Ted Greene joins Ash Patel in a discussion of institutional purchases, interest rates, and inflation. Ted shares his earned scar tissue of being sued for $68M and losing money on a personal venture — and how you can position yourself for an impactful retirement.
Article mentioned: Buy with Conviction
Ted Greene Real Estate Background:
- Investor Relations Manager at Spartan Investment Group
- 20+ years of real estate experience
- Portfolio consists of 14 properties, 10 of which have gone full cycle
- Based in Golden, CO
- Say hi to him at: https://spartan-investors.com/
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TRANSCRIPTION
Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Ted Greene. Ted is joining us from Golden, Colorado. He was a previous guest on a couple of episodes, so if you google Joe Fairless and Ted green, those episodes will show up.
Ted, we’re glad to have you back. Thank you for joining us, and how are you today?
Ted Greene: I’m good, Ash. Thanks for having me. It’s a pleasure. You guys are industry thought leaders, and I’m glad to be tagging along with you.
Ash Patel: Well, the pleasure is ours. Today is Sunday, so Best Ever listeners, I hope you’re having a great weekend so far. And because it is Sunday, we are going to do a Skill Set Sunday, where we talk about a particular skill set that our guest has.
Ted is the Investor Relations Manager at Spartan Investment Group, and has over 20 years of real estate experience. His portfolio consists of 40 properties, and 10 of which have gone full cycle.
Ted, before we get into your particular skill set, can you give the Best Ever listeners a little bit more about your background, and what you’re focused on now?
Ted Greene: Sure, happy to. So I’m in my early 50s, and out of college, I started a 24-year career. Most of that was with Merrill Lynch as an investment advisor, and the last six was Chief Compliance Officer of a fiduciary firm, registered investment advisor, and over the years, lots of lessons learned. A little bit of scar tissue, but lots of fun, too.
Ash Patel: Today we’re going to dive into institutional purchases of assets. What are your thoughts on that?
Ted Greene: I wrote an article for your group last summer… Because of my stock market history, I have a bit of a hangover where it’s an addiction, you just can’t turn it off and let it go. The Department of Labor, which oversees ERISA plans, which are 401(k)’s, 403(b)’s, 457 plans. The Department of Labor made a change last summer. In the article that I wrote for Joe Fairless, the article title I believe was Invest with Conviction. And in that article, I cite the actual Department of Labor regulatory code that allows large plans to, the first time — Ash, this is a big piece — for the first time, those massive pockets of money can now buy, own and control, not just publicly traded REIT assets in the publicly traded securities market, but rather specific assets.
So, think Exxon or Caterpillars, 401(k) plan – they own these specific pieces of commercial real estate. And again, that’s the first time. To really highlight this point, think about how big that retirement plan marketplace is, and think about the 1970s when we had — the hallmark of the ’70s was inflation. Maybe that’s coming around the corner for us. I’m not saying it is, but maybe it is. But during the ’70s, interest rates – they rose. Ronald Reagan gets into office. Paul Volcker is the chairman of the Federal Reserve Board. Interest rates get to 18%. So mechanically, as interest rates rise, bond values decline. Where are we now with interest rates? What might happen to bond value assets if we go back to, let’s just say, 10 on the federal funds rate, or a prime rate of 10?
So the point there is, interest rates potentially could rise. What happens to P/E ratios? Sneak peek preview, they compress. Right now we’re in the mid-30s. You could say 36 or 37 without stretching things. In 1982, the PE ratio on the Dow Jones was less than seven. Google it. It’s scary. So when interest rates rise, P/E ratios compress, bond values fall, and yet for the first time, last summer, August, the Department of Labor says, “Okay, biggest investing pockets of money in the world, you can go buy portfolios of commercial real estate.” So Ash, there you go. That’s it. That’s what’s going to be happening the next 20 years. This is the first inning of the nine-inning ballgame or seven-game series or what have you, but we’re just getting started on these institutional sales, I think.
Ash Patel: Yeah, that’s everywhere right now, and the goal for a lot of people that I’ve interviewed is, get your asset base big enough so you can sell to an institutional investor who’s going to overpay. So, on a smaller level, with Wall Street firms buying real estate assets and single-family homes as well, what do you think is the motivation behind that? Do you think it’s a hedge against inflation? Or do you really think they want to be landlords?
Ted Greene: They want assets. Think of it from the pension funds perspective. They have an obligation. So the retiree who’s in retirement, age 68, and statistically will live to whatever age dependent on gender, they have an obligation to them, and they can’t come up short. So, if P/E ratios have been stretched, because the last 10 years of quantitative easing to infinity, hockey stick everything, it doesn’t get any cheaper… What’s going to happen when rates rise?
Will P/E ratios compress the way they have every cycle in the past? So yes. They will. So it may be that it’s the least dirty shirt in the laundry, worst-case scenario. Best-case scenario, if you’re finding assets where the sponsor or the operator can actually grow that net operating income through organic expansion — with Spartan, we enjoy self-storage, and we’ll buy properties and put down additional units for lease, lease them up and carve that asset out and get it sold. So that’s organic net operating income growth.
So, if you can grow that NOI and defend that asset’s market value in the face of rising interest rates, you tell me, would you really rather have a large chunk in the stock market, or in bonds that yield in essence nothing? Or from the really intelligent investor, they’re going to be working with four or six sponsors, and they’re going to have everything; retail, industrial, core four, storage, and not really betting on any one specific sub-asset class… But the intelligent investor is going to say, “Yeah, these things cycle. I’m going to have a little bit of everything, because the next big cycle move – I don’t know if it’s going to be retail that comes on strong, or if it’s going to be multifamily, or triple net, or who knows what.” But the trillion-dollar pockets of money, they’re loaded to the gills with stocks and bonds, and for the first time, they can now come to commercial real estate of all types. It’s a big thing, and it’s just starting.
Ash Patel: Is there evidence of that shift happening?
Ted Greene: That’s an interesting question. The article that I read last summer identified of all the plans that were pulled — it was an article that I pulled from Investment Advisor Magazine. Decent publication, goes to fiduciaries, and it spoke to the percentage of the plans that were pulled, the percentage that had begun the move to include actual specific properties in their 401(k) plan asset allocation. And I want to say that 3% or 4% of the plans that were pulled – and I’m going on memory, Ash. I’m going on memory… It may have been 175 plans, but I think 5% or 6% had started to take a bite. So Investment Advisor Magazine, I’m sure if we were to collectively internet search and find an updated article, I’m absolutely convinced those 401(k), 403(b) and 457 plans, as well as pensions, are moving into the space.
Ash Patel: So they’ve already started to dip their toes in the water.
Ted Greene: Yeah.
Ash Patel: So, I am a non-residential commercial investor, and a lot of my big retailers will sign 10-year leases, and that is a little scary, because they might have 3% rent increases or less over 10 years. So, from their standpoint, if inflation rises, they’re tremendously hedged. And then you see all these Starbucks and Walgreens out there on 10-, 15-, 20-year leases, with renewals built in, sometimes as far as 30 years. That’s a pretty chilling thought if inflation rises rapidly.
Ted Greene: Yeah. What’s the action item? Do you shorten that? I can’t imagine lengthening that, but you’re right. How do you position yourself so that you’re not impacted too negatively, but at the same time, you want that surety? It’s an interesting dynamic.
Ash Patel: Yeah. My only thought is you build in a CPI kicker or inflation kicker, where if the numbers go up significantly, the rent goes up by some kind of factor of that number. Historically, that’s never been done.
Ted Greene: Yeah, that’s a challenging question. You don’t want to disadvantage your tenant to your advantage, because there’s got to be fair value for both sides for people to want to continue to engage with you. Tough question.
Ash Patel: Yeah. The National Tenant Leases are trading at such low cap rates; you’re already barely getting by as it is. You’re parking money, essentially.
Ted Greene: It’s very fragmented. It’s like the 1980s in the banking sector, before Bank of America and Wells Fargo had bought up all the little regional banks. So you’ve got the individual investor out there who’s taking down their first fourplex. I think for the passive investor, the key for the passive investor who’s not going to roll their sleeves up and do it themselves is look for sponsors who are aware of what’s happening in the space, and who are marching towards or are transacting at that.
My best guess, from conversations around the halls of Spartan, that minimum is a $250 million transaction, likely to be predominantly Class A, with some A-minuses and B-pluses in there, but predominantly Class A assets. But if the individual retail investor is looking for their first $50,000 passive investment, it does not behoove you to be partnering with somebody who wants to do it on their side, because they’re 55 and they’re going to retire at 58, because they’re not going to be playing into that pool, where you transact in the high 3’s, or the low 4 cap range. If you just have one asset and you look to transact it, you may be buying at a 5 and selling at a 5 cap, and heaven forbid, interest rates rise and you get pinched a little bit, and you might get hurt.
Ash Patel: So that’s another strong headwind, is if interest rates rise, the price of assets is going to get lowered, because it’s more expensive to own that asset. So a lot of challenges, but yet, we still see real estate prices ballooning. It’s crazy.
Ted Greene: Yeah, you’re correct. It is crazy. I think the wisdom of the ages is to bear in mind, when we were all young, we all loved to win more than we hated to lose. Meaning, we took a lot of risk. At some point, we all, as investors, we wake up one day and we see the world just a little bit differently.
I got sued for $68 million when I was at Merrill Lynch, and it was a family that had close to $300 million with us, Merrill Lynch myself. That was scar tissue for me, were some dot.com stocks that had made the money on the way up, quickly lost, and now personally, I’m very much of the opinion, I hate to lose, much more than I love to win.
So back to your point. It’s stupid money right now. It’s been risk on for 10 years, no holds barred. Okay, that’s happening. It’s a thing. Take a little bit off the top, move a little bit more to cash, have some money in an actual bank CD, carry a little bit more cash than you’re accustomed to, because the world will change a little bit eventually, or a lot, eventually. It’s just the wisdom of the ages.
Ash Patel: love that contrarian advice, because right now, cash is burning a hole in people’s pockets, right? Everybody’s looking to deploy capital as fast as they can, and especially now, as we’re approaching the end of the year, everybody’s trying to buy whatever assets they can. You and I have lived through a couple of these market cycles, and historically, I think we saw the writing on the wall. We chose to ignore it, because we were chasing returns. Do you see the writing on the wall now?
Ted Greene: The frenzy that we’re in right now legitimately could continue for five years. And these kinds of markets, they can outlast your conviction to be frugal, conservative [unintelligible [00:14:45].26] what have you. And it’s kind of like a margin call in the stock market on the way down, where it goes exponential on the way down. Market tops typically are formed with exponential movements on the way up, so I don’t know. And admittedly, I have been dead wrong on interest rates for the last five years, and that may be conservative, and it may be more like seven and my ego is getting in the way.
I remember in 2010, through 2012, I owned a business, it failed. My wife and I, we lost a lot of money. That’s more of my personal scar tissue, and I think that just being a good member of people’s community, with no regard to where they invest or what they invest in… Just think back to 2010 to 2012, you couldn’t give a home away; you could and you could sell a home. But the risk appetite right now – it’s extreme, and that should be cautionary. I think, at the most conservative level, it should be cautionary. Because it’s not a race to retire at 45 just so you can tell your friends you retired at 45. Now, maybe that pushes your button, but from an intellectual perspective, we all need, as investors, that stimulation of community, of rolling into bed exhausted, because you worked really hard, and you had a great time. Who would really want to give that up permanently? And I’m getting off track—
Ash Patel: Now I listen, I agree with you. What are you going to do when you retire? I don’t know why people look forward to that so much. If you love what you’re doing, you’re going to keep doing it.
Ted Greene: That’s it. That’s totally it.
Ash Patel: What advice would you give somebody starting out in real estate, actively doing fix and flips, or buying some small multi-families? And let’s say they’re in their early to mid-20s. They’ve got several market cycles ahead of them. What should they do?
Ted Greene: Don’t be in a hurry; really and truly don’t be in a hurry. Join a mastermind; these real estate conferences, Best Ever’s coming up after the turn of the year… You can find a mastermind group, which is just a collection of folks just like yourself, that get together every four or six weeks, to just compare notes on what they’re doing personally with their investment dollars, what sponsors they’re talking to… You get all kinds of sponsors out there. So, as good community members, we want to see people be successful, all of us.
So talk to folks, tap the brakes a little bit; the excitement in the adrenaline, it can cause you to maybe make a decision before you really should. And by visiting with others and learning from their experiences, you just really benefit from that. So some perspective of other people who don’t look like you, who don’t act like you, but have done stuff that you have not – there’s tremendous value from that. And, Ash, as you can tell, at the end of the day, I’m worn out and I need some downtime. But during the day, talking to investors, that’s the fun stuff. And I think a lot of us are like that. So tap the brakes, talk to people who are different than you, in different parts of the country… You don’t need to pay a dime for this kind of education. Just put the energy into it, and you will learn a tremendous amount, for free.
Ash Patel: Now, let me flip the script. Somebody that’s a little bit later in life – they’re going to have that fear of missing out if they sit on the sidelines. What advice do you give that person? Let’s say they’re okay right now, they potentially could retire, but it’d be a lot better if they can keep writing this up; or do they conservatively sit out and wait for the next cycle?
Ted Greene: That’s an interesting question. Friends out there, Ash and I did not script this. I promise you.
Ash Patel: Yeah.
Ted Greene: The next article I’m working on is how folks that are in my generation – I’m early 50s – how do you transition from not having a dedicated source of income that will support you in retirement? How do you construct that? So, if you’re going to be spending – let’s just throw out a number; a modest $85,000. If you want to spend $85,000 in retirement, how do you begin to construct that, so that you can pull the W-2 job, just forego it. So what percentage of the $85,000 that you would like to live on should come from areas where you know you’re going to get those funds?
In my mind, because of what we’ve seen with our Federal Reserve chairs over the last 10 years, be it Bernanke, or current, Janet Yellen, you’ve got to start to put in place fixed and specific investments that have fixed and specific both pref and cash-on-cash rates of return. So take a bite of the apple. Divide the market up into the core four; you can google that. You’ve got some storage, you’ve got some life settlements… You can just kind of start to put into place specific sources of income, and as investors march to and through retirement, so the 50 year old to the 70 year old, or somewhere in between, you’ve got to methodically architect that.
So right now the cash-on-cash rates – they’re decent. So you may not make all the upside that the sponsor models for you currently, but you should get that cash-on-cash as long as that asset is performing. And if you’re able to get 6% or 7% cash on cash, the age-old rule of thumb, “Don’t take more than 4% of your net worth out of your investment portfolio on an annual basis.” Now, we can move that a little bit higher when we’re dealing with real estate assets, but maybe 5 or 5.5. You can architect that.
So put a line in the sand, “I’m going to retire or have the opportunity to do something different at 65,” or 60, or 54, what have you, and then map out where your sources of income will come from, incrementally, as you march toward that goal. So you’ve got to get started, I think.
Ash Patel: That is phenomenal advice, because I’m an extremist. So I’m thinking it’s either sit on the sidelines, or chase those massive returns. But you’re right, there’s a happy medium, and look for those conservative investments where you’re still growing your cash-on-cash, versus having it sit idle.
Ted Greene: Home run. Yeah. Just get started and learn as much as you can.
Ash Patel: Ted, thank you so much for your time today. We’re looking forward to seeing that second article. And how can the Best Ever listeners reach out to you?
Ted Greene: LinkedIn is a great tool for me. That’s where my community lives. So Spartan Investment Group. I’ve got an E on the end of Greene, and my first name is Ted.
Ash Patel: Awesome. Ted, thank you so much for joining us and giving us some great advice and a glimpse of what’s happened in the past and what may or may not happen in the future. So thank you again.
Ted Greene: My pleasure.
Ash Patel: Best Ever listeners, thank you for joining us and have a best ever day.
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