Welcome to the My Private Network Podcast!
Hosted by Bob Simpson, today's episode we invited Trez Capital's Co-Chief Executive Officer & Global Head of Origination, John Hutchinson, to speak on one of the topics that is always trending, investing in real estate.Real estate lending and private debt investing are strategies Trez does well. With $5.5 Billion of assets under management, this episode uncovers all important and pressing questions, along with an invitation for investors to not only learn but start investing in this exciting concept today!
Today's Expert Guest
John Hutchinson
Co-Chief Executive Officer & Global Head of Origination
Trez Capital
Today's questions of interest:
0:00 Intro
3:09 What's the thesis underlying Trez's investment strategy?
6:33 Can you explain the swing states and where the U-Haul traffic is going?
8:33 What are some of the preferred asset types that you like to look at?
11:15 Can you share with us what you mean by lot development?
14:44 Do you have really tight relationships with any of the builders you work with?
15:51 How are residential projects different now since the 2008 financial crisis?
19:43 When putting out a loan what do you do to keep risk levels contained?
22:36 From the 75% of your recurring groups you work with, you're more a partner in the deal as opposed to the lender?
24:10 Are people lining up on lot development projects today or are there a lot of lenders who are avoiding this kind of work?
25:29 If we look at where your focus is today where is your city state focus?
27:09 What kind of work do you do on the equity side?
30:30 As you look out over the next 2-3 years, what kind of returns would you anticipate for people on the debt side versus the equity side?
33:19 What is the comfort zone that you think investors might be able to achieve with Trez?
35:35 Can you tell us about the win win relationship you establish with those you do business with?
36:38 Can you explain your loss ratio on lot development loans?
37:14 Final thoughts.
Transcript
Bob Simpson: Welcome to another episode of My Private Network. I'm Bob Simpson, your host, and today we're diving into the world of real estate lending and private debt investments. And you know what? There's no better person to guide us through this than John Hutchinson, CEO, Trez Capital, joining us today from sunny Grand Prairie, Texas. Ever consider how real estate backed loans can generate consistent income and how private debt investments can offer stability in volatile markets. Well, today's your lucky day with over 4 billion, like 4. 4 billion. I think John, is that what you said to me?
John Hutchinson: 5. 5 billion.
Bob Simpson: Whoa, 5. 5 billion in assets under management. Trez capital stands as a leader in real estate financing, especially across booming markets like the U.S. Sunbelt. Under John's leadership Trez Capital has earned a reputation for providing high yield returns while maintaining a laser focus on capital preservation. A rare combination in today's unpredictable market. In this episode, we'll explore some of the more pressing questions around real estate lending. What's the thesis behind Trez's investment strategy? Why are residential projects still such a hot ticket? And how does today's environment compared to the 2008 financial crisis? John will also share insights on risk mitigation, why some lenders steer clear of things like lot development loans and which are some cities and states that are his primary focus. So I think that's a pretty good summary of what we're going to talk about here today. Now, if that's not enough, we're going to dig into why repeat borrowers flocked back to Trez and why Trez is venturing beyond debt and into some equity investing. So John, how's it going?
John Hutchinson: You know, it's going pretty well.
Bob Simpson: Pretty well. Yeah. So just, you can hear John's accent a bit. Yeah. John's an almost Canadian. You can probably tell by his accent that he grew up in Buffalo. By the tone of his voice and he's still struggling with what happened to the Bills in the week five loss to the Texans. It was a little better last week, John, but still too close to win against the Jets. Did you think?
John Hutchinson: Well, I'm still Bob. I'm still struggling with the four Super Bowls in a row that we lost back in the nineties. So it's, yeah, I'm a long suffering Buffalo Bills fan.
Bob Simpson: Yeah. What's the, what are the worst words, in the vocabulary of a Buffalo Bills fan?
John Hutchinson: Wide right.
Bob Simpson: No, it's wide left. Yeah, it's wide right.
John Hutchinson: Yeah. I think it's wide right.
Bob Simpson: I think it's wide right. Yeah.
John Hutchinson: Yeah. I remember that.
Bob Simpson: Yeah, I bet you do. Yeah, I think we all do. Because, you know, living here in Ontario, we're pretty much mostly Bills fans. So up against the clock, let's dig in. You know, I mentioned one of the things that we're going to talk about today, John, is the thesis. What's the thesis underlying? Trez's investment strategy.
John Hutchinson: Well, well, Bob, it's relatively simple. It's, it's about growth in our, our thesis is that growth in population and growth in jobs is, presents opportunity in real estate, particularly for residential real estate. It's as simple as people have to have somewhere to live and when they're moving from, other places in the country, for, because of usually because of a job or sometimes family reasons. They, they need a place to live. They need an apartment or they need a house. And that's our primary business is financing or investing in, residential properties. And that's our fundamental thesis. And, and, and, and those, the growth, you know, it's, you know, it's primarily beneficial to residential, but it's also beneficial to retail and other things because if people are moving and areas are growing. People need a place to shop. They need a place to, to eat. They need a self storage facilities to store things in. So it's all, it's all driven in our opinion by growth. And that's what we, what we seek out is opportunities and growth there. Yeah. John, I think a lot of people in investing, they fail to look at one of the most important factors in investing and that's demographics, right?That's right. Sounds like you're a demographic, follower. We are very data driven. We subscribe to a lot of the, Best market research companies in the country. John Burns is one of them, Zellman and Associates is another. Zonda, we've got a whole plethora of, of research that we get every, every, sometimes every day.Burns publishes something virtually every day. So we, we're all about demographics. Where are the people going? You know, how, how, how many houses are being built in a particular market? What is the supply of vacant lots or, what's, what are the, what are the, supply of lots in the pipeline? All that data's there.You just have to, expend the time and energy to, to research it and, and, and find the, find the information. And, and one thing that we're, we're, we're particularly careful about is not overgeneralizing things. You know, you'll, you'll hear, well, you know how sales in the United States are in decline or whatever, and that may be true on a national basis. But it isn't necessarily true of every market. So we look at every market, every market we do business in, and we don't just look at the top line numbers and say, well, you know, it's slowing down in a particular area, or it's picking up in a particular area. We want to look at each sub we look within the sub market of the major metropolitan areas. For example, in Dallas, there's about 90 different sub markets that, that, you can, build houses in or apartments or whatever. So we look at the particular sub markets to determine where we're going to invest our funds, not just in Dallas, but in other, other cities that, that, that applies as well.
Bob Simpson: Yeah. So it's sort of like watching the U.S. Election and studying the swing states. The swing states are probably states that, you know, in your vocabulary, a swing state is maybe where, where the population flow is really positive. And you're getting things like U-Haul traffic going in that direction, as opposed to going the other direction.
John Hutchinson: The U-Haul, U-Haul traffic is one of the, one of the items that is followed, when it, when it costs so much money to, take something from, U-Haul from California to Texas. That's a sign of people moving to Texas, and then it, when, when they almost pay you money to take it back from Texas to California, that, that is a sign that there are very few people who want to move to California. So, we have, we have had for quite a while, a, a great, what I call another great migration. The U. S. has had several great migrations. The 19th century was one. After World War II was another. And now we're, we're undergoing another great migration as, as people leave California, New York, Illinois, new Jersey and move to the southern states of the Carolinas, Georgia, Florida, Texas, Arizona. The, you're talking about thousands and thousands of people. And, and those people, like I said, they need a place to live. They need a place to shop. They need a place to, to store things and there's various things that are driven by that population growth.
Bob Simpson: Yeah, I think it's pretty amazing that people would even consider moving from New Jersey to the Sun Belt. Don't you?
John Hutchinson: No, actually I wouldn't. Having moved from Buffalo to Dallas in, in the late 70s, I've seen, what goes on in, you know, a lot of the northern cities as they've declined and then the southern cities as they've boomed. Over that period of time, it's, it's really quite incredible.
Bob Simpson: Yeah. Yeah. Might be, might be nicer living in Dallas than listening to Irv Weinstein talk about six feet of snow and fire in Lackawanna.
John Hutchinson: Yes, that, that is, yes it is. We, I don't, I don't miss the winters, down here in Texas.
Bob Simpson: I'll bet you don't. Yeah. So if you look at products, in your lineup there, what are, what are some of the preferred asset types that you like to look at?
John Hutchinson: Well, as you said, in, I think I've said, we do a lot, we do a lot of lot development projects where lots are developed for, home builders to build houses on. We also do, although with this has slowed down quite a bit, a bit due to the current economics of it with high interest rates and whatnot, we do, we have typically done a lot of multifamily construction loans. We also like to do, industrial and, we, we do some retail. We don't do any office building loans. Uh no, we haven't done any and don't have any intention of doing any. It's a, it's a market that, is very troubled right now. And, and it's not one that we were, we were ever attracted to. So that's, those are our primary, areas of, and, but, you know, we're opportunistic. We do some other things every once in a while, but, that, that's our core business. And, that's where we like to invest our investors money because we're very, we're very comfortable with those, product lines.
Bob Simpson: Yeah. And you're pretty, you're very strategic too. It's not like you're multi weighting the different asset types. That you look at where you believe, there are positive factors involved and they ignore the ones where negative factors like office.
John Hutchinson: That's, that's absolutely correct. We, we, we, We started making some hotel loans a few years ago on limited service hotels. And we did a very thorough analysis of what it, what it takes to be successful in doing that before we embarked on doing it. And then we made probably eight or nine loans and they all went fine.And, but we spent a lot of time studying an area before we'll do anything, in that particular area. We, we made a couple of, RV park loans. And we, again, we did a lot of research in that before we, we, we did those loans and they're going, they're, they're fine. But, we look for opera. We try to be opportunistic. We, we, do not have limitations placed upon us by any government regulations, like the banks do, in the United States, I'm sure in Canada as well. And, and right now the banks have a lot of limitations on them and that's good for us because it means they can't, they can't do as many loans. And in, in a lot development world. The, the regional banks were our competition and now they're really not because they, they have the, the government is, limiting what they can do, and how many real estate loans they can make and whatnot. So that opens up opportunities for us.
Bob Simpson: Yeah. And then when you talk about lot development, just to share, share with, with us a bit, what you're talking about.
John Hutchinson: Yes. Lot development is a very, very big business in the United States because you can't build a house unless you have a lot to build it on. And there are hundreds of thousands of homes built each year in the United States. Texas being the one with the most homes built in a particular year. So a developer will come to us and want to buy a track of land. We will, once the land is entitled, we don't loan on speculative land. We only loan on land that's zoned and can be developed. Into whatever the developer's plan is. So, we, once it's, once that is, zoned, the builders who are going to buy the lots sign contracts to buy the lots. And when they do that, this is the unique feature of lot development financing and lot development, investment. The builders will put up significant amounts of earnest money to, to secure their obligation to buy the lots. That is additional equity that goes into the project. The developer puts in equity. The builders put in earnest money, which is, as far as we're concerned, is equity because it's at risk in the project. And so when we make a loan, we've got two parties that are, have a skin in the game. One is the developer, the other is the builder. And the builders will put it, we, we closed the loan recently where the builder had, builders had 42 million dollars in earnest money in the project. And it's, that it makes us, you know, from a risk mitigation standpoint, it's very important because that that builder who has put in all that money not only has that at risk, but has their business plan at risk if they don't get the lots delivered to them to build the houses that they're planning on building and, and selling.= And, you know, would obviously affect their, their returns if they don't have those lots available. So that that is a very important thing to the builder. So, that is a big, the big component that's very different. No other real estate investments have the earnest money component that that exists in lot development. So that is something very important to us as a, as a lender and also to the, it's important to the developer, because it, that builder's committed to the project.
Bob Simpson: Yeah. It's pretty hard to walk away from 42 million.
John Hutchinson: Yep. And, it gives that, that builders skin in the game and, and they, they, they're as interested in getting those lots completed on budget as we are so. It 's a very unique, it's a, it is. One thing about lot development also that's, that's very different is you don't evaluate a project based on cap rates, you know, the projects aren't transacted based on cap rates, so cap rates don't have anything to do with lot development. And, so you can sit around all day and argue about cap rates and where cap rates are going to go and what they should be and all that. It's, it's meaningless for lot development. Interest rates are important. IRR is important, but, not, not cap rates.
Bob Simpson: Yeah, one thing that I've, been down on a couple of your tours down in Texas and you know, you put the builders right up on stage to tell their story and how, you know what they're all about. But, you really tight relationships with many of those people, don't you?
John Hutchinson: Oh yeah. We have very strong relationships with the, with the builders that are in the projects and the developers. And one thing we're proud of is, is our, our percentage of repeat business. About 75 percent of our loans. are made to borrowers that we've already done business with. You know, we're always looking to add new borrowers, but we focus, you know, a lot of attention on on the borrowers that have done business with us before, because obviously we've underwritten them. They performed or we wouldn't make them alone another loan. And so it gives us a great great deal of comfort from Risk mitigation standpoint that, these are people that we've done business with and we have a reason to trust them.
Bob Simpson: Yeah. Now, one of the, you know, a big word that comes up in the world of investing is bubbles, right? You know, your, your focus is on investment in real, in residential projects. Everybody remembers what went on back in 2008 and the conditions that led to the great financial crisis. How are things different today? Then they were back in 2008.
John Hutchinson: Well, Bob, that's a, that's a, that's a good question. And it's, it's one that, a lot of people, they, they ask, and a lot of people suffered, you know, some scars from those days. I was in the home building business during, during the great recession, and I saw what happened and I saw why it happened there. The lending was too far too loose. There was an effort to create an owner, what was called an ownership society. And both political parties were, were involved in this. It wasn't, you can't blame it on the Democrats. You can't blame it on the Republicans. They were all involved and it was well intentioned. Let's create an ownership society in their life. They'll, they'll, they'll have a chance to build up some asset. They'll be good for families. I mean, there's a lot of reasons why you wanted that. But the fact that was there, there are people that just weren't qualified to buy homes. The whole market on the front end in terms of, well on the front end, it got too loose with lending to developers. On the back end, it got too loose for homebuyers. People were buying homes that should never have been able to buy a home. They didn't have the credit. They didn't have the savings. They, as soon as their car broke down they couldn't fix it, they couldn't pay their mortgage payment because they had to make their car pay car repair bill. So it was, too many houses were built and they were built for people in many cases who could not afford to keep the house once there was any. And he set back in their life, and that resulted in massive foreclosures, reduction in value of homes, and in a lot of losses. But that doesn't exist today. On both ends of the, of the, of the, of the pipeline, it's much tighter. The, the lenders, let's say the banks, they're not loaning a high percentage on non recourse loans. If you want a non recourse loan the bank today, they probably won't loan you more than 60%. So you got a 40 percent equity gap that needs to be filled. Some of that's good in lot development. Some will be filled by the builders. The rest have to be filled by the developer. And, so it's tighter on the front end and it's much tighter at the consumer end because it's hard to get a mortgage today. Their mortgages are underwritten strictly and they are, very demanding, particularly if you're self employed. There was a lot of fraud that went on. And a lot of, a lot of people were, were allowed to buy houses based on, you know, fraudulent statements about how much money they made. In many cases, loans were made to people who just said, well, I make $10,000 a month and nobody checked. Underwriting was very lax, if it existed at all in many cases. And that does not exist today. If you're self employed and you say you make $10,000 a month, you bet you got to be able to prove it or you're not going to get a loan. So that's very different than what it was leading up to the great recession. The system is tighter, it's more disciplined. And, it, it, so I, you know, we're, we're confident that, you know, what's going to, what, what caused the great recession isn't going to happen again. Yeah, they, they really tighten things up. And, you know, we're, we're confident that that situation is, is behind us and our government has, has put some things in place that are going to prevent that from happening.
Bob Simpson: Yeah. So it's sort of not like Oprah, you get a home, you get a home, you get a home.
John Hutchinson: Right. Right. It's right.
Bob Simpson: It's much tougher than that today. So it is. And you've been touching a fair bit on the mitigation of risk. When you look at putting out a loan, an investment, what do you do to, to keep risk levels contained?
John Hutchinson: Well, first of all, we, we, get to know the borrower very, very closely. Right. We do background checks on the borrower. We do some, inquiries in the market about the borrower, about the quality of the borrower's quality as a person, the quality as a developer. We know a lot of people, throughout the country. So we can, we can check people out even though it's not somebody in Dallas. And so we, we, we do that. We do some research our personally, we get, like I said, we get the, we get a serious background check. And then we, as our due diligence on the on the project, we have a market study performed by a market research company.\ We will have our consulting engineers review the budget to make sure that the project can be developed for the for the amount that's in the budget. And the budget is reasonable. We, you know, we usually know the builders pretty well, about what, you know, what the bill, the builder qualified to build this type of product. Some builders can build houses at, at the higher end of the pike spectrum but not the lower end and the vice versa. So we, we want the builder to be qualified. We want the builder to have good operations because, if they're not a good operator, then they can, they can screw up a deal that would otherwise be successful if in the hands of a good operator. So we have to, we approve the builders that the developer, you know, suggests who the builders are, but sometimes we, we, we tell the developer, we won't loan if you have that filter as you're in your project. So that's, you know, what we do on the front end. And then it, excuse me, as the project progresses and there's draws made on the loan as work is done. Okay. We send a consulting engineer out to the field to review the work, make sure the work has been done and that it's, and that the draws is supported by actual work in the field. We don't want our, borrower getting ahead of us and, drawing more money than, than work has been completed. And that's, you know, what we do through the life of the loan to stay on top of things. We have a really good asset management team that's that, stays, stays on top of all of our loans during their lives. So we can tell if a loan's starting to look like it might start to have problems going over budget or whatever, then we address it early on and, and generally have the developer put more money in to fill up any gaps caused by cost overruns.
Bob Simpson: So you're, the way you describe it, and from what I've seen in some of the, seminars and things that I've attended, is with that 75 percent recurring group, it's almost like you're more of a, you're a partner in the deal as opposed to the lender.
John Hutchinson: We take that approach philosophically, but not legally. You know, we like to talk in terms of an interest that we have a mutual interest. We're very careful about not calling ourselves partners cause we don't want the legal ramifications to go along with that, but we do philosophically look at things that way and our borrowers do as well. And they, we helped our, we help our borrowers, in some respects, sometimes to give them, information about who they should be dealing with for one thing or another, who's a good builder, who isn't, you know, it depends on various circumstances. But yes, we are not antagonistic towards our borrowers, which I think some lenders are we're firm, but fair and, you know, we expect them to do what they're obligated to do, what they've agreed to do, but we, we don't go out of our way to nickel and dime them, you know, in, in like some lenders will do, which just aggravates the, the borrowers. And, so, you know, we build a relationship through, through many, many ways, and we, that's why we get, we not only have repeat borrowers, we get a lot of referrals from borrowers. Or refer they're, you know, developer friend to us.
Bob Simpson: Yeah. Somebody they're working with and done the work in the past. So it's a good referral. Now, are people lining up John on, development, lot development projects today, or many, are there a lot of lenders who are avoiding this kind of. This kind of work.
John Hutchinson: Well, yeah, lot development is, is I, I may have said earlier today is an area of real estate lending that a lot of lenders don't enter into because it is different. Analysis of it is, is not related to cap rates. You can't just put a financial statement together, come up with some NOI and then multiply it times a cap rate that that's not the way it works. So a lot of lenders don't get involved in it and, and that's, you know, that's fine with us. There are, it's not like we're the only one in this business. Believe me, there are a lot of good lenders that do it, but it's not as many that do, retail loans or office loans or, or some other things that are more, more, middle of the road. But it is a, you know, it's, it's got its idiosyncrasies by, you know, and, and that does keep some people out of the, out of the business.
Bob Simpson: Yeah. Good to be a specialist in a specific area.
John Hutchinson: Right.
Bob Simpson: Yeah. No, you know, we kind of hear the broad term Sunbelt. If we look at the, where your focus is today, because you are strategic, where is your city state focus? What's your primary focus today?
John Hutchinson: Well, our focus is, well, in many cases, it's called the smile state. You might have heard that term. It's, you know, from the Carolinas around the Southeast through the South to the Southwest. From the Carolinas to Arizona, is our primary, focus. We don't do business in California unless it's a very, very special, situation. California is just too difficult. We, we do a little bit of business up in the Pacific Northwest, but they've been bitten by the California bug. They're a little difficult to do business too, so we don't do much up there. Although we do like Utah, we do like Idaho. But our primary business is the Carolinas, Georgia, Florida, Texas, Arizona and, Nevada, are the, you know, the so called smile states. And that's what we, where we like to focus our attention. We will go outside of that. If, we have done business in Minneapolis, we've done business in some other northern cities where, where a borrower that we do business with in our primary states, goes up to Minneapolis or something to do a project. And we like the project and we know the borrower so we'll occasionally do something out of our our core.
Bob Simpson: Mm-hmm . Yep.
John Hutchinson: We don't solicit business typically in those other markets.
Bob Simpson: Yeah. So there, you're really, Trez is really known as a, as a lender, but you sponsor equity investments as well as debt. Why, why do you do that? What kind of work do you do on the equity side?
John Hutchinson: Well, we do, about Morley Green, our founder and I decided that we had, we were seeing, we were meeting so many people. And we were seeing so many opportunities that we wanted to bring some of those opportunities to our investors. So we started doing, what we call TOFs, Tribes Opportunity Funds, and we've just, we're in the midst of closing TOF 8 right now. So we partner with developers and our primary business, as you might suspect, is related to residential. We've done a number of multifamily projects that we've invested equity. And we have done a number of a lot development projects where we have invested equity. We are not, we do not loan money on a project that we are the, we have equity involved, obviously conflict there. We've done 25 different partnerships with Hines, which is the largest, one of the largest developers in the world. They have operations all over the world and that's spelled H I N E S. It's not the, not the ketchup people. And, they've been a partner with us on 25 projects. They're the developer. We're the financial partner. We look out for our investors interest and, you know, we have approval rights on all major decisions. And Hines puts in half the equity and we put in half the equity and we go forward together. It's been a great relationship. We've been doing business with them since 2012. We have another company that, Thompson Realty that we've done 10 multifamily projects with and I've known those, I've known that company for since back in the middle eighties. And, we've had enjoyed great relationship with them and we've do it. We have some relationships with a few other developers, but those are our primary relationships that we've invested in, through the TOF's. And the one that we just closing TOF eight is, entirely lot development. There's no other assets in it other than lot development projects. And we have two projects in Virginia, three projects in, in Charleston, excuse me, not Charleston, Charlotte, North Carolina, one in Austin, one in Florida, and one in Phoenix. And Hines is our partner on four of them. And then we have, another, group that we do business with in Charlotte. We're going to do three or four projects with them. So it's, we're very excited about that. We just, we raised, I think we just raised $45 million for that fund, TOF 8, and, we're about to do our first closing with investors.
Bob Simpson: Yeah, and I've met Rob Hines. He's just a, he's a lovely man. Yeah. You don't know what it's like when you're, when something's going sideways and you, you talk to the same guy, but, on the surface, he seems, he seems nice.
John Hutchinson: Well, they're quality firms.
Bob Simpson: Yeah. Now, from an investor point of view, if we look at the lending side versus the equity side, as you look out over the next two to three years, what kind of returns would you anticipate for people on the debt side versus the equity side?
John Hutchinson: Well, let me, I didn't fully answer one of your questions. You asked me if, if people are lining up to borrow money for lot development. I believe, and I don't think I answered your question that that is a very, high demand area right now. As I think I've said, we're not doing much in multifamily because multifamily is overbuilt and most sub markets right now, and the economics are difficult to make it work. With interest rates as high as they are and cap rates as high as they are. So we're not doing much in the way of multifamily. We are doing some, but not, most deals don't work. But we're getting, really inundated with requests for, for lot development financing. For a number of reasons. The builders are very concerned that because of a slowdown in development in 2022 and 2023, they're not going to have enough lots to answer the market in 25 and 26 and 27, it takes a year and a half to two years to develop lots for a new project. So they, they need that. So they're, they have a very strong appetite right now to sign up for new lots and new projects. So that, you know, obviously drives the market. So we are getting a lot of requests for a lot development financing, and that is good because, it allows us to put money to work and we don't have as much right now on the, as I said, on the multifamily, we're doing some retail loans, but we're very selective about what we do. We're not going to start making office loans and, and get into that mess. So we, we, so to say there, there's a line of potential borrowers. It's not too far off as it relates to lot development right now. Our borrowers that we've done business with are, have, have a number of projects lined up, for us to do, and, and as I said, we're focusing on some, more along the East coast right now, we've got some new relationships in the Carolinas. And that's a, that's a very active market. So we're doing more business in North and South Carolina as well.
Bob Simpson: Yeah. So back to, answer, didn't answer that question yet, but, if somebody's looking for regular income and they're investing in your, your debt on the debt side, you know, rates are coming down, you know, we're seeing rates come down anyway, what, what's a reasonable expectation over time for somebody on the debt side who's looking, you know, maybe a GIC investor is saying, I, you know, I can't really get along with 4%. What, what's, what's kind of that comfort zone that you think investors might be able to achieve?
John Hutchinson: Depending on the, the, what, what the parameters of the fund are we feel comfortable in the seven to 8 percent range as the net for our investors. And, you know, it may be higher, but I don't think it'll be lower than that. And you know, our Prime Trust fund, which does only first liens, and it's only 50% loan to value, and so it's a very low risk fund, lowest risk fund, maybe more like 6%, 5, 6%, but the other funds should be able to get seven to 8%. Now interest rates are going down, but we've put floors under all of our loans. We, about four or five years ago, we, we shifted from fixed rate loans to floating rate loans, which was very beneficial as rates were going up. Now rates are coming down so we still have floating rate loans. We may return to the days of fixed rate. I don't know, but, but we put floors under them. So if rates, if prime rate, and we are private, we, we base our rates on prime, not on sulfur, so if prime rates go down, to, you know, 4 percent again r, or whatever, our rates won't fall that much. And these we'll be able to maintain, we'll, maybe we feel we'll be able to maintain that.
Bob Simpson: The 7-8%. And then if you look at the equity side on the Trez opportunities side where you're more doing equity, what if what are anticipated returns on lot development?
John Hutchinson: Well, on fund eight, we, we are projecting a 20% IRR over a seven year period. So that's, with a multiple of over, over two and, we think that's,
Bob Simpson: reasonable
John Hutchinson: reasonable return in, in, in, in relatively conservative, probably very conservative.
Bob Simpson: Yeah. Okay. So John, that's, up against the clock a little bit. I do appreciate your insights today. One of the things I know about you is, you know, your market, and I've always been impressed with the quality of your borrowers, some of the people that I've met. The relationships you have with them and how you really, you work hand in hand to create a win win relationship.
John Hutchinson: Yeah, it needs to be, it needs to be win win. It's like I said, we want to do business with people that we, we, we have experience with and you know, if they don't, if a borrower doesn't trust us, then they're not going to come back to us. And if we don't trust them, we're not going to want to do business with them. So it's a, I think people look at things as, this is a relationship business. It really is. And, you know, having good relationships bears, bears a lot of fruit, not just in making somebody alone, but having somebody you can talk to and get information from and other referrals and whatnot. So, and that's, the people that we have here in my office in Dallas have all been here for quite a while. And we, we have been in the market for quite a while. If you add it up, my God, we must have 150, 200 years of experience in the market. So among, you know, collectively, I mean, myself alone, I got over 40 years.
Bob Simpson: Plus another a hundred years for Morley.
John Hutchinson: Oh boy. That's right.
Bob Simpson: Yeah. You can tag that one on there.
John Hutchinson: Bob, I should, I should say one thing. I should have mentioned this earlier. Our loss ratio on lot development loans. Is we've lost on one loan. We lost 50, 000. We've made 266 loans over 5 billion in lending. Now that, that 50, 000 over 5 billion is, I don't know how many zeros you got right of the, of the decimal point, but it's, there's a lot of them before you get that to a digit. So anyway, it's been a very successful business for us and our investors. And we, we expect that to continue.
Bob Simpson: Before making any investment decisions, it is crucial to consult a financial professional advisor to determine suitability, full disclaimers are available on privatedebtandequity.ca. John, thanks so much for joining us today. It's been a pleasure.
John Hutchinson: Thank you, Bob. Look forward to seeing you soon. Go Bills!
Bob Simpson: Go Bills, yeah. I haven't told you that, in 1971, I picked the Miami Dolphins to make the playoffs after a 4 10 record. And they made the playoffs next year when undefeated
John Hutchinson: in
Bob Simpson: 72. So I've kind of been a dolphin fan versus Bill's fans.
John Hutchinson: All right. I'll forgive you. You can't help yourself.
Bob Simpson: Anyway. Thanks for tuning in to My Private Network podcast. Be sure to subscribe. Tell your friends.