Thread by @bradleyjohnson2

How to Build - Or Find - A Real Estate Compounder.

You’ll need the following:

(thread below)

A Niche Business Model Where:

• Demand is outpacing supply (constrained market)
• Tenants are “pot committed” (sticky customers)
• Organic income grows regardless of economic cycle

Low Ongoing Capital Requirements:

• Great cash flow visibility = easier to price deals
• Avoids black swan expenses that derail investments
• Capital spent to grow income, not just maintain

Partially Self-funding:

• Function of the prior two categories
• Less reliant on capital markets
• Issue less and less new equity (%) per deal

Committed to External Growth:

• Acquisition culture – entire team drives new deals
• Enables team to keep and incentivize All-Stars
• Leverages existing portfolio & data to expand

Improving Cost of Capital (WACC):

• Fanatical about lowering interest costs
• Used as a weapon against the competition
• Compounds as scale can drive interest costs lower

Operational Excellence:

• COO is a killer that loves systems (engineering mindset)
• Asset managers are celebrated & compensated for performance
• Heartbeat of firm: drives confidence within every division; empowers acquisition team to win more deals

Efficient Capital Allocator:

• Occasionally recycle capital via opportunistic sales
• Issue or buyback equity when market gets irrational
• Use everything in the tool kit – lines of credit, fixed non-recourse, bonds, preferred equity, OP units

Below Average Leverage:

• Counterintuitive, but less leverage leads to higher returns over long term
• Avoids blow-up risk and need to raise capital at inopportune times
• Allows firm to go on offense when overleveraged competitors struggle in a recession or credit crisis

Investment / Reinvestment Opportunities:

• Long runway of expansion, acquisition or portfolio targets
• Development pipeline or – better yet - developer partners that take entitlement and construction risk (option land)
• Critical to high returns over long-term

Net Result = Real Estate Compounder

Flywheel where acquisitions are accretive ($$$) vs. cost of capital. This reduces G&A costs, which further reduces WACC, which drives more acquisitions.

Bonus: Virtuous circle reduces risk via improved deal / market quality at same returns