Build something of your own and believe that you can build wealth in the real estate industry. Join your host Sam Wilson as he talks with David Blatt, the CEO of CapStack Partners and Banxel, about raising capital and closing deals. David is a frequent public speaker, and writer on innovation and capital market trends in real estate discusses his perspective on the real estate industry, focusing on managing your money and handling your deals. He willingly offered himself to work a receptionist job to learn distressed real estate and real estate finance. Now he is managing investment funds, particularly on trading with lenders and building up a loan portfolio. But the critical factor in doing this type of business is your capital. It’s time to learn real estate strategies and know the right time to bring in more investors to have more capital to take on more deals. Tune in!
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Raising Capital, Closing Deals And Building Wealth With David Blatt
David Blatt is the CEO of CapStack Partners, focused on helping clients find real estate investment and capital solutions. He is also the Founder and CEO of Banxel, the first lender-to-lender marketplace to syndicate, buy and sell real estate loans. With a background in distressed real estate, Mr. Blatt has successfully structured and closed countless complex deals. He is also a frequent public speaker and writer on innovation and capital market trends in real estate.
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David, welcome to the show.
Thank you for having me.
The pleasure is mine. You’ve got a lot of fun things going on. I know we talked before the show kicked off about the innovative and unique things that you are working on. Before we dig into the nuts and bolts of that, here are the same three questions I ask everybody who comes on the show. Can you tell us where you started, where you are and how you got there?
I started in real estate specifically. I loved the asset class in the industry. I saw it as a vehicle to be able to build personal wealth long-term. For my first gig, I was looking around, trying to figure out where my entry point was and there was a development group that was looking to hire a secretary. I loved what they were doing in the distressed real estate space. They were focused on contaminated properties at the time.
I said, “I’m willing to set your coffee, send the mail and do whatever you need to do. I’ll take that receptionist job but I want to learn everything I can from you with the caveat that you understand that the second I feel like I do have an understanding, I’m out.” My game plan was always to start my own shop. That’s what I did. That was my first job. It’s where I learned the distressed real estate space and real estate finance. It was the jump-off to my career.
I love that hustle and grind. A lot of people miss that early on because they say, “I want to go big. I want to figure this out.” You said, “I’ll work the mailroom. I don’t care. As long as I get the front row seat to what you are doing, by all means.”
I looked at it as a hands-on apprenticeship. I have always been an entrepreneur. I always knew that I wanted to build something of my own. You have a couple of paths to do that. You can go and work for a big shop, get that pedigree, that name association with a big firm and certainly the discipline or you can do it at that small shop, grind it out level, boots on the ground, frontline kind of thing. I saw that as a better path because I would be working next to the CEO of that company and picking up all the pieces that one needs to run their own platform. That was much more interesting to me.
That sounds like the right strategy there. Let’s fast forward to what it is that you’re doing in your day-to-day. Where are you now?
I manage an investment fund that is buying performing and nonperforming commercial mortgages from other lenders throughout the country in markets that we like rather than being a lender that a borrower in real estate is more familiar with. We’re trading with those lenders and building a portfolio of loans through the relationships that we have with other lenders. It’s one level up and our lenders, the client versus an end borrower, even if we end up with the loan and work with the borrower once that’s on our books.
What has that been like? You have to have the capital to go out and buy these nonperforming or performing notes. What was that like raising the capital for that?
Capital raising in and of itself is a job, responsibility and skillset. It’s something that you need to tend to much as you need to tend to the deal flow pipeline. Talking about it in the context of a fund vehicle, you’re talking about it from an input-output way. You have to balance the two because it’s an ongoing endeavor. It’s one thing to raise money on a deal and close that particular transaction. You grind on the front end and put that money together. It will be friends and family or wherever the source could be.
The second you hit that number that you need to close on the acquisition or whatever the business plan is, you’re done, and then you go to that next stage of executing on your business plan to manage the assets, create the value or whatever it is that you have laid out to get it to the point where on the back end you have now delivered, hopefully, a profitable exit for you and your investors, which is a lot easier.
In a fund context, the credits never roll to a large extent. You’re constantly managing the capital raising and investment management process. It’s critical to be able to do that. At the same time, you also have to make sure that there are deals plural coming in the door currently as well as going forward so that you’re utilizing that investor capital in the way that investors gave it to you to justify why they gave it to you. There’s a little bit of a layer of complexity to that one-off.
The trade-off is when you raise money on a deal, hit a home run ideally and return that money to the investors. Inevitably, when you have done a great job, they always ask, “Where’s the next deal?” I always think of it like you have driven yourself out of a job. You got to go and figuratively go get another job. When you’re dealing with a fund vehicle, it’s a little more stable in that way because the fund is the next job. It’s the deal that you liquidated and now you’re moving into the next deal within the scope of the fund. That is the deal. It’s a lot easier to manage to that end. You got to keep deals coming in the door.
You’re upping the ante on the two things that we need to succeed in real estate, which are deals and money. You’re shortening the hamster wheel to where it spins faster. It’s like, “We got more deals, more money.”
Capital raising in and of itself is a job, responsibility and skill set.
It’s like a perpetual wheel to some degree. You need to be adept at managing that facet of it versus the sequential, “Get on the ride, get off the ride,” which is another path. If you’re going that route then you want to try to be managing all into that.
To stay on the capital raise conversation side of this, you constantly need to generate new sources of capital because you can tap out investors to some extent. Am I incorrect?
You need to be conscientious of introducing new investors into the fund. By the same token, I would add that you need to also consider the double-edged sword of that when you’re so focused on trying to raise enough money to curb the deal flow that you have or prospectively can get your hands on. The other side of that is you don’t want to raise so much money at a given point in time that you’re not deploying that capital into deals.
It’s nice to perhaps get approached by an investor group or a high volume of investors at some point that are willing to throw a ton of money your way. It’s enticing to take advantage of that but you also want to think that this is a fund vehicle. You’re being measured on your overall performance, not that one deal that was a home run, the other one that’s still waiting and the cash that’s sitting in the bank. All of that contributes.
One of the things that you need to manage is, “How much am I going to take in? How much am I going to have to turn away?” It’s a luxurious discipline. You want to be able to get to a stage like that and maybe let it in in six months, in a year or whatever that is to try to be responsible about, “How much money am I going to take on because I can reasonably deploy that, hit my targets for the benefit of the fund and then go back out and let more money in at inappropriate stage and so on?”
That’s an interesting perspective. We heard it said many times. Your problems never go away. They just change. When you’re getting started in real estate, you’re going, “I need deals and money.” You’re always balancing this. Once you get a track record and start establishing, now you’re balancing and going, “I need to hold the money back and make sure we can deploy this responsibly.”
The problems never go away. They just change. I enjoy you taking the time to dig into some of those thoughts and how you have to approach your business and be responsible on that front. Have you had the experience where you did have too much capital and then couldn’t get it deployed in a timely manner?
We haven’t run into that so far, luckily. That’s also about trying to get a handle on what the perspective pipeline can look like. The ideal situation is where you are opening up a fund to bring in investors and know, “I’m doing this because there’s always a spike around this time of year. I have certain deals that are on the horizon that I will get my hands on. There’s enough activity in the market. I have a relationship with a seller of some profile that is going to reliably send me deal flow sizing.” It’s that stuff that you want to try to be as thoughtful about in terms of what your projections can be.
The guiding principle here is that a zero return on capital per day is effectively a loss. You’ve made zero for that money that day so you want to think about, “I got to get this money to work.” It’s compensating for the fact that you always have some cash reserves sitting on the sidelines anyway because you want to have some cash. That’s a component of what you need to bake in, which means you have to think about, “What’s the level of return I need on those dollars that are working for the fund?” It’s because the stuff that’s sitting in the bank is creating drag as a counterbalance.
Those are certainly a lot of things to think about. I love that you put it zero for that day. A lot of times, we think about annualized returns and things like that. If you break it down to a very day-by-day component of, “Is this working?” that puts a lot more urgency to those things when you’re thinking about, “There’s cash sitting idle.”
A zero IRR a day is a loss. That’s what it is.
Thanks for pulling back the curtain on how you think and handle your capital side of the business. The other side of your business that is intriguing as well is the deal side. You told me you do both nonperforming and performing commercial mortgages. Talk to us about the nonperforming side. That’s one we would find intriguing too. I will love to hear if there’s an uptick in that, if we anticipate an uptick in that and get your forecast on that front. If you can, break down the components of it and what you see coming down the pipe.
To fill in a blank between my first gig and where I am now for context, the platform that I launched right after I left that shop was a distressed fund platform. I ran a specifically distressed fund buying defaulted commercial mortgages for ten years into and through the last recession to the point that it was scaled to about $1 billion AUM.
We had a private equity fund that had stepped in to back us right as the recession was starting. We had a whole meltdown, The Big Short situation. That was our time to shine. I have a tremendous amount of experience in the distressed space. More so, I have decades of relationships with banks and lenders that we’ve still traded with.
I ended up dissolving the fund and forming CapStack Partners, my current platform, mainly because the market came back. There wasn’t much distress to chase to support a fund. Going back to the zero IRR days, at that point, you’ve got to read the market. We were doing one-off deals and it has been working to that extent until we were able to scale it to a fund that exists now, which is doing both the performing and nonperforming.
I needed to fill that in for context. To answer your question more specifically and directly is I have certainly seen an uptick. I wouldn’t predict that it’s a signal on the overall market. I believe that the overall market is very healthy and robust both from the real estate and real estate debt sides of the equation.
A zero return on capital per day is effectively a loss.
The reason that we have a pretty steady flow of deals is a function of the relationships that I have with lenders. I’m not chasing deals on the distressed side as much as solving problems for lenders that know that that’s what I do. We’re getting offered this stuff because of our position in the market, which is a nice place to be.
There are always 1 or 2 deals that go sideways for a given lender that they need to move off their books. My view on that is I don’t need to buy a massive portfolio of distressed deals in order to justify having a fund that buys distressed deals. I need to have enough relationships where the 1 or 2 that they need to move gets directed my way. That’s how we build a portfolio.
I have the other element, which is reflective of the timing. There are a number of deals that went offline when COVID lockdown happened and they were put in what I would describe as induced comas as it relates to a lot of loan forbearance. It’s like a timeout. Timeout is over and a lot of these loans have come back online and started to perform. There are those that are not performing and won’t be coming back online.
The lenders, contrary to how you would think about it because the banks are doing so well, are profitable. They’re doing great and they’re in the money business. For them to have a deal locked up in some nonperforming loan makes zero sense. They’re much better writing that thing off and rolling that money back out into a good loan.
There has been what I would describe as a great reopening side that we’re starting to see. That will last into 2022 as lenders are allowing all of that forbearance runway to burn off. I do expect some more market data to consider. There are also a lot of traditional loan maturities that happened to be coming up that are coinciding with coming back online or rather not coming back online for forbearance situations.
When you have that, it does create a little bit of a dynamic that, “I’m a borrower and I’m able to pay my loan. The issue that I’m going to run into is I’ve got the asset that is going to be hard-pressed to refinance at all or at the level that I borrowed at originally because it’s retail.” Lenders don’t like retail or it’s an office and half of my office building is unoccupied still or a hotel, it’s in an area that has been impacted and hasn’t bounced back the way that it did pre-COVID. Those are things that we’re looking at closely and certainly, the lenders are. It’s like, “You’re making your monthly but when this loan comes due, you got to pay off this loan.” How does that get resolved? That’s something that we’re looking at but I do expect that there would be some opportunities on that front.
That’s an interesting point you bring up there as you look to some of those nuances to what you’re buying. What does a distressed deal look like that you’re buying that makes sense for you?
I’ll give you the profile. Going back when the world was coming to a capital markets end so to speak, we were paying some pretty heavy discounts on paper at the time and going down to as low as $0.20 on the dollar to around $0.50 to $0.60 on a dollar. Now, more often than not, we’re in the $0.90 to $0.100 on the dollar because a lot of the distress that we’re seeing lies at the borrower level and their inability to either service or take out the existing loan but the underlying real estate has value.
For us, it’s to work through whatever that problem is to get the loan liquidated. To be clear, the business plan isn’t a backdoor into building a portfolio of real estate at a discount. It’s to get to an exit however that materializes. We’re looking at it and saying, “This is going to deliver an acceptable return for our targets so we’re willing to pay that value.” Philosophically, it’s by value go by price. Whenever you talk about distress, people hear discount. That’s not necessarily the case. You’re taking advantage of what is effectively a problem for somebody else is an opportunity for you.
To that end, that’s also what contributes a lot to why lenders are sending things our way. Everyone around the table knows what the situation is. It’s a clean asset with a clean story and the value is what the value is. We’ll pay and they know that. If there’s enough of a problem that it does warrant a haircut, you get a 100% vacant shopping center. It’s in a good area but it has to be written down. Everybody around the table knows that too.
It makes for a much more seamless transaction. To us, we’re focused on the same fundamentals as anybody in real estate. We’re looking at good markets and asset classes that we like. We are in the distressed component thinking about, “How does this jurisdiction handle the foreclosure process? Are there moratoriums?” They have all effectively burned off at this point. What’s the runway to get a resolution? If we go state by state some of them are weeks and others are years, even if you don’t get pushback from a borrower. These are the considerations that we had.
Those are a lot of things to think about in the components of what deals make sense. Talk to us about the performing side of things. Why would a current lender want to even sell something that’s making money on their books? What’s the opportunity there for them and for you?
That’s the more active side of the business because the market is pretty strong and healthy. You have a couple of situations but the easiest one to lay out as a scenario to your point is when you’re a lender. Let’s say you make a bridge loan to keep it simple. It’s a one-year loan. Hypothetically, you are able to get an early repayment on that loan at six months and you’re going to put that money out. In a situation like that, you have effectively turned the money twice. Your upside is the origination fees that you will collect on a loan. The annual rate stays the same when you put the loan out and put it out again. If it’s one year, it’s a one-year interest rate.
You’re a lender who’s doing great business. You’re raising money from your investors. You put the money out on loans and more borrowers come in the door because you’re growing and you have relationships. Things are going great because the market is strong and your shop is getting more visibility and you’re getting more business. You go back to your lenders and raise more money because your other money’s out on the street and you have to wait until that pays off. The next month, repeat it. That’s a great problem.
You can only go back to that equity well so many times. You’ve got to think about investors constantly, which is something you should be doing anyway. You can only go back and say, “We need more money now. Things are great.” At some point, that well dries up. How do you address the ability to scale? If you take, let’s use $1 million for simplification, make that loan and sell it to my fund, you are now keeping the points and you’ll be able to recycle that same $1 million every month over the same one-year period.
You have turned the money not 2 times but 12 times. Let’s say you’ve got some drags so it’s ten times. Every time you’re turning the money, you’re clipping the origination fees. Instead of earning it 1 or 2 times a year, you’re earning it 10 to 12 times a year. You don’t have to go back to the equity well at any point because you’re using that same $1 million. It’s rinse and repeat.
What is effectively a problem for somebody else is an opportunity for you.
For the lender, it alleviates this capital constraint that they may have because of a good news problem. They’re growing. It also opens up a door to make more money alongside that. For us, what it’s doing is I get to think about real estate loans more like how a hedge fund thinks about building a portfolio of stocks and bonds based on where we like to play. I’m never going to compete with that guy on the ground in a market like Atlanta, Dallas or Nashville because it’s a relationship game. You need to have all your infrastructure down there. You’ve got to have originators. You need all of that human resource.
That requires the bandwidth to build that out and manage it as well as the burn rate of paying for all that. Whereas this way, I get to find the lenders who are deep in their markets and are in a position, like we described, that need that cash. I get to construct a portfolio like a fund does where I want exposure to Dallas, Austin, Nashville and Atlanta. I can build my portfolio through those relationships. I know that I’m going to see a flow of loans from those relationships on a pretty steady basis to be able to create that portfolio. I stay lean on my side doing it while solving a problem for them.
That’s a well-thought-through and very clear answer. To cap it off here, your long-term play is to hold those until the fund decides that, “We have run our course with this loan.” Do you then sell it to someone else? Do you hold it until maturity or pay off?
We mostly hold it. It’s shorter-term stuff that we’re typically buying but we do have the ability to sell it off if we want to exit out for whatever reason to rebalance our portfolio because we have a pretty deep relationship base with lenders that we’re trading with. At some point, with a lot of the lenders that we do business with, it starts to open up all sorts of combinations of everything I described. Maybe we will jump in and fund the loan on the front end for a lender if it’s too large for them. We have enough of a track record that we think that they’re good. They think about risk in the appropriate way and are running a professional shop or we will partner with lenders as if it’s a big loan.
The biggest challenge that everybody has in this market, I don’t care where you’re playing in real estate is finding and controlling the deals. That makes sense. You need to get creative on how you access those things. Our thought process is we’re focused on our counterparty relationships and helping them solve problems.
I’m in the debt space so I think about the lender and what their problem is. If they need liquidity, I buy performing loans. If they have a defaulted loan, I’m solving their problem that way. If we get some things that we think make sense for them, we’re trading. We’re able to create this ecosystem with other lenders that give us a much deeper and wider reach because we’re playing well in the sandbox with all these lenders all over the country. That opens up the pipeline in a way that we can choose the best.
You have given a lot of clear answers and pulled back the curtains on how you think about raising capital, your relationships in the real estate space and how you have grown your company. I have certainly enjoyed this. Thanks for coming on. Let’s jump here into a final few questions if you don’t mind. The first one is this. If you could help our readers avoid one mistake in the real estate space, what would it be? How would you avoid it?
People tend to underestimate the number of reserves that they need for this asset class. That doesn’t matter whether you’re playing in debt or equity. Real estate is a large fixed asset game with a long duration. It moves slowly and it’s a big ticket. A lot of people, particularly when you’re reaching to try to make a deal work, might come in thin. That will bite you in the ass. Overestimate reserves that you need because that rainy day materializes more frequently than you expect. You want to be prepared for that. There’s nothing worse particularly with investors to go back and say, “We need more money.”
That’s a painful one and we see it too often. That is certainly sound advice. The next question for you is when it comes to investing in the world, what’s one thing you’re doing to make the world a better place?
Our approach to the investing space and the debt space, in particular, is we interact with a lot of smaller debt funds and private guys who may have even started their business and it has just taken off. In addition to the transactional side and how we work with these lenders, I thoroughly enjoy the relationship aspect, particularly with these private lenders who are taking these strides to grow as professionals in their space and start to conduct their businesses in a much more buttoned-up way. It’s borrowing from a lot of the business that I have done with bigger, multibillion-dollar institutions and bringing it down to that two-foot level.
I enjoy that and I enjoy seeing a lot of these lenders graduate into becoming much better at what they’re doing and more successful within their shops. I love that story. I’m always rooting for those guys. That comes through and that’s why we do a lot of business with different lenders. It’s being able to share my experiences on, “Here’s how things go wrong. I bought going wrong for many years. Let’s step this up over here and over there.” To be able to do that in addition to making some money together is the best.
The larger you get and the more successful you become, the tougher it is to stay rooted to the common man or woman taking off in this space. That’s cool that you find joy in doing that. I’m certain that the people that are following in your footsteps appreciate it. That certainly comes through. Thanks for doing that. David, if our readers want to get in touch with you, what is the best way to do that?
Our website CapStackPartners.com is one way and my LinkedIn. I’m pretty active on that so you can find me on there. @DavidBlatt-CapStackCEO.
David, thank you so much for your time. I do appreciate it.
Thanks so much. Thanks for having me.
Important Links:
- CapStack Partners
- Banxel
- @DavidBlatt-CapStackCEO – LinkedIn
About David Blatt
David Blatt is CEO of CapStack Partners, focused on helping clients find real estate investment & capital solutions. He is also the Founder & CEO of Banxel, the first lender2lender marketplace to syndicate, buy & sell real estate loans. With a background in distressed real estate, Mr. Blatt has successfully structured & closed countless complex deals. He is also a frequent public speaker & writer on innovation & capital market trends in real estate.