WS1887 Why You Should Invest in The Midwest in 2024 | Andy Sinclair

In today’s episode, we're diving into the world of commercial real estate with the astute Andy Sinclair, CEO of Midloch Investment Partners. We’ll be exploring why Andy and his team anchor their investments in the Midwest due to its lower risk profile and incredibly promising growth outlook, relative to the competitive blaze in hotspots like Texas and Florida.

As we dissect the resurgence of Midwestern markets through the lens of Realpage reports, Andy will share Midloch’s strategic approach to debt and capital structure to ensure stability over market cycles, expressing a preference for fixed interest rates and more conservative leverage practices.


Join us as Andy unveils the intricacies of market evaluation, showcasing the metrics that matter most, his pivot away from certain oversupplied markets, and the potential for distress and discounts that the current market climate might offer.


Plus, in a climate where over-leveraging and short-term hedging have become hazards, we’re getting into the nitty-gritty of debt selection and the role of gap equity in refinancing. And if you’re considering tapping into distressed funds, you won’t want to miss Andy’s insights on partnership importance and investment criteria discipline.


So, whether you’re an investor, a family office, or simply intrigued by the dynamics of real estate syndication, gear up for a fact-packed session with Andy Sinclair. If you’re hungry for more detailed information on investing with Midloch, email Andy at asinclair@midloch.com , and don’t forget to leverage the data-rich resource, CRE Daily News, for your market analysis needs. Let’s uncover the layers of successful real estate investment strategies right here, on The Real Estate Syndication Show.

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Transcript

Andy Sinclair [00:00:00]:
Insurance. A lot of providers right now, they're pulling out of these growth markets because you got hurricanes, earthquakes, wildfires. Right. And they want to be in places like Madison, Wisconsin, where we, you know, in Ohio or in Michigan, because they just don't have the same natural disaster risk, both from a supply side, expense side and revenue growth. A lot of good reasons to be there.

Whitney Sewell [00:00:25]:
You, this is your daily real estate syndication show. I'm your host, Whitney Sewell. Today our guest is Andy Sinclair. He's CEO and principal of Midloch Investment Partners. Invested over 685,000,000 in commercial real estate, focused on properties of $15 to $50 million. Works with individual investors, family offices, JV partners and Roth Iras. Previously vice president at MLG Capital, a real estate, private equity investment firm in the, oversaw private equity, the private equity division, and previously at Palmer Capital, an.

Andy Sinclair [00:01:01]:
Institutional real estate brokerage.

Whitney Sewell [00:01:03]:
He's a graduate of Marquete University with a degree in finance, real estate and economics. And he's also run four marathons, which I can't believe that didn't come up during the interviews. But Andy, over the next, actually two days, you're going to hear him dive into a number of things around how Midloch operates and even the markets and why you're going to hear in this first segment, but why are they focused on the certain specific markets? And he's going to dive into that, even some things around distress funds, whether if you're an LP, you're going to.

Andy Sinclair [00:01:37]:
Want to know about.

Whitney Sewell [00:01:38]:
Andy, honored to have you on the show.

Andy Sinclair [00:01:40]:
Welcome. Thanks for having me.

Andy Sinclair [00:01:43]:
Glad to be here today.

Whitney Sewell [00:01:44]:
Now, great to dive in on a number of topics today that I know the listeners are wondering about and you are our expert, especially for today and maybe a couple of days. I want the listeners to know we're going to do a series with Andy and talk about a number of things. But I know that you, Andy, you and your group are focused on the Midwest, right?

Andy Sinclair [00:02:05]:
That's correct.

Andy Sinclair [00:02:06]:
Actually, the mid and Midloch actually stands for the Midwest. So originally my co founders and I, everyone had midwestern roots and so we named it.

Andy Sinclair [00:02:15]:
Awesome. Awesome.

Whitney Sewell [00:02:16]:
Well, maybe share why there's such a focus on the Midwest and then maybe we'll talk, know, we'll compare the Midwest with some other growth markets or other.

Andy Sinclair [00:02:26]:
Markets that you all are in as well. Sure.

Andy Sinclair [00:02:29]:
Happy to do that, Whitney. And so Midloch, at our core, we're a real estate operator and investor and we do own coast to coast. But as the name points out, Midwest is our roots. But half what we own is in the Midwest, half is elsewhere. And one thing I think that a lot of investors maybe haven't seen is that there's been such a focus the last four to seven years on the growth markets would be Texas, Phoenix, Florida, to a lesser extent, places like Las Vegas or Reno. And my belief is, while the Midwest maybe doesn't have the growth trends that you might have in Tampa, Florida, or Orlando, Florida or Phoenix, that people still want to be there, and it's perpetually undersupplied. And so you need to be a little bit careful. You can't just pay any price. Maybe on the Midwest, but there's usually good growth in terms of the revenues, just because no one's ever done a value add approach or never done things that maybe you see in the coastal market. So I always like to say we're always looking to incorporate best practices. There might be something that's occurring in the coast that we can bring to our midwestern portfolio. Additionally, on the less sexy side of the ledger, though, from the expense side, you have a lot of reasons that service providers want to be in the Midwest, most notably insurance. A lot of providers right now, they're pulling out of these growth markets because you got hurricanes, earthquakes, wildfires. Right. And they want to be in places like Madison, Wisconsin, where we know, in Ohio or in Michigan, because they just don't have the same natural disaster risk. And that means their loss ratios are lower. So both from a supply side, expense side and revenue growth, a lot of good reasons to be there. Other know, being in the growth markets.

Andy Sinclair [00:04:13]:
Yeah.

Whitney Sewell [00:04:13]:
No, that makes a ton of sense. People still want to be there.

Andy Sinclair [00:04:17]:
Right.

Whitney Sewell [00:04:17]:
Even though it's not a growth market, it's still home to many and people. Future home, no doubt about it. It's interesting, the thought behind the insurance also, and, man, that's changed a ton over the last little bit, hasn't it? So many are getting rates that are much higher than they unfortunately expected.

Andy Sinclair [00:04:37]:
You can never be conservative enough in your insurance estimates, so you need it. And you got to be conservative because it's going to keep going up. I always say, you don't know anyone that goes home and says, we're going to start an insurance company, and so there's just fewer of them, so we have to learn to work with them.

Whitney Sewell [00:04:53]:
Yeah, I don't know if you've ever heard anybody either that says my rates just dropped by 50%. Typically.

Andy Sinclair [00:05:00]:
Very rarely.

Andy Sinclair [00:05:02]:
Very rarely.

Whitney Sewell [00:05:03]:
Yes. Well, speak to the midwest versus those growth markets that you all are in and how you all are maybe deciphering which markets you're going into or focusing on or why you would still consider.

Andy Sinclair [00:05:15]:
Some of the growth markets. Yeah.

Andy Sinclair [00:05:17]:
So I think it comes down to supply, demand and growth. Right. You kind of need everything to work in. Let's, let's kind of look at the growth markets first. Just because people are moving to Phoenix or Florida or Texas, you obviously have the wind at your back when it comes to demand drivers of people wanting to be there. But on the flip side, that also attracts a lot of developers and would be just other competitors. So you have a lot of supply, and that's not just for apartments. That's also true for industrial retail self storage. Right. You got a lot of supply risk, given that. So if you look at that from the demand side from the Midwest is you might not have the supply risk, or in some markets we're in, there might be no supply or just one building. So you still have population growth, but yet if your supply side is not growing, so it's one part supply growth, one part revenue growth and demand growth. And so certainly you can make a case that over the long run, you'll have great success in some of those growth markets. But you got to be careful because with great growth also comes a lot of headaches and challenges. And this has been true, Whitney, over the last month, realpage, which is a big accounting service for real estate, they released where rents are growing, where they're not, and highlighted that a lot of the midwestern markets are having great growth at the expense of a lot of markets like Texas and Florida, which are.

Whitney Sewell [00:06:41]:
You know, reports like that. And I always like to ask, because I get questions like this all the time. Any other places? Kind of a side note for a moment where you get data like that.

Andy Sinclair [00:06:49]:
That you all trust?

Andy Sinclair [00:06:51]:
Yeah, I mean, we use a lot of paid services like Costar, which owns the parent company of apartments.com, or LoopNet, amongst other sources that we do pay for. But there's a great free one that I would encourage anyone to go check out. I actually make sure my whole team is subscribed to it. It's known as CRe Daily News. They've got a great website. They put together a daily newsletter and then also a weekend newsletter. It is the best free source out there. And they always link to other articles. You can't always get the paid articles for free, but they do such a great job of delivering the data. So if you don't have the ability to pay for a costar or even something like that, check them out great service.

Whitney Sewell [00:07:33]:
Yeah, no, I appreciate you mentioning them. I've also been reading quite a bit on there as well. So back to the markets just a little bit. So what about your focus now? How are you all focusing on specific markets now? How are you all determining which ones are and maybe which ones specifically are you looking at now and why?

Andy Sinclair [00:07:53]:
Yeah, so we break it down every year and then multiple times within that year. So usually on a quarterly basis we evaluate is this a market we want to stay in? Is this a market we want to exit? And is there a market that we think has good metrics that we're not in currently? And ultimately though, Whitney, it comes down to a local basis. So you could say you want to be in any market in the country, but if you don't have the right local operating people from a management perspective, none of that matters. So really key is who's going to run your property. But certain metrics we look at, which is population size, we look at know, for instance, a lot of people bring up Austin, Texas right now. It's got a lot of supply issues, obviously big metro, though. And then we also look at what know, does it have good regulations? Does it know right now? Unfortunately, on the mega side, New York City has been characterized as almost uninvestable. Right. Not that we're looking to invest there, but it's got so many regulations and headwinds. As an investor, you're going to take your money elsewhere. You're not going to fight the good fight where it's really tough. But yeah, looking at growth trends and then major employers, how sticky are those employers? And then what's the cost of living versus the average income? These are all really easy stats that hopefully most people can get. I always like to kind of show a few markets that we're in, such as Madison, Wisconsin, which has the state capital, also major Fortune 500 employees such as Epic and Azac Sciences. Or if I go over to Minneapolis St. Paul, also state capital as well. Right. And a slew of Fortune 500 companies, take your pick. Right. And so if we can find those areas, just like Phoenix or Minneapolis or Columbus or Madison, those are going to be good markets that are going to have good ongoing jobs for people to work at but also have some stability. And stability matters, by the way, because if you lose a major employer in a certain area, that can be a devastating economic impact.

Whitney Sewell [00:09:53]:
Has there been any big changes in maybe the focus of markets for you all just recently and why? Or maybe you've seen demographics change? Obviously we've seen some of that over the last year or two, right? No doubt about it across the country in different states, mass exodus in some places. But has that changed your philosophy at.

Andy Sinclair [00:10:13]:
Know recently as far as the markets you're focused think?

Andy Sinclair [00:10:17]:
I think overall, I mean, still a focus in the Midwest, Whitney. But I will say a few markets that we're a little less focused on that I think have been in vogue. For instance, we own just a small bit in Florida and obviously people are moving there and we've done very well with our Florida assets but not looking to expand. The pricing remains relatively high, expenses also remain ongoing high and growing. And so know, there's a little bit of imbalance in my opinion. Know maybe that's not the right market long term. And I think to another degree, I think there are certain markets such as Houston, Dallas and Austin in the Texas side that while they've got great growth trends, they've got big supply issues and then they're also dealing with quite a bit of bad debt. Bad debt mean you have delinquent tenants, that they're a renter, but they're not actually. So, you know, I think whenever we see we're working on a prospective deal in Texas or know, we take a side eye, say is this the right deal versus other markets of similar attributes, such know, the greater DC in terms of Maryland or Virginia or Phoenix, which have some similar problems but maybe don't have the same headwinds that maybe Florida.

Andy Sinclair [00:11:29]:
And Texas do speak to.

Whitney Sewell [00:11:32]:
Let's dive into maybe the just current market situations a little bit around interest rates or inflation. Maybe you can speak to do you see opportunity, do you not with the.

Andy Sinclair [00:11:42]:
Current where we're at? Yeah, I think so.

Andy Sinclair [00:11:44]:
So right now, Midloch, we're outraising for our third fund, which is my 7th fund overall that I've worked on with a thesis of discounts. And know, and I do think if you would have asked me this, know, maybe even two months ago, I would have told you that the distress is going to be a lot more than we're already know with the recent pivot of the fed of maybe easing just a tad on interest rates, I think you'll still have a fair amount of discounts and some distress. And so I do believe that the current market is going to present opportunities. One thing that's funny about real estate people, and I saw it yesterday in an email, that they don't necessarily look to take leverage that's just right. Like take a loan that just fits. Instead, they try to take as big of a loan as possible. Well, that's all good while things are going right. But what happens when that loan comes due or what happens even worse if you trip a covenant? I think this is going to be a buzzword you're going to hear in 2024, which is we did not realize we had a covenant that we had to meet. And so that's also going to be in terms of we can't meet our leverage thresholds and we have to refinance. And so I think when I look at 2024, you're going to have a lot of people trying to refinance, maybe because interest rates have pulled back, but also some people needing some gap equity. So Midloch right now, our belief is that there's going to be needs for pref equity or mezzanine financing to kind of keep that leverage the same or even a bit down to maybe avoid some capital calls. But I would urge anyone who's in the real estate business that just to be careful not to on your new deals, take the debt just because it's there, to maybe pick the right lender because that's the right fit. And because of that Midloch, we're very proud to say we don't have any bridge loans. We've been really careful not to do that stuff because it gives you flexibility when things change.

Whitney Sewell [00:13:33]:
I've interviewed, as you know, over 1800 people now. And I mean, it is a common theme when we talk about previous cycles, right. Or crashes or things like that. And so many operators now, if they've been in the business long enough, well, they've lived through a few cycles or at least one downturn or 2008 or whatnot, and always ask, well, what was the cause?

Andy Sinclair [00:13:53]:
Right.

Whitney Sewell [00:13:53]:
What would you do to different now almost hands down the top, they'll list numerous normally, but one of the top things is being over leveraged.

Andy Sinclair [00:14:02]:
Yeah, I would tend to agree. You got to be really careful. And I think who your lender is. And one thing, Whitney, I see bad behavior every day is prior to this run up in interest rates, so many people would take these two year interest rate hedged loans that they moved to floating with these expensive interest rate caps, and then they would need a lot of revenue growth just to get back to par, just to keep stuff even. That's a recipe for a disaster. And that's led to some of the issues you've heard from people of people in the industry. All of a sudden they need capital just to fund a new interest rate cap. Not to say that it's all roses and butterflies with banks and other people. But I think who your partner is matters a lot. And then right along with that, there's one thing that Trammel crow issued after the 1980s crash is that you cannot deemphasize the amount of how much your local people matter. Leasing, property management. You need to have the right people making sure stuff matters.

Whitney Sewell [00:15:01]:
Couldn't agree more about the team and local team. Many accredited investors listen to the show.

Andy Sinclair [00:15:07]:
Right.

Whitney Sewell [00:15:08]:
Many of our investors listen, I guess speak to them a little bit as far as them investing in a distress fund.

Andy Sinclair [00:15:15]:
Right.

Whitney Sewell [00:15:15]:
A lot of us have heard that terminology a lot. Or it's becoming more and more common.

Andy Sinclair [00:15:19]:
Right.

Whitney Sewell [00:15:19]:
People are getting ready.

Andy Sinclair [00:15:20]:
Right.

Whitney Sewell [00:15:21]:
For this potential opportunity. No doubt about it. Speak to how it works for them, maybe some things that they should be considering or questions they should know to ask.

Andy Sinclair [00:15:29]:
Yeah, I think right now, whether you invest with Midloch or maybe another operator of sorts, have they done it before? What's their strategy? What makes them unique to go access deal flow? So the very first part is how are they going to go find deals? And I think it's very easy to say you're going to go find deals. And doing it is another thing at Midloch, over the last few years, we've done about 100 million of buying notes. That's buying distressed paper, where the loan balance is, the note price of the loan is worth less than the loan overall. And so I think you're going to see some of that. I think that's a question to know how they're going to find deals, what's their strategy? And then also how are they going to provide returns in case the property does not turn around? And one thing we talk about here at Midloch all the time, there's plenty of discounted and distressed real estate, but that doesn't mean you want to own it or if you want to own it, is the price that the person who can sell it to you, is it low enough? And so that's the one thing I see right now I would ask is what's their criteria? How are they going to find it and then how are they going to operate it? Because if you buy it and it doesn't turn around, then you still have a problem on your hands. And so you go back to operations. I think that matters. And so right now in today's marketplace, we're very acute in looking for either notes. We can buy preferred equity or mezzanine fancy. We can to maybe get a little bit of a preferred basis. And then we're also doing traditional equity as well. Whitney, which our belief is that you can get a fair amount of discounts that properties might be on sale from where they were in 2020, 2021. But you got to be careful. You can't just pay any price. It's got to fit criteria and you got to stick to them. That's one cardinal sin I see from so many real estate investors is that they're dying to do a deal, and so they start to sacrifice some of the things that they say just to do a deal.

Whitney Sewell [00:17:28]:
Yeah, no doubt about it. I think that's very wise. I appreciate even early on, you're talking about operations matter.

Andy Sinclair [00:17:35]:
Right.

Whitney Sewell [00:17:35]:
Who is operating the deal? Because there's a reason it may be in the position that it's in now.

Andy Sinclair [00:17:42]:
Right.

Whitney Sewell [00:17:42]:
For one, whether it's operations or obviously floating rate debt or whatever it may be, that's changed. But sticking to your criteria, like you mentioned, I agree, deal flow has been so slim.

Andy Sinclair [00:17:56]:
Right.

Whitney Sewell [00:17:56]:
I can see that happening to many groups. Right. Man, we just have to do a deal.

Andy Sinclair [00:18:01]:
We got salaries to pay. Right.

Whitney Sewell [00:18:03]:
Yeah, but now all of a sudden, you got a lot more problems than you had before.

Andy Sinclair [00:18:07]:
Right, right.

Whitney Sewell [00:18:09]:
And so I love that, sticking to your criteria. And even before that, I wanted to highlight, you're talking about you can't just throw more money after bad money.

Andy Sinclair [00:18:18]:
Right.

Whitney Sewell [00:18:18]:
And so I'm seeing that as well.

Andy Sinclair [00:18:21]:
It seems like it's like, well, if.

Whitney Sewell [00:18:23]:
We can buy some time.

Andy Sinclair [00:18:24]:
Right.

Whitney Sewell [00:18:25]:
And it may buy some time, but the deal is still going to go down. It may feel better in the moment, but sometimes it's obvious. But it seems like it's hard to get your mind wrapped around when you're in that position.

Andy Sinclair [00:18:38]:
Right.

Whitney Sewell [00:18:38]:
Well, this deal is just not going to make it. So I can try to sympathize with the operator that has deals like that.

Andy Sinclair [00:18:44]:
Right.

Whitney Sewell [00:18:44]:
I wouldn't want to see it go down either.

Andy Sinclair [00:18:46]:
Right.

Whitney Sewell [00:18:47]:
But when you're trying to negotiate with operators like that, do you see realization like, okay, we got to have some help here. Maybe the deal is salvageable. And that's where you all could come in with what you called earlier, like gap equity or whatnot, but just some sellers, how they're seeing their deals right now, or potential sellers, do you see just more realization than maybe they would.

Andy Sinclair [00:19:09]:
Have had a year ago? Yeah, I would say if you go.

Andy Sinclair [00:19:12]:
From March of 22 to really the end of Q four here of 23, if the bid ask spread was here, it has started to narrow. Right. And so there was this big capitulation that if you had to sell, the market was not there. And so know, for instance, we have this on assets we've done really well on, which is we'd like to sell. We've got about five properties we've done very well on, and we're holding them back from listing them for sale because the market is not there. It's a little volatile. So right now, I think the first lesson, Whitney, I would say, is if you don't have to sell, I wouldn't. But as I look at the bid ask spread in terms of people realizing where they're at and moving on, I think that's happening. And the biggest reason for that, a lot of that, it comes back to the debt stuff that we talked about in their capital structure. Right. If they took a five year loan in 2020, well, that means it's coming due in the next 18 months, right. So you have to do something here. Likewise, if you took a five year loan or even a two year loan in 2021, that means your loan is coming due right now. And so people are often much more willing to be realistic about what they have to do. So that kind of goes back to the front end when is buying time. So at Midloch, our belief is we take fixed interest rates for almost everything and it's got to be kind of a five to ten year cycle of interest rate hedge because you want to be able to have some breathing room because cycles are going to happen. But one thing that's been consistent, though, is if you can hold cycles do turn. So right now, though, we're in the midst of a cycle.

Andy Sinclair [00:20:47]:
Yeah, I appreciate that too.

Whitney Sewell [00:20:51]:
If you can hold on.

Andy Sinclair [00:20:52]:
Right.

Andy Sinclair [00:20:53]:
Don't sell.

Whitney Sewell [00:20:53]:
Yeah, don't sell. Right now. What about you mentioned a minute ago, and we may have to end this segment on this note, but I wanted to at least allow you to elaborate a little bit on your criteria to buy. Or maybe there's some hard and fast things that are like, we're never going to do this, we're never going to go over this. Or even so investors understand, man, these are some things I need to be thinking about as I'm talking to operators, or I want to make sure that we're not in higher LTV than this. Or how does Midloch look at some underwriting there?

Andy Sinclair [00:21:22]:
Yeah, there's a few of them. There's a few basic ones. Typically, we're not looking to take leverage in excess of 70% on average. We try to keep our leverage in our portfolio just as an FOI. As of this recording, Whitney is about 58%. So we're quite a bit away from even that threshold. We try to stay away from stuff that has a bullet. So stick with the lenders for a second. We try to stay away from these two year bullet loans where maybe you have to go buy a new interest rate cap and you're right back at it. Never say never. It's been about a decade, but we try to stay away from cnbs. That was a big poster child for the eight crisis. So we try to stay away a little bit from the CMBS lenders because there's just no flexibility if you have to change something out. So who your lender matters. Additionally, I think other criteria, you got to look at the demographics. I think for apartments, that matters a lot because if your renters can't afford the rent or it's a choice between paying bills like electricity or food, they're just not going to pay for your apartment. So bad debt does matter and your demographic matters. And then it sounds very basic, but their supply of the market matters, right? I think so often people overlook that thinking, oh, you know what? More people are moving to the area. It'll just get gobbled up. But supply is something you cannot reverse. Just ask any office landlord right now. They've been perpetually oversupplied for 30 to 40 years. That doesn't mean every office building is in trouble, but it does mean that you got to be a little bit careful because once you get oversupplied, it's tough to get out of that unless you get more.

Andy Sinclair [00:23:05]:
People love that.

Whitney Sewell [00:23:07]:
Well, Andy, that's a great list for any LP to be thinking through or as they're asking questions and looking at deals as well. And operators also. No doubt about it. Andy, thank you so much for your time today. I want the listeners know we're going to come back again tomorrow with Andy and dive into some other topics. Andy, how can they get in touch.

Andy Sinclair [00:23:26]:
With you and learn more about Midloch?

Andy Sinclair [00:23:28]:
Yeah, I have a really simple email. It's just Andy, A-N-D-Y for those who watch this on video at Midloch, which is midloch.com. So drop us a line. We'd love to meet you. We'd love to hear more. Or visit our website, which is just ww dot Midloch, midloch.com.

Whitney Sewell [00:23:53]:
Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the real estate syndication show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.

Andy Sinclair [00:24:16]:
Close up.