March 26, 2025 • 35 mins
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ABOUT SAM MORRIS
Sam is the CEO of Sunset Capital, a vertically integrated real estate investment and asset management firm based in Houston. With over 23 years of experience in real estate, he has led acquisition and disposition teams on transactions exceeding $550 million. Sam's background as a corporate banker for 18 years involved facilitating over $1B in real estate financing, equipping him with a comprehensive understanding of property lifecycle management.
THIS TOPIC IN A NUTSHELL:
Sam’s background and journey in real estate
Lender Inspections and Proactive Communication
Current market conditions and Underwriting tips
Market Dynamics and Deal Acquisition Strategies
Understanding Loan-to-Value Ratios
Pros and cons of floating and fixed-rate debt
Cost Control in Asset Management
The value of investing with experienced operators
Understanding local markets
Raising capital challenges
Connect with Sam
KEY QUOTE:
“It's okay to invest with somebody who's got some battle scars because they've been there and gone through it and they know how to get out on the other side. “
ABOUT THE WESTSIDE INVESTORS NETWORK
The Westside Investors Network is your community for investing knowledge for growth. For real estate professionals by real estate professionals. This show is focused on the next step in your career... investing, for those starting with nothing to multifamily syndication.
The Westside Investors Network strives to bring knowledge and education to real estate professionals that is seeking to gain more freedom in their life. The host AJ and Chris Shepard, are committed to sharing the wealth of knowledge that they have gained throughout the years to allow others the opportunity to learn and grow in their investing. They own Uptown Properties, a successful Property Management, and Brokerage Company. If you are interested in Property Management in the Portland Metro or Bend Metro Areas, please visit www.uptownpm.com. If you are interested in investing in multifamily syndication, please visit www.uptownsyndication.com.
#RealEstateInvesting #RealEstate #CreatingWealth #PassiveInvesting #AssetManagement #UnderwritingDeals #StrategicUnderwriting #CostManagement #ProactiveCommunication #FloatingRate #FixedDebt #LoanToValueRatio #FinancingStrategies #RaisingCapital #Lenders #Acquisitions #ValueAdd #Multifamily #Syndication #NetOperatingIncome #CostControl #RiskManagement #VerticalIntegration#FinancialFreedom #LongTermWealth #InvestmentStrategies #RealEstateInvestments #InvestmentOpportunities #SteadyCashFlow #LatestPodcastEpisode #PassiveWealth #JoinTheWINpod #DealDeepDive #WestsideInvestorsNetwork
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Intro speaker (00:03):
Welcome to the Westside Investors Network. WIN,
your community of investingknowledge for growth. This is
the real estate professionalsinvesting podcast for real
estate professionals by realestate professionals. This show
is focused on the next step inyour career, investing. Thank
you for listening.
And please, if you like ourcontent, rate us on your podcast
(00:24):
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opinions expressed in thispodcast are for educational
purposes only and should not beconstrued as an offer to buy or
sell any shares or securities,make or consider any investments
or take any other action.
Trent Werner (00:40):
Welcome back to another episode of the deal deep
dive segment on the WestsideInvestors Network podcast. I'm
your host, Trent Warner. In thissegment, our future guests will
share their unique stories on aspecific deal they've invested
in. We'll dive deep into findingthe deal, financing the deal,
writing an offer, and the duediligence. Do us a solid and
smash that subscribe button,leave us a rating, and share
(01:03):
this episode.
And now let's dive deep. Welcomeback to the Westside Investors
Network podcast. I'm your host,Trent Warner. On today's
episode, we are joined by theCEO and founder of Sunset
Capital, Sam Morris. Sam isgoing to share his story on his
eighteen year career in realestate finance and lending that
has now led to Sunset Capital, avery successful multifamily
(01:26):
syndication company.
Sam is gonna share his opinionsand his insight on what we
should be looking at inunderwriting in today's current
market, as well as some assetmanagement focuses Sunset
Capital has been focused onduring the last few years. Now
let's welcome Sam Morris. Allright, we have Sam Morris
joining the Win podcast today.Sam, thanks so much for joining
(01:49):
us.
Sam Morris (01:49):
Yeah, Trent. Nice to meet you and glad to be here,
bud.
Trent Werner (01:53):
I'm excited for our conversation because Sam has
a lot of experience in realestate finance and that clearly
translates to real estatesyndication because finance is a
huge part of acquiring deals andoperating deals. Sam, do you
wanna talk about your experienceand your background in the real
(02:13):
estate finance specific?
Sam Morris (02:15):
Yeah. Sure. You know, as we have started, my
name is Sam Morris. I'm the CEOof Sunset Capital. You know,
we're based here in Houston,Texas, and we're owners and
asset managers in themultifamily storage space.
But as by way of education, asyou alluded to, Trent, I was a
I'm a former corporate banker.And so that's actually how I got
(02:38):
my start in really real estatewas from the banking side. And
so at a at a young age, rightout of college, I started
working in the banking industry.And all I did all day, every day
for years was underwrite. So Ijust underwrote deals all day,
(02:59):
every day for years.
And I always chuckle becausepeople always ask, you know, it
takes 10,000 to master a skill,right? And I always say, Well,
that's the case, I masteredunderwriting probably by the
time I was 24, 20 five years oldbecause it's literally all I did
for hours on hours every singleday. And it gave me a great base
(03:19):
and foundation from aquantitative perspective to have
a really fantastic understandingof CRE and the assets, the
commercial real estate assets,how they worked, what worked,
what didn't work, who operatedwell, what areas of town did
better than others. It wasreally a great initial kind of
(03:41):
education that helps springboardme into the industry.
Trent Werner (03:46):
So normally I ask people that have had a previous
career to real estate whatskills have have correlated and
translated into syndication. Ithink I already know the answer
to that. And underwriting wouldprobably be the the easy answer
there. Was there any
Sam Morris (04:03):
One of them. But you know what may surprise you too
is, in particular, when I becamea lender, you quickly figured
out who were good operators,what they did that was good,
what they did that wasn't good,how they handled adverse
situations, things like that.You were able to kind of ingrain
yourself on the operational sidewithout having to actually be in
(04:24):
it. And so there were a lot ofskill sets that translated over
really well from a syndicationstandpoint as well. And
understanding, you know, siteselection and things like that
and what's going on in the areaand how that impacts, the
properties that you have.
Trent Werner (04:41):
And from a operation standpoint, when you
were doing lending and andcommercial real estate finance,
were you specifically working ondeals in certain markets or
locations?
Sam Morris (04:53):
Yes, I would say Texas, which is where we operate
now. And that's, that's a it's agreat thing, because that's
really where we have our assetstoday. And so what I would tell
you is, you know, we quicklylearned being the largest
partner in the deal most of thetime as the lender, which most
of the time that is the largestpartner in the deal, because
they put up more than half theequity to acquire a deal. We
(05:16):
were heavily ingrained withknowing what's going on with our
asset. Really where theeducation line is, is like I
said, when something adversehappened.
We're based in Houston, Texas.And so it's not uncommon to have
a hurricane come through orsomething like that to where we
were able to quickly kindalearn, you know, who who handled
it well, what they did to handleit well, and how they were able
(05:38):
to do that.
Trent Werner (05:39):
And and I know Sunset is vertically integrated.
So how did your experience incommercial lending and finance
relate to asset management, forexample?
Sam Morris (05:49):
Yeah. I mean, there's obviously a heavily
quantitative side associatedwith that. But, you know,
lenders, you know, a lot ofbankers too, they're sales type
guys. They have to be able toget along with a lot of
different personalities. And sobeing understanding how to run
teams, which I, you know, I wasa market president.
So I ran teams of people, thatwere all different types within
(06:10):
the bank too. And so having theunderstanding of what you need
to do to get everybody to cometogether to fulfill the purpose,
I. E, execute on a businessplan, things of that nature. And
so it's marrying thequantitative with the
qualitative is probably easiestway to say that and allowed us
to, you know, succeed probablyquicker than most most groups
(06:31):
would.
Trent Werner (06:33):
Yeah. And and so I know you've been in the business
longer than I have, and you'veon the finance and lending side,
one thing that I've noticed,especially over the last two,
three years, is lenderinspections are becoming very
frequent. You know, sometimestwice a year, in some cases more
than that. Prior to the lastcouple of years, it might have
(06:53):
been once a year or ifeverything seemed to be going
well, it might have been acouple of years for a lender to
schedule an inspection and gothrough all that. What have you
noticed from an asset managementstandpoint and knowing how
that's operated for years?
What have you seen in thatspecific facet of this
syndication space?
Sam Morris (07:14):
Yeah, I would say it hasn't really changed for us,
but there's probably a couplereasons why. One, we communicate
well with our lenders, and we'reproactive about it from the
standpoint of, hey, you know,big storm just came through
freeze and same kind of thingswe do with our investors and
we'll allow, you know, we'llwe'll send a message. Hey, just
to let you know, freeze camethrough, you know, here are the,
(07:35):
here are the steps we took to beproactive ahead of time. No
damage, no nothing to theproperty or nothing of
consequence. Just dropping you aline to let you know your
collateral secure.
You do things like that on amore consistent basis with your
lenders. You're not somebodythey're going to be worried
about. You're not somebodythey're going to sit there and
go, man, we haven't been outthere in six, eight months. We
really need to get back outthere again. Because we're
(07:58):
proactive from the communicationstandpoint with that.
And so there's just a cadencethat we work through anytime. We
have hurricanes almost everysingle year. We'll literally
send them messages beforehandgoing, Hey, just to let you
know, our teams are out there.They're cleaning gutters,
clearing drains, prepping forpotential wind and rain,
(08:19):
whatever it may be. We'vealerted all the residents.
We're securing everything,buttoning down the hatchets.
Right. And then once it doesoccur, Hey, here's what
happened. Whatever you limit,you show them whatever the
damage was, whatever it may be,but you're proactive about it,
showing them what's going on.And from there, you know, they
(08:41):
they get kind of a comfort levelwith with you as a borrower.
And obviously have a comfortlevel knowing that that's a
piece of collateral for a loanthat they have.
Trent Werner (08:51):
Yeah, I think that's that's a really good
piece of advice for anyonelistening is to communicate well
with your lenders. And if you'restruggling with that, get better
at it. Because from myexperience, lenders are usually
pretty understanding as long asyou're managing the property,
operating the property, andprotecting the, like you said,
the piece of collateral thatthey're lending millions of
(09:13):
dollars on in some cases.
Sam Morris (09:15):
Yeah. It shows it shows that, hey. You know, I'm
not a fly by night person. I'mhere to you know, this is my
business. I'm taking care of mybusiness.
And it's really simple for ustoo from the standpoint of the
investors wanna know the sameinformation. So it's almost kind
of a cut and paste. You canactually, you know, do it with
both of them at the same time.And the investors have a comfort
(09:35):
level knowing you're taking careof the asset and so does the
lender.
Trent Werner (09:39):
Absolutely. So, Sam, real estate finance right
now is a a hot topic. A lot ofpeople are talking about it.
What is your take on thecurrent, I guess, lending
environment? And how can peoplenavigate the current market that
we're in when it comes tocommercial real estate,
multifamily, you know, storage,whatever it may be?
Sam Morris (10:02):
Yeah, I mean, if you are, if you're looking for a new
asset, let's say you're on theacquisition trail, right? I
would say for your underwriting,you probably need to recognize
that we may be in a what theycall higher for longer period,
meaning the interest rates. AndI have a little bit longer term
perspective of this, too. Theinterest rates from a historical
(10:25):
perspective really aren't high.If you go back just five years,
they do seem high because ofwhere we've come from.
But if you go back twenty years,we're really kind of in a normal
type of situation of where wewould be. And so it doesn't seem
too far out of bounds with wherewe're operating today. But what
(10:45):
I would say is from anunderwriting perspective, if
you're sitting there going, hey,in two or three years, we're
underwriting to have a refinanceoccur that's going to be at 100
or 50 or 200 basis points lowerthan where we are today. I would
really advise caution againstsomething like that just because
you're now trying to control anuncontrollable and deal with at
(11:07):
a macro level of something thatyou really just nobody knows.
And if they say they know,they're wrong.
I mean, they really are. I wouldactually really caution against
listening to somebody like that.But one of the benefits I get is
I still sit on the board of abank. And so, you know, we get a
little bit probably more insightof far as what people are
thinking with interest ratesjust with a broader range of
(11:30):
financial resources available tous that way. But to me, I would
say a higher for longer is kindof a more common sentiment.
After going to NMHC a couple ofweeks ago, it really does seem
like we're in a fairly stableinterest rate market that's
really not going to go too farup or down, you know, for the
(11:52):
foreseeable future at thispoint.
Trent Werner (11:54):
So when that comes to, I guess, looking at
acquisitions and andunderwriting these deals, a lot
of people in the last handful ofyears were banking on refis at
low interest rates. If that'sout of the question or or maybe
not in the question for, youknow, five years, we'll say.
What does the underwriting modelfocus on on, let's use a
(12:17):
multifamily property class B atthis point, what does an
operator or someone that may benewer into underwriting, what do
they need to focus on in theirmodels when they're looking at
the possible acquisitions?
Sam Morris (12:30):
Yeah. I mean, it's gonna depend somewhat on the
business plan that they haveassociated with the property
itself. But if you're, you know,if your plan is, hey, I'm we're
gonna go in here. We're gonnabuy them. We're gonna hold for
seven years.
Right? I mean, my advice wouldbe, you know, go figure out what
a spread is to treasury, youknow, in a in a maybe an agency
type deal. And I would put thatunderwriting in. Right? And so
(12:53):
and that that could potentiallykill a deal.
But at the same time too, you'rebanking on interest rates. Mean,
it's caused issues for a lot ofoperators and particularly those
that made acquisitions in'twenty one and 'twenty two,
where they had floating ratedebt on it and rate caps start
to expire and things of thatnature. And it really changes
(13:15):
the dynamics of the deal and whyyou're seeing a lot of cash
calls and preferred equity fundsthat are now coming into play to
try to save deals and extend thelife of them. And it was due to
financing and the way thatpeople underwrote back then.
Trent Werner (13:30):
What would you say to someone that says prices are
over elevated? They're, youknow, through the roof right
now. No deals are penciling. Isit still possible to find a good
deal and make a deal pencil?Mean tell someone like that.
Sam Morris (13:45):
Certainly hope so. I mean, we acquired quite a bit in
the last twelve months. I wouldsay, no. I would say absolutely.
I mean, you just you youprobably need to do more
underwriting of deals.
And it may not be that you'refinding your exact perfect match
and you're starting to seepeople start moving outside of
their box, meaning they have abuy box right here that they're
gonna that's all they wanna do.And that buy box is now shifting
(14:08):
or growing a little bit ofthings that they're willing to
consider. But I mean, is the bidask spread still pretty far
apart? I would say yes. But it'sbeen shrinking, in particular
over the last twelve months.
And I don't know where thatequilibrium is, but when it
hits, I mean, everybody willkind of know because a lot more
deal flow will occur. And someof the sellers, their backs
(14:33):
against a wall, meaning theyhave a note maturing or
something of that nature. Andthey're going to be forced into
a situation where some kind ofliquidation event needs to
occur, whether it be a sale orrefinance. And so it's a cycle
like anything else. And where weare in the cycle is it does feel
like there are going to be moretrades occurring this year.
(14:56):
But to say that everything'soverpriced and nothing's going
to pencil, I would sayunderwrite your number and see
what happens because and stickto your number and stay
disciplined that way because youmay find that as we get as
sellers get backed up to thatwall, they may be a little bit
more open to hearing what buyershave to say and vice versa. I
(15:19):
mean, if seller's not there andthey said, no, this is what's
going to trade at and this iswhere we're at and the buyer
really wants it, you may have ameeting in the middle, so to
speak. And that's how deals aregoing to transact. And now
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uptownsyndication.com today tolearn more. How are you guys
finding your deals right now?
I know you said you primarilyfocus in Texas and the
Southeast. How are you guysfinding deals that you said you
acquired a handful in the lasttwelve months. Clearly, you guys
are still acquiring deals. Howare you finding these deals that
pencil makes sense for your buybox and your criteria?
Sam Morris (16:47):
Yeah, I mean, our size, the size deals we go out
and chase, I mean, we reallyneed brokers to be involved. And
so I would say there's probablynot a day that goes by that
we're not talking to brokersthroughout the state. And, you
know, knowing, hey, what'scoming on? What potentially
could come on? Is there anythingwe can get early looks at things
(17:08):
of that nature?
Or there's anything you can showus early numbers on where we can
give you kind of here's where wewould be and see how close it is
with your BOVs, things of thatnature. But I would say, you
know, from a relationalstandpoint, we just have
relations with, you know, a lotof brokers throughout the state,
every brokerage house you canthink of, and we talk to them
(17:29):
fairly consistently to seewhat's going on. They have a
very good understanding, too, ofwhat our buy boxes. So a lot of
times they're reaching out tous. I talked to one earlier
today, and he just he had adistressed opportunity come up
that's a little smaller thanwhat we would probably look at.
But we just we talked about it.It's not on the market yet, but
(17:52):
it will be. And, you know, hejust wanted to know if it was
something we wanted to take anearly peek at.
Trent Werner (17:58):
I guess a question that just popped into my head is
in terms of financing right now,one thing that I've seen is
operators and people acquiringdeals are having to bring more
capital to the table. You findthat true in deals that you're
seeing and deals that you'redoing?
Sam Morris (18:12):
Yeah, again, it depends on the on the deal
itself and the type ofunderwriting. One of the things
that we did a lot of last yearwas we put deals into HFC, which
is the Housing FinanceCorporation. And so there was
affordability component that webrought to the deals. And it
significantly enabled us to getbetter leverage on the deals
(18:35):
associated with that because wewere able to reduce the tax
burden associated with thoseproperties. And it enabled us to
transact a handful of times ondeals because of that.
But in general, I would say yes.And it's really more
underwriting to either a debtyield or debt coverage ratio.
And so if you're going in andjust it's not automatic that
(18:57):
you're going to have to put down40% on a deal, It's more of a
what's the cash flow of thatdeal? How does it look like from
an NOI perspective and backinginto the numbers to be able to
get to the loan amounts thatyou're looking to get? I mean,
are pretty much all the same.
They want to know that they havecoverage to get repaid. Right?
And so the loan to values, theymay have some caps associated
(19:20):
with it or some minimumsassociated with it, but it still
comes into play of what is ityou know, how much money does
the property make that's goingto be able to repay us.
Trent Werner (19:28):
Right. Okay. That makes sense. And and for your
guys' deals, what are you Imean, you don't have to give me
specific numbers, but are youfalling in that 30% or, I guess,
70% loan to value? Are youfloating closer to the 40% or
60% loan to value?
Sam Morris (19:44):
No, I would say we're probably more like the 75%
LTVs associated with the deals.And that means that we're buying
at a purchase price that willalso cover at a, you know, call
it a one two or one two fivedebt coverage ratio for the deal
to be able to make those dealswork.
Trent Werner (20:03):
That's interesting. Because the the
people especially the neweroperators that I've talked with
recently have all said, youknow, we're looking at 60% loan
to value, sometimes 50% loan tovalue. And so I'm it's
interesting to hear how you guysare are doing deals with a 25%
or, I guess, 75% loan to value.
Sam Morris (20:24):
And like that, it's it's still gonna be deal
specific. Right? It's how youbuy the deal, what your plan is
for the deal, and then the theincome associated with it.
Because a lot of people whenyou're buying real estate, and
it really doesn't matter whattype of real estate you're
buying. Right?
You're buying either a currentand or future income stream.
Right? And that's how we'regetting our values. And as
(20:45):
operators, you come in and yougo, all here are the things I'm
going to do that are going toenhance that from a valuation
standpoint. And why investorsand or lenders should come in
and do this with me is becauseI'm going to be able to do x, y,
and z.
And so part of it is our abilityto go, hey, here are the things
that we're doing to the propertyand why it's going to make sense
for you, lender, or you,investor, to come in on this
(21:09):
property with us. And so ifyou've got to come in and go,
man, for me to be able to makethis work right off the bat, I'm
going have to come up with moremoney. But with what I'm going
to be able to do to it, it couldcreate quite a bit of value.
Well, there still could be a lotof reasons to do deals like that
that have, you know, 60 or 50%leverage because of the returns
(21:29):
that you are, you know, as anoperator planning on going and
getting.
Trent Werner (21:33):
Yeah. That's that's an interesting point too,
is it sounds like you're stilllooking at value add deals.
Right?
Sam Morris (21:39):
Sure. Absolutely. Absolutely.
Trent Werner (21:42):
Because the another thing that people have
been talking about is value addis a lot more difficult right
now. Not only are you having tobring more capital for the
actual acquisition, but then youstill have this rehab budget.
And so, you know, they're usedto raising a certain amount of
capital, but now you gotta bringmore to the table for the
financing piece, and they'reit's scaring them off of the
(22:03):
actual rehab cost and performingon that on that rehab budget
that they're setting.
Sam Morris (22:09):
Sure. And and a lot of that, again, is gonna be site
specific, right? Because ifyou're in an area where, let's
say, there's a lot of excesssupply, you going in and
spending a whole lot of dollarsto do a value add at that
property to try to get somethinghigher than where they're
currently at can be a bit of achallenge. And so trying to make
money off of that kind of a spinmay not make a lot of sense. You
(22:31):
may not be able to get thereturn that you're looking for
associated with that spin.
Whereas if you're buying in anarea that, let's just say, is
more supply constrained andthere's a lot more demand
associated with it, you may getmuch better return for the
dollars, or you may not onlyhave to spend as many dollars to
be able to get a larger returnassociated with that. And so
(22:53):
real estate is locationspecific. And that's why I say
every deal is a little bitdifferent. You have to kind of
weigh where you're at associatedwith it. And that's where the
financing is gonna come intoplay for each of those deals as
well.
Trent Werner (23:06):
Well, Sam, I do have another question on on
financing and and you may havean answer that I'm not ready
for, but what is your opinion onfloating rate versus fixed rate
debt in our current market rightnow?
Sam Morris (23:23):
I think both have both of them have merit. They
really do. And so, you know, I'mnot one of those guys who are
anti floating rate debt. Youcan't ever use it. You know, it
just it burned some people.
But I will tell you, we haveinvestors, not necessarily for
our deals, but for other dealsthat have some PTSD associated
(23:45):
with it because it impacted thevalues of their deals. But there
is absolutely a time and placefor floating rate. But it has
more to do with the businessplan associated with the
property. If you're sittingthere going in and going, hey,
we have to get floating rate tomake a deal work, And rates need
(24:07):
to be x or below. And that's theonly way we're going to make the
deal work.
That can be a challenge. Itreally can. And obviously, if
you have a fixed rate product,an agency type rate product, and
you go, all right, we're goinggo borrow money at ten or twelve
year type rates, but ourbusiness plan is to exit in
(24:27):
three years, that may not workbecause of the yield maintenance
or defeasance associated withthose deals. And so there is a
time and place for both of thosewhere they absolutely make sense
just based upon the businessplan associated with the asset
that you're buying. So I'm notanti either of them.
I absolutely think both workdepending on the business plan
(24:49):
associated with the deal.
Trent Werner (24:51):
I'm very glad that you answered it that way because
over the last twenty four monthsor so, there have been a lot of
people, you know, acquiring PTSDfrom floating rate debt
investments that maybe wentsouth for them. And I agree with
you. I think there are times andplaces for both, and it just
really depends on what youracquisition and business plan
(25:14):
looks like for these deals. Youdid mention something about, you
know, if it doesn't make senseor if if you have fixed rate
debt and you're looking to exitin three years, it might not
make sense because you might nothit the returns. Do you see
people holding acquisitions fora little bit longer than maybe
we saw five years ago, forexample, at this current time?
Sam Morris (25:34):
For sure. Because if you look at how people
underwrote deals five years agoto today, right, their business
plans are probably not asaccurate as they thought it
would be five years ago. And sothey're more likely behind on
their pro formas associated withit. And so they probably have
had to make some pivots toadjust to be able to get to
(25:56):
where they want to go from anexit standpoint. And therefore,
they may have to hold longerbecause of that.
The whole reason I said you maynot want to go like a long term
agency deal for a three yearbusiness plan is because of what
I was talking about from a debtyield or yield maintenance
perspective. I mean, you canhave a fairly significant
prepayment penalty, which iswhat those are. They can wipe
(26:19):
out a lot of growth from avaluation standpoint. Whereas if
you wouldn't have had a floatingrate deal that didn't have that
kind of prepayment penaltyassociated with it, those funds
that you earn in valuation cango to your investors.
Trent Werner (26:34):
Right. And that makes that makes perfect sense.
We've actually kicked around theidea. There was a couple deals
that we had that we were lookingat selling earlier than we
anticipated, and the yield orthe, you know, prepayment
penalties. At one point, we weresaying, you know what?
It's okay if we pay them. It'snot the end of the world. And
then you get actually down intothe details. You're like, man,
this this isn't money that Iwanna spend in fees. I'd rather
(26:56):
give it to the investors.
And and so we decided just tohold on and continue operating
these assets that we had.
Sam Morris (27:02):
And that's a reason why some people that maybe
acquired a deal five years agoare potentially still holding on
to it because they realize if Ilet this burn off in another
year or two, just the prepaymentpenalty going away could be of
significant benefit to theirinvestors.
Trent Werner (27:19):
Absolutely. So I do have an asset management
question for you because we kindof talked about it a little bit
earlier. In these last thirtysix months, we'll say, what are
some of the asset managementfocuses from Sunset Capital and
things that you guys are reallypaying attention to right now?
Sam Morris (27:38):
Yeah. A lot of it is adherence to the business plan,
meaning are the operating teamsthat are on-site adhering to the
business plan that we haveassociated with it? But also, a
lot of it's more cost controltoo, and particularly things
that are somewhat outside of ourcontrol. Down here in Houston,
we're a tier one county, whichmeans we deal with a lot of
(28:02):
insurance issues from a coststandpoint. And insurance has
gone up quite a bit, not justwith us, but all over the
country.
But in the coastal communities,it's gone up quite a bit. And
it's really hard to outrun thatwhen you have an NOI based
growth that you want to do froma valuation standpoint, and you
have large line items that aregrowing at far significant
(28:24):
double digits. And so you haveto do things and find ways to
make sure that you can staywithin those parameters so that
you can maintain and createvalue associated with it. And
that's really that's a heavilyquantitative way of of looking
at things from an assetmanagement standpoint. But then
you gotta like I said earlier,you gotta marry it with the
(28:45):
qualitative and make sure thatthe on-site teams have a great
understanding.
Hey. Here's what we're doing andwhy we're doing it, And this is
how it's going to impact you andour residents. And so it's
really trying to open up thoselines of communication a little
bit more, probably more so thanwe have in the past and getting
everybody on board with thebusiness plan. It's a little
(29:06):
unique because it's really lessof a financial answer there and
more of a collaborative answerof going, hey, you know, I'm
trying to make sure the teamsare talking well with one
another so that they can executethe business plan that we have
in place.
Trent Werner (29:20):
When I know the the solution or the resolution
to increase expenses isn't justpass that on to the tenants or
the residents there becausethat's you know, if insurance is
going up by twenty five percent,you can't just give everyone a
25% rent increase and have thatcover the bill. So what are what
are some of the the things thatyou're doing? Maybe areas that
you're cutting costs or tryingto reduce expenses to combat
(29:43):
this? Because insurance is a hottopic too right now. But Yeah.
What are some of the things thatyou guys are doing to combat
some of these significantexpense increases?
Sam Morris (29:51):
Yeah. From a strategic standpoint, a lot of
it could be know, really, it'swe're having to eat quite a bit
of it. But a lot of theresidents, I will tell you, have
a very clear understanding ofwhat's going on with insurance
as well. And in some cases, Iwish it was only 25%. Right?
And so some of it is educatingthe resident, letting them know,
hey, it is not the same for usfrom a cost perspective just to
(30:15):
run the operations of this thingthe way it was six months ago or
a year ago. And so it's reallykind of being vocal about it,
letting them know, hey, guys,there's going to be increases,
albeit on renewals and newleases. And you're going to see
some of this costs because ithas to be passed, passed down.
Right. I would say we make cutswhere we can make cuts, but we
(30:38):
won't cut to the bone.
And that's something else we'regoing to be pretty vocal about
with the residents, letting themknow, Hey, you know, we're not
going to cut the services thatwe have to you. We still want to
be able to provide you theamenities we do and the services
that we have that you've come tolove and expect and enjoy at our
facilities. Right? And all ofthese are becoming a little bit
(31:01):
more expensive everywhere yougo. And the thing is, it's being
reiterated everywhere.
It's not just us. So they'reseeing inflation on the news.
They're seeing all these otherthings associated with it.
That's actually reinforcing whatwe're telling them. And we're
now showing them what that'sgoing to look like.
And so we're having a lot ofthose communications ahead of
time. And it absolutely helpstoo, because it's not going to
(31:22):
be the shock and all when aresident sees, hey, we're going
to have to increase your rent by$50 or $75 from a renewal
perspective. There's no shockand awe associated with it
because we've been communicatingwith them, letting them know,
hey, have some costs that aregoing up and it's hitting
everybody. And everybody's gonnahave to kind of do their part to
(31:43):
live in this great, wonderfulcommunity we built.
Trent Werner (31:46):
Yeah. That's from our experience, we've kind of
seen something similar. Ourinsurance expense is not nearly
as bad as it is in other marketswhere our assets are here on the
West Coast. But just like yousaid, all the expenses overall
are hitting these tenants,whether it's their groceries or
their insurance, theirutilities. And you know, some
(32:08):
tenants are more more willing toto eat that that rent increase.
And other tenants, it's a lotmore difficult for them, they're
having to move or, you know,seek assistance. Do you guys
have any resources like thatwhere you in Texas for rental
assistance and that sort of Not
Sam Morris (32:26):
only that, I mean, we have there's there's a ton of
resources out here from aperspective of not just rental
assistance. Right? We may we mayhave other assistance programs
that we're able to at leastinform them of. We don't really
guide anybody to them, but we doinform them of, hey, if you're
struggling, you know, here aresome other programs that are out
there that, you know, couldpotentially help in these
(32:48):
particular times.
Trent Werner (32:50):
And what are your thoughts on how these expenses
are kind of running wild rightnow? How how are how is this
increase in inflation and thisexpense category going to affect
performance of assets in thefuture?
Sam Morris (33:05):
I think it'll show you who the true operators are.
I mean, just being very frank, Ithink it'll show the guys who
are ready to get in there andgrind and work with their teams
and and pinch the pennies wherethey need to be pinched and
operate out of the times we'rein. Mean, real estate is a cycle
(33:25):
like a lot of other industries.And so you'll see who can do
well through this through thiscycle.
Trent Werner (33:31):
I love that. I think that's that's some that's
some very true words that youjust spoke there because, I
mean, even already, we've seensome operators go under that
were taking advantage of a veryhot real estate market where
they can get in and out, churnand burn, and do deals and share
their successes that way. But assoon as it got time to, like you
said, dig your dig your heels inand get gritty, Unfortunately,
(33:54):
they're they're not aroundanymore. And that's been a topic
in the news. I'm sure a lot ofpeople have seen that are
listening to this.
Sam Morris (34:01):
Sure. I mean, I think it's it's important. A lot
of people I mean, they you wantto stay with somebody who's
pristine or things like that. Iwould tell you, it's Okay to
invest with somebody that's gotsome battle scars because you
want to know that they've beenthere and gone through it and
that they know how to get out onthe other side. And so part of
(34:22):
that is, you you gotta have afew gray hairs and been through
some cycles to be able torecognize what you're going
through and then recognize whatyou need to do to get through it
all.
Trent Werner (34:33):
Absolutely. Well, Sam, speaking of good operators,
where can people hear more fromyou, connect with you and maybe
learn more about Sunset Capital?
Sam Morris (34:40):
Yeah, easiest way is to go to our website,
sunsetcapital.com. And we lovemeeting new people. We love
entertaining new investors. And,you know, come learn more about
us.
Trent Werner (34:54):
And I think when you guys visit their website,
you will definitely see Sam andhis entire team success, their
awesome portfolio that theyhave, and definitely connect
with Sam and the rest of histeam when you can.
Sam Morris (35:06):
Trent, really appreciate it, bud. Thanks so
much.
Trent Werner (35:08):
Thanks, Sam.
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Trent Werner (00:40):
Welcome back to another episode of the deal deep
dive segment on the WestsideInvestors Network podcast. I'm
your host, Trent Warner. In thissegment, our future guests will
share their unique stories on aspecific deal they've invested
in. We'll dive deep into findingthe deal, financing the deal,
writing an offer, and the duediligence. Do us a solid and
smash that subscribe button,leave us a rating, and share
(01:03):
this episode.
And now let's dive deep. Welcomeback to the Westside Investors
Network podcast. I'm your host,Trent Warner. On today's
episode, we are joined by theCEO and founder of Sunset
Capital, Sam Morris. Sam isgoing to share his story on his
eighteen year career in realestate finance and lending that
has now led to Sunset Capital, avery successful multifamily
(01:26):
syndication company.
Sam is gonna share his opinionsand his insight on what we
should be looking at inunderwriting in today's current
market, as well as some assetmanagement focuses Sunset
Capital has been focused onduring the last few years. Now
let's welcome Sam Morris. Allright, we have Sam Morris
joining the Win podcast today.Sam, thanks so much for joining
(01:49):
us.
Sam Morris (01:49):
Yeah, Trent. Nice to meet you and glad to be here,
bud.
Trent Werner (01:53):
I'm excited for our conversation because Sam has
a lot of experience in realestate finance and that clearly
translates to real estatesyndication because finance is a
huge part of acquiring deals andoperating deals. Sam, do you
wanna talk about your experienceand your background in the real
(02:13):
estate finance specific?
Sam Morris (02:15):
Yeah. Sure. You know, as we have started, my
name is Sam Morris. I'm the CEOof Sunset Capital. You know,
we're based here in Houston,Texas, and we're owners and
asset managers in themultifamily storage space.
But as by way of education, asyou alluded to, Trent, I was a
I'm a former corporate banker.And so that's actually how I got
(02:38):
my start in really real estatewas from the banking side. And
so at a at a young age, rightout of college, I started
working in the banking industry.And all I did all day, every day
for years was underwrite. So Ijust underwrote deals all day,
(02:59):
every day for years.
And I always chuckle becausepeople always ask, you know, it
takes 10,000 to master a skill,right? And I always say, Well,
that's the case, I masteredunderwriting probably by the
time I was 24, 20 five years oldbecause it's literally all I did
for hours on hours every singleday. And it gave me a great base
(03:19):
and foundation from aquantitative perspective to have
a really fantastic understandingof CRE and the assets, the
commercial real estate assets,how they worked, what worked,
what didn't work, who operatedwell, what areas of town did
better than others. It wasreally a great initial kind of
(03:41):
education that helps springboardme into the industry.
Trent Werner (03:46):
So normally I ask people that have had a previous
career to real estate whatskills have have correlated and
translated into syndication. Ithink I already know the answer
to that. And underwriting wouldprobably be the the easy answer
there. Was there any
Sam Morris (04:03):
One of them. But you know what may surprise you too
is, in particular, when I becamea lender, you quickly figured
out who were good operators,what they did that was good,
what they did that wasn't good,how they handled adverse
situations, things like that.You were able to kind of ingrain
yourself on the operational sidewithout having to actually be in
(04:24):
it. And so there were a lot ofskill sets that translated over
really well from a syndicationstandpoint as well. And
understanding, you know, siteselection and things like that
and what's going on in the areaand how that impacts, the
properties that you have.
Trent Werner (04:41):
And from a operation standpoint, when you
were doing lending and andcommercial real estate finance,
were you specifically working ondeals in certain markets or
locations?
Sam Morris (04:53):
Yes, I would say Texas, which is where we operate
now. And that's, that's a it's agreat thing, because that's
really where we have our assetstoday. And so what I would tell
you is, you know, we quicklylearned being the largest
partner in the deal most of thetime as the lender, which most
of the time that is the largestpartner in the deal, because
they put up more than half theequity to acquire a deal. We
(05:16):
were heavily ingrained withknowing what's going on with our
asset. Really where theeducation line is, is like I
said, when something adversehappened.
We're based in Houston, Texas.And so it's not uncommon to have
a hurricane come through orsomething like that to where we
were able to quickly kindalearn, you know, who who handled
it well, what they did to handleit well, and how they were able
(05:38):
to do that.
Trent Werner (05:39):
And and I know Sunset is vertically integrated.
So how did your experience incommercial lending and finance
relate to asset management, forexample?
Sam Morris (05:49):
Yeah. I mean, there's obviously a heavily
quantitative side associatedwith that. But, you know,
lenders, you know, a lot ofbankers too, they're sales type
guys. They have to be able toget along with a lot of
different personalities. And sobeing understanding how to run
teams, which I, you know, I wasa market president.
So I ran teams of people, thatwere all different types within
(06:10):
the bank too. And so having theunderstanding of what you need
to do to get everybody to cometogether to fulfill the purpose,
I. E, execute on a businessplan, things of that nature. And
so it's marrying thequantitative with the
qualitative is probably easiestway to say that and allowed us
to, you know, succeed probablyquicker than most most groups
(06:31):
would.
Trent Werner (06:33):
Yeah. And and so I know you've been in the business
longer than I have, and you'veon the finance and lending side,
one thing that I've noticed,especially over the last two,
three years, is lenderinspections are becoming very
frequent. You know, sometimestwice a year, in some cases more
than that. Prior to the lastcouple of years, it might have
(06:53):
been once a year or ifeverything seemed to be going
well, it might have been acouple of years for a lender to
schedule an inspection and gothrough all that. What have you
noticed from an asset managementstandpoint and knowing how
that's operated for years?
What have you seen in thatspecific facet of this
syndication space?
Sam Morris (07:14):
Yeah, I would say it hasn't really changed for us,
but there's probably a couplereasons why. One, we communicate
well with our lenders, and we'reproactive about it from the
standpoint of, hey, you know,big storm just came through
freeze and same kind of thingswe do with our investors and
we'll allow, you know, we'llwe'll send a message. Hey, just
to let you know, freeze camethrough, you know, here are the,
(07:35):
here are the steps we took to beproactive ahead of time. No
damage, no nothing to theproperty or nothing of
consequence. Just dropping you aline to let you know your
collateral secure.
You do things like that on amore consistent basis with your
lenders. You're not somebodythey're going to be worried
about. You're not somebodythey're going to sit there and
go, man, we haven't been outthere in six, eight months. We
really need to get back outthere again. Because we're
(07:58):
proactive from the communicationstandpoint with that.
And so there's just a cadencethat we work through anytime. We
have hurricanes almost everysingle year. We'll literally
send them messages beforehandgoing, Hey, just to let you
know, our teams are out there.They're cleaning gutters,
clearing drains, prepping forpotential wind and rain,
(08:19):
whatever it may be. We'vealerted all the residents.
We're securing everything,buttoning down the hatchets.
Right. And then once it doesoccur, Hey, here's what
happened. Whatever you limit,you show them whatever the
damage was, whatever it may be,but you're proactive about it,
showing them what's going on.And from there, you know, they
(08:41):
they get kind of a comfort levelwith with you as a borrower.
And obviously have a comfortlevel knowing that that's a
piece of collateral for a loanthat they have.
Trent Werner (08:51):
Yeah, I think that's that's a really good
piece of advice for anyonelistening is to communicate well
with your lenders. And if you'restruggling with that, get better
at it. Because from myexperience, lenders are usually
pretty understanding as long asyou're managing the property,
operating the property, andprotecting the, like you said,
the piece of collateral thatthey're lending millions of
(09:13):
dollars on in some cases.
Sam Morris (09:15):
Yeah. It shows it shows that, hey. You know, I'm
not a fly by night person. I'mhere to you know, this is my
business. I'm taking care of mybusiness.
And it's really simple for ustoo from the standpoint of the
investors wanna know the sameinformation. So it's almost kind
of a cut and paste. You canactually, you know, do it with
both of them at the same time.And the investors have a comfort
(09:35):
level knowing you're taking careof the asset and so does the
lender.
Trent Werner (09:39):
Absolutely. So, Sam, real estate finance right
now is a a hot topic. A lot ofpeople are talking about it.
What is your take on thecurrent, I guess, lending
environment? And how can peoplenavigate the current market that
we're in when it comes tocommercial real estate,
multifamily, you know, storage,whatever it may be?
Sam Morris (10:02):
Yeah, I mean, if you are, if you're looking for a new
asset, let's say you're on theacquisition trail, right? I
would say for your underwriting,you probably need to recognize
that we may be in a what theycall higher for longer period,
meaning the interest rates. AndI have a little bit longer term
perspective of this, too. Theinterest rates from a historical
(10:25):
perspective really aren't high.If you go back just five years,
they do seem high because ofwhere we've come from.
But if you go back twenty years,we're really kind of in a normal
type of situation of where wewould be. And so it doesn't seem
too far out of bounds with wherewe're operating today. But what
(10:45):
I would say is from anunderwriting perspective, if
you're sitting there going, hey,in two or three years, we're
underwriting to have a refinanceoccur that's going to be at 100
or 50 or 200 basis points lowerthan where we are today. I would
really advise caution againstsomething like that just because
you're now trying to control anuncontrollable and deal with at
(11:07):
a macro level of something thatyou really just nobody knows.
And if they say they know,they're wrong.
I mean, they really are. I wouldactually really caution against
listening to somebody like that.But one of the benefits I get is
I still sit on the board of abank. And so, you know, we get a
little bit probably more insightof far as what people are
thinking with interest ratesjust with a broader range of
(11:30):
financial resources available tous that way. But to me, I would
say a higher for longer is kindof a more common sentiment.
After going to NMHC a couple ofweeks ago, it really does seem
like we're in a fairly stableinterest rate market that's
really not going to go too farup or down, you know, for the
(11:52):
foreseeable future at thispoint.
Trent Werner (11:54):
So when that comes to, I guess, looking at
acquisitions and andunderwriting these deals, a lot
of people in the last handful ofyears were banking on refis at
low interest rates. If that'sout of the question or or maybe
not in the question for, youknow, five years, we'll say.
What does the underwriting modelfocus on on, let's use a
(12:17):
multifamily property class B atthis point, what does an
operator or someone that may benewer into underwriting, what do
they need to focus on in theirmodels when they're looking at
the possible acquisitions?
Sam Morris (12:30):
Yeah. I mean, it's gonna depend somewhat on the
business plan that they haveassociated with the property
itself. But if you're, you know,if your plan is, hey, I'm we're
gonna go in here. We're gonnabuy them. We're gonna hold for
seven years.
Right? I mean, my advice wouldbe, you know, go figure out what
a spread is to treasury, youknow, in a in a maybe an agency
type deal. And I would put thatunderwriting in. Right? And so
(12:53):
and that that could potentiallykill a deal.
But at the same time too, you'rebanking on interest rates. Mean,
it's caused issues for a lot ofoperators and particularly those
that made acquisitions in'twenty one and 'twenty two,
where they had floating ratedebt on it and rate caps start
to expire and things of thatnature. And it really changes
(13:15):
the dynamics of the deal and whyyou're seeing a lot of cash
calls and preferred equity fundsthat are now coming into play to
try to save deals and extend thelife of them. And it was due to
financing and the way thatpeople underwrote back then.
Trent Werner (13:30):
What would you say to someone that says prices are
over elevated? They're, youknow, through the roof right
now. No deals are penciling. Isit still possible to find a good
deal and make a deal pencil?Mean tell someone like that.
Sam Morris (13:45):
Certainly hope so. I mean, we acquired quite a bit in
the last twelve months. I wouldsay, no. I would say absolutely.
I mean, you just you youprobably need to do more
underwriting of deals.
And it may not be that you'refinding your exact perfect match
and you're starting to seepeople start moving outside of
their box, meaning they have abuy box right here that they're
gonna that's all they wanna do.And that buy box is now shifting
(14:08):
or growing a little bit ofthings that they're willing to
consider. But I mean, is the bidask spread still pretty far
apart? I would say yes. But it'sbeen shrinking, in particular
over the last twelve months.
And I don't know where thatequilibrium is, but when it
hits, I mean, everybody willkind of know because a lot more
deal flow will occur. And someof the sellers, their backs
(14:33):
against a wall, meaning theyhave a note maturing or
something of that nature. Andthey're going to be forced into
a situation where some kind ofliquidation event needs to
occur, whether it be a sale orrefinance. And so it's a cycle
like anything else. And where weare in the cycle is it does feel
like there are going to be moretrades occurring this year.
(14:56):
But to say that everything'soverpriced and nothing's going
to pencil, I would sayunderwrite your number and see
what happens because and stickto your number and stay
disciplined that way because youmay find that as we get as
sellers get backed up to thatwall, they may be a little bit
more open to hearing what buyershave to say and vice versa. I
(15:19):
mean, if seller's not there andthey said, no, this is what's
going to trade at and this iswhere we're at and the buyer
really wants it, you may have ameeting in the middle, so to
speak. And that's how deals aregoing to transact. And now
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uptownsyndication.com today tolearn more. How are you guys
finding your deals right now?
I know you said you primarilyfocus in Texas and the
Southeast. How are you guysfinding deals that you said you
acquired a handful in the lasttwelve months. Clearly, you guys
are still acquiring deals. Howare you finding these deals that
pencil makes sense for your buybox and your criteria?
Sam Morris (16:47):
Yeah, I mean, our size, the size deals we go out
and chase, I mean, we reallyneed brokers to be involved. And
so I would say there's probablynot a day that goes by that
we're not talking to brokersthroughout the state. And, you
know, knowing, hey, what'scoming on? What potentially
could come on? Is there anythingwe can get early looks at things
(17:08):
of that nature?
Or there's anything you can showus early numbers on where we can
give you kind of here's where wewould be and see how close it is
with your BOVs, things of thatnature. But I would say, you
know, from a relationalstandpoint, we just have
relations with, you know, a lotof brokers throughout the state,
every brokerage house you canthink of, and we talk to them
(17:29):
fairly consistently to seewhat's going on. They have a
very good understanding, too, ofwhat our buy boxes. So a lot of
times they're reaching out tous. I talked to one earlier
today, and he just he had adistressed opportunity come up
that's a little smaller thanwhat we would probably look at.
But we just we talked about it.It's not on the market yet, but
(17:52):
it will be. And, you know, hejust wanted to know if it was
something we wanted to take anearly peek at.
Trent Werner (17:58):
I guess a question that just popped into my head is
in terms of financing right now,one thing that I've seen is
operators and people acquiringdeals are having to bring more
capital to the table. You findthat true in deals that you're
seeing and deals that you'redoing?
Sam Morris (18:12):
Yeah, again, it depends on the on the deal
itself and the type ofunderwriting. One of the things
that we did a lot of last yearwas we put deals into HFC, which
is the Housing FinanceCorporation. And so there was
affordability component that webrought to the deals. And it
significantly enabled us to getbetter leverage on the deals
(18:35):
associated with that because wewere able to reduce the tax
burden associated with thoseproperties. And it enabled us to
transact a handful of times ondeals because of that.
But in general, I would say yes.And it's really more
underwriting to either a debtyield or debt coverage ratio.
And so if you're going in andjust it's not automatic that
(18:57):
you're going to have to put down40% on a deal, It's more of a
what's the cash flow of thatdeal? How does it look like from
an NOI perspective and backinginto the numbers to be able to
get to the loan amounts thatyou're looking to get? I mean,
are pretty much all the same.
They want to know that they havecoverage to get repaid. Right?
And so the loan to values, theymay have some caps associated
(19:20):
with it or some minimumsassociated with it, but it still
comes into play of what is ityou know, how much money does
the property make that's goingto be able to repay us.
Trent Werner (19:28):
Right. Okay. That makes sense. And and for your
guys' deals, what are you Imean, you don't have to give me
specific numbers, but are youfalling in that 30% or, I guess,
70% loan to value? Are youfloating closer to the 40% or
60% loan to value?
Sam Morris (19:44):
No, I would say we're probably more like the 75%
LTVs associated with the deals.And that means that we're buying
at a purchase price that willalso cover at a, you know, call
it a one two or one two fivedebt coverage ratio for the deal
to be able to make those dealswork.
Trent Werner (20:03):
That's interesting. Because the the
people especially the neweroperators that I've talked with
recently have all said, youknow, we're looking at 60% loan
to value, sometimes 50% loan tovalue. And so I'm it's
interesting to hear how you guysare are doing deals with a 25%
or, I guess, 75% loan to value.
Sam Morris (20:24):
And like that, it's it's still gonna be deal
specific. Right? It's how youbuy the deal, what your plan is
for the deal, and then the theincome associated with it.
Because a lot of people whenyou're buying real estate, and
it really doesn't matter whattype of real estate you're
buying. Right?
You're buying either a currentand or future income stream.
Right? And that's how we'regetting our values. And as
(20:45):
operators, you come in and yougo, all here are the things I'm
going to do that are going toenhance that from a valuation
standpoint. And why investorsand or lenders should come in
and do this with me is becauseI'm going to be able to do x, y,
and z.
And so part of it is our abilityto go, hey, here are the things
that we're doing to the propertyand why it's going to make sense
for you, lender, or you,investor, to come in on this
(21:09):
property with us. And so ifyou've got to come in and go,
man, for me to be able to makethis work right off the bat, I'm
going have to come up with moremoney. But with what I'm going
to be able to do to it, it couldcreate quite a bit of value.
Well, there still could be a lotof reasons to do deals like that
that have, you know, 60 or 50%leverage because of the returns
(21:29):
that you are, you know, as anoperator planning on going and
getting.
Trent Werner (21:33):
Yeah. That's that's an interesting point too,
is it sounds like you're stilllooking at value add deals.
Right?
Sam Morris (21:39):
Sure. Absolutely. Absolutely.
Trent Werner (21:42):
Because the another thing that people have
been talking about is value addis a lot more difficult right
now. Not only are you having tobring more capital for the
actual acquisition, but then youstill have this rehab budget.
And so, you know, they're usedto raising a certain amount of
capital, but now you gotta bringmore to the table for the
financing piece, and they'reit's scaring them off of the
(22:03):
actual rehab cost and performingon that on that rehab budget
that they're setting.
Sam Morris (22:09):
Sure. And and a lot of that, again, is gonna be site
specific, right? Because ifyou're in an area where, let's
say, there's a lot of excesssupply, you going in and
spending a whole lot of dollarsto do a value add at that
property to try to get somethinghigher than where they're
currently at can be a bit of achallenge. And so trying to make
money off of that kind of a spinmay not make a lot of sense. You
(22:31):
may not be able to get thereturn that you're looking for
associated with that spin.
Whereas if you're buying in anarea that, let's just say, is
more supply constrained andthere's a lot more demand
associated with it, you may getmuch better return for the
dollars, or you may not onlyhave to spend as many dollars to
be able to get a larger returnassociated with that. And so
(22:53):
real estate is locationspecific. And that's why I say
every deal is a little bitdifferent. You have to kind of
weigh where you're at associatedwith it. And that's where the
financing is gonna come intoplay for each of those deals as
well.
Trent Werner (23:06):
Well, Sam, I do have another question on on
financing and and you may havean answer that I'm not ready
for, but what is your opinion onfloating rate versus fixed rate
debt in our current market rightnow?
Sam Morris (23:23):
I think both have both of them have merit. They
really do. And so, you know, I'mnot one of those guys who are
anti floating rate debt. Youcan't ever use it. You know, it
just it burned some people.
But I will tell you, we haveinvestors, not necessarily for
our deals, but for other dealsthat have some PTSD associated
(23:45):
with it because it impacted thevalues of their deals. But there
is absolutely a time and placefor floating rate. But it has
more to do with the businessplan associated with the
property. If you're sittingthere going in and going, hey,
we have to get floating rate tomake a deal work, And rates need
(24:07):
to be x or below. And that's theonly way we're going to make the
deal work.
That can be a challenge. Itreally can. And obviously, if
you have a fixed rate product,an agency type rate product, and
you go, all right, we're goinggo borrow money at ten or twelve
year type rates, but ourbusiness plan is to exit in
(24:27):
three years, that may not workbecause of the yield maintenance
or defeasance associated withthose deals. And so there is a
time and place for both of thosewhere they absolutely make sense
just based upon the businessplan associated with the asset
that you're buying. So I'm notanti either of them.
I absolutely think both workdepending on the business plan
(24:49):
associated with the deal.
Trent Werner (24:51):
I'm very glad that you answered it that way because
over the last twenty four monthsor so, there have been a lot of
people, you know, acquiring PTSDfrom floating rate debt
investments that maybe wentsouth for them. And I agree with
you. I think there are times andplaces for both, and it just
really depends on what youracquisition and business plan
(25:14):
looks like for these deals. Youdid mention something about, you
know, if it doesn't make senseor if if you have fixed rate
debt and you're looking to exitin three years, it might not
make sense because you might nothit the returns. Do you see
people holding acquisitions fora little bit longer than maybe
we saw five years ago, forexample, at this current time?
Sam Morris (25:34):
For sure. Because if you look at how people
underwrote deals five years agoto today, right, their business
plans are probably not asaccurate as they thought it
would be five years ago. And sothey're more likely behind on
their pro formas associated withit. And so they probably have
had to make some pivots toadjust to be able to get to
(25:56):
where they want to go from anexit standpoint. And therefore,
they may have to hold longerbecause of that.
The whole reason I said you maynot want to go like a long term
agency deal for a three yearbusiness plan is because of what
I was talking about from a debtyield or yield maintenance
perspective. I mean, you canhave a fairly significant
prepayment penalty, which iswhat those are. They can wipe
(26:19):
out a lot of growth from avaluation standpoint. Whereas if
you wouldn't have had a floatingrate deal that didn't have that
kind of prepayment penaltyassociated with it, those funds
that you earn in valuation cango to your investors.
Trent Werner (26:34):
Right. And that makes that makes perfect sense.
We've actually kicked around theidea. There was a couple deals
that we had that we were lookingat selling earlier than we
anticipated, and the yield orthe, you know, prepayment
penalties. At one point, we weresaying, you know what?
It's okay if we pay them. It'snot the end of the world. And
then you get actually down intothe details. You're like, man,
this this isn't money that Iwanna spend in fees. I'd rather
(26:56):
give it to the investors.
And and so we decided just tohold on and continue operating
these assets that we had.
Sam Morris (27:02):
And that's a reason why some people that maybe
acquired a deal five years agoare potentially still holding on
to it because they realize if Ilet this burn off in another
year or two, just the prepaymentpenalty going away could be of
significant benefit to theirinvestors.
Trent Werner (27:19):
Absolutely. So I do have an asset management
question for you because we kindof talked about it a little bit
earlier. In these last thirtysix months, we'll say, what are
some of the asset managementfocuses from Sunset Capital and
things that you guys are reallypaying attention to right now?
Sam Morris (27:38):
Yeah. A lot of it is adherence to the business plan,
meaning are the operating teamsthat are on-site adhering to the
business plan that we haveassociated with it? But also, a
lot of it's more cost controltoo, and particularly things
that are somewhat outside of ourcontrol. Down here in Houston,
we're a tier one county, whichmeans we deal with a lot of
(28:02):
insurance issues from a coststandpoint. And insurance has
gone up quite a bit, not justwith us, but all over the
country.
But in the coastal communities,it's gone up quite a bit. And
it's really hard to outrun thatwhen you have an NOI based
growth that you want to do froma valuation standpoint, and you
have large line items that aregrowing at far significant
(28:24):
double digits. And so you haveto do things and find ways to
make sure that you can staywithin those parameters so that
you can maintain and createvalue associated with it. And
that's really that's a heavilyquantitative way of of looking
at things from an assetmanagement standpoint. But then
you gotta like I said earlier,you gotta marry it with the
(28:45):
qualitative and make sure thatthe on-site teams have a great
understanding.
Hey. Here's what we're doing andwhy we're doing it, And this is
how it's going to impact you andour residents. And so it's
really trying to open up thoselines of communication a little
bit more, probably more so thanwe have in the past and getting
everybody on board with thebusiness plan. It's a little
(29:06):
unique because it's really lessof a financial answer there and
more of a collaborative answerof going, hey, you know, I'm
trying to make sure the teamsare talking well with one
another so that they can executethe business plan that we have
in place.
Trent Werner (29:20):
When I know the the solution or the resolution
to increase expenses isn't justpass that on to the tenants or
the residents there becausethat's you know, if insurance is
going up by twenty five percent,you can't just give everyone a
25% rent increase and have thatcover the bill. So what are what
are some of the the things thatyou're doing? Maybe areas that
you're cutting costs or tryingto reduce expenses to combat
(29:43):
this? Because insurance is a hottopic too right now. But Yeah.
What are some of the things thatyou guys are doing to combat
some of these significantexpense increases?
Sam Morris (29:51):
Yeah. From a strategic standpoint, a lot of
it could be know, really, it'swe're having to eat quite a bit
of it. But a lot of theresidents, I will tell you, have
a very clear understanding ofwhat's going on with insurance
as well. And in some cases, Iwish it was only 25%. Right?
And so some of it is educatingthe resident, letting them know,
hey, it is not the same for usfrom a cost perspective just to
(30:15):
run the operations of this thingthe way it was six months ago or
a year ago. And so it's reallykind of being vocal about it,
letting them know, hey, guys,there's going to be increases,
albeit on renewals and newleases. And you're going to see
some of this costs because ithas to be passed, passed down.
Right. I would say we make cutswhere we can make cuts, but we
(30:38):
won't cut to the bone.
And that's something else we'regoing to be pretty vocal about
with the residents, letting themknow, Hey, you know, we're not
going to cut the services thatwe have to you. We still want to
be able to provide you theamenities we do and the services
that we have that you've come tolove and expect and enjoy at our
facilities. Right? And all ofthese are becoming a little bit
(31:01):
more expensive everywhere yougo. And the thing is, it's being
reiterated everywhere.
It's not just us. So they'reseeing inflation on the news.
They're seeing all these otherthings associated with it.
That's actually reinforcing whatwe're telling them. And we're
now showing them what that'sgoing to look like.
And so we're having a lot ofthose communications ahead of
time. And it absolutely helpstoo, because it's not going to
(31:22):
be the shock and all when aresident sees, hey, we're going
to have to increase your rent by$50 or $75 from a renewal
perspective. There's no shockand awe associated with it
because we've been communicatingwith them, letting them know,
hey, have some costs that aregoing up and it's hitting
everybody. And everybody's gonnahave to kind of do their part to
(31:43):
live in this great, wonderfulcommunity we built.
Trent Werner (31:46):
Yeah. That's from our experience, we've kind of
seen something similar. Ourinsurance expense is not nearly
as bad as it is in other marketswhere our assets are here on the
West Coast. But just like yousaid, all the expenses overall
are hitting these tenants,whether it's their groceries or
their insurance, theirutilities. And you know, some
(32:08):
tenants are more more willing toto eat that that rent increase.
And other tenants, it's a lotmore difficult for them, they're
having to move or, you know,seek assistance. Do you guys
have any resources like thatwhere you in Texas for rental
assistance and that sort of Not
Sam Morris (32:26):
only that, I mean, we have there's there's a ton of
resources out here from aperspective of not just rental
assistance. Right? We may we mayhave other assistance programs
that we're able to at leastinform them of. We don't really
guide anybody to them, but we doinform them of, hey, if you're
struggling, you know, here aresome other programs that are out
there that, you know, couldpotentially help in these
(32:48):
particular times.
Trent Werner (32:50):
And what are your thoughts on how these expenses
are kind of running wild rightnow? How how are how is this
increase in inflation and thisexpense category going to affect
performance of assets in thefuture?
Sam Morris (33:05):
I think it'll show you who the true operators are.
I mean, just being very frank, Ithink it'll show the guys who
are ready to get in there andgrind and work with their teams
and and pinch the pennies wherethey need to be pinched and
operate out of the times we'rein. Mean, real estate is a cycle
(33:25):
like a lot of other industries.And so you'll see who can do
well through this through thiscycle.
Trent Werner (33:31):
I love that. I think that's that's some that's
some very true words that youjust spoke there because, I
mean, even already, we've seensome operators go under that
were taking advantage of a veryhot real estate market where
they can get in and out, churnand burn, and do deals and share
their successes that way. But assoon as it got time to, like you
said, dig your dig your heels inand get gritty, Unfortunately,
(33:54):
they're they're not aroundanymore. And that's been a topic
in the news. I'm sure a lot ofpeople have seen that are
listening to this.
Sam Morris (34:01):
Sure. I mean, I think it's it's important. A lot
of people I mean, they you wantto stay with somebody who's
pristine or things like that. Iwould tell you, it's Okay to
invest with somebody that's gotsome battle scars because you
want to know that they've beenthere and gone through it and
that they know how to get out onthe other side. And so part of
(34:22):
that is, you you gotta have afew gray hairs and been through
some cycles to be able torecognize what you're going
through and then recognize whatyou need to do to get through it
all.
Trent Werner (34:33):
Absolutely. Well, Sam, speaking of good operators,
where can people hear more fromyou, connect with you and maybe
learn more about Sunset Capital?
Sam Morris (34:40):
Yeah, easiest way is to go to our website,
sunsetcapital.com. And we lovemeeting new people. We love
entertaining new investors. And,you know, come learn more about
us.
Trent Werner (34:54):
And I think when you guys visit their website,
you will definitely see Sam andhis entire team success, their
awesome portfolio that theyhave, and definitely connect
with Sam and the rest of histeam when you can.
Sam Morris (35:06):
Trent, really appreciate it, bud. Thanks so
much.
Trent Werner (35:08):
Thanks, Sam.
Intro speaker (35:09):
Thank you for listening to this episode of the
Real Estate ProfessionalsInvesting Podcast on WIN, your
community of investing knowledgefor growth. We hope that this
episode has increased yourknowledge and added value to
your path to freedom. If youwould, please take a second to
rate us so that we can get moregreat investors to interview. If
you or someone that you knowwants to be on, please visit
(35:29):
westsideinvestors.com and fillout our form to be on the show.
Thank you again, and enjoy yourday.
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