world. And, you know, as I mentioned earlier, the signature bank deal that's out the market and all those private equity players are bidding on those notes. Right. So I think the play right now is on the notes. And just because, you know, cap rate expansion, nobody knows where that's going to go. And nobody's really going to play in that game. But if you have an asset that's worth 100 and you have a par value that's worth 70 and you can buy that par value at $0.50, you've created an equity gap of 50 bucks, right? So you know, if you're an on the acquisition side you really like that basis.

Patrick (00:30:43) - And I do know some private equity players that are playing around in 24 hour cities. And they're coming in at very distressed deals, but they're coming in at super, super attractive basis bases. So if I was an acquisition guy, I'd be calling up all the regional banks who are, excuse me, maturities coming due and say, hey, you know, if you can't retire this debt and your borrower can't pay you off, we're happy to bid on it. We're happy to come and get that debt off your books. So I think the play is in the NPL, the plays in the non-performing loans. Um, that's where I would be, you know, that's where I would be if I was an acquisition guy.

Josh (00:31:18) - Okay. So then walk us through the next stage of right. Right now this is where you would play non-performing notes. What about the next season when, when when all the players listen to this podcast and they're like, oh, we're all in now. Non-performing notes aren't the best focus.

Josh (00:31:33) - Where do you think the where what's the next step that that you and I should be focusing on? Well, so.

Patrick (00:31:40) - As I mentioned earlier, the CFA charter holder and I still stay involved with CFA society in New York, and we just kind of plug an event that we have coming up on November 8th. You can live stream it, whatever. But it's on it's on this topic of infrastructure, capital kind of coming into niche and esoteric asset classes. I'm excited to learn more about it because I'm not bidding on these projects. And I'm I'm very curious to see how infrastructure money is penetrating things like data centers, student housing, charter schools, but most importantly, data centers, right? Data centers that are derivative of all the big data analytics that are out there that need processing, right. They need a home. They need a place to stay. And there's articles out there that keep talking about how, you know, there's so much data out there, where is that data going to be stored.

Patrick (00:32:25) - So you get past the NPLs, you know, you know, I have a health care real estate background. I mean, that used to be in vogue. I mean, that's a little bit more esoteric asset class. When you get into senior housing, acute care facilities, medical office, medical office has become a little bit more of an institutional asset class. I do think data centers, I do think charter schools, student housing, you know, that's been around we're invested in a closed end fund that focuses on student housing. I love that asset class. So I would say kind of, you know, chase asset classes that aren't so tied, there aren't a cyclical Chase asset classes that don't have the same type of volatility as multifamily as offices, retail because they're out there. And I'm very excited to learn more about data centers. I've never really underwritten one, but that's a that's an asset class I'd love to be all over. I just had an educated on it.

Josh (00:33:18) - That's interesting. Why do you think student housing.

Patrick (00:33:21) - Well, I'll tell you. So student housing versus conventional, right. You think of it as a parent, right? The last thing I'm going to give up is my college education or my students, my kids education. Right. They're going to go to school, they're going to get their education. And I'm going to support that as much as possible. Right. So I do think that there's a that non cyclical component. Right. It's a little bit more of a sticky asset class short somewhat seasonal to the academic year. But you know it's and there's always that premium right. There's a 10 to 15% premium over conventional. Right. And as student enrollment grows student housing will grow as well. I do think there's a lot of academic universities that are they just don't have the dorms, right. So it's just kind of spilling over into off campus housing. So if you're finding that type of product stickier rent, um, you know, again, parents are going to give up their kids education and a 10 to 15.

Patrick (00:34:17) - And premium over conventional. So I think all those things, and I look at it from the standpoint of just getting out of cyclicality, of real estate and kind of diversifying your income stream a little bit more. So that's the kind of things that, you know, we haven't rolled out our investment management business that's down the road, but we'd love to chase those esoteric asset classes that are just non cyclical and a few groups that have performed that way. And the gentleman is actually going to be on our panel is from Harrison Street and Harrison Street focused a lot on student housing. They chased a lot of self storage. You know those are asset classes that were, you know, just stickier. And they just weren't as cyclical as some of the some of the, you know, the office, the multifamily, the industrial, the hotels. It's just a different risk profile. Yeah.

Josh (00:35:04) - Super interesting. Do you mind if I ask you maybe another asset class like I think I love your perspective on things. How do you feel about assisted living.

Josh (00:35:12) - Right. So student housing is one asset class right. Non cyclical pay a premium. But you have the the you know assisted living senior housing which Covid decimated right. Like so like potential values dropped pretty heavy there. Like what's your views of that asset class. Do you think it's going to come back. The population's grown. We have all these baby boomers. What's your what's your thoughts.

Patrick (00:35:36) - Um so just be a little bit more specific. So when you get into so assisted living I want to say was a little bit more I think perform better. So you get into the the care spectrum right. So you have age restricted right 65 plus minus. Then you get into independent living and you get into assisted living assisted living with memory care. And then you get into skilled nursing. Right. So skilled nursing those have have very very low break evens, meaning that the the operating expense ratio is like 8590, 95%. So the ability to cushion, you know, a downturn in occupancy is very, very low.

Patrick (00:36:13) - So skilled nursing during the pandemic was impacted the most. And then as you went down the care spectrum, you had a little bit more cushion from a break even standpoint. But skilled nursing I think got pummeled. Um, again, senior housing isn't something I chase every day. It was an asset class that I focused on significantly. But, you know, now I'm a little bit more diversified. But so assisted living I think will come back. I do think before Covid even happened, there was so much money that was chasing senior housing. It was just, you know, it wasn't it wasn't the traditional players like Ventas. You had Goldman Sachs and a lot of folks that kind of went into the business and there were capitalizing all sorts of deals, and all those deals were under construction projects. Right. So yes, that gray wave is coming, but the ability to capture that gray wave into your project when ten other senior housing communities being built, very challenging. So I do think there's a yes, you're coming back, but I definitely think there's a supply issue that needs to, you know, needs to kind of run its course.

Patrick (00:37:14) - And then obviously where interest rates are challenging, it's a challenging asset class to be a part of. Have a good buddy. You know that's out there. He's doing a lot of more on the NPL type stuff in the senior housing world, but he does like the kind of the long term play. But just where base bases are right now in that asset class, it just doesn't make fundamental sense to go out there and acquire those assets. Um, so.

Josh (00:37:38) - When when someone a $100 million fund, you know, real estate fund, and I come to you and I say, you know, we want to we want to engage with you as a consultancy. What does that look like? You know, I grew up in traditional construction. Then real estate. If I didn't sell a building or a house or whatever, I didn't eat. I didn't get paid. Right. So what does that look like? On the consulting side? I'm a fund. I want to engage with you. What do your engagements look like? I mean, you don't have to give the specific details of of dollars and such, but, like, what's it look like?

Patrick (00:38:10) - Well, I haven't unfortunately.

Patrick (00:38:12) - I haven't had that engagement yet, but it'd be very nice to have a nine figure fund come to me and say, hey, we need a I need to bring you on board. Um, you know, it's hard to speak to. I, you know, don't I've never had that that immediate exposure. But we have we've worked on an owner operator side again, this is this is not my consultancy on the umbrella, but I do have the expertise of working with an owner operator that's ready to scale. And he wants to raise kind of a fund that is specific to. And when you say a fund, you know, we go straight to the institutions, the sovereign wealth, the pension funds, that type of ilk. So you kind of skip the investment manager and go straight to the institution for somebody that's scalable. You know, I think that's the challenge is finding an owner operator that's scalable. But, you know, it's a programmatic JV. And if you raise that type of equity capital, any time you draw equity, you get kind of paid a fee on that.

Patrick (00:39:04) - Um, you know, there's a few folks that I'm kind of advising on that the challenge is, is just, you know, can they bring a deal flow where, you know, you're not in a negative leverage, negative leverage situation? But so fun doesn't come to me. I wish they did. But, you know, maybe, maybe down the road. But owner operators that are looking to raise some sort of bespoke fund or something that's specific, that can help scale their business, we do that. I've done that type of work in the past and I'd love to do it now. I just think it's a challenging time in the marketplace to go out there and raise that type of equity capital.

Josh (00:39:40) - Got it. So for owner operator or for operators that are looking to scale, right. And they want to raise some capital or figure out that process to scale, they engage with you and you kind of help walk through that process. Go straight to sovereign funds. Go straight to institutional. Let's skip the investment managers.

Josh (00:39:57) - Let's let's deal with big checks. Right. What for operators out there who are listening in and going, yes, that could be me. How do I know I'm scalable or not? Deal flow is important, right? Can I continuously get good deal flow? What other what other things might I be needing to pay attention to as an operator?

Patrick (00:40:16) - Um, so obviously geographic presence, right? If you're somebody that wants to acquire in different markets, do you have boots on the ground? Do you have geographic, geographic, a geographic presence in those markets? I'd say the next one is continuity of the executive team, right. How long you've been together, how long you've been executing. What's the track record look like? Um. And I'd say, you know, when you lay out what the scalable platform is going to be, needs to be very, very, very specific. And what I mean by that is just, you know, we're not going to, you know, once we allocate equity a certain amount for this geographic area, we're capped out from that standpoint.

Patrick (00:40:53) - All the deals that we work on, it's going to have a return on cost 120 to 150 basis points higher than class A product, whatever you want to call it, whatever the asset class may be. So it's got to be a very defined investment box that this is what this is what we're good at. This is what we've done in the past. We've built $1 billion track record. We're going to replicate it from this standpoint, and we're going to expand in certain markets where we have a geographic presence. We have continuity among the executive team with boots on the ground. We were knowledgeable professionals. People know us. We're very good at managing properties and all those things. Right? I mean, you have to be a company that that's that's vertically integrated somebody, somebody that's already scalable. And I think a lot of owner operators try to approach that capital where, you know, the in-house team is small, you know, they don't have a vertically integrated staff and they don't have geographic presence. And but they want the money and I get it.

Patrick (00:41:48) - But you have to be able to scale and you have to be able to deploy that type of equity and a 1 or 2 year time frame, because, you know, you're competing against the folks where investment managers are knocking at the door and saying, hey, we're going to do a multibillion dollar fund. This is our 10th fund. We're able to deploy our capital, we're able to get our capital out in 36 months. And where you need this rate of return. So that's the alternative, is that they just go into an investment manager who can deploy that capital very quickly. So it's hard mean I wouldn't say it's fine. You know those owner operators aren't they're not everywhere. But if you if you built your company correctly and you've built it to the point where you have continuity, you have boots on the ground and you have a geographic presence, you can do it. You can do it.

Josh (00:42:35) - Yeah.

Josh (00:42:38) - What is the name of your podcast show? You told me this and I couldn't pull it to memory.

Patrick (00:42:43) - So it's called apropos, right? And we talk a lot about. Um, we have, you know, again, a really good Rolodex where I have the ability to kind of bring on some smart folks, and I kind of get to, you know, problem a little bit similar how you're doing me and but, you know. We talk about things that are apropos that are relevant to finance. And we've only we're on a third recording. But the gentleman that we just had on was was Frank Kelly. And he's the founder and managing partner of Fulcrum Macro. He's the type of guy that you spend $5,000 to go watch in a keynote. Fantastic guy, super knowledgeable. He's advised a few presidents. He's a Wall Street guy, too. So we talked a lot about geopolitics and, you know, the chaos in D.C. and thankfully we now we have a House speaker. Now, can we pass some of the bills that we need to pass before year end? Probably doubtful. But he's he brings in those data points that are just that you don't hear about.

Patrick (00:43:41) - And you know, the media. Right. And the gentleman I had on before that was the deputy CIO for a hedge fund in New York, super smart guy. We talked a lot about what was happening in China, our relationship. We talked a lot about, you know, state actors versus non-state actors. And some of the BRICs countries. And then we just kind of talked about what keeps you up night, what's what's apropos to the conversation that we're not talking about? And he said, well, I, you know, I is taking productivity to the next level, you know, are we we have the ability to grasp that as a society, as a human race, to be more productive, produce new products at a faster rate. So we talk about these things. It's it's yes, it's a little bit outside just finance. It's a little bit outside commercial real estate. But it's all relevant to. The financial markets. And the gentlemen I had on private to that was kind of our our inaugural event, our inaugural event, our inaugural recording.

Patrick (00:44:38) - We actually talked a lot about, you know, six months in Silicon Valley Bank. Right. What's changed in the banking industry, you know, are we do we expect to see more heartburn, to expect to see more kind of bank failures? We talked a lot about that. And we also talked a lot about which kind of led to the event where we talked about infrastructure, capital, kind of filling that, that bank debt that's not there and kind of chasing more necessities like asset classes. So we like to throw a wide swath out there. And, you know, I'd say kind of the next speaker that we we don't have in the queue yet, but we are talking to folks, I really want to talk about data centers, okay. And have somebody that's coming on that. She's a venture capital. She's a Proptech founder. I don't think she is, but she's coming up and yeah, she's two female leaders that started something that is super, super cool. But they also had some challenges as female venture capitalists.

Patrick (00:45:32) - Right? They had very, very hard time raising, you know, raising capital as females. And so we want to talk about that too. We want to talk about Dei. And so we want to have a diverse group of folks that kind of come on, talk about things that are that are apropos to, to finance and don't want to be constrained. You know, if there's a topic that comes around and it might be impactful to the financial markets, we hope to have them on.

Josh (00:45:56) - Forgive my ignorance. How do you spell that? I'm trying to find that right now. Appro pos appro pro pose.

Patrick (00:46:05) - That's apropos.

Josh (00:46:06) - What does that mean relevant.

Patrick (00:46:09) - Right. It's it's it's kind of relevant to the situation. Right. It's it's apropos to the conversation we're having now. Right. Um. Yeah. Mean, mean. There's a better definition for that. I'm, I'm not Webster's Dictionary, but I always the first synonym I always give is is relevant. Right. How is it relevant to the conversation.

Patrick (00:46:28) - How is it relevant to the topic of finance? How is it relevant to the topic of commercial real estate, financial markets, etcetera?

Josh (00:46:34) - I love it. You're looking at things that are going on in the world, things that are going on with different asset class and how it will affect other stuff. So Apr oppose. Right. And that's where people could find your podcast. So I want all my listeners to go over, listen, download, subscribe, give a raving review on the podcast. Yeah, absolutely Patrick I want everybody to to go do that. And he's currently looking for guests in the Dcim world, the data center infrastructure management or data centers. Right. Like those are the kind of people that you want to have conversations with. So if anybody is out there who could talk about that in a at a high level, Patrick's information will be in the show notes. Please connect with our guests and say, hey, you know, I'd love to talk about this. You know, give them your pitch and maybe it'd be a good fit on his show.

Josh (00:47:27) - I appreciate and just absolutely.

Patrick (00:47:29) - One more plug.

Josh (00:47:31) - Please. Yeah, go for it.

Patrick (00:47:32) - Get back to your show. But we're now doing this as a collaboration with CFA New York. They have an audience that is bigger than mine for now, but we're kind of we're kind of clubbing our minds together to go out. And so my point is, is if you come on, you kind of get the same audience that you would from a CFA society in New York, which has like 14,000 charter holders just in the New York metro area. So that collaboration is happening and you'll get that audience to super powerful.

Josh (00:48:02) - What's the name of your consultancy and where can people find out more about that? Because there's $100 million fund out there who's not going to knock on your door and say, hey, heard you on Josh's show.

Patrick (00:48:10) - Let's hope so. So that's Nest and Associates. My last name is Nassim Thaler. And, you know, Ness and Associates. I mean, I always kind of pluralized it. It's just me now, but we're kind of in the market looking for looking to bring somebody on.

Patrick (00:48:23) - I think I found who she is. So she's going to help with this capital raise and super excited. She's super smart, super smart girl. And hope to bring her on. So that would be my first associate. But you know, she come on as a partner and all those good things and super bright and can learn a lot from her and she can kind of help kind of scale our business. But so it's Nest Associates, you know, there's probably a few nest associates. I wish them the best. We'll probably do the best with our title relative to theirs. But and we're based here in prospect, Kentucky, you know, Louisville area, if you will. So I'd maybe use that in your search engine. Yeah.

Josh (00:48:59) - Very good. Um, I know you can't share all the information because you're in the middle of all sorts of building some technologies and such that you just not yet. You can't share it with the world. Give us something. Give us a glimpse of what to look for in the future, if you can.

Josh (00:49:15) - Yes.

Patrick (00:49:15) - This is this is research that we're doing at at a university. And we have two blue chip data providers. We're actively engaged in conversations with both of them about what our thesis is. And it's it's and I guess it goes back to my career and the evolution of my career, where I talked about numerator denominator. But you can also look it from the standpoint of space market in the numerator transaction market in the denominator. And my exposure of spending time in the space market in Dallas. It's a market with its own nuances etcetera. In terms of operations of real estate, you know, space users, how they behave, where they satisfy their needs. And there's a whole there's there's a whole much there's so much research and theory that goes into that. And then I spend time in New York where you're on the transaction side and, you know, debt and equity satisfying capital partners, debt providers, equity providers, but they think in a different term. So it's the vision that should make sense.

Patrick (00:50:11) - It should be complementary and be synergistic. It's not. And what we're trying to do is we're trying to show the relationship between the space market and the transaction market. We're trying to incorporate big data variables to help create more, better leaning indicators than time series to, you know, predict what's going to happen in the transaction market. Right. And I think there's research out there that that's touch on this. And people have shown relationship with big data variables and how it impacts rents. But I don't think they've had the data partners that that we have had. And once publicly traded one, you'll mean you'll both know them. And anybody in the commercial real estate world knows who they are. So but you know, we're right now we're in the world of academia and we're we're looking to establish a working paper. Do we have ideas that could turn into some product that we want to monetize to be determined? But right now we're kind of in the thick of it for the research. And we're slowly putting together that mousetrap.

Patrick (00:51:07) - But exciting things to come if we we strike gold. But we're we're pretty excited about it. And obviously there's conviction in what we do because we were able to attract these data partners. And they it's interesting. They don't like working with each other. So we actually got them under one idea, one other standpoint. And we actually had to attack one. You know, one of them gave us like 20 gigs of data. The other one gave us several gigs of data. But we the way we negotiated, we have to tack one data set first and then the second data. We're not like merging the data. So my point is, is it's you know, it's there's a lot of conviction in what we're trying to do. So we're excited about it.

Josh (00:51:44) - Yeah. It's super cool. You're in you're the middle guy bringing it all together. So it's you're gonna have you're gonna have a lot of fun coming on up, man. Really cool. I can't wait to see the journey of that unfold.

Josh (00:51:55) - You know, make sure you stay in contact with us in our community so we could cheer you on. And when you're ready to roll that out, man, we want to be one of the first to hear it and celebrate it with you. During this interview, there's probably a question that you and I discussed that I should have asked you, that I did not. What is that?

Patrick (00:52:12) - Uh. Um. I'm not sure. I think we covered a lot of ground. You know, we were talking about our boys earlier. Um, you know, maybe, don't know, goals of the family. I mean, we're super excited here and in Louisville. Maybe ask me why come to Kentucky, right? Yeah.

Josh (00:52:31) - Well, your father in law's there. That's where your wife's from. He teaches law at the what's called U of L.

Patrick (00:52:36) - It's the University of Louisville. It's the Brandeis school. But one of the things when I'm always talking to folks about Louisville, I'm just like, we're known for bourbon, right? And that's become almost like like Napa Valley.

Patrick (00:52:49) - Yeah. Right. For bourbon, but for brown water. And the second thing is horse racing. And the coolest two minutes of your life would be at the Kentucky Derby. Awesome.

Josh (00:52:57) - Drinking bourbon.

Patrick (00:52:59) - Drinking bourbon and love watching horse racing. But, you know, the Derby is one of the coolest events you'll ever go to. I promise. It's up there with, like, a Super Bowl. Yeah. If you ever make it out here, Josh, please give me a ring and we'll get some tickets and go watch some horse racing and drink some bourbon.

Josh (00:53:13) - Funny story. And this off my mentor. He's like a grandfather to me. He's a Derby winning horse owner. He lives in right near Louisville. He lives in Walton, and I think that's not too far. Or he sneers, more near Cincinnati. But yeah, I owe him a trip. So this trip might be coming sooner than later. I'm going to hold you to it. We're going to grab some bourbon together and watch some horses yell at some horses.

Patrick (00:53:38) - I love it.

Josh (00:53:38) - Yeah, cool. Well, I appreciate you coming on, Patrick. This man, you really challenged me to think really deep and thoughtful higher level questions. So thank you for that, man. You you put me to the test. I hope I passed fellow listeners out there. As always, reach out to our guests and say thank you. Especially if if you could use their help, reach out to them and say, hey, I'm working on something. I'm $100 million fund and I really could use some help, you know, with what we've got going on, their contact information will be in the show notes. If you have a deal that you'd like to talk about here on the show, head over to the deal Scout, fill out a quick form. We could talk some deals, do some deals, or maybe have you on the show next. Till then, we'll talk to you all on the next episode. Bye everybody.