Erik Flegal
So here we go. So thank you, everybody for joining us for another episode of thought and action. And we’re here with Mike McDaniel from Sealy investments, he’s a great partner of mine. And I want to just give him the floor to talk about, I think a very specific area of the market that’s growing rapidly doing very well in the midst of all this COVID that people may not know about. But before we get to that actual opportunity, I want you to tell us a little bit about Sealy just to start because I think the company itself is also unique. Not in a good place. For me, that’s okay. I think the company itself is also unique in the way that it was formed and its long term track record. So if you talk a little bit about Sealy before we get into the actual investment itself.
Mike McDaniel
Sure, Eric, and thanks for having me on today. I’ll give you a brief background on us. Our history is pretty long, so we could get in depth, but I’ll try to keep it brief. The the company is about 76 years old, it’s a family business. We’re currently in the fourth generation, the third and fourth generation are actively involved in the business. And I’m not sure how much you know about family businesses, but generally, only the number of leaves only 3% make it into the third generation. So hopefully it means we’re doing something right. It started as a real estate company in 1946, still a real estate company today and had been exclusively in the distribution warehouse space since 1971. So originally it started as a way for some very wealthy people in Louisiana, Texas, that area of the world to invest. We handle their money, it was mostly friends and family, then that network grew. And then in 1990 we started actually allowing outside money and that began more institutional investors, pension funds, California State Teachers Retirement System, American Electrical Workers Union, working with folks like that. And then in 2012, we stepped away from that institutional size, so that we could have complete control over buy and sell decisions, it’s great to get access to large dollars like that, that also comes with the caveat that they can sometimes need their money back when it’s maybe not a great real estate time to make that decision. So in 2012, we started to open it up to friends and family, still do some institutional business in a different way. And then also open it up in 2012 to individual investors, individual high net worth investors that meet certain criteria, and those are usually accessed through registered investment advisors, family offices, broker dealers, those sorts. So a little bit about us, we kind of do one thing, do it very simply, we try to execute on it extremely well, but keep it simple and repeat the process as proved as well.
Erik Flegal
Super, super, I love it. Because you got a long track record, you usually see those family businesses, one or two generations kind of fizzle, but you got a good thing going, you find a really good niche. And that’s what I want to talk about is really, because so many parts of real estate, you’ve tended to focus on that commercial side and then specifically now, ecommerce. So could you talk a little bit about kind of the explosion, some of maybe the numbers in ecommerce and the opportunity that’s there for your investors today?
Mike McDaniel
Yeah, absolutely. I mean we originally got into distribution in industrial space, because it had low obsolescence, the building didn’t change very much over time, there wasn’t a lot of the risk reward scenario was very much weighed towards more reward for the amount of risk you’re taking. We do set them up as triple net leases, so we kind of know what the exact income we’re getting, but not exposed from a capital expenditure standpoint. And so we love that business because it was always very recession resistant. If you think about wherever you’re sitting today or listening to this, if you look around the room, basically everything got to you through a distribution center in some way unless you’re going to the farmers market and behind everything direct from the grower or the producer, it has to get to you. So those are some of the reasons we originally like that sector of the business. It was usually last into a recession first out, but really what’s been the wind in the sails the last 10 years or so has been ecommerce. It started with sort of the Amazon effect when we all realize that you can get something in a couple of days without having to leave your house for essentially the same price. That’s really convenient. Now it’s gone from two days to one day to hourly delivery. I know I have some some food and protein shakes showing up later today that I ordered a couple hours ago. And what we’ve seen in this space is, a few years ago, the total retail sales in the US that were done through ecommerce was around 10 to 12%. And that was projected to go to 12 to 14, 15%, over about a 24 month period, which doesn’t sound like a lot, but that’s a, you know, a 50% increase, which is pretty substantial. And for every dollar you spend online, it takes somewhere around, it takes three times as much distribution space to get that to you as it does $1 spent in a brick and mortar store. Since going into COVID, we’ve really taken what we knew was going to be a huge growth in ecommerce and the need for distribution space, just pulled all that demand forward. We literally had as much growth in the last eight to 12 weeks since we’ve had in the last eight years in ecommerce. So now those ecommerce sales are more like 30%. And again, when you talk about the demand needed for space, there was an article on CNBC, you can google this, that roughly the US needs over 2 billion square feet in warehouse and industrial space in the next three to four years. And that hasn’t even been built yet. So as a buyer of properties that are existing now, a value add buyer, meaning we buy properties that need a little love either from the standpoint of the ownership, or it could be the physical property, fixing that and then selling it. Owning those properties went inside the city center where that last mile delivery is so important, that hourly delivery barrier to entry for other folks, has been a huge wind in our sails. While COVID has been obviously, so devastating to many parts of the economy, hotels, restaurants, retail, in the real estate world, it’s been, you know, in a macabre way good for us. In March & April, we received over 99.3% of the rents we expected to receive. A couple of tenants who got a deferral make that up before the end of the year. And then since then, May, June, July, August, September, we’ve received 100% of our rents, that’s actually more than we did the years before. So distribution need is going up, traditional warehouse space for on shoring things bringing them back from China, from Vietnam, having toilet paper, hand sanitizer on hand versus having to ship it in just in time has just been a huge support of our business.
Erik Flegal
Right. So take me through like if you know people know about Amazon, obviously Amazon as a stock’s blowing up. People know this ecommerce trend is coming. What are typically the ways that people get involved in, you know, commercial real estate, specifically ecommerce. Now I know one way is obviously limited partners by you, but can you take me through some of the different ways that people could participate? If they were interested in doing it?
Mike McDaniel
Yeah, I mean, if you want to play the ecommerce world, which is again, we sort of balance between, obviously, ecommerce is a big impact in business, but also just traditional distribution where folks like Luxottica or Plumbing Supplies or FedEx and UPS all who are, which are tenants of ours, you know, you can go out and buy the stock, you’re going to be subject to the stock market volatility there, you’re going to have the election interest rates, all the other things kind of playing a role in that, earnings reports. We’re really just a landlord. We own the building and rent it to them, they pay the taxes, the maintenance and insurance on the property, we have leases set up, and the rent increase in those we’ve been experiencing anywhere from 6 to 10% a year, year over year for the past, I think 48 quarters. And so nothing really is projecting right now if that’s going to come back any I mean, again, the demands increasing so it’s a great way to not only get real estate exposure and protect your downside because you’re owning a hard asset that’s outside of the market, it’s not going to be subject to daily fluctuations in price, but also play the bigger macro ecommerce. You know, our fund is set up to pay you, it’s a value add growth and income portfolio. So we pay you rent, per se a distribution every quarter. And then as we sell the properties two to four years down the road, then in our current portfolio, you’ll get the gain from any sales from that on the back end. And, you know, I’ll spare you all the details since we’re you know, short in time, but a great way to play it now. How do you get involved with that? You talk to your advisor, your financial advisor, registered investment advisors, fee only planners and the ones that we have relationships with, you’re able to enter the fund as a limited partner. And we limit that actually we’re about to close our current offering, we limit to usually it has to be under 2000 investors but usually around 1800 or so. So we’re very close to that mark.
Erik Flegal
Got it. And it was the typical cost of a warehouse that you’d buy.
Mike McDaniel
You know, they go for anywhere from 5 to about 25 million dollars in price. 50,000 to about 350,000 square feet, those are the average, probably typical sizes. We play in what we consider a niche market where we’re buying below the radar, the institutional funds because folks raising a billion dollars a month to buy real estate aren’t going to have time to go around and buy 5 and $10 million properties. But above the level of the country club buddies who see a building across the street and want to go in together and purchase it. So a little bit of a niche market, we have enterprise financing setup where we always have the equity and the debt lined up to do so, we keep our debt levels pretty low, usually between 45 to 60%. But that’s sort of our market that we play in. And again, we’re buying properties that usually are a great location, great building that either has something wrong in the cash flow or management of it, we know that it’s under rented or the rent rates are too low for the area, maybe it needs a new roof on it, maybe it needs an extra bay door or the truck court needs extending. So those are some minor fixes kind of like flipping a house, you make some minor changes, like a big impact on the sale price. The difference is it doesn’t take place in you know, one hour show on HGTV, it takes a little bit longer than that.
Erik Flegal
Right. So I guess, you know, I if I had an option I could invest with you and you could kind of canvass that an unknown area. Or I could go out and raise a couple you know, $5, $10, $25 million and buy one of these myself and see how it goes. Right? And what is your exit like? So you get like a couple of these buildings? And then how long does the fun typically last? What do you typically pay once it gets rolling?
Mike McDaniel
Yeah, I think what you’re looking at is the real benefit of doing something like we do is that instead of maybe finding a couple buddies and buying one building for 5 million bucks, the current offering has over 800 million in assets and probably 130 buildings in it. So your diversification is very widespread. Again, the folks like FedEx UPS, Amazon, we own a return facility up in Lexington, Kentucky. Luxottica eyewear, Casey Boots, Williams Sonoma Kitchen Gadgets, so that is spreading across, you know, 9 to 10 different sectors of the economy. Our buildings are multi tenant, so that 130 buildings adds up to about 300 to 400 tenants. So there’s just much more diversification involved. Again, we pay a quarterly distribution, and see anywhere from probably 5 to 6%, depending on where you come in at, or what way you participate, that comes out quarterly, you have a preferred rate of return after that, and then you obviously capture the growth on the back end and we split that with our investors.
Erik Flegal
Good deal. I mean I’m kind of butting up against the end of time here. I want to see if there’s any questions. If not, is there anything that I’ve missed, Mike, that you think is important for people to know regarding your space? I know that’s like a wide open question.
Mike McDaniel
Yeah, I think when you’re considering something like this, you take a look at your asset allocation, you know that we’re not going to be 30% of your money, 40% of your money, we might be 5 to 20% of your money. And it’s a great spot again, that provides some downside protection, great risk adjusted return, again, you’re talking about a part of the economy, that ecommerce side continues to boom, the real estate side, you have a hard asset protection against interest rate rises, you’re a landlord with a lot of areas there that you know what kind of rent you’re going to get with a good broad base. So as long as it makes sense for you, you know, we think it’s a great spot to look in real estate. And again, not too excited. to probably talk about like hotels or malls or restaurants at the moment, but really excited to talk about distribution warehouses. Business is good.
Erik Flegal
Yeah, you did actually just remind me of one thing I think is super important. That income that comes in is tax deferred. And I love the idea of the way that I’ve seen people use it lately. You know, everybody’s looking at how do I protect against rising interest rates in bond portfolio, you know, if interest rates go up, my bonds pay flat or go down in value. What you’re looking at is it not only defends but it also still keeps giving you that tax deferred income in a way that you know, at a multiple that bonds can’t even touch right now. And it’s a really nice kind of income alternative for those assets that may be at risk if interest rates are going up because you do see your rents increasing kind of alongside it. So it’s a nice, you know, complimentary play that way. So, there, I took your plug for you.
Mike McDaniel
Always love dissertation by everybody.
Erik Flegal
Well, super. Yeah. And I appreciate you coming on. I think it’s been a great tool in our sleeve. I love the fact that you know where you’re accessible to us and, you know, just keep on doing what you do. And we’ll have you back on here soon with a new update on hopefully some other really good numbers and other strategies.
Mike McDaniel
Absolutely. Thanks so much, Erik. appreciate your support.