Mark Khuri: 0:00
When you start with mobile homes, J, it’s the if not one of the most affordable housing options in the US. And the amount of supply versus demand on this asset class is staggering the spread between the two. There’s simply not enough supply. And the amount of demand for affordable housing continues to grow. And we think that’s a long term trend. For the US, we’ll see if there’s anything that’s going to hinder that trend, but it’s been with us for a long time. There’s literally a lack of affordable housing in every single state in the US. So we love that asset class because of a few reasons, obviously, the supply demand disequilibrium that we’re noting, but you also have a moat to the asset class from new supply, which is quite unique that you don’t get in a lot of other real estate sectors. It’s very hard to build a new mobile home park in a desirable area. Most of the, I would say desirable locations that are zoned and allow it mobile home parks were built in the 60s and 70s. And so to to think about it from a supply standpoint, you have flat or even declining supply of this asset class while demand is going up.
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J Darrin Gross 1:39
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio.
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Today, my guest is Mark Khuri. Mark is the co-founder or co-founder SMK Capital Management in 2010. SMK is a boutique private equity real estate investment firm, focusing on recent recession resistant investment opportunities. Mark has created and managed over 65 Real Estate partnerships with investors. And in just a minute, we’re going to speak with Mark Khuri about strategies to create a recession resistant real estate portfolio.
But first a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like, share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at Commercial Real Estate Pro Network. And while you’re there, please subscribe. With that, I want to welcome my guest, Mark Khuri. Welcome to CRE PN Radio.
Mark Khuri 3:34
Thanks, Jay. Happy to be here.
J Darrin Gross 3:37
I’m looking forward to our conversation. But before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Mark Khuri 3:46
Yeah, I started in corporate America, Jay, working in finance and also operations management. Gosh, those two just meshed well for real estate investing. I started investing on the side kind of after work very active. The fixer uppers brr strategy, buy, renovate rent, and then repeat partnering with family really, for the first called five, six years of my real estate career while working full time. And then by 2010. J The economy had changed. Of course everything really changed right Great Recession. I left my corporate job and went in opened up our company SMK Capital Management to really expand on what we were already doing as a family but just dove in full time. And fast forward to today. We’re a private equity real estate investment firm we focus on really the relationships that we’ve built over the last 15 years or so Darrin with operating partners, they provide us with private investment opportunities. We live we love to diversify across asset classes. I’m sure we’ll dive into some more specifics as to which ones but also diversify and spread risk across regions. And people. And of course, duration of investments shorter term, medium term long term.
J Darrin Gross 5:11
Awesome. I appreciate you sharing your your background there. I guess the first question I have is recession resistant real estate? What are the specific asset classes? Is it specific geographies? Or how do you define or what do you consider to be recession resistant? Real Estate?
Mark Khuri 5:35
Sure, yeah, I’ll say this. You know, for us the way we look at the term Darrin has been a focus of ours for over five years now, we started focusing on recession resistance, we created a recession resistant fund. In 2018, we thought there could be some changes to the economy a downturn, there were some indicators in the marketplace pointing to that potentially happening. But what it means for us is investing in a strategy where we feel high conviction that the investments have a very high likelihood of continuing to perform through varying market cycles, and being resistant to a recession, of course, and continuing to perform what does that mean, it’s to us it’s maintaining or growing asset value, and continuing to provide distributions and cash flow from the the proceeds from the investments.
J Darrin Gross 6:30
Got it? So with that said, what are some of the asset classes that you are investing in?
Mark Khuri 6:39
Yeah, so I started investing in some recession resistant asset classes. Through 2009 1011, Darrin, when, you know, the largest recession in my life had been seen. And that included mobile, home parks, self storage, some multifamily, those are the top three, today, they remain a big focus of ours, we’re also invested in triple net industrial, and also tax exempt apartments, those are apartment communities where we don’t have to pay property taxes. Those are our main focus as far as asset class care, and that fall under the category for us.
J Darrin Gross 7:22
So with that, do you have a community size criteria? Or how do you define, you know, determine where you’re going to place your investments?
Mark Khuri 7:35
Yeah, as far as location down, I mean, we’re J, we’re pretty much we’re invested in about 40 states right now. Where we don’t focus on is the coasts and the Northeast, predominantly because of you don’t you don’t typically see cashflow in those regions. And we’re focused very much on cash flow and growth we like to see both in our deals. So we tend to stay away from those regions. But essentially, market agnostic depends on our operating partners experience in the market depends on the size of the market, you know, we try and stay away from very heavily, I would say high tertiary markets, J which don’t have a lot of jobs, very low population. Usually we’re trying to invest and say within a close proximity to a major MSA of 500,000 people or more.
J Darrin Gross 8:32
And in the different areas, how do you I guess vet your, your operators or your your equity, or your investment partners, how do you how do you go about vetting those?
Mark Khuri 8:48
Yeah, it’s a long process. So I’ll share with you how we got into vetting operators. But essentially, you know, when I left a finance job in corporate America and started our company, we were the operating partner J. we sourced vetted, operated the assets from A to Z by raising capital from our investors. And we did everything we picked the paint color, the tile, we decided went to sell refi, etc. But I left corporate America, I had a 401k sitting idle can invest those monies into your own deals. And so I opened up a self directed IRA and I started networking. Gosh, this is 2009 and 10 or so there, Jay, I basically found a couple meetup groups that were local to me at the time. Every week or two I was there shaking hands, meeting people taking notes, listening to operators that were specialists in other fields outside of what we were focusing on, that included mobile homes and self storage and apartments and several others and we started investing myself and my family as LPS into those deals. To diversify to get exposure to We spread our capital out personally, while doing our own deals predominantly in single family in the small multifamily space. And then by, gosh, I’d say five, six years later, we had built some really good relationships with some of these groups, Jay. And we decided to offer some diversification outside of our core competency to our investor group by creating syndications and partnering with our operators and negotiating better terms for our group. So we could raise capital and bring some equity to the deal, but also rely on our operating partners to execute on the business plan and to manage the asset and the residents and everything in between. And so fast forward today, just about all of our deals J come to us from relationships that we have with other operating partners, they oftentimes have acquisitions teams, in house can be anywhere from two to 10 folks on their team that are just scouring the market, trying to find investment opportunities that makes sense that they’re attracted to. And when they get one, they’ll share it with us, Hey, Mark, are you guys interested? Your family or your company, we’re under loi, or we will be soon. Here’s a pro forma, here’s a business model. And then we’ll look at that deal and see if it meets our investment criteria and if we like it. And one other thing to point out, Jay, it’s like we’re very much in the people business. So we’ve underwritten, vetted, analyzed over 130 different operating partners over the years. And so today, we invest with about 10 or so. And so it’s very much a people game first and then analyzing the opportunity, of course, as well.
J Darrin Gross 11:49
No, I’ve heard more and more recently, that that’s becoming, you know, the piece that is kind of the weak link in some of these deals where, you know, some opportunities are not performing as as originally intended, and creating a little bit of grief for the investors. So let me ask you, when when you’ve mentioned the mobile home self storage and multifamily is kind of the the three asset classes. What is it that you see that that makes these recession resistant?
Mark Khuri 12:29
Yeah, a few things. So you start with mobile homes, J, it’s the if not one of the most affordable housing options in the US. And the amount of supply versus demand on this asset class is staggering. The spread between the two, there’s simply not enough supply. And the amount of demand for affordable housing continues to grow. And we think that’s a long term trend. For the US, we’ll see if there’s anything that’s going to hinder that that trend, but it’s been with us for a long time. There’s literally a lack of affordable housing in every single state in the US. So we love that asset class because of a few reasons, obviously, the supply demand disequilibrium that we’re noting. But you also have a moat to the asset class from new supply, which is quite unique that you don’t get in a lot of other real estate sectors. It’s very hard to build a new mobile home park in a desirable area, most of the, I would say desirable locations that are zoned and allow it mobile home parks were built in the 60s and 70s. And so to to think about it from a supply standpoint, you have flat or even declining supply of this asset class while demand is going up. That really sit makes it stand apart from most any other real estate sector. And then you have self storage. You know, similar to mobile homes. during a downturn, you often see demand for storage go up. If there’s a correction in the economy or recession, people tend to make a change in their life, that can be to move to relocate to change jobs, downsize and anytime there’s that change, you often see an increase in demand for storage. So a little bit counter cyclical. You also have a 30 day lease, so it’s easy to adjust the rents and short notice on self storage, that concern with storage. Unlike mobile homes, it’s easy to build new and they go up quick and they’re very low cost comparatively to other real estate. And so you have a situation we just got to be careful about new supply in the self storage space. And then apartments. J for us. We focus predominantly on workforce housing, and affordable tax exempt departments. These are typically catered to folks that are Making the area median income or even slightly less, to think about a two bedroom with great access to transit, renting anywhere from usually $800 a month to $1,500 a month, that’s kind of the space that we like to invest in. And in the apartment sector, we’re not really investing in class a high rent, apartment buildings. So we find that similarily it’s an affordable option. And so going back again to supply and demand, it’s very hard to build, call it Class B $1,200 A month rent apartment communities in the locations that we’re investing in today. Just because the cost of the land, the cost of construction is very high, that you most likely your end product is going to be a Class A rent where you’re, you know, maybe at $2,000 a month, is the unit, compare the 212 1300 or so that we’re typically focusing on.
J Darrin Gross 16:00
So in the the multifamily you’re investing in existing, more kind of dated stock versus or are you investing in low income housing tax credit? Properties?
Mark Khuri 16:13
Yeah, so we focus predominantly on tax exempt apartments in the affordable space J. That is quite different than the Low Income Housing Tax Credit, all the residents have to qualify to, to get accepted and live into the property. The main play on tax exempt apartments for us is I’ll just describe what it is. It’s a essentially a partnership with a local municipality, it’s a public private partnership. And what our operating partners do is they allocate up to half of the units as affordable. That’s a def by definition, it’s tied to the area median income. And in exchange for keeping half of the units affordable, you get in 99 year, tax exemption, property tax exemption. And so you’re really creating a win win where you can invest in multifamily, you can create affordable housing, but also reap the benefit from a obviously a pretty large tax abatement in exchange for keeping half of the units affordable.
J Darrin Gross 17:16
Is that a federal opportunity or is that a like a state by state or local opportunities?
Mark Khuri 17:24
It’s state by state and local j. So it doesn’t work everywhere. If you think about the idea of keeping the rents at certain 50% of the units. Affordable by definition, you have to find locations where it makes sense financially, because a lot of times you’re going to be dropping your revenues in order to keep these units affordable. And if you’re able to get a tax exemption that greatly offsets that it’s a win win. But if you’re in a, you know, an Austin or a Class A apartment community where the rents are $2,500 a month, and maybe you need to keep the the area median income set at 60, or 80%, of area median income for those applying, you might have to drop your rent significantly, and so probably wouldn’t work in those areas. So there are certain places and locations and properties where it works very well. But it’s definitely not everywhere.
J Darrin Gross 18:23
Got it. So the mobile homes, it sounds like the supply constraint is kind of the big advantage. As far as the opportunity for new new properties. The multifamily I like that strategy where you’re you’re finding the the tax exempt properties. That’s that’s good. And then the Self Storage just mentioned that the demand typically increases when kind of challenging financial times. Are any of these sensitive to interest rate changes? Or, you know, what happens if the economy improves? Do they perform as well as they did? Or do they? Do they suffer any kind of, you know, drop if the economy improves? Or is it or is it just always been steady? And this is just kind of the base housing base base level of, of product and always in demand?
Mark Khuri 19:24
Yeah, I’ll answer the first question. So they’re all sensitive to interest rate changes 100%. I think all real estate is whether you use financing or not, assuming you’re buying all cash, the value of your asset is based on net operating income and comparable sales in the market. So a lot of those comparable sales jail, of course, have debt on them. And so if they become constrained and have issues because of interest rate spikes, which you’ve all experienced, that can hurt the local market, which could then hurt your asset and so, yes, they’re all sensitive to interest rates. Now with that There’s, I’ll give you an example of how we kind of combat that risk with tax exempt apartments J, you get very attractive agency like financing. So Fannie, for example, has certain programs out there for affordable housing, that are much more favorable than just buying a market rate property. And so put it into perspective, a deal we just closed on last month in Houston, tax exempt department community 532 units built in 2008 95%, occupied we we got 10 year agency fixed rate debt with tenure interest only at around 5.35%. And the going in cap rate on that deal, once you account for the tax exemption is around 6.8%. So very healthy spread between the cap rate and the interest rate, something we look at Jay very closely, and all of our deals today helps provide positive cash flow day one, right, if you buy the place, and don’t do anything, you’re earning positive income. And so that’s what we’re really looking for today. So I apologize. No, you asked about interest rates. What was the second part of the question? I think it was, if we,
J Darrin Gross 21:14
If the economy improves? I mean, ya know, I think the the go forward concern right now is if the economy, you know, stalls or or, you know, we go into recession, which are so we may be in r&d. And yeah, curious, how do these perform. As the economy improves,
Mark Khuri 21:35
They do very well, J. It’s kind of why we select these asset classes, we find them to perform well, in both market cycles up and down. And nothing’s perfect, there’s always risk. And so you have to be careful, especially if things are shaky and the economy went on an upswing, what you see in kind of, I would say, the middle income housing sector, is you have people essentially, maybe moving out of the mobile home park and into an apartment, maybe you have folks that were living at home that are now going to move into the mobile home park. So you have kind of that middle spot where there’s people still having high demand. The other thing with mobile homes, J is a lot of the parks that we invest in, the residents own their own home, and they pay lot rent to us. And so the average tenancy, this is just a national metric. But it’s usually over 10 years that they’ll stay in that community. So you have a lot of sticky tenants, which is great. And then in self storage, you you have a seasonality effect in that asset class number one, but during positive times, you can see people also moving and changing. It’s not necessarily just a downturn. So we find them to be in high demand across varying market cycles, which is why we invest in them.
J Darrin Gross 23:01
As far as your investment platform, your investors do you? Are you raising capital? What kind of minimum investment is required? If you are?
Mark Khuri 23:15
Yeah, yeah, we raise capital from accredited investors, J. Most of them are business owners, entrepreneurs, doctors, lawyers, CPAs attorneys, C suite executives, our minimums are typically 50,000 to invest passively through our own funds. And, you know, one of the things I think that a lot of them like is that we’re worth a group that if it doesn’t make sense to invest, we just won’t we won’t send out a deal unless we believe in it unless, almost always there’s a curry someone in my family writing a check and investing alongside so I personally invest in just about every one of our deals, because I think they’re great investments and, and it helps us align interests with our investors, they trust us to go out and find and source and create opportunities that they probably couldn’t find or do on their own and vet them. And of course, try and cherry pick what we think are the best risk adjusted returns.
J Darrin Gross 24:18
The property mentioned built in 2008. In Houston, you mentioned a financing of 10 year fixed interest only is that one you guys control directly or is that one through your one of your investment partners or?
Mark Khuri 24:34
It’s through it through one of our operating partners, we give up control on purpose to them, they’re specialists in this space. They have 25,000 apartment units under management and ownership. They’ve been focusing on affordable housing for over a decade, and specifically just in apartments predominantly just in Texas. And so that’s kind of how our business has evolved. Jay, you know, we were really good at one thing and wanted To spread out our capital and to other assets in areas where we could partner with those that were experts in those areas, right, so we don’t operate, I don’t operate mobile home parks, but I have several different operating partners. That’s all they do. And that’s all they’ve been doing for years and years. They have asset management team, property management team, in house, accounting, bookkeeping, admin, all of that many of these groups have 500 million or, or more in assets under management, several have multi billion dollars of assets under management and well built out teams j. So our philosophy has evolved to, you know, join, join him, instead of trying to go and create all these different investments and upgrade him yourself, we find that the risk goes up, because we’re not specialists and all that. But the returns can, of course, be very commensurate to doing it yourself. If you’re partnering with great people.
J Darrin Gross 25:57
Makes sense. Your fund, I can’t remember, how long has it been in existence?
Mark Khuri 26:06
Yeah, so we create a font usually about once a year, J Just depends on if we find deals that we think would go well together in a fund. Currently, our fund is alternative income fund three, and we open this fund, early in 2023, we’re talking near to the end of 2023. To date, we’ve made seven different investments into the fund j that includes mobile homes, self storage, apartments, triple net industrial, also, a were invested in ATMs, and a private real estate debt fund. So you have a a portion of the strategy of this fund is to invest roughly 25% of the equity into fixed income assets. And then the remaining 75% or so into assets that provide income and growth. And so that’s something we’ve been working on most of this year. And it’s very well diversified. And we’re really excited about it today.
J Darrin Gross 27:10
As far as the the funds, is there a, like an unwind date, or are these like perpetual how to how you set those up?
Mark Khuri 27:18
They’re closed in funds, so we raise capital for a period of time, and then we’ll close the fund. And that’s it, you know, we then manage the assets and the investments for the life of each investment. So to put that in perspective, we made seven investments, some of them were into single asset properties, like the deal in Houston I just talked about. And then there’s a couple of investments that are into portfolios, like the triple net industrial portfolio owns eight assets in six different states. And so when is it going to dissolve? Well, once the assets sell, we return the principal back to our investors, plus profits, of course, and at the point of disposition of all the assets than the fund is essentially closed. So going into that we know the projected investment duration of each investment J. Right. So it ranges between three and seven years for this fund. And we basically tell folks that you can expect to have the majority of your capital back by year five, some of it will come back sooner, but we think 70% or more will be returned by year five.
J Darrin Gross 28:31
And being the the the current fund is the third have any of your earlier funds had any liquidations or have you? Or is everything pretty well? in place and and performance?
Mark Khuri 28:48
Yeah, yeah, you know, we we created we’ve created funds since the beginning of our company, we just find that grouping properties together helps reduce risk. So even J. when we were focusing predominantly on single family and small multifamily, we would create funds and portfolios where investors could invest in multiple properties. And so over the years on the single family and small multifamily deals J we’ve bought, renovated and sold over 60 properties. Some of those were funds that included multiple properties. And on the commercial real estate side, we’ve had 16 exits to date for the asset classes that we’re talking about. And we currently hold an equity interest and ownership interest in Gosh, over 120 properties across multiple states and regions at this point two that are still actively invested in.
J Darrin Gross 29:44
Got it. That’s, you know, quite the portfolio you’ve got there and I love the strategy there with the the recession resistant real estate and I learned a lot about that tax exempt thing that’s have land. And I’ve heard other strategies. But that one, I’m curious when you with that being your strategy, are you finding properties that are already in that? Or are you finding the property and then approaching the the authority or the municipality, whoever has the tax exemption opportunity to put the property in the tax exemption? Or I guess, maybe the question is, are your operators the investors that you’re investing with?
Mark Khuri 30:31
Yeah, it’s the latter. So each tax exempt deal that we’ve done to date, J has been created while in escrow so the seller does not have the property tax exemption, it’s underwritten, and assumed that we will get that tax exemption. And then that’s confirmed before we close on the property confirmed with the local municipality, property tax exemption is in place. So it’s a cumbersome process takes a lot of time, you need to have several attorneys on staff working with the local municipality in order to be able to create these partnerships. But there’s obviously inherent value for that time and effort. Even just day one, you see, the appraised value, and a lot of these deals j is much higher than the purchase price that we’re paying. Because you’re essentially removing the property tax expense line item. And so your net operating income goes up significantly, day one. And so that’s how they’re appraised as well. So it’s a benefit. But yeah, it’s created predominantly in escrow.
J Darrin Gross 31:35
No, I love that strategy. I hadn’t heard that before. And, and with all the demand for housing, I could see that, you know, a real win for where the community have some solid housing stock available, but also then for the investors. Sounds like a definite win win. Hey, Mark, if we could, I’d like to shift gears here for a second. By day, I’m an insurance broker. And as such, I work with my clients to assess risk and determine what to do with the risk. And there are three strategies we typically consider, we first look to see if there’s a way we can avoid the risk. And that’s not an option, we’ll see if there’s a way we can minimize the risk. And if we are unable to avoid or minimize the risk, then we look to see if there’s a way we can transfer the risk. That’s what an insurance policy is. It’s a risk transfer vehicle. And as such, I like to ask my guests if they can look at their own situation. Could be your investors, your partners, the the political environment, interest rates, whatever that you identify and consider to be the biggest risk. And again, for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. Sure. And so if you’re willing, I’d like to ask you, Mark Khuri, what is the BIGGEST RISK?
Mark Khuri 33:04
I’d say today J, a lot of people think economy, recession, downturn, asset values dropping, etc. All of that is top of mind, but it’s not the biggest risk for us, the biggest risk has, for many years has been the same. And it remains today and its people. So we are a private equity firm. We are inherently trusting others to operate the assets that we’re investing in. And so people risk number one for us, Jay, and one of the hardest to, to mitigate against because people by definition can be mysterious and difficult and hard to understand and complicated. And so a lot of that risk for us is reduced by working with people for a number of years, it takes a long time to get to know them, see if they’re really good. And if the business plan wants you to go left, but the economy is telling you to go right what do you do? Do you have the right people that can steer the ship that can adjust in the middle of the the operation and continue to always have the investors best interest in mind? So for us, it’s definitely people risk.
J Darrin Gross 34:15
No, I think that’s that is well said. I remember a long time ago a car salesman telling me that money talks and Bs walks you know, kind of thing and you know, unfortunately, there’s a lot of BS out there. So having somebody that that does what they say they’re going to do is definitely worth a lot. So
Mark Khuri 34:37
I guess that’s it. That’s the name of the game. We’re nailed it. J. Do as you say you’re gonna do a period.
J Darrin Gross 34:42
Yeah. Hey Mark, where can listeners go if they’d like to learn more connect with you?
Mark Khuri 34:49
Yeah, our company name again is SMK Capital Management. Our website is SMKcap.com. We have a lot of information on there, J, some recent investments that we share with folks. People can can sign up and join our investor group to learn more. And you can also email me if you’d like at info at s and k cap.com.
J Darrin Gross 35:14
Awesome. Mark Khuri, I cannot say thanks enough for taking the time to talk. I’ve enjoyed it. Learned a lot, and I look forward to doing it again soon.
Mark Khuri 35:24
My pleasure. Thanks for having me. All right. For our listeners.
J Darrin Gross 35:29
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