Investing In “Boring” OZs, With Nest Opportunity Fund

In this webinar, Clint Edgington presents the Nest Opportunity Fund, investing in residential real estate in the Midwest.

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Webinar Highlights

  • Nest’s unique status as fund that acts like a “partnership and not a product” and implements a relatively conservative strategy;
  • Why Nest focuses on Lexington and Columbus;
  • How Nest assesses supply constraints in the markets where it operates;
  • Why employers and investors like “boring” markets like Columbus;
  • Examples of the types of project that Nest is taking on its second OZ fund;
  • Live Q&A with OZ Pitch Day attendees.

Industry Spotlight: 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 Opportunity Fund

Webinar Transcript

Jimmy: Nest Opportunity Fund. Clint always describes it as a plain vanilla fund that invests in residential properties in the Midwest. I’ll let him dive into his presentation here.

Clint E.: Hey, fantastic. I appreciate you having me on here and letting us share a little bit of information about what we’re trying to do and anyone’s of interest. It’d be a good study of contrast between our fund and Peter. You know, as big as they are and institutional. We’re a relatively small partnership. We’ve got 11 million that we’re running and we’re in just local neighborhoods in Columbus, Ohio, and Lexington, Kentucky. Neighborhoods that we you know, like and care about. Hopefully, won’t be a study of contrast because he seemed pretty smart. Hopefully that won’t be a contrast.

So, if you’re interested in the fund that’s relatively small, actually a partnership, not a product and is conservative. So, we’re in conservative places and we do it conservatively, then this will be a good use of your 10 minutes and if not, grab a cup of coffee and take a break. But we want to kind of introduce what we’re doing.

We’re working within the communities of Columbus and Lexington. We do urban, heavy rehab, and small multi-family and single-family. So, we think it’s a good combination. You guys know real estate, it really happens with boots on the ground, not about flashy presentations and PowerPoint. So, I’ll just walk through before we get into the business nitty gritty, just kind why we’re doing what we do.

Clint C.: We’re currently here impacting housing. We’re providing safe, secure housing for people to have the opportunity to live their best life. We are providing [inaudible 00:01:48] or develop [inaudible 00:01:55]. We are providing on a daily basis good houses, for good people, built by good people.

Clint E.: And if this is of interest to you, hopefully funded by good people. So, that’s Clint Capelle. He runs the operations in Columbus, Ohio. The rehab side of things. His focus and his passion really is helping folks who have graduated from addiction rehab programs and get them that kind of first job out and to give them the skillset. And, you know, at first, I was kind of leery of it thinking about, you know, employee theft and turnover. And, you know, we do, we have seen, we have a little bit more turnover probably with folks that just come on board and start. There’s some relapse issues, but when they have been there a year or so and have started to create some skills, our retention rates are very high and in the trade that’s been pretty important.

So, once people are skilled, they stick with Clint, they have an immense loyalty for them. So, my job is kind of to make sure that you know, we’re getting the investor returns and the things that the operations folks want to do don’t harm investors certainly but otherwise get out of the way if they have a passion to help the neighborhoods that we’re in, because that’s kind of the spirit of it all.

So, within this, it’s a conservative asset class because we’re just relatively conservative. I’d like to say it’s because we’re smart and we knew the interest rates were gonna double last year. But we have a good chunk of single-family properties about an even chunk of single-family and multi-family. The single-family gives us kind of that slow conservative capital gains that we’re looking for. We want the highest probability of capital gains.

And multi-family gives us a little bit of income but single-family is even more conservative than multi-family. When we look at what the prices might be in 10 years, you know, if interest rates stay the same or continue to move up and cap rates have gone up as well. And there’s a kind of production in your value from that. So, we like that mix. And in particular, our locations are relatively conservative as well.

So, in the Midwest, you know, kind of draw a line from Chicago to Cleveland to Pittsburgh. Anything below that is not really Rust Belt as a lot of folks throughout the nation think of. So, both Columbus and Lexington have good growth. The counties around it have growth in kind of the upper decile of the country. And then when we look actually at the cities within both Columbus and Lexington, we’ve got some of the fastest-growing cities in our respective states.

Our towns actually kind of look a little bit alike. Columbus is about three to four times bigger than Lexington. It’s growing faster. But both of them have relatively stable population or employment centers. So, we find that to be important. You know, I don’t really want to predict based on what’s hot right now, what will be hot in 10 years. I can’t really close my eyes and think of what office is going to look like in Silicon Valley, but I can think about what people are going to want to live in, in 10 years in our communities with, you know, population growth.

So, you know, even in Columbus, our financial sector, which you usually think of as being relatively volatile, it’s all insurance. We’ve got good insurance laws here, so there’s Nationwide, Allstate are set up here. In addition, we’ve got high state university and state government. Lexington is somewhat the same way, although smaller. So, the University of Kentucky is a good employment center, you know, for our kind of, not low-income clientele, but lower income. In addition we’ve got a good chunk of government works there.

Lexington’s not growing as fast and part of that is because they don’t want it to. They’re not anti-growth, but they do want to maintain that kind of pastoral horse farms that are, you know, in all the outtakes that you see in the Derby. And if you’ve never driven between Louisville and Lexington, you should, sometimes, it’s pretty. But they have an urban service boundary. It was the first in the nation that basically rings Lexington and has development constraints outside the city.

So, as an urban infill heavy rehab you know, we’re able to buy pretty, you know, inexpensive properties. They require a lot of work and a lot of money. But we don’t have that competing thought that what if they put in a bunch of tract housing, just outside the outer belt because those lot division requirements are very stiff. You can subdivide once, it’s got to be, each subdivision has to be 20 acres or more. And you can only do it, you know, one time. So, it really kind of curtails the development outside the city.

Columbus is a little different story. We don’t really have that supply. We don’t have a supply constraint naturally, but we do…we are kind of bumping up against sprawl when we look at cities in the Midwest with over a million in population. You know, we’re the top growing in population growth in private sector job growth. In addition, we’ve got a kind of younger, more educated workforce than a lot of cities, certainly in the Midwest. And we’re starting to see employers take note of that.

Intel is building their largest chip manufacturing facility in Columbus. And in addition, partly the reason why many people outside of the Midwest really have never been to or heard of Ohio is because we’re not really in the news. You know, there’s no big fires that come through here or you know, floods, tornadoes which is boring and it doesn’t really make the newspapers, but data centers love it. So, we’ve got a pretty big data center group on the hyperscale data centers, and also a lot of companies are putting their own in and it’s starting to show up as far as our housing stock goes.

So, there’s just kind of immense pressure to build. Within the lower-income area, there are some permitting for issues, for new developments. So, you know, they really can’t profitably build properties for less than 350. And so, we work on an urban infill under that space. And there’s quite a bit of demand with the properties that were covered online.

So, just looking at Lexington to give you an idea of our two footprints. Lexington has more single-family properties. We’ve got about 50 properties in Lexington. Give you a little breakdown between the A and the B. And I’ll walk through that in a second. Zooming in on the area, we think we’re kind of in the path of pre-major redevelopments. The purple line is what previously was just a creek that was taken under the streets with culverts. And the streets are not really walkable at all.

But they’re really kind of connecting the downtown with the campus, where you see kind of that north side, not sure you see my mouse or not. This area is all kind of campus but they’re kind of connecting that with, you know, our neighborhoods. And we think that that’s going to be helpful for our neighborhoods and also for our property valuations.

Columbus, I won’t walk through too awful much. Just looking at our…so we have basically our A Fund closed in the beginning of 2021. We just had a period of time where underwriting was difficult. Costs were up to rehab with COVID and lumber had tripled, rents had not yet moved and the prices of homes had not moved substantially up yet due to those cost increases. So, we were having a hard time penciling underwriting. So close the A Fund.

But to give you an idea of what some of the properties look like. I love this kind of project. So we, you know, have a multi-family that looks very dumpy, and then we’re able to just make it a little bit prettier. I mean, it’s obviously never going to be an A class building. But when we bought it, you know, it looked like that. And I love that kind of project. We do that all day long. I like it, my screen now. Okay.

And I show you the A Fund, just to give you an idea of what, you know, what B Fund will look like when it hits maturity. So with the A, we’ve got 10% rent yield and we’re about 50% tech to equity. Our target is 65%. We’ll move up as we see fit and then when it makes sense with the capital market time. Our B Fund is obviously less developed. We opened it towards the end of ’01. We’ve got about 20 properties. A good chunk we’ve started to work on. Some are still kind of in the planning phase. We really haven’t taken much debt on yet. A little bit of qualified non-recourse debt to be able to give our investors some tax losses. And then we can see just before and after of one of the ones we’ve finished. We zoom in on that as well.

So, this is what it looks like when we buy it. Pretty, huh? And then we’re able to turn it into this. We can do it relatively low cost. We’ve got enough scale that we’ve kind of done this before. There’s little things that we do that you know, are upgrades. Clearly we do like games with flooring generally. It’s a little bit more expensive than LVP, not a ton, but we’re going to own these for 10 years, so that they’re more hardy.

In addition, we’ve got little things where we’ve seen through our kind of landlording careers that towel bars get ripped off all the time. So we, you know, actually put a wood packer behind it. Just small details like that, that you know, show up when you’re starting to do property management.

Walking through kind of what the financials look like. I don’t have the time to walk through the details of this but effectively for single-families, I know you’ve all seen debt on multi-family and you would’ve an idea of what our multi-family kind of financial model looks like. Single-family is a little different. There’s not a bunch of yield that comes off of it. There’s not a ton of income once you pay back kind of debt and all of your expenses at first. But then there’s pretty decent rent growth that’s I think built into those. And those go directly kind of to the equity holders either through cash flow or increase debt pay. So, we can walk through that more if you’d like to have a call to discuss. But I won’t walk through it too much. That increase in rent and cash flow kind of goes directly to our metrics.

Walking through kind of our basic financial terms, you know, we basically do what we think is fair for our investors. The first investors were like me and my mom and our current manager GP down in Lexington, who does our operations in Lexington. It’s just the three of us at the capital gain. And we started an LLC. This is before we knew about the OZ benefit in 2018. And then we kind of read through the OZ benefit and I was like, “Let’s just make this a little OZ fund. It’s just the three of us.” So, it was just us and we kind of did it the way we like to do it. And then we just sat down, once we had some of our investment advisory clients asked to be let in and thought about what was fair.

So, our fees are going to be probably the simplest that you read when you’re looking through PPMs. Essentially, we’ve got 1.5% of net assets, is our management fee to keep the lights on, pay the expenses. We pay a relatively low prep, 4% because, you know, our focus is not on income generation. It’s on having as much capital gain in 10 years with the conservative strategy that we can. But we give that back on the profit share. So, we have a 15% cherry which is on the lower end. We raised 11.2 million and we put about a million in ourselves. Got some grant money. We projected 12% after the OZ benefits, IRR through time, kind of looking through what we’ve done just to show that the execution in this smaller space is more important than my PowerPoints and fancy slides.

When we open it up to investors, our A Fund in 2020, you know, we just had a small amount of properties. I think one completed, one in final rehab, which is after the trial was up. And now, once we reopened it in the D Fund, you know, we had developed some 80 units. Put a half million in ourselves, and now we’re at 115 units, put about a million in, and we’ve got 70 units that’s complete. So, gives you an idea of what the B Fund will grow into.

And at this point in time, we’ve got a good cash position. We have very little debt. In the B, I think we’re 2% debt to equity. But we’re starting to see some deals come through that we would like to be able to move on. I would invite you, if you have an interest in talking to us you know, I pick up the phone here at the office and you can email me or Sam, [email protected] or to find out some more information. Our webinar, we hold a little more detailed view of this. Reach out to us we can give it to you or our deck calculator as well. Jimmy, thanks for having me on. Anything I should clear up? Did I mumble over anything or stutter?

Jimmy: No. Thanks, Clint. We’ve run out of time. Unfortunately, I need to move along to our next presenter, but really appreciate Nest Opportunity Fund partnering with us once again on OZ Pitch Day. There were a few questions in the chat and in the Q&A section. I’ll get those passed over to you soon or for those who did ask the questions, feel free to reach out to Clint now. He’s got his cell phone number on there or I guess it’s his office phone number, but ring him up or send him an email. He’ll get back to you right away. Clint, thank you.

Clint E.: Feel free. My email is just [email protected]. Thanks, Jimmy, appreciate it.

Jimmy: Right on. Thank you, Clint. Take care.

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