Bonus Episode – Investment Strategies, Market Trends, and More

Our Director of Investor Relations, Rosch Wadera, sat down with Casoro Group’s Connor Lee-Wen to discuss real estate investment strategies, market trends to stay ahead of and more.

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[00:00] Rosch: Hello everyone and welcome to Upside Insights. I’m Rosch, Director of Investor Relations at Upside Avenue which is a public, non traded multifamily REIT, and in this episode we get to speak with Connor Lee-Wen on real estate investment strategies, market trends to stay ahead of and a lot of other fun stuff. Connor works on acquisitions for the Casoro Group, which is a Texas based multifamily owner operator with decades of experience. So sit back, relax and listen in on some fun stuff.

[00:45] Rosch: Alright. Hey Connor, how you doing?

Connor: Good, how are you?

Rosch: Awesome. Very excited to speak with you today, kind of learn more about Upside Avenue, discuss what’s going on and hopefully some information on educational stuff for the folks that are listening in with us.

[01:04] Connor: Absolutely, happy to be here.

[01:09] Rosch: Yep. Yep, so of course I have to start first with the disclaimer. As always, we are not offering investment advice, nor are we providing any accounting, legal tax services or selling any securities of any sort, it’s purely just an informational discussion as I mentioned, and I hope folks enjoy learning about what the Upside Avenue portfolio consists of and maybe learn a thing or two from from our chat with Connor about kind of how these folks are going about investing in apartment complexes.

[01:43] Rosch: So Connor, I have a question for you that we can start off with, which is basically just what is Upside Avenue?

[01:52] Connor: Yeah, Upside Avenue is a public non traded real estate investment trust, or REIT. What that basically means is it allows individuals to invest in big real estate, commercial real estate like multifamily apartments, which is what we focus on, for smaller amounts. So usually, you know, if you wanted to invest in an apartment deal, you might have to pay $50,000,  $100,000, maybe even more, maybe a minimum of $1,000,000 to get into these deals, but Upside Avenue gives everyday investors access to these deals with smaller contributions. So that’s the goal of Upside Avenue is to open up that world of possibilities, those returns, to the everyday person.

[02:48] Rosch: Okay, so I like the idea as far as, you know, me as an individual, I may not have enough money to buy an apartment complex, which I know can be a very lucrative investment, but I do have a few thousand that I can spare and that I would like to invest. So previously I think a lot of folks are limited to, with just a couple thousand, I think it’s mostly just kind of stocks that you can get into, not much else available outside of that. But in this case, because of vehicles like Upside Avenue, you’re saying that basically pooling all those small dollars to invest in those higher performing assets that you wouldn’t be able to if you’re just an individual solo investor doing it on your own who, because of the capital requirements, and still getting, you know, those same level of returns I assume, is that right?

[03:39] Connor: Absolutely, so at Upside Avenue the individual investments of every shareholder get pooled together and invested into these larger multifamily deals and that allows Upside Avenue and its investors to benefit from the same returns that other high net worth companies or individuals might have and that might not be usually accessible to them.

[04:07] Rosch: Okay, and for those folks that are listening in through YouTube, just FYI, I’ve got some some slides on in the background. So for those that are more visual take a look. But in any case, Connor and I will kind of explain through this presentation and that kind of brings — before I get to my next question rather, Connor, actually there was one thing that you had mentioned I was hoping you can clarify on is: you said it’s a public non traded REIT. I think everyone understands what a REIT is, it’s just a corporation that’s not taxed so long as it meets certain requirements, but what do you mean by non traded?

[04:47] Connor: Yeah, that’s a great question. So, real estate isn’t something that you know you can get into and out of in a single day. You know, you’d be able to go and invest in another company on the S&P 500 or any one of these stocks and enter and exit those shares on a daily basis whenever you want. But nontraded means is basically there are restrictions on how long your investment is going to be held, and that’s mostly because the benefit of real estate comes over, you know, three to five years at minimum, and we want to make sure that whoever invests in Upside Avenue is going to be able to receive those level of returns. So nontraded just means if you invest in Upside Avenue, you’re able to get locked in with these deals and participate in these returns over however long you plan on it. I believe our minimum investment period is a year.

{05:49] Rosch: Okay, okay, so basically anyone that’s interested in investing but getting their money back in a year or even almost you know up to two or three years if someone is investing on that short of a of the time frame, would it be fair to say that this may not be the best investment vehicle for he or she?

[06:14] Connor: Exactly, you know, we picture Upside Avenue as being something that helps people over the longer term because that’s when real estate really begins to shine, is as those assets grow and appreciate in cash flow. And so these investments aren’t something that you should only plan on for a year, but for longer than that. Now if you want to withdraw your funds after a year, you’re more than welcome to. However, you know, nontraded basically means that you can’t, you know, enter and exit an investment, you know, at will basically. There is a little bit more dedication and commitment that’s required.

[07:00] Rosch: Gotcha, yeah, and I think also investing in a time frame less than three years, I like the analogy it’s kind of like leaving the party before the music starts, right? Because isn’t there usually a ramp up period, at least a couple years, where the money is being deployed, it’s acquiring assets, those assets may be being fixed up, and so because of that they’re not necessarily generating revenue but their potential to generate more revenue and cash flow in the future is being increased. So for someone to leave before that potential has been realized and become actual cash flow, I think is setting oneself  up to kind of miss out on when the music starts and join the dance, but I do want to move on. I’m sure you and I can go on forever about the importance of being a long term investor and how that time horizon has a huge effect on the the rate of return, like I said, let’s move on here. Next question is what are the assets that Upside Avenue owns? So, you know, we have a listing over here and I’m seeing Houston, San Antonio, Irving, San Antonio again, so looks like a heavy concentration in Texas. So if you can kind of just share with us your thoughts. Why the focus in Texas and then also what type of assets are we owning? I understand it’s multifamily, but in some cases I see here equity versus preferred equity. Just go ahead and elaborate on all that stuff for us.

[08:42] Connor: Yeah, that’s a great question. So the properties that we own are primarily multifamily properties, which means that these are apartment communities, these are sizable apartment communities, are the total assets of Upside Avenue is about $6,500,000. So these properties located in Central TX are giving investors returns from their income and also their appreciation. Now Upside Avenue might participate in equity or preferred equity, and the difference between equity and preferred equity is fairly simple. Preferred equity just means that when you get paid out that you get paid out first before everybody else. And what that does is that guarantees to an extent that you’re, or maybe not guaranteed, but it lowers your risk when you’re doing the investment because you’re first in line to get fed. Now, a common equity might get paid after everybody else, but preferred equity will get paid first. That’s the big distinction. As for the locations, we’ve found that Texas, Central Texas, and the rest of the sunbelt really has been historically very strong for finding value in deals rent. Growth in Texas has been higher than in other areas in the country, but at cheaper prices and with less restrictions than a market like Southern California, for example. So all in all, you really get a much better bang for buck in Texas,  which is why we see so many investors flocking to the state specifically for real estate deals.

[10:37] Rosch: Right, yeah, and I do want to add, you know, at Upside Avenue, we did look into, of course, a lot of the macroeconomic factors behind the assets and the positions were in and the overwhelming majority of the locations that our assets reside there is positive population growth, positive wage growth, and, you know, overall appreciation and increases in employment. So is it fair to say that, not that we would ever just sit back and do nothing, but technically speaking, if I’m a little bit more colloquial I suppose, is even if you did nothing but you owned a plot of land in the right location where people keep flocking to, chances are the land value, at a minimum,  it’s just going to kind of keep going up.

[11:29] Connor: Absolutely, and that’s, you know, the appreciation aspect of these deals that we really get to enjoy in Texas, not just from the value that we bring to a deal, whether it’s through renovations, adding amenities, fixing up parts of the property that are damaged or mismanaged, not the just the appreciation from that, but also the appreciation just from the market as a whole. We really get to benefit from that here in Central TX.

[12:02] Rosch: Gotcha, so there’s the macroeconomic trends behind us, those tailwinds that that we ride, but in addition to that, there’s also what the manager does, and for Upside, the manager is the Casoro group, of which you work for and kind of leads into my next question is, you know, who is the Casoro Group? How do they generate wealth? How do these assets, you know, kind of walk us through in layman’s terms, how they make money for their shareholders?

[12:37] Connor: Yeah, of course. So Casoro Group is a vertically integrated multi family investment company which is a fancy way to say that we’re involved in all parts of the commercial real estate business. We have a property management company under our umbrella, Clear Property Management, which is fantastic. We offer asset management, utility billing, some construction management, etc, and we focus on apartments. So we’ve been around for, you know, about 20 years now specializing in apartments, specifically in Central Texas, so we’re experts in not only our field, but also we have very strong connections here in Texas and the greater Sunbelt region, and we’re able to really get detailed with how we run the property and pricing, just because we touch on all those parts of the business. Now, relating to how these assets generate wealth, then we touched on it a little bit before. There’s two parts, right? There’s income which you can see as the rents that tenants pay, which if Upside Avenue investors get dividends from those rents, they can reinvest those into more stock in Upside Avenue. And then there’s also the appreciation side, so there’s forced appreciation, which is the value of the property being enhanced from programs like renovations, adding amenities like dog parks, fixing any mismanagement and then there’s also a natural appreciation which comes from the market forces that we talked about earlier.

[14:23] Rosch: Awesome, awesome, and so that actually sets us up well for kind of this next slide, which is an actual transaction that had occurred. So these are not projections, but Connor, these numbers  look amazing to me. Naturally, I’m a little bit biased towards Upside, but these numbers are as real as it gets. $600,000 is the purchase price that Upside paid to buy an interest in this Cronos portfolio, is that correct?

[14:51] Connor: Yes.

Rosch: And that was back in February of 2020. Upside exited that position in November of 2021, so the timing I feel is very important to emphasize that this was done, the enter and exit of the investment was done in less than two years, and exited for $936,000 so that comes out, you know, to a 1.7 exit multiple. Now, I don’t think every deal is this good, is that right, Connor? Let’s be fair.

[15:28] Connor: Well, actually, Casoro Group has historically had an average multiple of even higher at 2.34 times, but that’s over longer hold periods, so this Chronos deal was amazing simply because of the short time period. I mean, for every $100 you invest, you get $170 back. That’s amazing, you know, that 36.11% IRR is fantastic. But Casoro Group as a whole, the company that’s going to be driving Upside’s investments, you know, we’ve had an average of a 2.34 multiple over a longer term. So meaning if you invested $100, you’d have $234.00 at the end so that project was amazing ’cause of the short timeline and the high returns for that short timeline and we expect to continue to be able to offer high level returns like this to investors on into perpetuity, on forever. This is what we’re good at. This is what we love to do.

[16:37] Rosch: Right, right, and the best part of all of it is normally after someone tells you something like that, they say, “but you have to be an accredited investor and the minimum buy in is $50,000”, neither of which is the case with Upside Avenue. Just $2000 is the minimum to buy in. No shares are currently being sold, but when they are and when they were previously, only $2000 to buy in, so it’s a very special way to help, you know, equalize the access to these high returning investment vehicles. But since we just discussed, you know, one of those latest transactions. So those buying and selling of multifamily assets over different hold periods using different strategies, whether it’s value add or core plus, that all produces returns to investors, you said, in two forms. One is the appreciation, which translate to the change in our stock price and the other is the income from those properties which then trickles down to form the dividends for our stockholders. So, what is that LTM dividend yield, and LTM I should specify for listeners is the last 12 months. So in the last 12 months, on a percentage basis can you tell us, kind of, how much the dividends yield?

[18:01] Connor: Yeah, our trailing 12 month dividend yield for Upside Avenue has been about 7.5% annualized. So, what that means is that the dividends coming out, the money that’s getting returned, is a 7.5% return on investment for those quarterly dividends.

[18:25] Rosch: Before the share price appreciation right? So we have-

[18:27] Connor: Yeah, that’s just without appreciation.

[18:28] Rosch: So that means that if I had a dollar invested in Upside over the last 12 months, it would have produced for me and sent to me, unless I was on the dividend reinvestment plan, but it would have sent to me $7 or $7.5, right?

[18:48] Connor: Yes, exactly.

[18:49] Rosch: I’ll tell you something, Connor. There’s nothing I love more than a dividend. It’s just the coolest thing in the world and I think once anyone starts receiving dividends, it’s a very addictive thing.  You can’t help but get happy every time you receive a little check in the mail and see that your money is working for you. But that’s only half of it. The other half is the share price, so, how has that share price changed overtime?

[19:20] Connor: Yeah, so our last update to the net asset value of the share prices was about a 15% increase, so went from about $10 a share to $11.14 or $11.15 a share, I believe. And so combining the dividends with the appreciation really creates a fantastic opportunity for the everyday investor. Now I will say, you know, some people might say, “Oh well, you know, Connor or Rosch, hey, I can go in the stock market and I saw my friend he got, you know, a 10X return in a week. You know, why don’t I just go do that?” And my answer to that is always, you know, you’re more than welcome to. Upside Avenue is meant to be a part of a portfolio and the best part of Upside Avenue is the risk adjustment that you get from these returns. You’re still getting high returns, but at a much lower risk than somewhere like the stock market or crypto currencies. You get it. There’s a solid asset with tenants, so you’re talking hundreds of leases that are diversified across this portfolio. So it’s really just a fantastic risk adjusted opportunity on both the income and appreciation.

[20:51] Rosch: Right, right and I also had to kind, of your story with the guy or girl that just made 10X return. And you know, three months with crypto or stocks. Again, not a knock on the stock market or the lot of money that has been made in crypto, but I guess, you know, from my perspective, ’cause I’m a fundamental kind of person, is the stock price that you had just mentioned that went up 15%, I think that was over a three year period, but the increase in the stock price is backed on and based on the capitalization rates, correct? Like, the income from the properties is ultimately that, in addition to the appreciation potential, is what determines the stock price. And that kind of just helps me sleep easy at night, knowing that, you know, what is backing the increase in the price as opposed to some of these other asset classes, you know, to go up and to be so volatile and change so dramatically. But fundamentally what created that change and not knowing what created that change or what’s backing it, kind of, I think, is another way of just explaining what is meant by that risk associated with those other asset classes and the reduced risk with real estate and Upside, particularly.

[22:14] Connor: Exactly, exactly, you know, the risk adjusted returns are wonderful in real estate. You can go and you can visit these assets, you can see how they’re run and the value of these assets is a little bit different from what you might think of when you think real estate. You know when you think real estate, you might think of typically your single family home, right? Or a duplex. The thing is, those properties are priced based on, you know, how many bedrooms you have or, you know, what other comps are selling for in the market. It’s a very intangible way of valuing the property, but for investment properties like the ones that you’ll be able to invest in with Upside Avenue, these properties are priced based on their income. So how much revenue these properties generate combined with how much demand there is for these types of properties in the market leads to these prices. And so when we go in, and when we increase the revenue of these properties and also manage them well and hold them for a little bit of time to take advantage of those market forces, you have a tangible backing to the valuation and you can be a lot more assured as to the fact that your value of the property has gone up so.

[23:46] Rosch: Yeah, so, you know, we talked about that dividend yield, 7.5% in the last 12 months. We talked about the share price growth, 15% gain over the last three years. And, you know, we understand now, kind of the location focus, the capabilities of our manager, having that in-house construction, in house property management, very little to outsource so that things can be done, you know, with a certain level of detail and attention that they should be when we’re handling investor’s money out of respect for our shareholders. And I love the the valuation approach that you and the guys and ladies at Casoro take to ensure, give shareholders the confidence that is not a manager that overspends. This is a manager that ties its spending and investing down to a formula, to a methodology, that’s also backed by that kind of qualitative and intrinsic knowledge of the market that they have coming from those multiple decades of experience. But, now let’s talk about, Connor, what’s going on in the future? So I’m just curious, you know, where do you see multifamily in general? What state of the market are we in? How do you position Upside to take advantage of where you guys think the market may be going?

[25:12] Connor: It’s a great question and you know, I wish my answer would be true, but I can’t guarantee that because I don’t have a crystal ball and I can’t see the future. But this is what I expect to see over the next 10 years. When I think about it, I really think about the tenant. I think about the person who’s living in the property, our motto at Casoro Group is better homes for better lives and so I have to think about who’s going to be staying in our properties. When I think about that I think about a few things. First thing I think about is this movement to apartment living because housing affordability has become such a big issue, not just single family home prices, but rents. Rents are going up and it’s because, in part, you know, we’re not only we’re not building enough affordable housing, but, we also need to start thinking about the quality of the housing as well. I think if, you know, your price of your housing went up but you were also getting value in that price increase, it would be a lot more acceptable than the same apartment that you thought was barely worth it not being worth it anymore because you’re getting priced out. So that’s the first thing we that we need to think about. Rents are growing. There’s a housing affordability crisis. The second part of that is really this revolution that’s come from the beginning of covid back in 2020, which is this movement to work from home and the technology that’s associated with that. People are caring less about the pool, not that they don’t care about it, but they’re caring less about the pool and they’re caring more about whether or not the apartment community has access to Gigabit internet. You know, they might not care as much about how fancy the fitness center is, but they do care that they have a dog park to take their dogs out. Now we do care about the fitness center because a lot of people do end up working from home and then going exercising right at home. But there’s a shift in what people are looking for to their apartments. Carports, attached garages, really making your apartment and your community a place that you want to be in all the time because you’re going to be in it all the time. And so our focus moving forward with that is really to focus on assets that have a population and demographic that are already working from home or working in a tech job, working in the management, the arts, we call these people the knowledge worker. So finding this knowledge worker and then providing them with the amenities, with the technology that they want, in order to make their lifestyle better, and along with that, we’ll be able to increase our returns and income. So installing tech packages, USB outlets in the kitchen, making sure high speed Internet is available, you know, cable packages if that’s what they’re asking for, package lockers, things like that.

[28:41] Rosch: Yeah, I really appreciate Casoro’s almost obsessive focus on the tenant. Naturally, there is a high degree of attention paid towards the investors, the employees, but this obsessive focus on the tenant, I think is kind of what separates a real estate investor from a real estate operator. Folks that are on the ground interacting with the tenants because ultimately they’re our customers. It is from them who our revenue is derived so that attention on them and how they can be better serviced, how these assets can provide more value to them, which then in turn increases the investment value of those assets. But going back to the market and multifamily in general, you know, I’m looking at Upside’s investment strategy over here and we kind of cut slices of the pie, about 33%, we say, is a fixed income. What we refer to as that preferred equity note, so it pays a more stable dividend than the other investments. Just because it’s a preferred equity rather than just a regular common equity and the rest of the portfolio, we classify as income and growth, 57%, but that leaves 10% of the portfolio where, you know, we identify as our growth strategy and that’s the only part of the portfolio which is not an income producing asset. It’s an asset, but it’s just land, and it seems that there’s an intention to develop, so I’m wondering if you can share with our listeners just, kind of, why are shareholders capital being deployed towards development? Is that an indication from where we are in the market and is that where you see a driver of returns going forward?

[30:49] Connor: Yeah, that’s a great question, so you know, I don’t think that it’s a secret to anyone who’s been following real estate at all that the real estate market right now is very, very hot. Prices are extremely high, and that’s not just for your single family homes. That’s also for your commercial real estate, your multifamily properties as well. And so what that’s meant is that we’re getting close or even above replacement costs for a lot of these deals. What that means is the price per unit of these 90s, early 2000s, vintage properties is higher or the same as it would be to build a brand new property from scratch. So in the history of Casoro Group and Upside Avenue, you know we’ve built a few properties from the ground up. And so what we’re doing right now is because the situation is right in the market, we’re going in and we’re developing once again. So one of these deals is in North San Antonio. We’re looking at building a Class A luxury product, apartment community there. And Upside Avenue has a share of that. There are partners in that deal.

[32:20] Rosch: Okay, okay, wonderful. So now basically this means that the multi housing income reit, which is more commonly known as Upside Avenue, has these income producing assets with very favorable locations, but now it also includes this land. So basically, investors in Upside get not just the acquisition of income producing assets, but also the development of what clearly seems to be, you know, adding to the stock of housing supply in areas where it’s really needed. So you know wonderful stuff to hear and I have so many more questions for you Connor, just about Upside Avenue, you know, its assets and how it drives shareholder performance, and just about real estate in general, investing, things that we could talk about all day. But let’s save it for next time. And I do want to end with just one more thing is who are you, you know, can you tell us a little bit about your background and, you know, your experience in real estate?

[33:29] Connor: Yeah, no, for sure. So I’m currently the acquisitions associate at Casoro Group. I lead the new investments and developments that Casoro Group and subsequently Upside Avenue get involved in. So I run everything from deal sourcing, communication, due diligence, communication with lenders, and I even assist the CIO and the CEO with their equity, with the equity side raising any additional money that we might need. And my background is in commercial real estate in multifamily. I, as a teenager, my father would send me down to the family business which was a multifamily business here in Texas to go and intern and I got to participate in property management, painting apartments, underwriting deals, helping out with some accounting work. So I really got a good understanding of what the business looks like from a high level. I went to Brigham Young University in Utah and studied Economics and Business. I was the President of commercial real estate club there that I started because I wanted to find other people who love this stuff and honestly I just, I love commercial real estate. I think it’s not only incredibly fun, but a great tool for everyone to build a wealth. As for my professional experience, again in the same industry. I did a lot of work in the public sector actually, so I worked for Salt Lake City’s redevelopment agency, helping with redeveloping blighted areas of land and determining the city strategy for that. And then also, I worked for Utah Retirement Systems, which is the public pension fund in Utah State. And we had about a $3 billion allocation to real estate at that fund. And so I worked on that team on the multifamily, retail, industrial, and specialty property types. And then I came here, Casoro Group, and I love it.

[35:54] Rosch: Yeah. You know, I think what what really stands out is that you’ve had a lot of different vantage points, a lot of different viewpoints within the same industry, but so many different ways of looking at the industry from the public side, the private side, multifamily, and other asset classes so it really helps having all those different viewpoints and those varied experiences kind of make a more formed opinion and understanding of not just you know what’s going on in the Excel model, but also how that really affects down at the on the ground level, having been there yourself as well, so really appreciate it. And for all those folks that are listening, thanks for joining in. Upsideavenue.com is our website. We do have some very helpful and informational guides that we put on there for anyone that just wants to, you know, read more about commercial real estate and multifamily investing. With that, it was a pleasure speaking with you, Connor, thanks and hope to speak with you again soon.

[36:55] Connor: Absolutely, thank you, Rosch.

Rosch: Goodbye.

Connor: Bye.

 

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