Episode 13 | Commercial Leases With Sentinel Net Lease

Episode Summary: 

Hosts Craig & Jack are joined by guest hosts Fred Lewis and Dennis Cisterna of Sentinel Net Lease. Sentinel is focused on acquiring commercial real estate investments that either produce monthly cash flow or possess significant profit potential through renovation and leasing. The group discusses distress in the industry, a shift they are seeing in the commercial leasing space, and how they are still able to find deals. 

*The following transcript is auto-generated.

craig fuhr (00:06.916)
All right, everybody, welcome back to Real Estate Investor Radio. I’m Craig Feuer back with Jack Bevere and Fred Lewis of the Dominion Group here in Baltimore. And we’re also here today with Dennis Cisterna. Dennis owns a company with Fred called Sentinel Net Lease, a real estate investment firm founded in 2019 that focuses on acquiring commercial real estate investments that either produce monthly cash flow or that possess.

profit potential via value add. And so one of the, we’re kind of shifting our focus right now to talk more about commercial real estate and what Fred and Dennis are seeing in the market and including Jack as well. And I think we all feel that there’s a shift that has happened. It sounds like you’ve been really beating the bushes for several months to find decent commercial deals to get into, but that’s been proving to be a bigger needle in a haystack than you would like. Sounds like you’ve been a little bored.

over the last several months, but you might be seeing a shift.

Dennis Cisterna (01:07.698)
I don’t know if bored is the right word. Frustrated is probably better. But sometimes we get frustrated too long, you just kind of give up and then you get bored. No, it’s been really an interesting market to follow. Sure.

craig fuhr (01:10.369)
Frustrated is probably the better word. Yes, exactly.

craig fuhr (01:21.624)
Maybe before we jump in, you should probably, I apologize. I just, maybe we, before we jump in really with both feet here, why don’t you tell people, do a better job of telling people about Sentinel Net Lease than I just did. What, how you got into the business.

Dennis Cisterna (01:32.446)
Oh, sure. Well, I think you read the copy from the website. Excellently correct. So I don’t know what you’re talking about. I wrote it, you know, it’s easy. In any case, it’s, it’s pretty simple. Fred and I started sitting on that lease in late 2019. You know, we originally were looking at some smaller investments to put out capital.

Fred Lewis (01:38.72)
Ha ha ha.

craig fuhr (01:38.861)
Thanks for noticing.

Dennis Cisterna (01:58.418)
for actually a family trust, kind of a little bit backstory here. And I have a long history in acquisitions in not only Build for Rent and SFR, but also in commercial real estate as well. I’ve really worn a number of hats throughout my career. So he asked me to assist him. So we started looking at a bunch of retail, industrial office assets, and we were looking kind of in the…

three to five million dollar range and I wasn’t really seeing anything that I thought was particularly compelling. But I noticed if we go kind of one level up to, you know, let’s call it seven million to 20 million, which is essentially kind of the middle market of commercial real estate, there was a lot of interesting opportunities. There was not the same type of pricing consistency you were seeing at this lower level. And what we realized was a lot of the smaller and smaller opportunities were really

the prices were governed by 1031 buyers, right? So people that were in need of buying a new asset to replace their old one. And so the pricing for a lot of those assets was highly commoditized. We were looking at Starbucks and Taco Bells and Walgreens, and they all traded within a very tight price band, regardless of the location, which I thought was very interesting.

And then when we went one level up, we started to see some really interesting opportunities there where the pricing was not really tied to the risk in a lot of scenarios. Brokers didn’t really understand what an asset should be priced to relative to the risk. So a property could be in a great location or a bad location, have a great tenant, a bad tenant. There was no real…

consistency where you could see anything on a sliding scale. It was just kind of all over the place. And a lot of that is because that middle market doesn’t have the same depth of investors that the small market does or that the larger institutional do. So, you know, 25 years ago, seven to $20 million would have been an institutional size deal, but as private equity and hedge funds have gotten larger, those are small deals. So now it’s middle market. So it’s kind of…

Dennis Cisterna (04:12.858)
Most of that market is comprised of syndicators, family offices, non-institutional investors. So there’s a lot less of us. So the pricing is not nearly consistent. So we saw some interesting arbitrage opportunities. We tied up our first deal, which was an Amazon customer service center in Huntington, West Virginia. I did not know much about Huntington, West Virginia, other than it was known for Marshall University and methamphetamines.

But we loved, we loved, we loved, we started to the folks at Huntington. I now have learned to love that town as I visited it with Fred. But it was an interesting opportunity. It was something that we were not gung ho at first, but we started to understand the narrative around it. And I think that’s what we’ve learned in our business at SentinelNetLease is the deep dive

craig fuhr (04:43.184)
It was a good top one, too.

Dennis Cisterna (05:11.186)
Some desktop analyst jockey is not going to understand sitting at a desk in New York or LA. You know, we go into the towns where we’re looking at considering assets. We meet with the mayor. We meet with the economic development department. And we understand what drives that piece of real estate. We understand what drives that tenant and what that narrative is around why it’s important to that community, that tenant, whoever. And that helps us understand and price appropriately. And

the portfolio from that initial Amazon deal of almost $17 million to nearly $300 million in assets in a little over three years. And we did this, we closed on Amazon right when COVID was going underway. When the country shut down was when we closed on Amazon. And so we’re raising capital for our first deal.

We had, you know, and literally they are shutting down basketball games and the golf tournaments and everything else. And we’re going, Whoa, well, if there’s one company that’s probably going to survive in through all this, it’s the company that’s delivering stuff to everybody. If no one can go outside. So we should probably close on this deal. Oh, literally about 25% of our investors walked away just cause they were spooked overall. We walked a lot of them back in and said, look, where else are you? Where else? What other company is going to thrive in this environment better than Amazon?

Jack BeVier (06:06.353)

craig fuhr (06:18.104)
Yeah, they do.

Dennis Cisterna (06:35.346)
It worked out well. And over the next three years, we were able to create a very strong reputation as someone that can do exactly what we say we’re going to do. It’s tough for syndicators. And we bought what we thought were very, we took a very thoughtful approach to the assets we acquired. We acquired a number of essential services.

Tech Forward, Mission Critical Real Estate. So customer service centers, corporate headquarters, grocery stores, all that produce extremely strong cash on cash return from day one, and that we used highly accretive debt on. So we’ve been pretty fortunate to grow the portfolio over that period of time and do something that a lot of other investors weren’t doing. We were creating our equity the day we bought it.

craig fuhr (07:34.28)
I have to stop. Jack, what are you smiling about?

Jack BeVier (07:34.57)
I’m smart.

Dennis Cisterna (07:37.238)
What are you talking at, Jack?

Jack BeVier (07:38.794)
I’m smiling because I remember Fred pitching me on, hey, I’m talking to Dennis and it’s like it’s late 2019. He’s like, hey, I think we’re going to start doing this net lease stuff. Do you want to be involved? And I’m like, net lease business. Isn’t that buying like a seven cap and then levering it with like five and a half percent debt so you can get a levered 12? Like, no, I’m cool. Like thanks. And then you guys do this Amazon deal.

And in the midst of COVID and then post COVID year off to the races and all of a sudden the seven cap became a 10 cap and the five and a half percent debt became a fucking four. So all of a sudden these like levered 12s. Yeah.

Fred Lewis (08:20.759)
Well, three and a half in most cases, but it’s okay.

Dennis Cisterna (08:23.246)
By the way, a levered 12 is phenomenal. If you’re actually buying it a seven and borrowing it five and a half, you’re getting like a levered eight, eight and a quarter maybe.

Jack BeVier (08:29.918)
Yeah, yeah, exactly, exactly. Like, and so all of a sudden, Fred’s like showing me, you know, show me these deals that I pass, right? I’m like, now I go have fun, go have fun with that. And then and then you guys start bringing in these levered 20 pluses like every like 45 days. And I’m like, shit, like, what do you guys do? You know, what do you guys what are you guys up to? Like, you know, hey, send me the next one. Can I can I throw in on that one, please? Like.

Dennis Cisterna (08:52.762)

I think we got Jack in a few of these deals right?

Fred Lewis (08:57.625)
We’re dead. We’re dead.

Jack BeVier (08:59.444)
Yeah, but yeah, you’re very great, very gracious and let me jump in the coattails that I had passed on.

Dennis Cisterna (09:04.926)
Well, trust me, we wish you were involved earlier because you’re a great operator and a smart guy, but we’ll gladly take your money anytime you want to give it.

Fred Lewis (09:13.25)

Jack BeVier (09:13.314)

craig fuhr (09:13.764)

Dennis Cisterna (09:14.95)
Craig, I think that the easiest thing to help the investors understand kind of our investment strategy is, you know, think of it as, you know, if you if you look at the traditional investment model of, of core investing value add or opportunistic, most of what we’re buying are core assets. So usually class A office industrial retail, but they’re going to be in primary or secondary markets.

and they may not have the same type of term, which is usually 15 years plus for most core investors. We’ll take on deals that have, at least historically, we’ll have taken on deals that maybe have even only two or three years of lease term left, if we understand the asset good enough. And an example of that, go ahead, Jack, sorry.

Jack BeVier (10:05.686)
And so, and then the opportunity that comes from that is that frankly, because of the price point, which is neither 1031 small investor commercial real estate, nor is it 50 million plus institutional real estate, you’ve got this middle market that is less institutional and

and the lease term or some other situation with like a distress seller, a motivated seller, or there’s some story behind, there’s some narrative behind the opportunity that has enabled you guys in this, as you mentioned, like less liquid market to find what you think is a couple extra hundred basis points of unlevered return. And then you go put great debt on it and you’re finding good deals.

Dennis Cisterna (10:55.33)
Right, that’s right. And so, in theory, we’ve done it a few times. Obviously, it depends on how the exit works out. Having interest rates at 7% plus doesn’t help anybody right now. But for most of our deal, yeah, well, look, I think one of the benefits we have, because we syndicate all of our deals on a one-by-one basis, we’re not set up in a fund environment where there’s an investment horizon or an expiration

craig fuhr (10:57.526)
in theory.

craig fuhr (11:09.24)
Yeah, that’s the kind of transmission I was hoping to make there.

Dennis Cisterna (11:25.754)
that we’re fighting against. We don’t have a gun to our head to make a bad investment decision when it comes to a disposition. So we buy these assets thinking about, you know, it’s great if we sell in three years, it’s great if we sell in five years, it’s great if we sell in eight years. It produces a strong enough cash on cash return, it’s going to beat the heck out of any other fixed income property you’re going to go look for. From a risk comparison,

The credit is typically secured by high credit rated or even investment grade companies. So you look at what their corporate bonds trade out versus what this clips a coupon at and they’re not apples to apples. This is not as liquid as a corporate bond, but it helps to look at a comparison from the risk standpoint because the default rate is very low for an investment grade tenant. But we’re looking at all these things and we’re kind of saying, okay, look, we…

We have a primary scenario. And if it does this, we think we can generate a return of a certain number. But if we hold onto it a little earlier, we sell a little, or we hold onto it a little later, we sell a little earlier, that’s fine too. We’re gonna make the smartest investment decision that at the time that it makes the most sense. So right now we’re not a seller of assets because why would we be? We don’t have to sell. We’ve secured everything with long-term debt.

And now we’re looking now we’re taking advantage of the changes that have occurred in the market. So whereas two years ago if I could buy a deal at an eight cap and It has eight or nine years of lease term left and I can borrow it three and a half Well, that’s gonna produce a low teens cash on cash for our investors They’re gonna get the majority if not all of their capital back just from contractual lease income

Great, maybe that deal is only five or six years of terms back then. Now because of the shift in interest rates, we’re not looking at a single deal under a nine cap. Before our minimum threshold was a seven. So even though interest rates have gone up 300 plus basis points, our shift on cap rates has moved up only 200 basis points. But our duration has gone from a minimum of two or three years.

Dennis Cisterna (13:50.062)
up to nothing less than than seven and a half. Right?

Fred Lewis (13:54.079)

craig fuhr (13:54.116)
So that’s nothing less than seven and a half years left on the lease.

Dennis Cisterna (13:58.126)
That’s right.

Fred Lewis (13:58.453)
Yes, because we need to make sure that if not 100%, 90%, 80% of the capital during the contractual lease term goes back in distributions to the investors. That is the thesis we’re working under now, given the market.

craig fuhr (14:20.964)
So one of the things that we were talking about prior to pressing record today was that you’ve sensed a shift. You know, obviously we’ve had a disconnect between interest rates and asking prices on assets so you’re sensing a shift recently. You want to talk about that?

Dennis Cisterna (14:41.614)
Yeah, I think you have seen, and this is not everybody, because trust me, I could screen share here and show you hundreds of deals that make no fricking sense to anybody. I don’t even think the brokers wanna post them at this price, but if they wanna take the listing and they gotta retain their relationship with the seller, you know, there’s some pretty laughable listings still out there right now that have been out there for some time. Those don’t get any traction and eventually they go away. But.

I have seen in the past 30 days a pretty significant increase in the baseline ask from sellers on what I would consider to be pretty high quality assets with decent duration left. So as an example, before 30 days ago, I was seeing a lot of office properties kind of in the…

mid seven cap range. I was seeing a lot of industrial in the fives. I was still seeing some multifamily in the fours. I still see some multifamily in the fours. I don’t really want to talk about that, but good for those cash buyers, I guess, Jack. Anyway, so now I’ve seen about, I’ve literally seen in the span of the last 30 days, I’ve seen almost like the baseline ask move up about a hundred basis points, if not more.

And those brokers are knowing they’re not going to get a bid at full ask, right? So you’re looking at a 100 to a 200 basis point swing in terms of what some of these sellers are expecting. And that’s made it a lot easier to have real conversations and dig into assets now. I will tell you from…

May of 2022 until a month ago, it was plodding along, as you said, Craig, needle in a haystack type of stuff. And we are, you know, we thrive on situational opportunities. We did that even when the market was good. But even those markets seem to go away. Even that market kind of went away for a little bit. Or it was harder to locate some of those deals.

Dennis Cisterna (16:59.502)
And as I said, we don’t buy anything using negative leverage. So it was just tough sledding for a long time. We only bought two assets over more than a year period. And before that, we were typically buying six, seven, eight assets a year. You know, you don’t go to…

craig fuhr (17:20.596)
I think you said that’s after looking at hundreds and hundreds of deals, correct?

Dennis Cisterna (17:24.046)
Yeah, we look at about 200 deals a week. 200 deals a week. And I don’t mean like we get an email. We get an email on about a thousand deals a week. Of those about 200 get an actual review of some type. And we put out maybe on a good month over the last year, we put out maybe two or three offers a month. And that’s probably being aggressive. Now, I…

Jack BeVier (17:52.414)
That’s something that I’ve always liked about the Sentinel deals is that since I know the way you guys raise capital is not to have raised a fund that you have pressure to then deploy, but instead you’re raising money on a deal by deal basis. When I get a Sentinel email about the latest deal, I’m like, oh, Dennis and Fred found something. This must be interesting.

Fred Lewis (18:12.738)

Dennis Cisterna (18:15.15)
That’s how we feel too, Jack, trust me, because it’s pretty freaking boring if you can’t find anything that pencils. But we appreciate that.

Jack BeVier (18:22.272)
Yeah, yeah.

craig fuhr (18:23.984)
You want to jump in?

craig fuhr (18:31.664)
Just wondering if you had anything to add.

Fred Lewis (18:34.313)
No, I think it’s a tremendous money effort in this market to kind of find value. And whether you have a fund, whether you don’t have a fund, whether you do a syndication one at a time is what investors have to think about. Whether it’s, it doesn’t matter what the asset class is, multifamily, office, retail, industrial. It’s how you want to raise money. We’ve taken the approach.

that not only is it our money that we’re investing, but as we syndicate our friends and family capital, we’d rather lose our money than lose their money. If you’re guided by that principle, that it’s more important that you don’t lose a penny of anyone’s money that you raise, I think it makes yourself, it’s more discriminating and harder because you wanna make sure that you return their capital.

Jack BeVier (19:30.641)
So, so.

Fred Lewis (19:34.553)

Jack BeVier (19:34.81)
So let me ask about that. So given that you guys are still reviewing office assets and have office assets in the portfolio and the future of office usage in America, frankly, has got a tremendous amount of still uncertainty around it. Interest rate environment aside, just there’s questions about the fundamentals of the asset class. How are you guys thinking about downside risk protection in that regard?

Dennis Cisterna (20:02.318)
So I think it’s important to note that we don’t just buy generic office, right? We don’t buy a random building chock full of 40 tenants that has a law firm and an architecture firm, whatever. We’re generally buying mission critical real estate to a firm. So as an example, our latest acquisition, which we actually close on next week, it’s an insurance company’s headquarters in Davenport, Iowa.

I’m sure nobody listening knows where Davenport, Iowa is, or maybe a small population does, but it’s in the Quad Cities area.

craig fuhr (20:37.972)
Alright, so just to be clear guys, we’ve already lost Hawthorne, West Virginia and Davenport, Iowa as our listenership. So we can just…

Dennis Cisterna (20:44.078)
It’s Huntington, West Virginia, and I’m bringing them back. No, at Davenport, I will tell you, much as I was pleasantly surprised when I went to Huntington, West Virginia and a number of other places we own assets, I was pleasantly surprised when I went to Davenport. So Davenport is part of the Quad Cities metro area. It’s on the state border of Iowa and Illinois, a couple hours west of Chicago.

Fred Lewis (20:44.166)

craig fuhr (20:50.145)
So goodbye.

Dennis Cisterna (21:09.006)
This insurance company is a wholly owned subsidiary of a much larger Fortune 500 insurance company. They’ve been in this area for almost a century. They were in their last building, which was on a landlocked side of town, of another town in the Quad Cities for 30 plus years, old decrepit building. This was a build to suit for them. They love it. They have…

every desk full and occupied here. And so they have great utility in the building. And so we like the narrative around it.

Fred Lewis (21:44.45)

craig fuhr (21:46.788)
Can I ask- can I just ask-

Fred Lewis (21:47.497)
So Jack, that’s the, that’s the, that’s the incremental test now. Dennis flies in and literally says, are you sitting at your desk or, or are you an actor that you came in to, you know, for the, for the meeting?

Jack BeVier (21:48.319)
So they’re not working from home?

Jack BeVier (21:53.671)
Are there people?

craig fuhr (21:57.456)
Yeah. We.

We have a pro forma on who shows up to work. Yeah, man, I’m so intrigued by the amount of due diligence that has to go into something like that. Like at what point do you get on a plane, go out there, really start looking at all of these factors that go into putting the deal together?

Fred Lewis (22:04.665)
That’s right.

Dennis Cisterna (22:22.926)
So we do a lot of, you know, this is probably unique. The commercial real estate acquisition process is a lot more detailed than fix and flip buying, or maybe even single family rental, because the amount of variables is so much greater. Not that doing residential investing is hard, but I can assure you some of the…

quantifying some of the risk around commercial real estate investing stuff. So we are already doing, you know, desktop review and analysis before we have the, before we even submit an offer, right? So we have a good understanding on where the property is positioned rent-wise, relative to the market, at what discount are we buying to replacement costs. That’s also a sticking point of pretty much every asset we acquire. And understanding what are projected.

craig fuhr (22:59.376)

Dennis Cisterna (23:17.934)
Return of of capital is from contractual income as Fred mentioned earlier. So in this deal, I think it’s like You know 80 percent or something is contractual income coming back So, you know, not only do we want to create profit, but we also want to make sure on the downside We’re we’re minimizing any potential loss by by any means necessary And then as soon as we have the the property tied up I am on a plane somewhere or Fred is Fred is driving somewhere if it’s in the Northeast. I’m

I’m not going to fly across the country just to have Fred to drive 45 minutes. But we’re boots on the ground meeting with the stakeholders of the property. So your existing property owner, the tenant, municipal and elected officials to understand really how does this fit into that market? Why is this building important? How sticky is the likelihood of this tenant sticking around here and everything else?

Um, it’s fun. Sure.

craig fuhr (24:17.84)
Can I ask you something? It is, I mean, it must be tremendously interesting and fun, but I’ve met with municipal officials before, planners, mayors, city council members, Fred and Jack have certainly had more than their fair share of that too. They tell, you know, you get the truth and then you get the rosy truth and you get the.

You know, we’re pretty sure this is gonna be a part of the master plan and stuff like that. And so how do you discern from the bullshit to what’s real?

Dennis Cisterna (24:47.726)
Well, I think what you guys are generally talking about is talking to elected officials as it relates to proposed developments and potential developments. It’s a totally different type of conversation when you’re talking about something that’s already part of that community. So when we talked to the mayor of Huntington, West Virginia about our Amazon asset, he gave us this great background story that you would never get anywhere else, which was well, you see here

craig fuhr (25:03.916)
Right, right.

Fred Lewis (25:17.953)
Just to get, just to give you the picture, he was in a tweed brown suit with a button down vest underneath it with a little hat and elbow patches. And he had a feather, he had a feather in his hat as he sat there to talk to us about, it was, it was perfect. Yeah, it was.

Dennis Cisterna (25:24.366)
Elbow patches and elbow patches.

craig fuhr (25:26.6)
I just stood up and then 83.

craig fuhr (25:32.356)
Thank you.

Jack BeVier (25:35.671)

Dennis Cisterna (25:37.006)
It was. We, you know, I didn’t get to see what vehicle he parked, he pulled up in, but I will tell you, it was, it’s a conversation you’re just, you’re not gonna get unless you go ask for it. And so he gave us this great background story of the reason that Amazon is in Huntington, West Virginia is because one of Amazon’s head real estate guy married a girl from Huntington and the girl from Huntington was back in town

craig fuhr (25:37.208)
What up in the 76 Cadillac DeVille?

Fred Lewis (25:39.797)
Yeah, it was a 78.

Dennis Cisterna (26:07.054)
visiting with some people and the pastor was there. And a pastor from the church explained how great it would be for the community if Amazon and swear to God, they put everything together. Marshall University was now part of the pitch in that we will train people to work at your customer service center here. You have a great feeder. We already have a lot of customer service centers in Huntington. We’re the perfect market. And so,

Huntington sold Amazon on why they should be there. Now they’ve been there for 20 plus years. And as the mayor said to us, Amazon is an anchor employer here in that other big companies want to come to Huntington because Amazon is here.

craig fuhr (26:55.746)
That’s an amazing story.

Dennis Cisterna (26:55.79)
And so they said, you know, if these guys are ever gonna leave, I’m gonna call the governor and we’re gonna put together a tax incentive package to make sure they never go. And Fred and I heard that and said, okay, this sounds pretty good to us.

Fred Lewis (27:08.633)
What’s for lunch?

Jack BeVier (27:10.254)
So shifting back to the overall market and what you’ve been seeing when you’re talking to brokers, you mentioned that you felt like there’s more capitulation on the seller side and that deals are coming out even from brokers and through brokers at a higher cap rate, a cap rate that may even make sense or comes close to making sense from the get go. So what’s the-

Dennis Cisterna (27:23.054)

Jack BeVier (27:36.766)
Is there like color behind that or is it just a trend that you’ve noticed? Like what’s the why?

Dennis Cisterna (27:38.062)
Yeah, yeah. So this goes back to the excellent commentary we had on episode 12, where we talked about people are realizing that interest rates are not going back down tomorrow. And that includes these sellers that obviously, for the most part, have been institutional or quasi-institutional owners of real estate. They realize that…

If interest rates aren’t going down in the next couple of years and I have a lease that’s burning off, right, that lease term is getting shorter over time, I probably am not going to get a better value on this property in two years, unless something dramatic happens. So I might as well sell now and then hold onto that capital and maybe buy something else later. So you have sellers starting to understand that, hey, I might be at…

It might be a peak value right now, even though interest rates are high, because the industrial retail office market is a little different from multifamily and SFR in that we calculate the lease term as a part of the way to derive value. So the longer the lease term, the lower the cap rate. Now unfortunately for the sellers right now, the interest rates are 6.5% to 7%.

for office industrial and retail, maybe a little lower than that if you find the right bank. So they’re gonna have to sell it a spread that’s positive to that because they know there are no buyers out there buying with negative leverage on these type of assets. Save a little bit, save for multifamily, which has some cash buyers and some other speculative guys because they’re also kind of long on housing as we talked about with that Safarjak. And then a little bit on industrial.

because guys are making a macro bet on the way that logistics are going to continue to grow in the United States over the next several decades.

Jack BeVier (29:44.714)
So you’ve got sellers thinking that they’re selling at peak value and you guys think that they’re not selling at peak value, right? Because otherwise you’d be making a shitty buy. Or really it’s that they just, you know, they realize that, hey, given that we’ve got eight years of duration left in this lease, if I wait to, I’ve actually materially impaired and they’re just not willing to wait to the renewal.

Dennis Cisterna (30:05.134)
Yeah, I should say peak peak again peak value relative to whatever their investment horizon is. And this goes back to the same principle of most of these institutional owners are set in some type of some type of finite timeline where they have to sell these assets. Yeah, even if there’s an extension option beyond the wind down that maybe they’ve got another 36 months. And obviously, we’re not talking about the entire universal commercial real estate.

Jack BeVier (30:23.61)
There’s a wind down, yeah.

craig fuhr (30:33.16)

Dennis Cisterna (30:35.438)
We’re just, it doesn’t have to be, it just has to be a small percentage that will truly mark the market. And now, you know, Fred and I are off to the races looking at deals that we think are, we’re fine holding on for, if we hold on to them for 10 years and they produce a 12, a 13, a 14% cash on cash return, like that’s a pretty good situation for an investor that’s looking for some type of passive income.

Certainly not a bad place for us to put our money.

Jack BeVier (31:08.622)
So the deals that have the deals that you mentioned that you’re looking at these longer duration deals now because that’s an offsetting factor to the other, you know, kind of undercurrents. So you know, for the commercial real estate owners that have a tenant in place and it’s got six years or less of duration, are they just kind of they just along for the ride? They’re just going to hold this thing till renewal.

Dennis Cisterna (31:29.422)
Or do you see them put them out at prices that are… There’s two options. They are… They’re… I guess three. Either they’re not in the market or they’re pricing it to sell or they’re not pricing it to sell because they’re delusional, in which case the market won’t move at all. But I mean…

Jack BeVier (31:49.126)
What’s pricing it to sell though with four years left on a tenant on a tenant? What’s what’s pricing it to sell?

Dennis Cisterna (31:53.87)
12, 13% cap rate.

Jack BeVier (31:56.119)

Dennis Cisterna (31:58.766)
But who wants to take that risk in this environment, depending on what the… And by the way, that’s on office, right? So if we’re talking on retail, that might be an eight or maybe an eight and a half. On industrial, it might be seven and a half. And then it goes back to… Yeah, we own three grocery stores, a BJ’s Wholesale Club, a Tesla dealership, if you want to consider that retail, it’s really more specialty use.

Jack BeVier (31:59.375)
So let’s.

craig fuhr (32:16.528)
Are you looking at retail?

Dennis Cisterna (32:28.398)
Yeah, we look at a lot of retail. But again, because we’re very focused on having highly accretive debt, I don’t consider 100 basis points between my cap rate and my cost of debt to be very accretive. I’m looking for 200 basis points plus, preferably 300 basis points. So we’re looking. It’s just not quite there for us yet.

Fred Lewis (32:45.387)

Jack BeVier (32:51.278)
So what’s the…

Jack BeVier (32:54.722)
So, shifting gears slightly, what’s the debt situation? You go to buy this asset, and how has it changed over the past 12 months? Give me the narrative of what the debt situation was 12 months ago and walk me forward to today, because it’s been moving fast.

Dennis Cisterna (33:09.87)
Can I just show an arrow? Can I show an arrow going down? That’s how you could quantify it. So.

Jack BeVier (33:15.81)
Has it, is it still there though? Is it still going down, but there?

Dennis Cisterna (33:19.278)
Yeah, debt is there, but it’s it’s it’s there for well qualified borrowers. It the leverage amount is less. Obviously the cost is much higher. The I’ll give you, I’ll give you a snapshot of what our, our, our last loan looked like before interest rates went up to what it would look like today. So, um, in, uh, I would say our last.

Our last pure deal that we closed in March of 2022, 10 year fixed rate debt, 3.5%, 70% loan to value, three years interest only, and then amortizes over 30. And we paid, I think that was a one point origination fee because it was with a credit union. Almost everything else is 50 bips.

Fred Lewis (34:16.993)
It was an A-cap.

Dennis Cisterna (34:18.094)
And that was on an eight cap deal with a Fortune 50 company and investment grade credit. So that was then. Now I would tell you, other than a handful of groups who are still kind of aggressive on the leverage standpoint, we are looking at 55% loan to value, loan to cost. I mean, sorry. Yeah, cost. Oh, and by the way, I’m sorry.

Fred Lewis (34:20.729)
in it.

Jack BeVier (34:40.93)
Loan to value or loan to cost?

Same difference.

Dennis Cisterna (34:45.326)
By the way, there’s a whole nother nightmare issue as it comes to appraisals now, because every appraisal firm is in cover your ass mode. So they are looking for every method possible to devalue the property, whether or not, and we’ve already gone into this on a couple of deals where it’s very clear that the lender is trying to steer the appraiser. So.

craig fuhr (34:54.541)
Always fun.

Dennis Cisterna (35:13.614)
55% loan to cost, almost exclusively five-year term, maybe one year of IO, maybe two. Non-recourse, I feel like the amount of non-recourse lenders has been cut in half, if not more. Now they’re looking for at least some partial recourse. Again, there’s some out there. Fred and I have a bunch of great banking relationships which has helped us, but.

It is tougher sledding for sure.

Jack BeVier (35:45.814)
Like beyond, yeah, beyond bad boys, beyond bad boys and completion guarantees.

craig fuhr (35:45.865)
What is this parcel recourse by the way?

Dennis Cisterna (35:48.366)

Dennis Cisterna (35:52.654)
Yeah, so maybe, so our guarantee will be, let’s say it’s a $5 million alone, they want us to cover the first million dollars of losses.

which we don’t, because we syndicate our equity, that doesn’t make sense for Fred and I to do. We wouldn’t, we’re gonna put in 10% of the money, but we’re gonna take 100% of the risk. But that doesn’t make sense for any investor.

Dennis Cisterna (36:21.422)
But by the way, the way we look at this, it’s really simple. Because when I go to panels or conferences and I speak on panels and I’m up there with a multifamily guy or someone else, I have them walk through their business plan. And their business plan generally revolves around when interest rates get lower. Cool. Great. If they don’t, what happens? They earn a very, very, very poor cash on cash return and then ultimately have to sell.

probably not making any money upon the disposition. Our investment thesis is pretty simple. I am going to double or possibly triple your cash on cash return. And then if interest rates come down, I benefit Sentinel benefits in the same way you do. Now, our cap rates aren’t going down from nine and a half percent to 5%, but they don’t have to. They just need to go down 100 basis points, 150 basis points,

the same way you’re underwriting even less for us to still outperform the potential IRR because we are already deriving between 10 to 15 percent or more per year in income from the property. And that’s really the biggest delta here. If you’re going to make a, if your investment thesis involves the speculative bet of interest rate decreases, we are going to beat the shit out of your strategy every time because of how much in-place income we already have.

Dennis Cisterna (37:58.35)
I’ve silenced the crowd. I appreciate that. That’s what I always look for.

Fred Lewis (38:01.277)
Yeah, which is right now, given the lower leverage that Dennis was mentioning, which is why duration now really matters because, and we have to have that spread on a higher cost of funds. So to find deals, you’ve got to find nine caps. I mean, Dennis will send me, he’ll go, as he said, he’ll go through 150 deals. He’ll send me five to look at, you know, that he’s gotten down to.

Jack BeVier (38:29.811)
There’s still an underlying bet that there is positive terminal value. That is part of your thesis here. These are not going to be worthless and eight years from now, there’s going to be a tenant and we’re not buying C-class stuff that’s going to be completely obsolete. We’re buying A’s and B’s that are still going to be desirable.

Dennis Cisterna (38:35.15)

Jack BeVier (38:53.234)
And hey, we’re probably not going to build any office for the next several years. So that’s going to be the inventory in a growing and American economy.

Fred Lewis (38:59.222)

Dennis Cisterna (39:00.558)
Well, I think that’s a really good point, Jack, because that is the conventional wisdom on office is nobody’s ever going back into the office again. But if you really look at the data and you look at what you’re hearing from the executives of Fortune 500 companies, they are pushing as fast as they can to get people back into the office at least three to four days a week. They’d love more if they can get it, but right now we’re in such a employee…

friendly labor market because we have a shortage. Let’s face it, right? We have all of the baby boomers exiting the workforce and not enough people to replace them in a growing economy, which has been a big challenge. So the employer has not had as much leverage as they’ve wanted over this, but you can see the writing on the wall. It does not mean that we’re gonna go back to what normal office utility was before 2020.

We don’t think that and we’re obviously bullish on office to a degree. We also look at suburban office as a completely different universe than, than downtown central business district offices. You know, we don’t want to get, we don’t invest in, in downtown areas right now. We are,

We are, we’re firmly convinced these doom loops that are occurring in these areas where nobody’s in the, nobody’s in the office, nobody’s using the restaurants, nobody’s using the retail. That’s, that’s a problem for the foreseeable future. Doesn’t mean the end of all downtowns. That’s a little silly, but what you have seen is a revitalization of the suburbs in a way that they have the amenities, commercial services, restaurants that, that just were never there before. You know, it’s no longer just a sea of, of.

you know, Bed Bath and Beyond and Chili’s and Applebee’s and Chick-fil-A. It’s like these suburbs have some pretty hoppin’ it in spots now all throughout the country because they understand that people want high quality attractions and amenities close to them. So that helps it. That helps from that perspective. And then in addition to your point on the supply side, you know, we are buying Class A properties that were built within the last 20 years.

Dennis Cisterna (41:14.83)
One of our recent acquisitions was called Bannockburn Corporate Center in Bannockburn, Illinois. This is one of the nicest suburbs in the greater Chicago area. The average median income is a quarter of a million dollars. We acquired the building for $126 a square foot. It would cost $550 to build today per square foot.

Fred Lewis (41:36.75)
and it had the lowest tax rate in a certain municipality in the region.

Dennis Cisterna (41:40.846)
Right, right. There’s a lot, again, a lot of the nuances of diligence, right? So, so you look at Chicago, Chicago as a metro is kind of losing population, but it’s still the third biggest economy in the United States. So, yes, it’s losing population, but it’s still much more dense than a lot of these growing areas that you’re talking about are. And so then we look for some of the, some of the positives, right? Because the entire metro area is not painted the exact

Jack BeVier (41:49.882)
Thank you.

Dennis Cisterna (42:10.766)
Let’s look at where the population is actually growing. That’s in the North Shore area where we’re at. Let’s look at where the Fortune 500 companies are. That’s where we’re at. So we’re looking at some of the quantitative and qualitative data to help inform on these micro locations within the larger metro areas, even if the metro area doesn’t necessarily point positive. But so then we have these Class A buildings that are at a fraction of replacement costs.

A, that’s a defensive barrier against new construction as it is, right? We’ve got a nice building, but we have it at 20 to 30% of replacement cost. Um, we know people aren’t building new office right now in a lot of these markets as it is, cause obviously it doesn’t make sense. Um, and that we, and we know that a lot of the older class C seventies, eighties, even nineties, their stuff is, is going away in a lot of markets. It’s being knocked down or repurposed for residential.

And even for groups that do want to stay in and have their workforce in the office, they’re not moving into those older buildings, they’re moving into nicer ones like we have. So, because there’s still affordability there. And that gives us a lot of flexibility in that we could lower our rents by 20 or 30% in a lot of our buildings and still produce a substantial cash on cash return. We don’t need to, but having, by acquiring at that lower basis,

gives us a lot of flexibility to navigate a very spongy market.

craig fuhr (43:44.728)
So speaking of, okay, Jack, well, I was going to say, you know, this, this morass and frustration that you’ve been in since May of last year, it’s sort of up until a month ago, what are you excited about over the next several months? You know, given, given the headwinds that we obviously have that don’t appear to be going away with interest rates and, um, things like that.

Jack BeVier (43:44.89)
Craig, go ahead, Greg. No, go ahead.

Dennis Cisterna (44:04.654)
I think I’m just more excited that there are market participants on both sides that are ready to transact. I think that the last 12, 13, 14 months have helped stabilize a clearer picture of what is going to actually happen with the Fed. And I think Fred alluded to that on the last episode. And that’s why you’ve now seen the 10-year Treasury.

you know, increase further. Like people have an idea that this is not going to be a roller coaster of interest rates. Like we are climbing and we still may climb a little more. And then we’re gonna be riding steady for quite some time until the market experiences some pain that’s gonna cause, you know, rates to come back down. So I think it’s us buying under this new paradigm.

knowing we can still generate an above average cash on cash return and then ultimately take advantage of any cap rate compression that occurs if it occurs. If it doesn’t occur, that’s okay. If it doesn’t okay, if it doesn’t occur, we’re going to outperform the cash on cash return of other real estate assets. And if it does, we think we’re going to be able to produce

a value add or opportunistic level return without actually taking any construction development or lease up risk.

Jack BeVier (45:38.702)
Yeah, I think maybe Craig, we tie this up with a bow. I think that the takeaway for me is that, especially kind of juxtaposed versus our previous conversation about build to rent, different asset classes have different, are investable at different times and probably investable I would say at all times, but with different strategies. And for build to rent right now, or even single family overall.

I think that what works right now is fix and flipping on deals that make sense where you’re able to buy assets at the right original cost basis because the top line hasn’t come down. To the extent that you’re a long-term holder and using leverage right now, know that you’re not going to get a phenomenal cash on cash return out of your incremental rental property assets. As long as you’ve got a capital base that…

has that in mind that has that very long term and doesn’t need the high cash on cash of today, then if you’re making a long-term bet on American housing, I’m down with that thesis, I think it makes sense. Whereas you can look at office and say, hey, there’s some uncertainty about what 10 years from now looks like. Mitigate those 10 year horizon downside risks through high current cash on cash

and believing that you’ve got an asset that is gonna have terminal value. And so, it’s not an uninvestable asset class, it’s just that you need to have a thoughtful thesis on what works today and then a mining operation, right? To then go find what you think is congruent with that thesis. And that’s, I think that’s probably the takeaway for me on how to approach different asset classes at different points in the cycle.

It doesn’t mean that you should never, you know, you don’t need to just sit on the sidelines for a particular asset class ever. You may need to pivot your approach, your screening criteria. And it seems like you guys are doing a great job of that at Sentinel on the commercial side.

Dennis Cisterna (47:47.918)
Thank you, appreciate it. Yeah, that’s great advice, I think, for the average investor, for sure.

Fred Lewis (47:51.213)
Good summer.

craig fuhr (47:53.312)
Well, I have to be honest, I would have loved to have heard more about the mining operation because I think that really hits people exactly where they live mostly in this business. Um, you know, it will always be a business of, of mining obviously. And you’re out.

Jack BeVier (48:06.638)
Dude, Dennis, tell us about that. Rachel can splice it in. She’ll just splice it in before I just said that.

craig fuhr (48:10.052)

craig fuhr (48:13.74)
I was going to say we’d have him back for another episode, but I thought that might be overreached though.

Fred Lewis (48:14.381)
Well, you know, I’ll say what’s interesting. I’m sure Dennis will add all the detail to it, is that we had to really kind of sit back and refine what we thought were the assumptions we wanted to operate under in order to remine the kind of assets that we thought that our investors would invest in, our banks would lend on, and would have the kind of…

product that we were willing to hold, both from how much capital was invested in the product and the price per pound perspective. We had a re-tour just last week. I mean, just last week, the week before, two weeks ago, I mean, it was either we sit back and find the needle in the haystack or come up with a refined thesis on saying, okay,

craig fuhr (48:54.59)
How early on did you guys have to redefine that?

Oh. Ha ha ha.

Fred Lewis (49:12.833)
this exact, these four boxes, if it hits these four boxes or six boxes, then we’ll bind to those boxes. And I think Dennis can talk about what we just recently have kind of refined it to, so that we can mine to those boxes.

Dennis Cisterna (49:28.27)
Yeah, I would tell you, because Fred and I pay so much attention to the capital markets, we are constantly evolving what we think is a good deal. But it really wasn’t until recently where we felt like, okay, we know there has been a true transition in the market that’s going to be here

Dennis Cisterna (49:58.51)
assess everything going forward, right? Because now we know what we didn’t know before. We know there is no roller coaster in rates. We know that the distress in the commercial real estate world is probably going to be slower than what we anticipated. And so what is the best way to still play in this sandbox where we can buy assets that make sense to us?

craig fuhr (50:06.776)

Dennis Cisterna (50:28.366)
today. And I think that’s the most important thing for any investor. And that’s where a lot of investors get, they get sideways is they start to underwrite to tomorrow. And you have no fucking idea what’s happening tomorrow any more than anybody else. So that is the biggest problem is, does it make sense today? And so literally we were sitting in Dana Point last week going over these key elements, like, okay, yeah, we agree that the least term should be at least X.

We think the total return of capital has to be at least this. We need to spread from our cap rate to our debt of Y. And putting all those together builds this buy box that makes it a little easier to navigate through all the fluff, all the listings, all the back channel inside deals that we’re looking at. It’s pretty easy to get to a quick no now.

because in this environment, there’s still a lot of risk at play. And so the best way to, to avoid that is really just by creating a very tight construct that we operate within.

craig fuhr (51:41.83)
How much of what you’re seeing is actually on the market versus you get the call from the guy who just found out about a potential listing?

Dennis Cisterna (51:48.238)
You know, I mean, it’s pretty, I would say probably 80% of what we see is on the market or about to be on the market because, you know, in the commercial real estate world, it’s not quite this, there’s not bird dogs the way you see in the single family world quite the same way, you know, it’s like, ah, you know, I know a guy who owns a million square feet of industrial, you know, or whatever. It’s, there’s just, you know,

craig fuhr (52:09.876)
It’s a broker.

Dennis Cisterna (52:14.862)
There’s not a back channel to a $400 million asset or something, the same way there is to a house in Plano. So it’s a little bit of a different animal. We have a lot of direct conversations with the existing owners and we’re working on growing our direct to owner operator channel as well because we think there’s a good runway on the sale leaseback business over the next several years as corporate debt gets more and more expensive.

Cash becomes king for those groups as well. But it’ll be tough. I think we have a very strong conviction in what we’re doing, but ultimately the proof’s in the pudding. We still have to go out and raise that capital. We have to find a lender that agrees with us and can play ball all the way to completion. And a lot of moving pieces to get a deal done in this market period.

craig fuhr (53:16.492)
Dennis, it has been just a genuine pleasure to speak with you. Can’t thank you enough for taking the time. Really enjoyed the conversation that we had in episode 12 about Bill to Rent and then obviously this one has just been a real eye opener, I’m sure for many. So thank you again for that. I hope we can have you back sometime again. I don’t know what we can pay you. Probably nothing again, but you’ll have the microphone and the camera ready to go.

Dennis Cisterna (53:41.358)
I’m keeping the gear. Well, thanks for having me guys. It’s, you know, I talk shop with Fred every day and I’ve known Jack for years and Craig, it was great to know you. I’m glad you guys are doing this podcast for your clients and other investors out there. I think this is, you know, in this universe, all this information is available for free. So I love that you are making this as resource available to folks right now instead of.

Fred Lewis (53:44.981)

Dennis Cisterna (54:10.03)
them finding some huckster to pay $10,000 to find this kind of information.

craig fuhr (54:13.772)
Well guys, I will tell you that I’ve received some feedback from folks that have been listening and they’re really impressed with the depth of the content. Really glad that we’re doing it. So I’m thankful for just adding more to that today. Today was a real deep dive into two great topics that affect many. So thank you again. That’s episode 13. Jack from Copenhagen, Fred from some undisclosed bunker.

Fred Lewis (54:14.375)

craig fuhr (54:41.956)
and me here at Dominion getting ready to go raid the place. So, since they’re not here. Guys, thanks for tuning in. We’ll talk to you again soon.

Fred Lewis (54:42.544)
Dear everybody.

Jack BeVier (54:44.133)
The office.

Jack BeVier (54:49.53)
Thanks guys, take it easy.

Dennis Cisterna (54:50.126)
Thank you.

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