Transcript

Aaron Y. Strauss: You are listening to the Dealmakers’ Edge with A.Y. Strauss, diving deep into stories behind commercial real estate leaders. The Dealmakers’ Edge highlights the stories, successes, and struggles behind major commercial real estate investors. You’ll get a behind-the-scenes look at commercial real estate leaders and their unique edge. We hope you’ll follow along for regular episodes highlighting exceptional voices of the commercial real estate, industry and beyond.

Today’s guest, Adir Levitas, founded Faropoint in 2012. Since then, the company has acquired over a billion dollars of commercial real estate. He has been mostly engaged in strategy, combining tech into commercial real estate fundraising for equity, and formation of credit facilities. He has also developed in-depth knowledge of industrial logistics, fundamentals, and trends.

Aaron: Adir, welcome to the podcast. We’re really excited to have you on today. Your story is fantastic, and we intend to get it out of you today for our listeners. Let’s start off with your personal background. If you wouldn’t mind sharing a couple minutes of an overview of where you grew up, where you went to school, and how you got started in commercial real estate.

Adir Levitas: I’m so excited to be here. Thank you for inviting me. I would love to share my story and the Faropoint story. I grew up in the southern part of Israel, in Omer. It’s a town near Be’er Sheva.  I served in the Israeli Air Force for about six years.  After my army service, I was on the Patriot system and I went to the IDC, what they call today the Reichman University. During the second year of university, I just got really bored after commanding 120 soldiers in the Army.  I felt that in my early 20s I had already done so much. Then you just finish the Army and you’re like, so what do I do now? I mean, I was so used to taking care of others, and I felt selfish just thinking about my degree and what I was going to learn, and my education, so I had to do so much more.

Meanwhile, one of the things I was doing was buying residential real estate out of foreclosed auctions in Memphis, Tennessee and Atlanta, Georgia. That’s how I got into real estate. In 2012, I opened Faropoint as a company to do that more easily and we had friends and family from the Army that joined us to purchase some of those foreclosed assets. After a year or so, we thought, “So this is nice, but how do we actually start to build a company? How do we get this to where we can actually manage properties, receive management fees, be better at what we do, think about the market?”

And so, our entrance to commercial real estate to your question, Aaron, was in June 2013. At that point, we decided enough of residential real estate! We want to build something bigger! We started with a deal in northern Mississippi, with an auto body shop and nine years on the lease. That was our first deal of 1.4 million dollars.

Aaron: Great deal – so you got started in that way – tell us about the earlier years of Faropoint. The earlier years of your career versus where you are today are much different. So, it would be great to hear about Faropoint’s evolution.

Adir: Yes, I think it was many, many things and changing all the time. There’s a lot of struggles to understand. How can you actually be a business? What do you do? What is your edge? How do you create corporate culture in the early days? And how do you actually reach investors and be true to your investment thesis when you have no track record. Building a track record without any track record, especially coming from Israel and talking to local banks, for example, in Memphis — that was a real challenge. How do you get a bank to invest with you? You know, young Israeli guys are coming to visit the States and trying to take out a loan from our community bank in Memphis to do a commercial deal with investors from the other side of the world. The bank would say. “Hey Adir, if I need to get my loan back, how do I do that?”

I think every time we had a challenge, it gave us a lot of strength to think, “How do we cope with that? Who/what do we need to know better?” It’s like a pain where you feel that pain, and you really want to go beyond that. You want to make sure that you understand what you’ve done wrong. And so, for us, it was, how do we get credit investors to ease our fundraising? How do we start vehicles to fund and have discretionary funds, so we don’t need to raise money every time? How do we get deal flow? How do you create this network of brokers – specifically in Memphis and Atlanta, that would be reliable, even though we’re out-of-state buyers? And so, all those questions came up – and if I had to choose one thing that really helped us get through it all, it was staying true to your word when you talk to people and doing what you said you were going to do. When people see that time after time, they take that in.

I remember the first time we met with a great bank, Capstar, out of Nashville, Tennessee and a great guy there in the commercial real estate department, Lee Hunter.  We met Lee in 2016 and he said, “You know, I thought you guys were going to make it challenging, but it was so weird – you guys just did what you said you were going to do.” It wasn’t obvious that we were going to do that. And again, that’s another great relationship that came out of that.

Aaron: Well said, well spoken. Speaking of sticking to your principles, being honorable, being honest in business. That’s a great reputation management tool. Fast forward to today, you have major institutional partners, you have major infrastructure, you’re on a buying tear, and it seems like those growth years between sixteen and today, really positioned you, and you kept pushing through those struggles. Tell us, as long as we’re on the topic of struggles – I know people who are building their own empires, always want to hear a little bit more, any specific adversity, other than what we’ve talked about, specifically how you overcame it. That would be really good to have. How you made the transition to smaller investors, to more credited, to now institutional. I know a lot of our clients tend to make that graduated approach.

Adir: We thought about evolving over the years and we are always evolving. I think it’s very much about being open minded. I think many people are closed minded, they seem open-minded, but they don’t allow themselves to really be challenged with their views. And all along, I think we were open to understanding – there’s much more we don’t know than we know and when technology came in – Israel is full of technology stories. I don’t live now in Israel, I’m in New Jersey, but it’s just you’re thinking this is going to hit real estate as it hit the finance world, as it hit insurance and it’s coming to you. I think being open-minded about how to structure things differently in terms of vehicles, fund vehicles, how others think about your business was very, very crucial.  One thing was being open-minded. And the other thing that I think helped us understand better how to build what we wanted to, was putting ourselves in the shoes of the investors or in the shoes of whoever we were buying a property from.  And really thinking about how it was going to play out. And when we started raising institutional money, you need to understand it’s a whole different animal. If you’re coming in with the concepts of high net worth individuals, or family offices – those same concepts don’t always apply to institutional investors. So, you’ve got to play that game. The amount of time I spent playing, you know the game with somebody else playing the investor and we’re thinking between ourselves all the time for hours and hours. What could happen? What happens if somebody says the investment thesis is not good and this, do we have proof to show that weight? If we don’t have proof, maybe we need to double check ourselves and be very open-minded while you’re thinking about your investment thesis. Think, how could you be really challenged? And what would be your answers and be very calm about knowing your subject, talking very fluently and with acuity about what you’re actually saying, but being able to listen and to think what is really important for the other side.

We made many, many mistakes. You asked about some struggles – the first institutional investor that we had – I remember, there was a nice email, and a phone call came after that. The email asked if we could sit down so they could let us know what happened. I was like, yeah, I’ll sit down and then an email came through saying well you guys got a 45 million dollar investment and I was so happy to see that email that we actually got our first 45 million dollar investment and during the due diligence process, like, two days before the investment committee, that would really sign off, it fell through.  It fell through because our due diligence materials were not good enough because we couldn’t provide good enough answers to what was needed. We learned so much out of that, but I was devastated, and you know, going back into the office, looking at the faces of all of the employees thinking, well, this didn’t go through what’s next …and just getting up and doing it again.

Aaron: Speaking of which, you’ve really done a great job of predicting what’s next. You hit on tech, and I think a lot of what it comes down to, is of all the investors I have interacted with, you really, really seem to be thinking about tech in a tremendously creative way, not as an add-on to the business, but almost sort of, as the business itself. Equally as much as the bricks themselves. I really am impressed by that. Maybe you can share your overarching view of tech; how you implement tech. How do you think that gives you an edge over other investors? That’s really where I think you stand out in today’s market.

Adir: That’s something that is super exciting. And I never thought I would deal with that. I think the story has unfolded slowly for us as we started to understand that really commercial real estate in its essence is one of the last sectors that is still not disrupted. You can see what Limited has done to the insurance market. And you can see Pagaya, which is a fin tech company going into a SPAC two weeks ago with an eight-and-a-half billion valuation as a fin tech company that has a marketplace with real assets. And so, you see this revolution in disrupting the traditional sectors, and real estate somehow is staying pretty untouched. And I think that as we understood that this was coming, we thought, how can we take advantage of the fact that we’re thinking of ourselves as open minded and that we have this ability to engage with tech people and understand better how they can help our business? How do we take that into our edge and create this long-term edge in our business? And so, we do industrial real estate. So, we’re thinking about everything in the scope of industrial real estate. And when you think about some of the basic things, not just as real estate, but take for example, comps. When people are using comps to understand the value of an asset – so you would call somebody in Dallas or somebody that works for you in Dallas and you say, “Hey, listen, I want to buy this building. What do you think it’s worth?” So, he’s going to bring you comps, right? That’s one of the things he is going to do. How can you actually expect for a person in 2021 to be able to understand all of the data that is changing and affecting Dallas every day and actually asking him to say what would be comparable. How could he compute in his head those things that he gives you and the effect of, for example, Amazon opening new delivery stations next to that, and how that affects pricing, the infrastructure that is being invested nearby, population change, growth, migration, people and income and those that care more or less about income. So many has things that have to do with the potential of whether that comp is good or not. The comp system is outdated, and there is so much data going through our lives that affect real estate that use comps.

And another short example is rent growth. How could someone without computing all the data say something smart about rent growth in three years? Technologies like AI, these technologies should be used to better understand how to underwrite the property. When you don’t, it is a mistake and I think not many real estate players are saying that out there. If someone thinks about getting into real estate and actually buying assets and using technology tools to do that better — I think that’s the greatest opportunity today in real estate as a whole. So, what we’ve been doing to capitalize on that opportunity at Faropoint, we’ve built an in-house team of R&D with, you know, A.I. people and software engineers and stuff like that. And what we’ve done is, we’ve taken a lot of data, we cleaned it up in some of the markets we were working on. And we’re looking, we’re running A.I. algorithms to understand how we can predict rent growth. How can we predict better pricing? How can we say something smart about what’s going to happen tomorrow, based on the past and based on trends and regressions? And so, we take that into our normal underwriting. Basically, it helps us to expedite our acquisitions. Just for example, last year – we did 200 million a year. This year we’re doing 600 and that’s five million dollars per property. So, we’re looking at 150 properties to purchase a year. It’s like three properties a week and next, we will look into doing 1.2 billion. You cannot buy 1.2 billion a year, which is, you know, so many properties, like 240 properties, without having to streamline your data to better decision-making while maintaining the quality.

Aaron: Well said, I know we’ve worked on some stuff, and I know you’re also very active in acquiring companies that help you in your core business as well. And you’re taking a holistic view as to how you can actually add value to the tenants by applying some of the important data that you have in your hand. So, it’s really wonderful to watch. What about just getting deals done today? Obviously, you have the tech infrastructure; you have a tremendous team; you have the backbone, and you have the capital, but even with all the technology, there is the reality that the market of industrial real estate has been white hot. Now, for a tremendous, long period of time in today’s market, how are you getting it done?

Adir: You know, we are always contrarians and when we started doing some more industrial real estate in 2015, our type of industrial real estate, which is assets below 200,000 square feet, we were contrarians. Nobody understood why we were buying small assets in 2015 and that’s how we liked it. If the fundamentals are there, the market cap is there, we prefer to be contrarians and, you know, do our thing. But somehow, we came into the spotlight. That’s why industrial real estate is interesting. You must be very sophisticated today to go into the market and to actually get good returns. I think that the reason we can hit our investment target is a) because we have local offices in the markets, we work in. And so, we’re very well connected to the broker community and to local owners. Being able to have that local network is very important. And what we’ve created is basically a single buyer marketplace. 90% of the partners who work with brokers, and such are integrated into our platform. And when they want to send us a deal, they send it through the platform. By sending it through the platform, within six hours we can let them know if it’s a good deal or a bad deal, if we can buy it or not. When they upload it in a certain format, it allows us to underwrite things almost automatically. So, I think that the reason we’re able to do that is because our partners know we can buy fast, and we can underwrite almost immediately. We’re, as you said, backed by the capital through our discretionary funds and credit facilities. And so, we created a system that only knows how to buy a certain kind of asset. If you bring the system a 400,000 square foot asset, it doesn’t know how to “eat” it; it’s going to take more time. If you’re trying to run across all types of assets or across everything in industrial, you’re going to have a hard time.  You’ve got to be focused. So, I think focusing on what we do gives us the edge because of what I said and also because it’s less of an institutional product by itself. You won’t see the Blackstones of the world backing a four million dollar product or looking at things less than 20 or 30 million. So, while we have the ability to purchase those smaller stuff with less, you know, heat being wasted, then we can actually aggregate those assets into a portfolio and enjoy a portfolio premium as the aggregators.

Aaron: Terrific answer. Thank you for that. And I think that’s absolutely right. It’s sort of a niche within a niche – will always beat it with its results and we’re talking about the edge in the market and the technology, everything else. But in fact, you also have to deal with a massive team. You’re overseeing a very large operation. How do you deal with the mental edge? How do you manage your stress? What do you do to relieve stress? You obviously have a big picture you’re executing on, but you are a fiduciary for a lot of capital and a lot of people are looking to you for leadership. So how do you get your mental edge day-to-day and month-to-month and year-to-year? And what do you think about that aspect of your career?

Adir: So, that is probably the most complicated question. It’s one of those questions that it’s hard to say. I wish I had a winning formula. That is the truth. I think I’m still working on that winning formula. I think that meditating once a day, ten minutes before I go to sleep really allows me to think about things; go to sleep, with much more ease. I try not to take my phone with me when I actually go to the bedroom. I moved to the States, so I won’t have to work until 1 A.M. every day, just because of the time differences. I think it’s also important to spend more time with the family being disconnected as much as you can when you actually do that. I think to really have good mental health, it’s a combination of what you are doing with yourself in your spare time to make sure you’re not running too much too fast, where you’re going to get exhausted. And the other thing is making sure you have a talented team. I think a talented team is the number one ingredient in having your own mental health. If you have to run things for others, you have got to replace them. If you have others that are smart and talented, there’s so much there. If there’s a problem that comes out, there’s going to be three people before you that can give smart answers and replies and things that are only very, very important would come to you. And it’s also important as an organization, you know, to have that flow and allow people to take that responsibility. It’s also important for your mental health to be off your phone for some time.

Aaron: Really well said Adir, I couldn’t agree with you more on that. I also put my phone downstairs, for the record, before I go to bed. We’re going to wrap but is there anything else you think we have not covered that you would love to address. I’m sure everyone listening to this is going to be learning a lot. Any other notes you want to throw in as far as any broader life lessons or commercial real estate advice?

Adir: I think that we’re entering a really interesting area in thinking about the combination of technology and real estate. Not just in industrial – in many other sectors. And I think that the real estate community, you know, should make more and more of those changes. Some of them would be, I think, more complicated to embrace and some less, like changing systems of comps and how we think about research and how we implement A.I. I think it’s an opportunity for everyone in the field and outside the field to really join this solution. So that’s everything.

Aaron: Adir, thank you so much for joining us today on the Dealmaker’s Edge.