Kevin Kim
You’re listening to Lender Lounge with Kevin Kim, a podcast dedicated to helping our listeners in the private lending industry grow, improve and streamline their business. I’m Kevin Kim, partner at Fortra Law, the nation’s largest private lending law firm. Join me as we chat with the best and brightest in private lending.
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Hey guys, welcome to another episode of Lender Lounge with yours truly Kevin Kim. Today we are graced by the presence of a friend to the firm, someone I worked with for some time now, Wes Carpenter, Managing Partner, I got it right, title right? Managing Partner at Stormfield Capital, you know, a firm that I very much respect, and a very much of a standout on the East Coast. So Wes, please introduce yourself to the audience and give us a little bit of background and let’s get started.
Wes Carpenter
Yeah, thanks, Kevin. First off, you know, thank you for having me and appreciate the you know, the kind words about Stormfield. Very briefly, co-founded Stormfield in 2015.
Stormfield is an SEC registered investment advisor. We currently manage three quarters of a billion dollars on behalf of, you know, venerable institutions like endowments, foundations, wealth management firms, etc. But what we do, you know, hopefully topical for today’s conversation is we originate first mortgage bridge loans.
So, that’s everything from RTLs, up to about, you know, 20 to $30 million commercial bridge loans. So we do cover kind of that gamut, which is a little bit unique. We’re a team of 22 professionals operating office in Connecticut.
And again, you know, I’ve been investing in this asset class since 2010. And again, Stormfield, as constituted today, actively started investing in 2015.
Kevin Kim
And you guys are a little bit different than a lot of the debt funds out there in the space, all the private lenders out there in the space, in a lot of different ways. I mean, you you do both CRE and residential. But before we get into that stuff, you guys first came onto the scene as an advisor, you weren’t a fund first, you weren’t a lender first, you were an advisor first?
Wes Carpenter
No, we were always a lender. So yeah, we were a lender kind of from day one. You know, interestingly, right, we were never like many of the market participants today, you know, we were never brokers. You know, we were never advisors.
You know, my background personally was actually as a multifamily investor. So that’s kind of how I cut my teeth in in real estate and asset management was on the equity side. My business partner, Tim Jackson, you know, he was an institutional asset allocator.
So, he came from, you know, the, like the true kind of Wall Street, you know, side of the business. But no, you know, we are I think that’s kind of one of the one of the things about Stormfield that makes us unique is, you know, we are we are investors first, right? We believe that the rate the loans that we, you know, find and underwrite and originate are extremely valuable.
And, you know, we never want to sell those loans. So, you know, we recently just celebrated, you know, $2 billion of loans funded. But I think what makes that a little bit different from some other firms who might hit that milestone is, you know, those loans were funded on our balance sheet and will be held to maturity on our balance sheet on behalf of our investors.
Kevin Kim
Still, and especially in the RTL sector of now relatively rare fund strategy now, right? And I’d like to kind of get into the first iterations of Stormfield now, 10 years ago. Wow.
It’s been, I think it’s been around 10 years now.
Wes Carpenter
We’re getting old.
Kevin Kim
Yeah, that’s great. I mean, did you guys start out outright to the market as just direct lender with a fund? Or did you guys start out more co-lender or just self-funding?
What was the, what was the first kind of genesis of the company?
Wes Carpenter
Yeah, 2000, really 11 through 15 was right. Hung a shingle, started finding some interesting deals. You know, the first handful of deals, you know, I funded myself.
You know, that’s ultimately how I met my, my business partner, Tim Jackson is, you know, I was effectively syndicating loans, right. Hard money loans, private loans, you know, call them what you will. And over time, right.
2012 to kind of 2015, right. Syndicating these loans across high net worth investors, developed a track track record. You know, you start getting kind of word of mouth, you know, you did deliver on a loan for an investor and they’re going to tell their buddy that, you know, at the time we were lending at 13 and three, 14 and four, it was a great time to be a lender.
And ultimately, you know, it got to, it got to the point where, you know, I think on the personal side I was making more money doing deals than I was at my day job. At the time I was working as a management consultant. And so, you know, at about the age of, you know, probably 29 or 30 decided to have a full go at it.
And that was 2015. Now getting our first fund off the ground, right. Like we had, we had great aspirations.
It ended up taking a year and a half before we got our first fund off the ground, right. Even though we had a track record that went back, you know, kind of five years, it was, it was thin, right. It was probably a five year track record, but maybe only 12 or $15 million of, you know, loans originated.
But, you know, getting that fund off the ground, right. Answering all the questions is an open-ended or a closed-ended fund. What are the fees going to be?
You know, do you do a subreed, et cetera, et cetera, et cetera. Had to answer all those questions. And finally it was October, 2016.
We got our first, you know, fund off the ground, which is the Stormfield Real Estate Income Fund, which is our, is our flagship and, you know, track record kind of speaks for itself at this point.
Kevin Kim
So, so in that traditionary period where you’re still doing like basically syndicating loans to get the deals done.
Wes Carpenter
Yeah, exactly. Yeah.
Kevin Kim
Yeah, makes sense.
Wes Carpenter
That was, yeah, that was, that was kind of 2011 all the way through. We launched the first fund in October, 2016.
Kevin Kim
Right. And it’s clunky, right. And that can be a little bit painful for a sponsor to have to manage all those different people, all those different transactions.
Let me ask you, like, was there a particular moment for you guys that, okay, we have to go direct and be a balance sheet lender? Like, was there a moment that made you realize that? Or was it, is it just like, okay, you knew you were going to do it out the gate?
Wes Carpenter
I think it was a confluence of things. Right. First and foremost, there was the issue that, you know, maybe taking a step back, right.
Everyone, everyone who, who doesn’t have a fund, I feel like wants a fund, right. The problem with a fund is that, right. The cash drag, once you have a fund, the cash drag becomes your liability, right.
When you’re syndicating, right. Loan pays off. You give that money back to your investor and they can, they can sit on the cash and deal with the cash drag.
But when you’re operating a fund, particularly an open-ended fund, that, that becomes your responsibility. Now, the other side of that ultimately is, you know, we’d gotten to the point where we, you know, we had, you know, probably a few dozen investors who would, you know, this is again, back before the fund, few dozen investors who may be invested in four or five loans with Stormfield. One of those loans goes bad.
And by bad just means it goes into defaults. The cash flow turns off. There’s no impairment of principle.
It’s just that, right. The cash flow turns off when, when that happens to one out of four, one out of five loans, right. The investor’s investment in that asset class, it’s character changes, right.
And we ultimately believe that right. Diversification is one of the, the only free lunches in investing. And so I, I ultimately think it was two things.
One, we wanted to build the best product we could for our end investors, right. And that meant a diversified portfolio of loans where there’s no constant credit exposure to any one position. And then the other side of that, you know, quite frankly, is, you know, if we’re going to, if we think about our, our LPs, our investors as our number one client, everything we do is for them, right.
Protecting their principle, generating an attractive risk adjusted return for them. You know, our second client, quite frankly, is our borrower and right. As anyone who’s, you know, operated in the market, syndicating loans, right.
You can’t deliver on that promise of speed of execution, security of execution. If there’s ultimately syndication risk in the background, right. So a, we wanted to build the best client or product for our clients, the, our investors, limited partners.
And then secondarily, we wanted to make sure we can deliver on our promise to our, our second client, right. Our borrowers to provide them with the best product that we possibly can.
Kevin Kim
Being a true balance sheet lender gives you that, I guess you can call it accelerated speed to close, which is interesting. The Genesis for you guys was kind of when the market started to see a lot of institutionalization, you started to see a trend away from the fund strategy, the balance sheet lender strategy, the direct lender strategy, you started seeing a head turn towards what I would call correspondent lending. A lot of guys are table funding.
What was it not your speed? Was it not something you weren’t wanting to pursue? Because I’m guessing the options were open for you because you’re also in the East Coast.
And a lot of those guys are based in the East Coast, right? Those programs are all in the East Coast. So, what was the reason not to get involved with those guys?
Does that mean you can do more deals, right?
Wes Carpenter
Yeah. I mean, yeah, I mean, look, I think, I think it comes down to, you know, a few things. One is right, this philosophy of, or just a notion of controlling our own destiny, right?
As an entrepreneur, as a business owner, right? That’s kind of why you set out on your own is because you want to kind of control your own destiny. And right.
What you realize is if you partner with whether it’s a correspondent or whether, you know, a JV, right, you have a binary outcome, right? The wins can be big, right? If you sign up a good JV, you know, good JV, and, you know, allow you to produce as much as you want to produce, you have investor concentration, you have customer concentration, right?
And think about any kind of private equity firm when they’re looking at buying a company, right? What’s the customer look like? And there’s any customer concentration.
If I, if I have 90% of my dollars coming from one investor and that investor turns sour on the asset class, find something that’s more interesting, et cetera, et cetera, you know, my business blows up, right? And it’s not just the business blowing up. It’s right.
The people that have helped you build your business know, you know, you have to let them go. And so for us, it’s always been about building a stable business, right? With a diversified client base, such that the investment management firm Stormfield Capital is, is durable and can continue investing over long periods of time.
Kevin Kim
Yeah. And, and it’s a…..I mean, I commend you for it because you didn’t face the same woes a lot of folks did during the crisis we had during COVID, right? I mean, shutdowns happened.
A lot of folks couldn’t continue to lend because they were overly reliant on what is now viewed as we kind of call it the secondary, right? They were overly relying on that segment of the market. And small shops aren’t around today.
Good. Yeah. I mean, so let’s, let’s take a look into kind of the lending style of Stormfield because you guys, when you, when we first met, I was under the impression that you were more of a CRE shop.
And then I was, I was happy that you did RTL. And to this day, you guys still keep a footprint in the CRE sector, right? The projector and those kinds of loans.
Was that always the case in the job where he has more multifamily when you started, because you have a background in multifamily, like what was that like for you guys?
Wes Carpenter
For me, you know, kind of my background, you know, as a multifamily investor. And just to be clear, you know, I was very much a bootstrapped multifamily investor. So, I was buying kind of one to 10 unit properties, you know, with all my own, you know, cash, I was doing, you know, value add, not flipping, but just holding for kind of long term, you know, income generation.
So, you know, that, that, that was the asset class that I knew. And it was the one I liked. I mean, maybe just stepping back, right.
Why, why invest in real estate? I think there are a lot of reasons, but I always appreciated, you know, the, the entrepreneurial nature of real estate, right. If you’re willing to be disciplined and work hard, you can affect the investment outcome.
You know, I think sometimes external market forces while obviously there’s very clear interest rate sensitivity again, through perseverance, you can control the outcomes. When I, when I learned about the asset class of right bridge lending, right, real estate secured bridge lending, the aha moment for me was, oh my God, I can land 50 cents on the dollar, generate a mid to high teens return against the same assets that I was right. Working really hard to buy and manage.
And it was just like, if you can do that, why wouldn’t you do that all day long?
Kevin Kim
Right.
Wes Carpenter
And so I think that was, that was the initial premise. So, there was a long, it’s a long winded answer to ultimately say, you know, we have always been residentially focused. So, RTLs, you know, fix and flip loans, you know, small balance, you know, multifamily you know, that said, right.
The premise has always been, if you can find asymmetry asymmetric, you know, risk opportunities in the market, do those deals. And I think invariably because there’s a void of capital in the small balance commercial space, you know, asymmetric risk opportunities, you know, if you’re disciplined, you know, will present themselves.
Kevin Kim
Yeah.
Wes Carpenter
And so, you know, we’re in, for example, you know, we are not active, you know, retail lenders, right? So, if a sponsor wants to, you know, buy a dated strip mall and they believe they can, you know, renovate the units and increase occupancy on a, you know, a route one somewhere, you know, we’re probably not going to do that deal, but four or five times a year, a special situation, triple net lease retail deal is going to fall into our lap because we are in that market where we can make a, you know, 60% loan to value loan with great, you know, great credit sponsor, and they just need some transitional financing. So, you know, we’ll support those assets when it makes sense.
Kevin Kim
Right. So, it’s not the primary driver for sure, right? Not at all.
The small multi has always been something that’s kind of a been, I have a small little brother of RT, I guess you can call it, right? That’s, you know, the eight to 10 units, seven, 10 unit, and it’s coming back in a big way in our sector. Particularly, we’re seeing a lot of headway, you know, headway made in the DSCR sector.
Wes Carpenter
The way that I think about it is, you know, because some of this is also just following your clients, right? And the path that you typically see fixing and flipping single family houses is a great way to generate short term, like a nice chunk of cash for, you know, for the, for the borrower, right? The fact of the matter is like, oftentimes that’s going to be taxed as, as ordinary income.
And what we see is a lot of those folks over time, right? They graduate, right? They, you know, long building, long-term wealth and real estate isn’t about, you know, fixing and flipping houses and making 30, 70, a hundred grand per flip.
It’s about ultimately, right? Buying cash flowing assets and holding them for long periods of time, right? That’s how you get very well.
Kevin Kim
You’re seeing the market evolve. Yeah. And that’s not, you know, what was once the auction house buyer, get it off the balance sheet in a week or two, right?
Now is with the DSCR product has been able to allow these folks to be able to invest in long-term, which has been really nice for our lenders, both on the RTL side and the DSCR side, it’s been really fruitful for them.
Wes Carpenter
Yeah. And for the end, and for the end borrower, right? Because of course, you know, being able to hold on to those right cash generative assets and not have to sell them after they value add, it’s, it’s a, it’s truly a win, win, win.
Kevin Kim
Right. I like to kind of ask you about the kind of mid-stage of the company as you guys are growing, because you started as a fund manager, you had your debt fund. It sounds like it’s a relatively kind of similar to what we see out there, open-ended Reg D kind of fund, high net worth investor driven as their starting point, but you made a transition to more of an institutional asset manager type role.
Give us some color into that kind of, into that transition, because that’s couldn’t have been easy. That’s a very big lift for a lot of, I mean, it’s a dream for a lot of, a lot of our sponsors.
Wes Carpenter
Yeah. Yeah. No, I mean, it was, you know, certainly a long process.
It was what we had always sought out to do. And I can’t take credit for this. My business partner, Tim Jackson again, who came from the institutional asset allocators world right.
He had a vision that, you know, we could institutionalize what is right. Ultimately a kind of in the grand scheme of things, a relatively nascent asset class, right. With a very attractive, you know, risk return profile.
And, you know, what we had observed was right. There are a lot of really good investors in our business, right. The problem is oftentimes they would put a non-institutional wrapper around their business, right.
And that’s going to be everything from what’s the, the, the, the fund structure, the fees, the terms on the fund, liquidity provisions, you know, hiring a, you know, a CFO, that’s a family member, right. All of these little things that an institutional investment firm would never do. It’s what ultimately holds people back.
Right. So, when we set off, set up, we set Stormfield up, we said years one through five, you know, we might not be managing money for university endowments or charitable foundations. We need to continue building our, building our audited track record, but we’re going to set the fund up today such that ultimately we can do that.
And then from there, it was just a matter of putting our head down, doing the work, building the track record. And, you know, like, you know, like we ultimately believed, right. It took five or six years of track record before you started getting looked and getting to a certain size, right.
Because these institutions, they want to write $25 million checks. They never want to be more than 10% of the fund. And so you need to ultimately just get to a certain scale before you can get the looks.
Kevin Kim
But you’ve kind of proven the argument that it is feasible for a balance sheet lender to, in RTL particularly, to attract an institutional counterparty and be a balance sheet lender and maintain their same formula. Because what became sort of the expectation in the marketplace was, oh, we can attract an institutional partner, but we’re going to have to get used to either heavy leverage or selling a lot of paper to the secondary. And it might be a new secondary, it might be the upstream secondary, but we’re going to have to get used to doing that.
And you guys didn’t have to do that.
Wes Carpenter
We didn’t. And, you know, what I would say was, right, that temptation was there, right. Because that temptation would have meant an acceleration of revenue generation in the short term.
But, you know, again, we just, you know, we remained, you know, we ultimately believed that, again, this is about, you know, I always say, I always say, like, you know, the way you get, right, the way you get wealthy in, because we’re, think about our business, right. We’re ultimately a fixed, we’re a fixed income alternative. I think when done well, yes, we are an alternative, right.
We’re a private credit alternative, but we’re a fixed income alternative. Oh, yeah. And you don’t get, you don’t get wealthy in fixed income hitting home runs, right.
It’s about staying power. It’s about building a durable business with a repeatable investment process. And you, you know, you get wealthy doing that by generating exceptional returns for your investors over long periods of time.
And so we’ve always kind of, you know, when presented with all the opportunities, right, sell loans, right. When you can make a four or five, six point rip on the loans, partner with a, you know, a partner with a capital partner, but we’ll take down 95 or 98% of all the loans is tempting as that would be, again, for reasons previously mentioned, we’ve never died.
Kevin Kim
Right. And on the fund, you mentioned something earlier, you and I have discussed this, you know, on panels and other things, but you guys made a very intentional choice early on in the fund structure and design that not many sponsors do. I mean, it’s becoming more common now.
I feel like you had something to say about that a few years back, but you know, it’s one thing is, and as a securities attorney, one of the things I always see is early stage sponsors are trying to keep things on a very low budget because then they know they’re not going to be that profitable early stage. But I always warn like that could be the one of the worst decisions you can make. You guys went full bore, full audit, full fund admin, institutional grade structure early on.
What was the driving force? Just, you knew you were going to head there in a couple years or like, you know, cause you could have transitioned, you know?
Wes Carpenter
That’s what it was. And, you know, we, you know, we did over time and, you know, increase the quality of our service providers. Surely just for example, you know, now, you know, Deloitte is our auditor, but we didn’t start with Deloitte, you know, we’re going to be launched in October of 16.
I think the first close was maybe four, 5 million bucks. We couldn’t afford Deloitte. So, we had a lower cost service provider, but what we knew was that we needed, right?
Our financial statements audited. We knew that third party administration, right? That’s, that’s table stakes, right?
Yeah. We can, we can do all the accounting ourselves if we wanted to, but an institutional investor wants to see that there’s a third party calculating the books and records, you know, every single month or quarter.
Kevin Kim
So, someone they probably know as well, they have to make sure that they’re actually an actual real administrator. That’s an asset too.
Wes Carpenter
No, I think what’s, what’s great. And, you know, we’ve obviously had the opportunity to speak with some of these folks on, you know, at some of your conferences and some of the panels, I think what’s, what’s really nice to see is that service providers have found our industry. And I think today versus, you know, 10 or 12 years ago when I started out, when, you know, there weren’t very many service providers in that kind of low to kind of mid tier range that could help an emerging fund get off the ground.
And so just one nice benefit of our, I think our industry coming of age is that right. The, the population of service providers, this has gotten, you know, much more.
Kevin Kim
And much more advanced too. I mean, the interesting part is the big shops are also making their, their headway into our sector and it’s, Deloitte’s a good example, right? Deloitte, KPMG, they’re, they’re now creating programs that are designed to fit what I would consider a mirror, a middle market player, not necessarily an emerging player, but a middle market player can be a good fit for those kinds of shops now, thanks to a couple of different changes they’ve made to their service profiles.
Let’s talk about the kind of growth of the fund real quick, because one of the things that you mentioned earlier, you got to the five year-ish life cycle. Was there anything else besides the, you know, the audit, the admin, obviously the quality of the sponsor, the quality of loans, that goes without saying, I think the audience understand. Was there anything else besides, like, was any kind of key events that allowed that fund to really like, oh, now we’re cooking with gas, right?
Was there something that happened in the, in the, like during those five years or after those five years?
Wes Carpenter
One of our fund, our fundamental integrate, and this is just, this is us, right? This is ultimately us, you know, being very deliberate about how to best attack this asset class. And it’s, it’s, it’s nothing more than an opinion.
But we don’t believe that using structural leverage on these types of loans is ultimately good for the investor, right? We, we are able to generate right net of fees, high, single low, double digit unlevered returns in this, in this asset class. Now, if you put a turn or a turn of a half and a half of leverage on a portfolio of these loans, you can get that up to, you know, 13 to 15%, you know, net of fees.
But what I think is oftentimes missed is what happens not only to the investment performance, but what happens to the platform when the tide goes out. And, you know, we saw that, you know, very clearly, you know, with COVID obviously securization stopped, but you also saw, I’m sure, and I’m sure you consulted with many clients on this, right? Like banks pulled out of the warehouse business, the leverage dried up.
And now all of a sudden you as an investor are forced to generate liquidity at the absolute worst time. So, you’re selling loans, maybe performing loans at a, at a discount just to pay back your senior lender. And, you know, again, it’s that same type of issue, right?
The leverage works when it works, but when it doesn’t, it’s really bad.
Kevin Kim
And so this is back to the idea of independence for you guys then.
Wes Carpenter
Exactly. It’s back to this idea of independence. And to answer your question directly, when those type of market events happen and Stormfield is still sitting there, right.
Unlevered ready to continue to lend, right. That’s when we not only gain market share on the kind of the origination side of the business, but then our investors, I think they, what they see is they see, wow, right. We are in this very volatile time.
Stormfield is still performing, right. And then they, you know, we’ll either make net new investments we’ll bring on new investors. And so we’ve been, you know, in a lot of ways, our biggest periods of growth in terms of production, my loan production and, you know, asset under man assets under management growth have been in periods of market dislocations.
Kevin Kim
So, then that raises an interesting question is like right now we’re kind of in the weird, in this weird stage in life cycle where leverage is quite common. So, not just funds, right. I mean, I would say the vast majority of debt funds in private lending have some leverage, right.
Moderate just to, you know, moderate meaning kind of sub 50% of the portfolio value of the equity to, you know, as high as a straight, you know, one to one ratio. Now, then you all add in the layering of securitization, right. Now securitization is becoming quite common.
And it was once a thing that only companies like Turac could do is now being democratized to your local lender. And so now we’re seeing an interesting phenomena and that’s all leverage, right. For the uninitiated securitization is a really fancy version of leverage, right.
And so now we’re in this phenomenon of the market being quite akin and quite accustomed to various forms of structured finance, right. But that creates an interesting phenomenon for you, right, because now you’re having to keep up, compete. What’s the, what would be your response to that kind of change in market condition because your competitors that are of a similar size or smaller are now pursuing securitization, right.
And so, and they also have lines of credit and because now the asset managers are doing the lines of credit and becoming quite, leverage is becoming quite robustly offered. What, what is your response in that situation to maintain competitive edge?
Wes Carpenter
Yeah. I mean, ultimately, if, if we, if we get to, and this happened, right, this happened for us in 2019, I think it was 19, 18, 19, you know, securitization, you know, certainly now that they’re kind of 2021 peaks, but securitization was, was firing. And, you know, we got to the point where your standard RTL was going out at, you know, 75 LTA RV, you know, 95% loan to cost, you know, the, the, the level of diligence on sponsor experience was just getting like weaker and weaker.
And we basically, we stopped making fix and flip loans. We said, we’re not going to play that game because it just doesn’t make sense anymore. And that’s where the ability to kind of, to transition between, you know, lending strategies, you know, is really valuable, right?
So, I think at that point, right, we just basically said, look, we’re not doing any RTLs unless we can be at sub 65 LTA RV, you know, 85 LTC with, you know, local experience that we can, we can verify. And, you know, we made value and multifamily loans, right. Which turned out to be, you know, good, a good period to, to do that in quite frankly.
So, I think that, I think that’s, that’s, that’s really it. Now we, you know, think about today. So today’s market, right?
Where are we today? Right. I think it’s a really interesting time for RTL securitization.
I mean, the fact that we got, you know, we’ve gotten rated deals done, I think is a, you know, a great thing, you know, broadly for our, our, our asset class. I think it’s a great thing for, you know, the super majority of, of, of market participants. But I would say, I would say this, you know, I would, I would ultimately just ask the question for the end investor, right?
The end investor in the bonds, what are you getting for all of that market structure? And I’d leave the question there, right? Because I think what I know definitively is securitization is very good for the investment manager, right?
I can securitize, you know, whatever I can do a $200 million securitization, hold a, you know, a reasonably small kind of equity piece, right? Get a very high amount of leverage. Everyone gets paid.
I guess my, my question for, you know, my question for the investor is, are you being adequately compensated for the risk? So, all that, all that market structure, none of it’s cheap, right? The lawyers are making money.
The AMCs are making money. All the third parties who are testing the appraisals after the appraisals are done, everyone’s making money. Everyone’s chipping away at the economics of that pool of loans.
And that’s what we’re talking about. We’re talking about a pool of loans and you securitize, you’re just introducing a lot of service providers who are chipping away at all those economics. And my ultimate question is end investor, what are, what are you getting for that?
Kevin Kim
Bond investor is making a straight note rate if you think about it. Right. And so, and it’s slicing the dice, at least in the two tranches.
Yeah.
Wes Carpenter
And, and, and I think for the, for the, right, for the investors, for the lenders, you know, who are listening to this podcast, we know where the risk is, right? These, these returns that we generate, it’s not free. We, we know where the risk is.
We know where the level, you know, we know where the leverage levels are. And, you know, we know, we know what’s going on there under the hood. And, you know, again, a question for Mr. Bond investor, right. Who’s buying in, you know, whether you’re buying in the A1 or kind of A2, you know, are you being compensated adequately for the risk in the portfolio? Or is the, or, or is the premium being eroded by the service providers to create this market structure? I think, I don’t know the answer, you know, maybe I’m leading a little bit here.
Maybe I have an opinion, but I think it’s something that should be looked at quite frankly.
Kevin Kim
You have some valid points in the context of the return profile is not very high compared to what a balance sheet can produce, right? If you really just distill it down to its core structure balance, you could easily produce a much higher coupon. What I’ve been told, and this may not be true, but I’ve been told is that there’s, there’s a lot of what I to the way this thing is run that give the institutional investors, the pension plan investor, right?
Basically those are the core investors, right? And it gives them comfort, as you can say, right? And all those service providers are the reason why they get comfortable, I guess, right?
And so that goes back to the question mark for them is like, well, why can’t you guys get comfortable downstream? Because really who better than to manage this portfolio than someone like yourself, right?
Wes Carpenter
And that would be, you know, clearly, I mean, that’s, and that’s, that’s clearly my view, right? That’s also me talking my own book, frankly, sure, sure.
Kevin Kim
You’re self-interested in, but at the same time, as an industry rep, you know, I don’t disagree. I think that there should be, I’ve always racked my head around the pension plans have always had a very big hurdle to breaking into the direct kind of mainstream main street level, middlemen, the actual sponsors. There’s always been a massive disconnect there.
And we don’t see the same level of disconnect in other forms of credit, right? In commercial real estate, even we don’t seem to see the same level of disconnect between the life codes, the pensions, and the direct lenders. What is it about our industry on RTL or DSCR construction that is keeping them from going direct to the sponsor?
Very interesting question, because there are several that would, I would, I would say meet the institution, what I would call institutional grade type programs, right? It’s an interesting question. I don’t, there’s no answer for it.
I don’t know that there’s an answer for it.
Wes Carpenter
I think I do. I do believe that, right. And again, it’s interesting to study, right?
It’s interesting to study, like you study the securitization markets and why does securitization begin 50, 60 years ago, right? They were ultimately looking to generate liquidity for loans that backed veterans’ homes, right? That, that’s why the first securitization got done.
And so, you know, you fast forward to today, right? You are bringing liquidity into this market, which is helping to, right, transform dated housing stock for, you know, today’s population. So, I think in many ways you are, right, you’re doing very much of the same thing that, that, that the market structure originally set out to do.
I think there are some, there are some differences though, that I think just investors need to, you know, again, needs to be aware of. I’m not passing, I’m not passing judgment on, but right. I think, and I think it comes down to the, right, what’s unique about our business, right?
The RTL business. And again, I give a lot of credit to, you know, John Beacham at Toorak, who I conquered a lot of, a lot of, a lot of these issues that the end bond investor had with the, right, the short-term nature of the loans and the need to kind of re, you know, reinvest the portfolio and how, how liquid these pools are. But I think, I think that’s where the rubber meets the road, right?
Like that, that short-term nature of the loan makes it a challenging product to, to securitize. And look, it’s been done.
Kevin Kim
Um, but at the same time, this is not a new thing. Like this, this was the funny part. It’s like commercial bridge had hits its era of CLOs.
They still do some CLOs. It had its era of CLO activity, you know, non-QM, it’s longer-term product, granted, mind you, but it’s still, they have their residential, they had their own, you know, they’re still doing a lot of securitization in that sector. What’s strange is at least in commercial real estate, it transitioned.
It felt like where the LifeCo’s particular pensions never made, made a move down, but the LifeCo’s made a move downstream and the asset managers made a move downstream direct to the street because they realized, wait a minute, I don’t need to do all that. I can just fund it on the balance sheet. And so I’m hoping that our space takes an idea from that market, not necessarily the non-QM market, because it’s, there’s just too many starts and stops in that sector.
I mean, the amount of layoffs that we’ve seen in non-QM is mind-blowing.
Wes Carpenter
Crazy. I think the, you know, the, and groups are obviously doing it, right. You know, many of these large asset managers and their kind of captive insurance businesses are kind of already in our space in some various forms, but I do think, right.
Kevin Kim
I think they’re more concentrated on DSCR, to be honest with you though.
Wes Carpenter
I think that’s right.
Kevin Kim
That’s what I was saying. They haven’t wrapped their head around the short-term nature of the RTL product, at least for the balance sheet. Yep.
Yeah. They’re a little uncomfortable with it still, it feels like.
Wes Carpenter
Yeah. I think, I think there’ll be some, right. There’ll probably be some interesting, I think they’ll take the form more of, right, separately managed accounts, right.
I think that’s the way, right. Because there are constraints that insurance companies have in terms of- And there are aggregators that do that, right.
Kevin Kim
And so my question will always, is always going to be, when do these guys get comfortable coming down to the actual originator and being I’m not asking for them to be a fund LP, but I am asking like, you guys should really give the, give the actual asset manager the shot, the actual originator of the shot. Because if they’ve got the track record and they’ve got the servicing book, they’re a better asset manager than you think. I think that’s the question.
They don’t think as highly as of a direct lender as compared to some guy that has, you know, five years on the street, you know. Yeah.
Wes Carpenter
It’s a, it’s a, it’s a great point. And I think what’s, right, what’s interesting, and I’m sure you’ve observed this, but right. You’re starting to see the price and disparity and self-originated deals.
So, securitizations that are originated by the issuer versus unrated or rated, right. Basically aggregated deals, right.
Kevin Kim
Yeah.
Wes Carpenter
Yeah. And so I think the market is starting to realize that there is value in the, you know, the issuer being an originator. And I think the market over time will continue to give, right, a better bid on the A1 for investors who are both originators and asset managers.
Kevin Kim
I tend to agree. I think, I think we’re, I think that’s going to be the future trend of securitization is that you’re going to see a lot more direct. Like it’s going to have to be, you know, I mean, Kiavi basically established that for everybody, but even the smaller shops that they’re going to all end up doing, I mean, there’s so many right now that are gearing up for one.
And so when Rain City did their first deal, that was kind of the, kind of the big gong for everyone. Like, okay, this is feasible for a direct lender. It’s not just for the big shops, not just for the Wall Street types to do, which is great.
I mean, I give kudos to the bankers that can, you know, bring this downstream to our larger shops. And hopefully this becomes something where it’s not so complicated for everybody to do. But at the same time, I see your point.
Like if you can, if you can do it without leverage and you can do it without all of that, and you can do a good job and you have the capital resources to do it, why wouldn’t you? So, you know, and then we’re, this has been a nice discussion on capital markets, right? And where we’re headed.
But you know, one of the things that I like to ask you is, does that push you now into more, or at least the time being into much more commercial style assets, right? Because that’s, I’m seeing a lot of opportunity in that sector, right? There may, we have this, we just had our conference last week and one of the discussion points is that it seems like commercial is back, at least in multifamily and something, you know, triple net lease, a little bit of industrial, they’re making its way back.
Is that going to be something more you guys concentrate on for the time being?
Wes Carpenter
We’re committed to residential, like residential lending, you know, and just because, right, there’s more liquidity chasing, you know, RTLs, we’re still going to find pockets of opportunity. You know, if we have to, right, find those deals that make sense and earn a little bit less on them, you know, we’re going to do that, right? We’re not going to push the risk level to kind of keep our returns, you know, propped up, right?
We have a very targeted kind of risk level that we’re looking to maintain. Now you could, as I said earlier, right, you could get to a point where so much capital flows into the space that you just have to ultimately say, like, look, I’m might as well just do the equity if I’m enough.
Kevin Kim
Well, we’re hearing complaints of similar effect, right? And so, you know, I’m not going to name names, but like a lot of our sponsors that we meet, especially when we’re on the street at conferences, they’ll tell us like, man, I just can’t compete with these guys. They’re killing me.
We’re seeing a lot in California, at least. And so, I mean, you guys on the east coast have been luckier with that. There’s not been as much rate compression out where y’all are, for sure.
Wes Carpenter
No, we have the benefit of judicial foreclosure. Which makes it more expensive to operate, for sure. Yeah, so we need to be, I think it keeps a lot of the west coast capital, you know, at bay and doesn’t kind of flood in as much.
Kevin Kim
Right. And for our audience to give the idea, what are your kind of core markets for Stormfield?
Wes Carpenter
Yeah, about 35% of our book is in greater New York City. We do a lot of lending in Connecticut, Massachusetts, you know, 15% of the book in Connecticut, 15% in Massachusetts. And then we really kind of lend down the eastern seaboard, kind of Carolinas through Florida.
You know, it’s just interesting kind of current market observation. You know, at one point we had as much as 28% of our portfolio in Florida. You know, we’ve trimmed that back to 14% as of today.
Kevin Kim
Is that because of the insurance issues, the fraud, I mean, or all of you?
Wes Carpenter
Yeah, it’s, it’s, it’s, it’s predominantly like, I think there’s two, you know, the hurricanes led to the insurance. And then I also just think, right, you have this unwinding of, you know, not everyone who moved down to Florida during COVID is going to stay there kind of long-term, right?
Kevin Kim
You’ve had a lot of- More Florida seeing a little bit of an exodus. Yeah, I know.
Wes Carpenter
You know, return to office. And so I think Florida, I mean, you look at the west coast of Florida, some markets are down 10, 12%, you know, year over year. I think that, I think they probably have some more to give quite frankly.
Kevin Kim
Yeah, it was starting to get a little crowded down in Florida too. I feel like everyone was lending down there.
Wes Carpenter
It is. Yeah. I mean, like, you know, Texas and Florida just got, you know, became so, became so crowded.
Kevin Kim
At one point we noticed that the rates and nice major metros in Texas were lower than California.
Wes Carpenter
Really?
Kevin Kim
It’s fascinating. Yeah. We were like about 50 basis points higher than Austin, Dallas and San Antonio.
It was fascinating.
Wes Carpenter
Yeah. I’ve never, I’ve never seen that data, but like anecdotally, it doesn’t surprise me. We’d made some, we’d made some pushes into Texas, call it 2022, 2023, and put on some, put out some good loans.
But very quickly we saw that again, there’s just so much competition. And, you know, we certainly didn’t want to chase in a market that wasn’t, you know, we didn’t know really, really well. Right.
Right.
Kevin Kim
And I want to kind of ask now, when what you meant, you said that you coined the phrase before we started the podcast, but you’ve taken quite the contrarian position to the market. Like there’s not a fund manager out there that looks like you guys. I know one very similar to you guys.
They’re pure balance sheet, no leverage. Like, you know, they’re not, they don’t manage assets for institutions, but they, you know, they’re multiple funds, but they have a very similar philosophy and the lending criteria. They’re the only one that looks like they’re here on the West coast.
So, you might have a twin out West, but most of your colleagues and competitors that look like you have not taken the tack that you have. And so I like to kind of expand on that a little more, like what’s driving that country? Is it just confidence in what you’re doing?
And what’s, what is that? Because it’s, you have to have been approached by several providers out there.
Wes Carpenter
Yeah. I mean, look, we’ve been, we’ve been approached by everyone looking to buy our loans, buy our management company, um, set up JVs. Um, you know, what, one of the things that someone, you know, when I was a younger man starting in this business, someone eventually, you know, someone at one point said to me, he’s like, you just could keep producing good loans and eventually you’re going to have more capital than you know what to do with.
And I think, I think that is ultimately come true. Right. I mean, we, we’ve produced, you know, nearly 2000 individual loans since inception, you know, our performance, uh, and track record is, uh, very good.
I’ll leave it there. Um, and ultimately, right. I mean, we could, there’s infinite capital that we could take in for this strategy.
Now, if we were to take in, you know, like we managed $750 million now, if someone tried to drop $500 million on us, it would, we couldn’t deploy that, that capital, right. Given the turnover, the portfolio, we couldn’t deploy that cap, but it would take us, it would take us a year to deploy an incremental $500 million.
Kevin Kim
Um, because you’re not considering to change the strategy, then the strategy remains the same.
Wes Carpenter
The strategy remains the same. And like, there’s always, there’s always growth and there’s transformation on the margin. Right.
But I ultimately think that, right. Keep it simple, right. Do what you’re good at, you know, don’t get distracted.
Right. These are some of the principles I think have ultimately kind of, you know, guided us as an organization. Right.
And that’s everything from, Hey, you have all these fix and flip borrowers. Why don’t you start selling DSCR product?
Kevin Kim
Yeah. I was going to ask you, but it’s not, DSCR is not a thing you guys do very often.
Wes Carpenter
No. And you could think for us, like it may seem like we’re leaving money on the table, but right. I have, I have limited resources.
I have limited time. Do I want my resources focused on brokering, effectively brokering alone to make a couple points or do I want my resources focusing on originating the best short-term RTL or commercial bridge loan that I can hold on my balance sheet for my investors who are going to, you know, stay, stay with us for seven, 10, 15, 20 years. Right.
And so it’s all about, in my mind, it ultimately comes down to, or, you know, you have limited resources and are you trying to build a cash flow for one to two years, or are you trying to build a cash flow for 10 to 20 years? And we just try to systematically make the decision that builds the cash flow for longer periods of time.
Kevin Kim
So, there is that level of like, we’ve gotten here successfully by sticking to our guns and our investors. You’re thinking about your investors as the driving factor behind it. Cause they’re the ones that you’re thinking about their perspective on this.
So, you don’t want to disappoint them. It sounds like, or you don’t want them to feel like you’re changing too much.
Wes Carpenter
As a fund manager, you answered, you answered to your investors, right. And, and, you know, as much as you have a lot of, or a lot of flexibility out in the market, right. You’re out making, you know, making loans and in the end, right.
The business is only as viable as, as long as your investors kind of trust you and have confidence in you. And yeah, while it would be great to, you know, broker, you know, a hundred million dollars of DSCR and rip whatever three, four points off that, you know, that would be a, you know, generate a nice amount of revenue for Stormfield as a business. Again, I’d rather build a durable cashflow stream over a longer period of time.
And we do that by focusing on investing our investors dollars to the best of our ability.
Kevin Kim
We’ve seen a lot of our sponsors now do deals with various, I would call private equity firms or these, you know, large institutional asset managers, but you’re working particularly with endowments and charities, and it’s a very unique institutional caliber investor. Cause it’s not something that you ordinarily hear about. What, what do you, what was it about that kind of community of investors that, that drove you?
Was it just the access points that you had to your partnerships or was it, I think you intentionally followed?
Wes Carpenter
Yeah, I think, I think we were, you know, we were, we were fortunate and, you know, a lot, a lot of credit goes to, you know, my business partner, Tim Jackson, who had no entry into some of these organizations because oftentimes you’re not going to, you’re just not going to get a look.
Kevin Kim
Right.
Wes Carpenter
He knows how they operate and he knows they are. That’s right. And there, there’s another piece to it too, quite frankly, which is for those that, you know, may not be aware, right?
Most of these institutional asset allocators, many of them, well, many of them will make their investment decisions in house. Many of them use consultants and a consultant is essentially right. A third party firm that will do due diligence on investment managers and investment opportunities.
And only after a, you know, a consultant approves a manager, will the endowment or foundation be able to invest with that, right. It basically an outsourced kind of due diligence, you know, type of organization there are right. And while many endowments will use consultants and pensions will use consultants, there are some more entrepreneurial endowments who are willing to look at, you know, quote unquote, you know, emerging managers.
And I think the definition of emerging, you know, it’s not a $15 million fund, right. An emerging manager for a, for an endowment is probably a hundred million dollars.
Kevin Kim
Right. 10% issue, right. They’re not going to want to have more than 10%. So…
Wes Carpenter
Exactly. So I think we were, we were lucky in that, you know, Tim had some, some good access into that channel through his prior roles. And then we were fortunate in that we, we came across some entrepreneurial chief investment officers who were willing to take the time to understand and explore our asset class and understand the risk return dynamics.
Kevin Kim
Do you feel like that part of the institutional investor world will start to kind of wake up to the sector a lot more aggressively? Because we’ve seen, I mean, if you look at the kind of wall street type investor, they are just now on fire for this asset class, particularly because of the securitization and the ratings, do you see any kind of headway? I mean, it’s opportunities for them to just, to get more active because life coaches are starting to make their ways in, you know, we’re seeing the institutions up in their own shingle or buy an, buy an originator and set up an originator.
We haven’t seen it from like that, that side of the institutional world, nor the pensions really either.
Wes Carpenter
Yeah. I think the, you know, one of the challenges is, you alluded to this, I think our audience will appreciate this. What’s unique about our business is, you know, while we’re originators, we’re asset managers, but, you know, we are running off, like we’re running operating businesses here.
Correct. We’re not, we’re not just picking stocks and picking bonds with a, you know, a thesis and a, you know, a kind of a risk overlay, you know, we can’t go out and buy an infinite amount of these loans, right? We are running operating real estate businesses, right?
There’s one servicer, there’s an originator, there’s an asset.
Kevin Kim
Underwriting.
Wes Carpenter
And they all have to work together. And I think what, what happens oftentimes is many of these institutional asset allocators, when they come in and they realize that this isn’t just a investment business, right? There is an operating element to investing in this asset class.
You know, quite frankly, a lot of them get, I don’t want to say scared, but sometimes they don’t want to do the work, right? There’s, there’s a lot that goes into, right? We can, you know, we haven’t talked about servicing, right?
But, but servicing a portfolio of these loans, right? There’s a lot that goes into it. And, you know, sometimes they just don’t want to do the work.
So, to answer your question, do I think there will be continued interest from these institutional investors? Absolutely. You know, if we’re seeing it in real time how durable will it be?
And, you know, will it get past those kind of entrepreneurial chief investment officers? I think that’s the question.
Kevin Kim
All right. Well, it just, it’s, it just kind of begs the question. It’s the endowment world, particularly in the charitable world has always been kind of like, you don’t hear a lot of activity in our sector from those guys very often.
And you’re really the only organization that I know that’s really kind of made it through. Right. And so it’s just fascinating that, well, in my brain, like, well, when, when loan buyers first became a thing back in 2014, 2012, that was the, the kind of the impetus for a lot of the institutions to start, you know, slowly coming in.
And my question is now is like, is what Wes is doing with these guys is going to be a way for them to come into our sector on that side of the house? Because they don’t really, they don’t buy loans. They don’t, you don’t hear a lot of things about those types of investors.
So, that’s, here’s hoping, right? It’s a much better type of investor sounds like.
Wes Carpenter
Yeah, look, they are, but here, here’s, here’s the other thing I would, I would, I would say, and right. It’s always, there, there is always this kind of grass is always greener effect. Right.
And so to the fund managers who have, you know, a portfolio of high net worth investors, you know, who are writing 100 to $200,000 checks. I’m like, oh man, I just want to, you know, I want a whale. I want a $20 million check.
It’s interesting to think through, right. Who your end investor is and what role you’re serving for that end investor and, and what, what options of suite of options do they have to invest in? So like the old adage has always been that, right.
When you get, you know, you get a university endowment or charitable foundation, right. They do a ton of upfront due diligence. I mean, these processes can take upwards of 18 months from like first meeting to investment.
Right. So it’s not quick. It’s not easy.
It’s a lot of work. Now the old adage was always, you know, yeah, it’s a lot of work, but once you win that investment, they’re going to be with you for, for a long period of time. What I will say is remember, right.
These are, these are highly dynamic, right. By definition, entrepreneurial endowments. And for example, right.
If our asset class, right. If, if we see rates compressed by a hundred, 150 basis points, we might not be interesting anymore. And that endowment has the ability to dynamically rotate into another strategy where they can pick up another a hundred or 200 basis points, right.
We have to remember that this asset class, right. Whether it’s RTL or commercial bridge, right. It exists within a very broad suite of alternative credit products that these endowments can invest in.
Kevin Kim: And they’re increasingly high yield on the other side of the world. Not necessarily real estate, but exactly.
Wes Carpenter
And so I think there’s, there is, there is more, there’s a greater risk. And I think people appreciate that these endowments, right. It’s great as a league, the big check sound.
They’re also right. Constantly testing you against other asset classes and they can, they can, they can redeem, right. So kind of money takes a long time to get in and they can pull it out.
You know, they can pull it out pretty quickly. Which is great. Juxtapose that to your high net worth investor, right.
You’re serving a critical role in their portfolio by generating stable high yield. That’s going to allow them to retire.
Kevin Kim: Right.
Wes Carpenter
And as long as, you know, I don’t know what the number is, right. As long as you’re printing an eight and a half to a 10 and a half, you’re probably not going to get fired. And so there’s value, there’s value to that client type.
Kevin Kim
I don’t want to deny the fact that the high net worth investor is still the most, one of the most important type of investors out there for a fund manager. I mean, it’s for a debt fund manager in our space, particularly that they are the lifeblood of the balance sheet lenders, life cycle of it. You know, one of the things I wanted to kind of get your thoughts on is, we cut this a little bit earlier with the advent of securitization, the democratization of securitization.
But the market’s headed in a weird place. We’re in a weird time right now. I mean, that’s been the truth since the beginning of, since APL last November, right.
I mean, everyone’s been very cautious. Everyone’s been kind of concerned. I don’t know the sentiment has really changed since then.
Now we’re in August 2025, we’re about to go into the next APL for this year. I don’t know, what are your thoughts on where we’re headed and what we’re seeing out there? Because I really am having a tough time with my finger on it.
Because to me, it feels like there’s some shops that are just killing it out there. And then there’s other ones that are really struggling. And it doesn’t matter on their profile.
There’s a lot of people that are struggling and a lot of people that are winning in the same product, in the same market sometimes, which is really strange.
Wes Carpenter
Yeah, it’s interesting. I think your characterization of the market is just spot on. It’s a weird time.
It’s a weird time to be an investor. It’s particularly a weird time to be a real estate investor.
Kevin Kim
And they’re the ultimate client, right? So, they have to be feeling confident for our clients to be doing well.
Wes Carpenter
That’s it.
That’s it. I’ll say this. What I see in the market, I think there is a multifamily. I think the market is hitting its trough, for lack of a better term.
I think you are starting to see product move through the market, right?
Kevin Kim
It’s very true. Yeah.
Wes Carpenter
So, product is working through cap rate expansion, wiped out the equity in a deal. And the equity manager fought for an extra 18 to 24 months, but now their fund is coming to an end and they need to sell the asset. And that just gives the next sponsor an opportunity to kind of reset their basis.
And I think that’s good, right? That’s healthy. That’s what the market needs given where rates are today.
So, I don’t think multifamily, if I were an equity investor, I’m probably not necessarily… If I’m trying to time the market, I’m not necessarily buying the market today. But I think we’re in the trough, somewhere near the bottom of the trough.
And just given what we’ve seen with starts, I think you’re going to start to see rental growth pick up again. Occupancy has been pretty good. So, I like multifamily over the next, call it two to five years.
Kevin Kim
Let me ask a follow on that. The lack of agency, permanent financing though, it hasn’t been solved yet. They’re not back to the table by any means.
Now, banks are now making some efforts to kind of fill a little bit of that gap, but I don’t see any kind of… I mean, we’re not seeing any kind of DSCR like product for the bigger multifamily deals. So I mean, that’s my concern is permanent financing is still kind of missing.
Wes Carpenter
Yeah. No, I think you’re right. I think that’s going to be a challenge that the market needs to figure out.
And that’s where you hope some of the, whether it’s the insurance money, some insurance money coming in could be helpful. Right? I mean, I think what we know is that the private markets in various durations, right?
It’s not the permanent agency solution, but in the short term, the private markets have stepped in and have helped to solve this issue. I saw some stat where I think like as much as 50% of the kind of short term CRE deals are getting done by kind of private lenders, up from about 25 or 30% a few years. So, I think that will need to be worked out and a very real risk to the market.
I’d say the residential markets, right? Have their own, have their own challenges, right? Over the past, I mean, look, how long has it been, right?
The period since COVID is, or is it the period since the kind of, you know, GFC in 2012, but right. There was, there’s been a very nice structural tailwind to residential for a fair period of time. Now you’re starting to see, you’re starting to see cracks, right?
You’re starting to see really what is a tale of two cities across the United States, right? You have areas in the Northeast and pockets of California where prices are, there’s a single family real estate prices are stable to up 8%.
Kevin Kim: Oh yeah.
Wes Carpenter: Juxtapose that.
Kevin Kim: Orange County has been blessed with that feature for a long time. You know, that’s fascinating.
Wes Carpenter
Yep. But then juxtapose that to Austin and Tampa and right. The Sunbelt, right?
Which, you know, ultimately just got overbought post COVID. And now you’re starting to see, you know, softness there. So, I think as a, as a residential investor, whether you’re on the debt or equity side, I think our job just got, it’s a little harder, right?
You know, you need, you need to kind of get back to first principles and bottoms up underwriting. You can’t just rely on, Hey, I can lend against anything in Florida because right. Property values are increasing 7% year over year, every year.
And that’s going to bail me out. You need to be more tactical and more dynamic. And again, focus on fundamental underwriting.
Kevin Kim
Yeah. I agree. I mean, discipline shops are seeming to be the winners in the longterm, but the challenging things that the discipline lenders is always going to be, man, that shop out there is, you know, killing me on price or killing me on leverage.
And it’s the reality, you know, you just got our markets grown up. So, you’re going to have that no matter what you do.
Wes Carpenter
Well, it’s funny too, right? Cause you know, like, let’s talk about Kiavi, right? Cause I think Kiavi, Kiavi is in my mind, such an, you know, they’ve done so many impressive things and, and so many, you know, so many peers, you know, in the RTL business are like, Oh, you know, I can’t compete with Kiavi, you know, I can’t compete with Kiavi.
If you actually look at Kiavi’s pricing, I don’t think Kiavi is winning on, I don’t think they’re winning on pricing. I think they’re winning on customer experience. Quite frankly, I think they’re winning on technology and customer experience.
Kiavi charges one and a half points, right? So, like you, when you tell me you’re losing on price, Kiavi’s charging one and a half points. And, you know, if you look at, we look at their rates, you know, I was saying, I think they do a great job at giving the investor, the borrower, the ability to write dynamically, like size their leverage, you know, kind of buy, buy, you know, buy down their rate by, you know, I don’t know if they can buy down their points, but I, I actually, I don’t buy into the narrative that a group like Kiavi is, I don’t think they’re winning just because they’re securitizing. I think they’re winning because they have invested in technology and they’ve invested in customer experience and they’re doing it better than anyone today.
And that’s a, that’s a simple fact.
Kevin Kim
Sure. You are, the platform is a very, very nice platform. It’s very easy to operate under.
If you’re a borrower, it’s just night and day compared to your average loan officer’s experience. So, I think you’ve got a valid point there. And I, I just, I’m, I’m just relaying from my perspective, I’m relaying the complaints that I got out there, but this is a something that hasn’t been discussed more.
And I think does need to be just, we used to talk about this all the time during the early stages of the industry. How do I make my, how do I create that Amazon buy with one click button? How do I make, you know, and that, that kind of sentiment has really been lost.
I think it has more to do because of the intricacies of the market. We have all these different players involved and you know, now it’s not just, you know, with your shop, it’s just, you guys are the lender, right? It’s not just that anymore.
So, like you see kind of similar, you see kind of, you know, shades of non-QMI, all of my investors doing this and I have to do this and I have to deal with that, you know, credit matrix and that’s changing in my line of credit over here. And so, you know, that, that seems to be causing, I would call it slowdown on the borrower experience side, less of a focus on it too.
Wes Carpenter
Yeah. Well, I think at least what I’ve observed and I’m curious as to your perspective is too much of the technological investment has been on what I would call, right. The, I guess the platform side.
And so, right. Everyone’s trying to put a tech wrapper on our, I don’t want to say it’s, it’s not a very simple business at all. It’s, it’s, it’s the contrary.
It’s, it’s extremely complex and intricate, but by focusing on whether it’s like the peer-to-peer model or like the AI underwriting kind of model, the AI aggregation and diligence model, right. Like these have invariably failed, right. They raise, they raise VC capital because they’re putting a tech wrapper on a lending business.
They buy market share. They then realize they need to do something with these loans. And so they start selling them to hold on buyers and then the platforms go bankrupt.
Kevin Kim
And I mean, you can’t run a…..capital, you can’t technogify capital raising.
Wes Carpenter: Exactly.
Kevin Kim
A robot can’t, it can’t replace, especially in our high net worth investor driven community.
A robot can’t replace you. Yeah. It’s not possible.
Wes Carpenter
But, but what I think, right, what, what Kiavi is doing right, is Kiavi is using their investments in technology to empower the borrower, right? They’re, they’re giving tools to their borrower to go out.
Kevin Kim: It’s online shopping, making online shopping.
Wes Carpenter
That’s with confidence, right? I want to know that if I make an offer on this property and it gets accepted, I want to know that I have, I have a lender that will do the deal. I want to know what my equity check is.
And I want to, and it might be nine 30 at night and I want to feel like I’m making progress on my loan so I can upload a few docs to a portal that that’s the, that’s the value.
Kevin Kim
Yeah. I feel like the nice part today is that people kind of like realized that, “wait a minute, like that, that’s the only version of technological advancement in our sector.” That’s, that’s at least on the sponsor side right now. Granted there’s a ton of different technological solutions on the vendor side and they all have their own virtues, right?
LOS platforms, lightning docs, and competitors, right? They all have their own virtues, but on the, on the sponsor side, you’re a hundred percent right. I, I, on the capital side, the whole platform world, the P2P crowdfunding, fintech for a while, like unless even, well actually there’s no unless the biggest names in fintech and real estate and real estate finance still have people component to them no matter what they do.
You cannot waste the people. It’s just making it a little bit easier to raise the money, but at the end of the day, you’re still having to answer to your investor. Now the borrower, but, but e-commerce has proven like you can eliminate the human component in how you take a loan application.
You still need loan officers. You still need people inside to actually answer questions, but like, you know, the eliminating the need and, but, but then at the same time, it’s like, you know, every company, no matter how big they are, is always going to want to fill the bucket more. And so they’re going to end up down the path of wholesale or correspond.
They don’t have to add those features, right? There are always companies like that. Many companies are fighting the urge to do it, but the large shops, I think they’re going to have to do no matter what they do, no matter how much to tell the world that they’re, you know, borrower facing only like they’re by virtue of the need to fill the capital market’s demands, they, they’re just going to have to continue to originate more loans.
And that means wholesale at some point. So, that….that removes them, that removes them from technology faster. Right.
So, there’s two points. I mean, as if being a consumer, right. And Rocket, their platform is amazing.
Right. So, I think you’re right. And the borrower experience is probably something that we should all be thinking about from a, how do I make this better?
Basically, whether you use technology or not, I don’t necessarily know that technology is the end all be all, but it certainly is more affordable for the borrower if the company doesn’t have that giant overhead of people. So.
Wes Carpenter
Yeah. Yeah. No, it’s the, you know, you get the, you get the call from the, you know, the mortgage broker, the borrower, and they say, wow, you picked up the phone. That’s great.
Right. How many, how many, I called four lenders, but none of them picked up the phone. Sometimes it’s, it’s just back to picking up the phone, you know, so.
Kevin Kim
Right. The fundamentals. And there are a lot of shops, many of them, many of them look up to you guys and some companies that look like you guys on the West coast too, like their philosophy hasn’t changed.
You know, we’re customer service oriented and that’s how we’re going to win. So, we’re going to be Kiavi’s kind of their ML, which is fine too. I think it works with the right kind of loan, right on the right kind of right kind of loan.
Cause at the end of the day, I think RTL has become quite commoditized. I think you’re right on that side, on that side of the house. I think you’re right.
Cool. Well, I think that’s about all the time we have for this episode. Wes, I love talking to you, man.
Thank you so much for coming on the show.
Wes Carpenter
It’s my, it’s my pleasure. And, and maybe just very quickly before we wrap, I need to just, I need to just, I don’t, I don’t know how, I don’t know how you probably don’t know how important this moment was for us, but this is probably 2017. I remember the moment vividly, you know, we’d, we’d had success in raising, you know, raising capital.
We were originally a C3, C31.
Kevin Kim: C31 Yeah, yeah, yeah, yeah, yeah, yeah.
Wes Carpenter
And, you know, we’d, we’d been successful in raising capital. And I think we had, you know, 79 investors in the fund and, you know, oh, we can only have 99 investors in the fund. We’re a C31.
I was in, I was in, I was in Boise, Idaho in a hotel room. We had a call scheduled, you know, you and I, and, you know, I got you on the phone and I was like, oh my God, what are we going to do? We have these 12 investors who want to come in.
And I went into this deep diatribe on like, oh, well, my reading is that we can, you know, we don’t have to count these investors and they collapse these investors. And so maybe we can get the slots in. And you’re like, Wes, have you heard of a C35?
And, you know, your advice ultimately allowed us to write, we kind of restructured the registration, I guess you would say. And it opened us up to, you know, the path that we’ve ultimately been on since then. But, you know, I’ll never, I’ll never forget that conversation.
I’ll never forget the, you know, the advice that you gave and kind of the path and opportunity that opened up for us. So, I’m eternally grateful for that.
Kevin Kim: Oh, you’re too kind, man. It was just my duty, sir. It’s all it is.
I mean, I really appreciate it because we’re going, we’re, we’re, we’re struggling out there too, right? We’re kind of trying to win more business and I appreciate the kind words. It’s really hard for us to get those opportunities and you gave us one.
So it’s, I really appreciate it.
Wes Carpenter: Well, thanks again for the opportunity, Kevin.
Kevin Kim
Oh, of course, man. This is a really good one. I really enjoy these kinds of conversations because your, your head space is different than a lot of our guests and that it’s important that our listeners hear a different perspective.
And I’m really glad you gave it today. So, for everyone listening, thank you for listening to Lender Lounge with Kevin Kim. This was an episode with Social Capital and Wes.
West, once again, thank you so much for joining us today. This is Kevin Kim signing off. Subscribe to Lender Lounge on your favorite podcast platform and visit our website, fortralaw.com to learn more about how we can help you scale.