A COVID-Proof OZ Strategy, With Nest Opportunity Fund

In this webinar, Clint Edgington discusses the Nest Opportunity Fund, which invests in attractive Midwest markets.

Webinar Highlights

  • An overview of Nest, including its history and its focus on single-family homes and smaller multi-family homes in Midwest markets.
  • Why Nest embraces a conservative strategy within what it considers to be a risky asset class.
  • How the challenges related to the pandemic have validated this approach.
  • The characteristics that make Columbus and Lexington attractive markets, including the presence of major universities and a stable workforce.
  • How Nest’s plan to “hit singles and doubles” while keeping an eye on expenses translates to bottom line investor returns.
  • Q&A with webinar attendees.

Featured On This Webinar

Industry Spotlight: Nest Opportunity Fund

Nest Opportunity Fund

The Nest Opportunity Fund is an OZ investment program designed to not only do well for investors, but also do good for those in the communities targeted for fund investments. The fund invests in single-family homes and smaller multi-family homes because they present a lower risk to investors while maintaining the culture and character of the neighborhoods.

Learn More About Nest

Webinar Transcript

Jimmy: Clint joins us today from the Nest Opportunity Fund. Clint, how are you doing?

Clint: Good, Jimmy, how are you?

Jimmy: Excellent. There you are. Well, the floor is yours for the next 10 minutes. And we’ll we’ll try to save some time for some Q&A at the end of your pitch. Take it away, Clint, thank you.

Clint: Great. Thanks for having me, Jimmy. And appreciate all of you spending a little bit of time. It’s a tough act to follow behind the folks you just brought up, I’ve talked to quite a few of them and good people and very knowledgeable. But I am excited to talk to you about what we’re doing here in Columbus, Ohio, in Lexington, Kentucky. And our fund’s gonna be a little bit different than a lot of the funds that you’ve seen. We are small, we act like a partnership, not a product. We’re gonna be relatively conservative in almost everything that we do. So if that has of interest to you, I invite you to give me 10 minutes. And Jimmy, if I take 11, I hope you won’t cut me off too fast. But feel free to like give me the warning or whatever it is because that is relatively quick. So walk a little bit through what we’re looking to do here. And if you’ve got questions, feel free to hit the chat button. And Jimmy, can you see my presentation screen?

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Jimmy: Yes, sir. Looking good, Clint. Please continue.

Clint: Fantastic. We started this fund… Ironically, we’re one of the older funds. We started the fund in 2018. The legislation was still in kind of initial forms. And we started to just simply… Me, my family, and operator. And although we called it a fund, we did not invest, there were some issues with multi-asset fundraising. And so we kind of built this fund like we wanted it and as we’ve been investing for the past 20 years, and if you like it, great, and if not, that’s okay too, we’re happy to point to some other folks that are out there doing good work as well. But what we do is we do affordable housing, heavy rehab, and we’re looking at kind of urban infill area in Lexington, Kentucky, in Columbus, Ohio. We’re looking to maintain kind of the character of the neighborhoods. So how we do that is it might not be the most professional way to think about it, we say, if there’s, you know, 38 front porches when we arrive, we want there to be 38 front porches when we leave. So we’re walkable communities and we’re looking to create, you know, streets that have seen better times, we’re looking to turn those around. We’ve been doing it so far relatively well and we’d like to continue to do that and hope some of you folks can can help us with that.

Although we are small, we do have an advisory firm that kind of provides a lot of the tax knowledge to folks. I invite you to reach out to us, even if Nest is not a good choice for you, we can kind of help you walk through… A lot of folks are kind of an orphan in this or maybe their CPAs brought it up with them, maybe their financial advisors even have those OZs on their platform, but we can walk them through, hey, is OZ investing even right for you? And if so, what’s the right amount for you to invest in an OZ? A lot of people think through like, I’m either gonna do it, you know, with all of my cap gain or none of my cap gain. But a lot of times, the answer is somewhere in the middle, especially for some tax bracket management. And we’ve got some tools, we can walk through with that. We do that gratis for folks, even if you’re not investing in Nest.

So as far as the Beacon Hill Nest team, you most likely would interface with me or with Meredith, in our group. And then we’ve got our operators in there that are really the folks getting it done every day. Although we are small, we do have, you know, great audit and legal groups that are working with us. As long as they have Midwest rates, we wanna have kind of the best folks on board for that.

We’re a little unique because we have both the OZ competency and kind of the personal financial advisory structure. So we’ve got those competencies and when you call us, you know, you won’t initially get that fund pitch, we’re gonna kind of walk through like, you know, what’s your personal financial situation look like? Does this make sense at all? In our view, we want to have great partners come on board but what we don’t want is for folks who realize in year 5 that we’re just not the greatest fit. So we’ll walk you through that some.

Going with the theme of our fund, our asset class is relatively conservative. So if you think about OZ funds, we all have that significant improvement for that kind of new build requirement, because we’re trying to put capital in these neighborhoods. And that’s gonna be on the riskier side of the strategy of most real estate. So you could also just…you could have bought something that’s just kind of a core holding, which means it’s already in good shape now, it’s in a good neighborhood, it’s all these stuff. But that is not the OZ funds. We have those requirements, so our strategy always gonna be a little on the riskier side. And we offset that some by having kind of the most conservative real estate that we can. So COVID I think showed us that, you know, in 10 years, it’s tough to define exactly what office space is gonna look like or, you know, hospitality certainly, but what we know is that folks are gonna want a place to lay their head at night and we’re looking to make good homes for good people.

Sticking with that conservative theme, and by the way, you’ll see our expected returns, you’ll also notice the conservative side of that as well. You know, our two locations are relatively conservative, number 1, because they’re conservative and number 2, because they’re close to where I live and to where our partners live. Real estate is a ground game and especially, you know, rehabbing smaller projects, you know, you need to be there. So I need to be able to be there to do my monthly site visits and back in time for dinner with my kids.

Columbus and Lexington are both relatively stable workforces. You know, for those of you who have ever seen a college football game, or basketball game, you may be maybe love, probably hate, Ohio State and the University of Kentucky. But those are both employment magnets and also a magnet to bring in, you know, younger populations from outside of the city. And within our areas, we’ve got very stable employment, even our finance in Columbus is mostly insurance. So we’ve got good demographic trends, good stable base, our population has been growing, it’s projected to continue growing. And both Columbus and Lexington within the states are, you know, the fastest growing areas. Lexington is a little bit unique in that it technically is not one of the fastest growing cities and the reason for that is that there is an urban service boundary. So there’s actually a supply constraint and we usually don’t see those in the Midwest. But effectively, if you wanna draw a ring around the outer belt of Lexington, everything outside of that outer belt for 10, 15 miles is in the urban service boundary. And they do this to basically conserve that pastoral horse setting. So if you’ve ever driven from Louisville to Lexington or watched the Kentucky Derby, it’s a beautiful drive, it’s a beautiful area. And they’ve structured it so that there are, you know, lots can be subdivided under 20 acres, and they vote for that every five years to continue that urban service boundary. The last vote was 2018 so the next vote would have been 2023 but they also voted to not have a vote in 2023. So what we know is during the majority of the time we’re gonna be investing in these urban infill areas, there will be kind of no sprawl outside of the city directly. Columbus is a little bit of a more normal story for Midwest growth city, where it’s just kind of natural sprawl that’s leading to pressure on the urban area.

I’ll slide past some of these slides. Lexington’s maybe a little bit more of an unknown for a lot of these folks that aren’t from the Midwest. But the area that we’re in is mostly north of the downtown area, UK, it’s gonna be a bit north of UK. But the area is undergoing pretty dramatic changes. Historically, the neighborhoods have been relatively rough and now they’re kind of up and coming and, you know, there’s some things that are going in that are changing the communities. We’ve got some programs in place to try to share some of the benefits of, you know, increasing house prices with our tenants but the…you know, Rupp Arena is expanding, it’s 10 times the convention space is being put in. There’s right now just like a little creek that runs through culverts to the downtown area and that’s gonna be opened up creating a bike trail, a splash park. And it’s gonna kind of tie our neighborhood in with the downtown a little bit better.

Like I’ve mentioned a few times, real estate is a ground game and in a smaller space, you know, if you execute, you hit singles and doubles and you continue doing it and you mind your expenses, you maintain your relationships, things will work out well for you over the long term. And what we’ve seen is, you know, we started in… Really our first capital raise outside was in January of 2020. And at that time, we had our partner money and we invested as LPs. So we tried to be aligned for about a year. And we at the time we had the capital come in, we had 23 properties, 23 units, sorry, we now have 83. The graph is showing you number of properties and it’s a little bit different. So you can see that the majority of properties that we had were started off in the inventory phase. And most all those except for a few we have permitting issues with, we’ve completed. And so although you don’t know what we’re gonna buy in the future, you can kind of look to see, what have we done, how has it worked, our underwriting techniques, to get an idea of what it’s gonna look like in the future. So, although we’re buying properties for little houses for 40 grand, let’s say, and we put 100 grand into them, you know, now we’re buying them for 45 and 305 into them, you can get an idea, it’s gonna look pretty much the same.

So looking through, you know, somebody mentioned in the opening, you know, what’s going on construction costs and how does that impact the 30-month timeframe? It doesn’t really for us. You know, we’re still looking like, can we underwrite, you know, new property purchases? As long as we can, we’ll continue doing it. So the properties that we have completed, 14, eight of those have been appraised for financing, and we see we’ve got values that’s 23% above our total costs for those properties, which is a above our kind of projected assumption of 15%. So even though construction costs have gone up, we still see that it’s making sense for our investors.

Speaking of the underwriting, you know, it’s always easy when property and construction prices are increasing to continue doing it but we underwrite, when we buy a property, we wanna have a 15% annualized rate of return and we wanted to cash flow at 70% leverage. So I believe that bad things happen when you don’t have cash flow so we always want the cash flow as well.

Again, a couple examples of just a sample property to give folks an idea, in a single family, you know, we’ve got some multi-family too. Just have a 32 unit we’re working on right now. But the single family is a little bit different and not stuff many people have in an institutional form like us. Our fund structure is, you know, we’re set up to have our OZ fund, and then we’ve got subsidiaries underneath the OZ fund. We had a series A capital raise that we closed earlier this year, and the properties and assets within that Series A, you know, in order of the benefit of the Series A investors. And then in the spring of this year, we plopped some money into a Series B, which are new subsidiaries, and we’re now capital raising for those Series B investors and for those properties. We’ve closed on two properties, relatively small properties. We’re really excited about them though, in particular, one of them is just… One of our techniques we like to use a lot where Series A already owns kind of the…one of the two dilapidated properties on the street, it’s really improved, and Series B was able to buy the second property before we even started on the A. So we get to buy at the price of a street that has some blight on it and then…but we know that our two properties will become the nicest two on the street by the time the…you know, by the time we’ve completed them. So we are buy and holds, we will buy those properties and we will hold them. And we will do some impact things with giving folks kind of the opportunity to get some down payment assistance to buy our houses if they’ve been with us for a while to kind of share the benefits of the OZ space and improving properties. And in addition, in Columbus, and we’ve got a flyer on that we’ll be happy to send you, our operations here for our construction workers, we really focus on folks who have graduated through addiction programs. I was a little leery on the business case for that originally, but our operator has no passion for it. And frankly, you know, in a year like COVID, where it was really hard to maintain construction crews and employees, we saw that our turnover was very low, we had essentially no issues.

Just a little bit of information about kind of the financial structure of our fund, like everything about our fund is, we’re gonna be pretty conservative and simple. So our fee structure and our waterfall is relatively simple. We think it’s aligned, we think it’s fair, and in particular, when you look at the fine print. You know, we don’t have…our LPs don’t pay our marketing expenses, there’s no overhead allotment. So our stated fees are gonna be our stated fees and the costs you have.

You know, we’ve raised $5 million to date, and that’s not a big number. And I actually bring that up to show you that we are small. So we are gonna be thought… You should think of us more as a partnership and less of a product. And if that’s something you want, that’s awesome, we wanna talk to you. And if that’s something you don’t want, that’s okay too. We’re happy to to link you up with other folks who are pretty connected in the OZ space. I can see Jimmy’s on board now so I’m probably getting the hook. But feel free to reach out to us even if you don’t like our fund. If you have questions on, hey, is OZ investing even right for me? We’ve got a lot of resources and the personalized calculation we’re happy to share with you. Thank you, everyone.

Jimmy: Excellent. Well, thank you, Clint. We got time for one question from Steven, “Will these assets be a 10-year hold or will you turn the portfolio within the fund?”

Clint: Yeah. So our plan, Steven, is to hold all of our investments for 10 years. Now there might be some opportunistic issues, we buy a lot of properties in packages, and perhaps one would not fit with it but the idea is to hold them for the long term. Another thing that might make that a little bit different is for property or packages we’ve kind of got a pilot program where we are providing down payment assistance. So for every year they rent from us, they get 1% that goes towards the purchase of the property. We don’t let them do it for the first five years. And the idea of that is in my mind the…you know, what are the impediments to middle-class homeownership? And one of the impediments to homeownership is that down payment. If you work at Walmart for 15 bucks an hour, it’s really tough to scratch up that down payment. So that helps with that. We’ve also partnered with the City of Life to give us some grants with that. And so those could be sold, you know, sooner as well. We’ll see though.

Jimmy: Excellent. Well, Clint, time’s up. But great pitch as always. Thank you again for joining. Second time in a row now having you on OZ Pitch Day. Really appreciate your time and attention and we’ll be in touch soon.

Clint: My pleasure. Thanks for having me. And I’ll be here for happy hour as well if anyone has any other questions.

Jimmy: Fantastic. Yeah, we got a happy hour coming up at 4:45 p.m. Eastern Time. Thanks for bringing that up.

Clint: I don’t miss it. I don’t miss those.

Jimmy: Yeah. Yeah, absolutely. Well, hope to see you there. Thank you, Clint.

Clint: Thank you.