In this webinar, Chris Loeffler gives an update on the real estate market in general and discusses how rapid changes have created opportunities in the middle market.

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Webinar Highlights

• The various roles that Caliber fills, including as an alternative asset manager and a developer.
• Updates on Caliber’s status as a public company listed on the NASDAQ, and why this matters for investors.
• The gap for middle market sized funds in the market.
• Assessment of the impact of rising interest rates, and where we are in the cycle now.
• How the speed of change has created opportunities in distressed markets.
• Review of some projects in Caliber’s portfolio.
• Caliber’s focus on adaptive reuse and distressed assets for its second OZ fund.
• Live Q&A with OZ Pitch Day attendees.

Featured On This Webinar

• Caliber Announces Closing of Initial Public Offering and NASDAQ Listing
• Caliber Expands its Internal Wholesale Team as the Firm Accelerates its Capital Markets Initiatives

Industry Spotlight: Caliber

Caliber Funds is the private equity arm of Caliber The Wealth Development Company, an Arizona-based corporation that services the capital of individual investors and disburses them into private real estate assets across the Southwest. Caliber offers a diversified portfolio of commercial real estate properties, real estate-related equity investments and other real estate-related assets, each of which Caliber Funds believes are compelling from a risk-return perspective.

Learn More About Caliber

• Visit CaliberFunds.co

Webinar Transcript

Jimmy: Next presenter will be Chris Loeffler with Caliber. Chris Loeffler is going to be presenting the Caliber Tax-advantaged Opportunity Zone Fund II. They’re headquartered in the Phoenix, Scottsdale area, and they invest in Opportunity Zone real estate all over the greater Southwest. They have a footprint in a handful of states in that greater Southwest region. Chris, there you are. How are you?

Chris: Good. How are you?

Jimmy: Fantastic. It’s another pitch day, so it’s one of my favorite days of the year, you know what I mean?

Chris: Yeah.

Jimmy: Well, Chris, I have you slated for a 20-minute presentation. We’ll save some time for some live Q&A toward the end as you always do. So, this is your time to ask Chris some questions. Please do submit those questions using the Q&A tool in the Zoom toolbar. And, Chris, without further ado, I see your screen, so feel free to dive into your presentation when you’re ready. Thank you.

Chris: Sounds great. Thanks, Jimmy, good to see you. Good to see everybody on the call, or in the event here. It’s been an interesting last 12 months in the market. And, Bob, I think your question was really well-timed around what’s going on. So, that’s actually gonna be part of the theme of what I’m gonna present today, is what’s happening in the real estate market now, and where’s the opportunity in the Opportunity Zone strategy. So, before I get to that, let me just tell you who we are, and what we do.

Caliber is in the business of creating strategic investments that build generational wealth for our investors, who are our customers, the communities that we invest in, and the team that works on your behalf. And so, when you boil down that to what actually our business is, we are a business that predominantly invests in real estate, and manages real estate, and develops real estate in the Western U.S. Technically, we’re considered to be an alternative asset manager because we actually create various forms of real estate funds, raise capital in those funds, manage the funds, act on your behalf as an investor, as sort of like an owner for hire for you. And then behind the scenes, Caliber is actually a developer, a construction manager, real estate broker. So, we do a lot of the parts and pieces that are necessary to not only build the funds and finance the deals, but also find them, and take them from point A to point B.

Interestingly enough, Caliber is listed on the Nasdaq as public company, which I’ll give you a little bit of background on why that matters to you as investors in our private funds. But what I’m talking about today is specifically one of the products on our platform, which is our second Opportunity Zone Fund. We exist for one reason and that is that over 80% of investors are looking to get more of their money into alternative investments as defined by things like real estate, private equity, venture capital, etc. Opportunity Zone investing is one of those alternative investments, and Caliber is a provider of those types of funds. We think there’s a major gap in the marketplace to provide middle market-size funds. So, $100 to $500 million fund sizes, investing in $5 to $50 million investments or projects, and using investor capital in the middle market, which is sort of high net worth, ultra-high net worth investors, as well as the investment advisors that advise them, and help them make their decisions. We focus, from a market perspective, in growing markets like Arizona, Colorado, and Texas. You know, kind of the greater Southwest region is what we tend to pay attention to, and places where you have long-term trends of population growth and job growth.

As far as being a public sponsor of a private fund, the benefit to you as an investor in the private fund side is that, when you invest in a fund that is gonna exist for 10 to 20 years, depending on how long a lot of these opportunities zone strategies will last, you need the sponsor, or the fund manager, to be a very strong lasting company. And the stronger the sponsor, the cheaper your debt will be for the underlying assets that you’re buying, which makes the assets themselves more profitable as an example. You increase the agility of the company. And so, if Caliber can quickly take down an asset, hold it on its balance sheet, and then transfer into the fund at the same cost, when the fund has raised enough capital to buy that asset, that gives us more agility in the market.

And I think most importantly for investors, we have the ultimate level of transparency in terms of how Caliber’s performing as a sponsor being a public company. You know, I told you there’s a theme for today. The theme for today is I think we are in a cycle that has completely turned over in March of 2022. Caliber, essentially, walked away from many speculative developments that we were doing, or planning to do, as we started to see expected interest rates to start to climb. Now, we didn’t expect them to climb as fast as they did. This is, I think, one of the fastest rates of change in modern history. And when things change quickly in real estate, especially interest rates change quickly in real estate, that’s gonna create stress in the system, distressed assets, and it’s going to create buying opportunities for investors. And so, I’m just giving you a generic example of what that looks like in the next slide here. But, you know, there’s been a lot of articles that you’ll see, you know, there probably be more that you’ll see in the coming months about, as an example, multi-family syndicators. There’s been a lot of people who have been doing multi-family investments, and multi-family developments, and saying, you know, that’s kind of a golden asset class in 2018 through 2022.

Well, this is what most of the deals look like. If you were in a pre-market turnover deal, you know, you invested in or bought an asset for 100 million in cost, you probably used a 75% to 80% loan. You were getting a decent cash flow on that 5.5%, and you were targeting a 13% rate of return in total. And the goal there is, you know, through a value add strategy, or maybe through a development strategy, that the asset would be worth 20% more than the cost basis. So, that takes you to $120 million asset value. You bought this thing with a two or three-year bridge loan at 3% interest, and so, you’re gonna refinance with a Fannie Mae loan, take out financing, as we call it, at 75% loan to value, which means your loan goes from 80 million to 90 million, you put 20 million in equity in, you get to give 10 million back to your investors. So, your investors came in with a $1 million, and they get a $500,000 tax-free distribution, you get an 8% cash on cash return, and a 13% IRR, who wouldn’t do that deal? Home run, right?

So, what does that deal look like today? Well, the market has come down, so the asset’s probably no longer worth 120 million, it’s probably now worth back right around 100 million because the market has come down. Underwriting has tightened, and so, your takeout financing’s not gonna be 75% plus of current value, it’s gonna be 65% of current value, which means the best loan you’re gonna get in a takeout is probably a $65 million loan from Fannie Mae. And being generous at the cost of that debt, I put it at sub 5%, but I think it’s gonna be over 5% in the near future, or probably already is. And so, what that means is, I have to go to my investors if I bought a bunch of multi-family in the last couple of years and say, “Hey, you put $1 million dollar in, I need you to write a second check for 750,000, so we can refinance this project.” And the investor says, “Okay, well, what am I gonna make on my million?” Well, at the moment, zero. What am I gonna make on my 750? Zero. But it’s gonna protect your million that you already have at risk.

And so, it’s a very challenging market because the speed of change that’s occurred, and that’s what’s creating the opportunity on the other side for distress. And so, as I go into our Opportunities Zone strategy, I’ll talk to you about how we’re taking advantage of that. Caliber has a track record in the space. We’ve been doing distressed assets. We started in late 2008, so we know how to do this, how to attack bankruptcy projects, non-performing nodes, existing assets, etc., and how to turn things around. Couple of recent events that we’ve announced on the company, one, is that we are launching and building a private hospitality REIT that we intend to take public. I think this is gonna be a great strategy. That’s one of the reasons why we took our operating company public so that we had the infrastructure to take real estate companies public in the future. And this is going to be, especially for Opportunity Zone Funds, a really compelling exit strategy down the road to combine our first fund, our second fund, and maybe some friendly competitors into a public exiting at the right moment in time.

The second thing that’s big news for us is that we’ve entered into the wholesaling market. So, we have a national platform to distribute our funds to investment advisors and broker-dealers. So, those of you who are in the financial advice space, and are looking to get access to this type of product on your platform, feel free to reach out and we’ll try to onboard with you. So, just moving into the Opportunity Zone strategy itself and the fund, this is an opportunistic strategy. The reason being is that the fund requires that you double the value of the cost basis of the tangible asset that you bought. So, if I bought a $10 million building, and the land was valued at 5 million, and the building was worth 5 million, I need to put at least 5 million in additional either renovations or in addition to the site or something like that to qualify for the program. That activity puts you as a requirement into either building new on land, or doing heavy renovations, or changing the use of an asset from, like, office to apartments, or something like that.

And so, in that opportunistic strategy, that’s where you’re gonna get the highest rate of return, and of course, higher risk. The way that we mitigate the risk in our fund is we limit the amount of leverage. I think many of you who’ve seen me present, have seen this slide, probably ad nauseam. The bottom line is, if you put a million bucks into an Opportunity Zone Fund, and it grows at an annual growth rate of about 8% a year, you can expect to double or triple your net profit after tax, investing in the same assets with the same rate of risk, as you would in a traditional investment. And so, is the 10-year hold, and the illiquidity of investing in an Opportunity Zone Fund worth the tax benefit?

In our minds, we think it is because you see a significant increase in the value of your capital over that period of time, and you’re not taking sort of any more risk than you would be in any other real-estate-related investment. The four ways to maximize the incentive are pretty simple. You’ve gotta grow the value of the capital. Any strategy that you’re evaluating to invest in Opportunity Zones needs to be very good, and have a demonstrated track record at buying something for X and selling it for 2X. This is what creates that incentive, that tax benefit to you in the program, especially considering the fact that some of the incentives have burned off at this point in time.

And so, you know, as great as there are many other strategies in real estate like core investing where you’re just buying for income, that’s not the right strategy in an Opportunity Zone Fund. Diversification I think is very important. You’ve gotta compound gains within the funds. If you’re gonna invest in a fund format, you’ve gotta look for funds that will actually sell an asset and redeploy within the confines of the law, which would allow you to generate better rates of return or higher rates of return on the fund. And then like I mentioned before, maximizing the exit. We think a public exit is one way to do that, a portfolio sale is another way to do that, a DST sale is another way to do that.

So, working with a company that knows how to maximize those exits is important. A couple of the examples from our first fund, we bought a behavioral health facility. This used to be an assisted living facility that was boarded up. This is a great example of adaptive reuse. We gutted the property. Started over basically. Renovated it. We’re into it for about 24 million at this point in time, and it’s worth about 35 million. Great deal, has a 20-year lease, produces rents like clockwork at this point in time, and we’ve created 96 beds of behavioral health hospital access in an area that really needed it. There’s a look at what the project looks like now.

Second example, I think is a really good example to understand how you can pair the Opportunity Zone tax incentive with other tax incentives for development. And so, in this case, we cut a deal with the city of Tucson, and a group called Rio Nuevo to get our land at a very low annual lease cost, as you can see. So, we essentially got free land, and then we got to build the asset, and we get tax credits for our property tax and our sales tax. So, we’re estimating about $7 million in tax credits. So, in this asset, we built a brand new hotel, that’s what it looks like. And we’re into the project for roughly $7 million less than the construction cost. Coming into our second fund, this is a $250 million fund.

We opened it in July of 2022. We were relatively quiet for the entire second half of 2022 because as I mentioned before, once interest rates started going up, the market was turning over, and we didn’t want to be out there fundraising and investing in developments when we felt that there may be better opportunities on the horizon. And so, we have been fundraising, you know, relatively slowly, paying attention to the market, waiting to get back in and be aggressive again, and now seems to be the moment in time to do that. Like I said, it’s a $250 million fund. We have a 1.5% management fee. We offer an 80-20 split on profit over a six pref, assuming a $1 million dollar minimum investment.

The company’s audited by Deloitte Tax Council. Marc Schultz of Snell & Wilmer, he’s done a phenomenal job in the Opportunity Zone space. And this is our second fund, so it’s really drafting off of all the deal flow that the first fund created, and all the notoriety in the market that we have because of that. The strategy for this fund is basically an exact reverse strategy from our first fund. Our first fund was development-focused because we were in a great development cycle, and so, it made sense to buy land and build new stuff. This fund is first focused on distressed assets, so we’re looking for broken developments, developments that can’t get finished without new capital and without a recap. We’re looking for assets that are gonna go into bankruptcy, we’re looking for bank-owned properties. We’re looking for all kinds of interesting deals in that side.

The second option is gonna be adaptive reuse. So, we’re gonna look for an apartment complex or a hotel that can be converted to an apartment complex, as an example, or an office building that can be converted to mixed-use, and shrunk in terms of an office footprint. And then the third is transformational renovations. And this is just taking, you know, like a class C multifamily project that’s really old and really tired, but it’s in a great location, and then gutting it and turning it into a much higher quality product. And so, those are the best strategies in my mind when you leave a development cycle, and enter into this type of cycle that we’re in because you can buy assets for less than it costs to build them. And a lot of investors will have to sell those assets because of their loan terms resetting, and a variety of other factors that are forcing them to sell, even though they don’t want to.

Timeline for this is gonna be a three-day year timeline on every deal we do. We’ll try to turn each deal once in the funds so that we, you know, can compound your gain over that 10 to 13-year fund life. And as you can see in the rest of the targets in the screen, we’re still targeting relatively low debt. We think that’s a competitive advantage for Caliber, especially in the environment where the debt is very expensive. Some of the assets we have in the fund right now, just to kind of wrap up on my prepared remarks, and get to the Q&A as fast as possible, we have Second Avenue Commons in this, this is in downtown Mesa.

Caliber’s one of the largest developers in downtown Mesa. We’ve invested over $100 million into the downtown core. This is an area of Phoenix where it’s the third largest city in the state. And we came into downtown Mesa when we knew Arizona State University was gonna be opening a new campus, and very few other people did. So, the downtown has been transformed and is being transformed on a regular basis by us, and several others that are now participating in the market. And this is 144 units, about two blocks from the downtown core. So, you can walk to downtown from here. It’s workforce housing. It’s in construction. We’re expected to complete the construction in September of this year, which is a little over a year of construction timeline. It’s on track, on budget, which is very exciting in this environment. And for those of you who have already invested with us in the fund, I’m excited to have this asset coming to fruition here.

Our second major investment was, we took the last piece of equity in the Riverwalk Land development. This is majority owned by our first fund. Our second fund took a little slice of it because the first fund had closed, and we had the ability to get in with the second fund. It’s a phenomenal investment in our opinion. Total size is about 80 acres. It’s about a mile of frontage along the 101 freeway that runs right down the center of the city of Scottsdale, Arizona. And so, you’ve got a Topgolf, you can see in the photo there. Caliber actually owns the Hampton Inn & Suites, which is that little red brick building as well. And the south side of the project, we’re gonna develop into a mixed-use entertainment zone. The north side of the project has some interesting industrial and commercial uses that we’re working through. So, this is essentially a land planning, and land development phase where we get through all of that.

We make deals across all the land on LOIs, and on contracts with developers and ourselves in essence, to build different components of the project. And then what we’re gonna do is we’re gonna take the land that we’re into for $11 a square foot, we’re gonna contribute that land as a partner into the vertical developments that we’re gonna build at somewhere between $18 and $25 a square foot. So, we get to lock in a land value increase right away, and then we get to own our proportionate share of those vertical developments, which will include things like restaurants and hotels, and other forms of entertainment uses that are really interesting and different than what you would typically see in most Opportunity Zone Funds. 29 West Main Street, we just broke ground on that two days ago with the City of Mesa. This is on Main Street in downtown Mesa.

It’s a six-story complex with 90 units of apartments, over 10,000 square feet of retail, which is basically gonna be a small grocery store in the downtown, on half an acre. So, the density is incredible. The way we’re able to achieve this is with a brand new product, which is a factory-built steel constructed apartment unit that stacks like Legos. So, we basically build a podium, and then we crane in these units that are fully built within the factory, even furnished, and we stack them on top of the podium. So, the construction time is much shortened in terms of completing this project. This type of project, six stories over retail will be something that this fund will likely stamp out, and repeat again and again using the same sets of plans in different parts of Arizona, presuming the first one is successful.

And the last but not least, I couldn’t do a pitch day without pitching you on a new deal. This is a highly confidential deal, so I can’t really tell you where it is, what location, what exactly it is. Some of the stats on this are sort of rounded to try to protect the innocence. But we’re in negotiation to purchase a class A Office building, that’s approximately 175,000 square feet. It’s currently all office, and we think we’re buying it for about 55% of its inherent value. There’s a building that is similar in nature that is 97% occupied that recently sold for a little less than double what we’re paying to acquire this asset. We’re coming in. Why are we able to buy this? Because it’s a large office building that is relatively vacant, and the owner is feeding it with a couple of million dollars a year of cost. In this environment, and in light of the COVID pandemic, a lot of people are realizing they have to do something innovative to get out of these deals. And so, we see an opportunity to take advantage of that situation.

We’re gonna take the third floor of the building and turn it into third-floor apartments in this location. The second floor of the building, we’re gonna keep this office, but we’re gonna shrink the footprint. So, we’re leasing much smaller units, which is typically successful, and we’ve done before in the past. And then the first story of the building, we have two restaurants signed up to take the first story, and then some entertainment concepts. So, you’ve got restaurant and entertainment on the first story, office on the second, and residential on the third. Conceptually, we would buy this thing and be into it all in for about a $60 million cost, and we estimate the value would be 80 to 90 million upon completion.

So, this is an example of the types of opportunities that are coming, that we’re seeing on a regular basis. In the last two months, I’ve seen the first couple of deals coming directly from banks and financial institutions that have taken assets back that I’ve seen since 2012. So, the opportunity is now. I think the Opportunity Zone program is one of the best programs in the country to take a capital gain from the last cycle, put it into the right Opportunities Zone Fund, and then invest it at a discounted rate into discounted real estate when you have a 10-year horizon to turn that real estate around, generate great rents, and eventually sell it for a nice profit. And so, I couldn’t find a better strategy if I had to draw it out myself, and I’m really excited for this moment in time. I’m probably the most excited about our business I’ve been in a long time. So, happy to answer questions at this point in time, and hopefully we made it in about 20 minutes.

Jimmy: Close enough anyway. I’ll give you a couple more minutes for some questions. We do have a few questions from the audience. I also just posted your email address in the chat. Chris, I noticed it on your slide there. So, if we don’t get to your question, feel free to send Chris an email directly. Again, his email address I just posted in the chat. Question here from, oh, you’re answering that question. I was gonna ask you, do you work with other OZ Fund managers?

Chris: Yep, I do. And especially in two different scenarios. One is if you have an OZ Fund that you were advised to open, and you’re more of an investor trying to figure it out, you can co-invest with us alongside our fund. You’re still gonna pay us fees as a manager, and that kind of stuff, but you’ll have someone who will be responsible for the asset, and get it through the entire process. And you have the ability to sort of bring your fund alongside us. Secondarily, one of the reasons why we went public is, we see an opportunity for us to provide a platform for other sponsors, sometimes smaller sponsors, or even maybe even larger sponsors, to get access to a more institutional infrastructure in light of what’s going on in the market, and what’s going on in the industry. So, to the extent you ever want to look at merging your fund, you can look at merging your fund, and we can just collaborate. To the extent you find a great deal, but you can’t fully fund it yourself, just let us know.

Jimmy: Good options there. Lisa asks, What’s the minimum investment in Fund II?

Chris: Minimum investments 250, no, I’m sorry. Minimum investment in fund II is 100. We lowered it. And it is subject to our discretion, so we can lower it in certain circumstances if needed.

Jimmy: Okay, good. Paul has a funny question here in the chat. He asked, What’s the better value buy, in your opinion, Chris, Caliber stock, or the OZ Fund?

Chris: Well, I’m the CEO of the company, so I’m gonna tell you both. It’s really two entirely different investments. On the stock side, it’s a small cap company, you’re gonna see volatility in every small cap company because they tend to trade at low volume, a lot of people don’t know about them, it takes time for you to build investor visibility through the market. So, if you’re comfortable with volatility, I think our stock is a tremendous value. I think right now we’re trading at what we were worth in 2015, when we had 100 million in assets, and we were losing money. And I believe we’re approaching a billion in assets, and we’re making money. So, those are two different ecosystems. On the fund side, you know, think of the funds as our products. So, it’s in essence. You’re gonna buy a Tesla because you like Teslas, you might as well buy some of their stock as an investment because you like the product. That’s the way I would look at it.

Jimmy: Good answer there. We’ll do one more question here from Julia, and then we’re a little bit over time, so I’m gonna cut you loose after that. Julia asks, How is Caliber OZ Fund I performing versus your initial projections there?

Chris: We’re on track. We’re revalued at about a 35% increase over basis. The assets are moving forward. We did some lending outta that fund to keep the cash busy making a nice return while we were waiting for projects to come through, and we’re nearly fully deployed. So, the early projects are cash-flowing, and we’re gonna start looking at how to turn those and redeploy. And the later projects are just on track in terms of their production. And, you know, I got a ticker symbol CWD, George. I have to answer the one question from Bill, which is a great question, To hold an investment for 10 years is 13% IRR a little low? I think it is. But when you look at a 50% loan to value fund, that’s using significantly less debt, then you’re gonna look at lower LTVs. Your multiple invested capital should be about two-and-a-half times is what we’re projecting or better, which is what we’re really going after. We’re not necessarily chasing IRR. Having said that, our deals tend to underwrite at a higher IRR than what we, will be posted in the PPM.

Jimmy: Fantastic. We didn’t get to your question, I’m sorry we’ve run outta time. But please reach out to Chris directly, I just posted his email address in the chat. Once again, Chris, thank you so much for joining me today. Always great to hear from Caliber.

Chris: Awesome. Good to see you.

Jimmy: Take care.