#287 - Scott Everett - Founder & CEO of S2 Capital - On MF Outlook, FED, Banking Crisis, Capital Markets

Chris Powers: We have the number one episode to date back by popular demand, and we were talking about it. I have my friend Scott Everett joining me today. Welcome back to the show.

Scott Everett: Thanks for having me.

Chris Powers: I thought it a fun place to start. If you haven't, you can listen to the episode we did last year and get more on Scott, how he built this company, and what he is up to.

But today, we'll focus on the current environment, but we have to start. Last year when we were talking last year, I think it was about February; you said that floating rates are for suckers.

Scott Everett: Fixed rate.

Chris Powers: Fixed rate is for suckers. Let's start there. What have you learned?

Scott Everett: Yeah, fixed rate. Still, I'm not too fond of it.

I said that right before the fed embarked on the fastest rate hike cycle in history, which put an egg on my face for that. The caveat to that is fixed rate is for suckers, and a floating rate is the best way to finance deals. It would be best to have a very active interest rate hedging strategy, so always fine print.

Right. We've got full interest rate caps in place; what have we learned since then heading into January 23? I'm sorry, January 22 SOFR Curve through December 2024 was one and a half percent fed changed their mind overnight. Fortunately for us, heading into March, we had about a 30-month average maturity on our rate caps for almost 80% of our notional.

Somewhere around, a blend of about a 180 to 185 strike. There are a lot of things I've learned over the last 12 months. When brake caps are cheap, buy large amounts of notional at the parent level, dissect it up, buy it for three to four years, and you can allocate however you need it, as roll and sell.

And you can move it around and be well-protected today. Our rate caps sit. We got paid out about 22 million last year in our portfolio, and the value sits at around 75 million. We paid about six, and that has been a massive help to us. The flip side is, was it ideal timing if you had a crystal ball to a rate lock, a five-year deal with a three-year pay down, and locked it in March of 22 at three and a half, 4%?

Yeah, that would've been the perfect world. But we've done a lot of math on floating versus fix and going back to the eighties. 93% of the time, it is more expensive to have fixed-rate debt on an actual coupon basis. And assuming all the things with the hedging, you lose all flexibility in the value of the game when you fix your debt.

And it does have an extreme amount of cost to it that people are unaware of. And so, anyways, fixed rates for suckers. Fix your debt, and do whatever is best for you. Our business plan, we move to Hawaii about 75%. I've got to have flexibility in my Capital. Right now, every person I talk to is getting eaten alive by floating rate interest rates, eaten alive by their rate hedges that are expiring or rolling off. They're all moving to this fixed rate product because every freaking private equity group, if you talk to an institutional investor, the hottest asset class is a fixed rate, private credit. Because if I'm an insurance company, I can now lock in all these high rates for 5, 7, 10 years that I've never been able to get.

And some people got burned because they were floating panics and saying, sign me up, signs at the wrong time, rates come down. They always do it in a cutting cycle. And you're now fixed while the recession hits, and your demand falls off. So now you're stuck with high-interest rates and rate cuts, and you don't ride the wave back down.

So you wrote it up. It's the buy high, sell low, all the nonsense. And so you have to think through your strategy and be sensitive to it.

Chris Powers: You mentioned active hedging strategies. So you have a large company, many resources, and tons of trust in the marketplace.

It's not easy, but for you to say we're going to put an active hedging strategy in place, you have the resources. And then you could probably think about Scott when he first started and had two properties. Is it something that everybody can reasonably do?

Or do you think you must be a larger company to quote-unquote and have an active hedging strategy? And what is an active hedging strategy?

Scott Everett: Yeah, for the longest time, especially the last 13, 14 years, an interest rate cap was something your lender just made you do. And you hated paying for it because you didn't understand or care about it.

And in the worst scenarios, which there are a lot of them today, your lender didn't make you even buy one. And so now you're learning what they are. An active strategy would be to buy large notional amounts of value at the parent company and allocate them across your portfolio however you'd like.

Or you can buy them at the actual SPE entity, which is just tied to your loan of value. You can buy a one-year, two-year, three-year, and you can buy a one-and-a-half strike to a five strike or whatever you want to do. And so all it is just actively managing the cash flows in the hedges based on where you think now. The issue with hedging today is it's like buying insurance during a hurricane.

You are pre-funding for all the volatility and what is already heavily baked in a soft curve. And so our strategy has shifted. So we have a few deals expiring over the last couple of months, and I have now moved from buying way in the money, calling it one and a half strikes with a three-year term or something like that.

I'm now buying one-year rolling caps and getting my lender to move me to a five-strike. So I'm now sitting even with S O F R and refusing to pay these hedging strategies, all this cash for volatility premium. And that's what we've studied for 50 years of this.

Generally, rate cuts happen eight to 12 months after they pause. We all believe they will pause, and now would be the wrong time to throw all this good money after bat.

Chris Powers: Can you explain in layperson's terms what one and a half strikes to five strikes mean?

Scott Everett: It means so for basically, okay.

So if you buy a one-and-a-half strike, that means you are protected at anything above one and a half percent on SOFR, so if your debt is spread at 300 and you buy a one and half strike, your max note rate would be four and a half percent. If you buy it at a five, you got a lot of room to run, but it's a lot cheaper obviously to buy.

Right now, everyone's starting to figure out, well, hold on, I didn't know I had to escrow for these cap rate replacements, and I didn't know that it was maturing at the end of this year. And I didn't realize that instead of being a hundred grand like my budget, it's $2 million. It is freaking the industry out, as it should.

By the way, this is what Powell wanted. If you weren't paying attention and unprepared for this, it would cause some pretty spectacular implosions in the industry.

Chris Powers: I was going to get to this question, but you just led right into it. Will this cause deal flow in multifamily to be just poor capital structures, or do you think it'll be fundamentally driven cause tenants aren't paying rent or rents are going down, or will it be a combination of both?

Scott Everett: We've talked about it, but fundamentally, we still see tremendous demand in our industrial and apartments. It's bifurcating; sluggish rent growth is very tech concentrated in Austin, Raleigh, and Phoenix, and Atlanta, Florida, and Texas generally have very healthy demand.

You are still seeing good returns. And the supply pipeline, you probably saw yesterday, Fort Worth permits are down 80%. So there's the bullwhip off; we had a slight oversupply. Now you need help getting financing. Everything's filling up, and no inventory will fill this demand.

So rents will generally come back up. It won't be fundamentals, and people need to understand how hard this stuff is to operate. It's not industrial with concrete walls; you get good tenants and are a living, breathing machine for hundreds of residents.

You got all these people that have different demands, and they have different options every six to 12 months. And there's a new shiny building you can lease whenever you turn around. And so if you're not executing flawlessly at all stages, as you start to get in this oversupply and we start to see unemployment start to clip up in a recession, the week operators will get wiped out.

They're also dealing with 30 to 40% insurance premium increases. You got real estate taxes, and someone forgot to tell the central appraisal district we're entering a recession. Our tax increases were like 30 plus percent. And so, right now, we've got a pretty poor and bad stagflation environment, even though our rents were up about 11, 12%, it's a break even.

And so you must know what you're doing to find that extra value. And so it's a combination of poor operations, exposure to lousy expense management, and ultimately, the credit system will spit you out after it chews you up. So many people got their heads in the stand, but I've got a lot of conversations behind the scenes with many big operators, big owners, whoever you want to talk to.

People are scared and starting to come to Jesus moment; this isn't as easy as calling some capital and riding ride the wave. It's a serious decision to make.

Chris Powers: Well, that set the stage perfectly for we can talk about capital markets, and then we've talked offline.

We all can agree we're heading into a recession, but you set up maybe you're more bearish than others. So I can lay it up however you want. Let's talk about capital markets and just like what you're seeing today, and then we can talk about, wrap that up, how the macro is influencing that.

Scott Everett: Yeah. We discussed it like transactions are down 80% in our industry. Not shocking, right? You've had almost equal value destruction to the GFC in our industry, and I don't think people are paying attention to that. The GFC from start to finish and multifamily had about 41 to 43% depending on the peak value to the floor.

We're at 35% right now because cap rates were higher, so it went from six to eight today, from three to five. And so, as it gets tighter and more compressed, it's a more significant percentage. We've absorbed some pretty severe impacts, and the more significant issue is the debt yields in this environment.

Everyone got four and a half intro debt yields, and they moved them to stabilize them to a six, and they had some takeout waiting. You can't get it for anything less than eight. And so there's a lot of just fundamental credit issues in the environment, but from a macro level, my money manager hates me because I'm looking at S & P at 4100; it doesn't make sense to me.

So I'm 98% cash and bonds right now, and I can get five and a half percent in rolling one-month treasuries. There needs to be more clarity between market expectations and the reality behind the scenes because everybody I talk to is getting VBS and trying to understand their exit scenarios. We get called on many different deals to toss in an offer.

They've realized it's not worth what they paid, but hoping they can get some value, it's not worth the note. We looked at, you probably saw, the Houston stuff that exploded after like 12 months in those 2400 units.

The guy had no idea what he was doing. I never should have been in the business. And those are challenging assets, but 12 months is, that's a rapid start to finish to throw back the keys. But there are many groups behind the scenes going, Hey, I understand it's not worth the debt; I'm burning 200 grand a month right now.

And some months ago, it was, maybe I'll get my equity. Now it's half my equity, maybe I don't get any equity, but I'm not willing to put good money after bad anymore. And so we're starting to hear that deal flow, start to pick up. The problem is the lenders now have to get involved, and once they have their moment, which is coming to figure out how much I'm willing to take a haircut on, you won't be able to see the transaction volume pick up again. But it'll come.

Chris Powers: Is it mainly like syndicated equity deals where they're saying we won't do it? Or even the big institutional LPs are saying let it go?

Scott Everett: Everybody is trying to figure out cash management right now. Yeah. So if you're in the fund business, you're saying, what vintage of the fund is it?

What's the liquidity of the fund, and what is so we bought a deal from a group that was part of a large group fund vehicle? It was the only one that made any sense to us on a value because they'd already exited billions of dollars and said, we just went out of this thing, we don't want to feed it and dilute returns clear us out, and we don't care.

And those are the ones that are transacting more and more. The syndicators can't transact; they are most likely unless they've moved rent somewhere between 40%, they probably paid a cap rate debt and will not be able to clear equity. So they will have to get equity to sign off the sale and get lenders to sign off possibly to sell.

Everyone's just waiting around to figure out which one breaks first. We all forget that this has been a seven- to eight-month reality. This rate hike cycle started in March, but it was apparent in August that this is serious for most people.

And I could have done better in risk management. And our market rents are down 6%. People don't say that demand is there; you could fill up, but if you performed a 4%, 5%, or plugged some co-star, organic rancho trend into your model, you are way down.

And fortunately for us, we're big on untraded rents during the value program, so we're hitting about 100,102,103%. It's been a slug of performer rent growth, but we need one 115-120 with the expense growth we're seeing.

So we're grinding it out. But we're good operators if we need help getting the occupancy and leases. We're looking around at other T2s and rent roll saying, You don't have a shot, your debt matures at the end of the year, and you got to buy a rate cap for 2 million.

Where's that money coming from? And who will fund the capital call to pay down the note so that you can even refinance or extend, and it still needs to be added? 

Chris Powers: What's slowing down the rent growth? Is it that we grew so much, and now we're only growing 3% off the top? Or are there other things that have slowed it down?

Scott Everett: So there's nothing, look, there are massive amounts of supply that everyone was aware of, and that's obvious. Then there was some rebound after Covid that may be gotten out ahead of itself. So it's returning to normality; no one mentions that rent growth accelerated in Covid because people couldn't evict.

And so you artificially inflated occupancies to give pricing power to the landlords. And now that's working its way back to normality, and you're looking up going, whoa, I'm back to 91% occupied, and I thought it was 95. But really, I've got 10% and accounts receivable. And so your pricing power starts to come back down.

And now you're competing with all your other lower groups. So our rents for basically the last 12 months. Our market rents have come down about 6% year over year, and our effective rents have grown about 12%. So there's a difference. There's market rent that does this or this, but you're effective if you know what you're doing and you buy, right? You should always be able to achieve your proforma without market rank growth. But I've seen some models that needed market rank growth, and that was when things were good. And so, we'll see how it shakes out.

Chris Powers: Okay, We touched on what's happening to equity and debt in already existing deals.

Let's talk about conversations you're having with equity and lenders on what the next 12-24 months look like and how you think about it.

Scott Everett: Yeah, For us, the best thing we ever did was in June of 21, walked into my COO's office and said, if we don't want to own for ten years, I want it gone by the end of the year.

And we embarked on an 11,000-unit exit over the next seven months.

Chris Powers: And at what cap?

Scott Everett: Three six to three seven, After we'd already renovated everything, so these were three x gross plus returns to the equity, I felt like you'd be just an absolute idiot. Please take it.

The other thing we did was refinance. So that would've been about?

Chris Powers: Real quick, why did you walk in June of 21 and say that what?

Scott Everett: Because Paper rocks, images we're selling for 50 million. It was like, today's the day; we're cashing out.

And it was a tough decision because everyone was calling for 20% of organic growth in the next 12 months. So if you just held it, that's 30, 40%. Why? But we've got, we've said it for years. Pigs get fat, hogs get slaughtered, and we debated it internally to equity.

Everyone wants to run these fancy analyses, net present value, and forecast future cash flow. There is the most important thing to do is what is the return on implied equity. Can I not take my equity from two to two and a half over the next five years?

 What is implied equity? I've got all this cash tied up; what can I do with that cash after I sell to make another 10, 15, or 20%? And that was what we decided to do. Dump it all. So we moved our average portfolio, which mainly was older stuff too, because the older stuff always has a, always blows out the cap rate more than the newer stuff.

They lose; you lose the liquidity in a recession. And so thank God for that. We sold 40-something deals, 11,000 units, and refinanced another 15 to 20 in early q1 2022. That was the best thing we did because, when we refinanced, we bought a bunch of extra rate caps, so we hedged our additional, new debt.

And it gave us a long runway on anything we still owned regarding maturity—90 plus percent of all foreclosures in the GFC war due to maturity defaults. And so you have to manage that runway of maturity. And so that was what we did. We went out and put ten-year floating rate debt with hedges on, and then there was the remaining stuff, and we bought some stuff in 2022 that, I'd say, my very worst deals got probably five step-kids that are driving me crazy.

And three of them are the most excellent deals we own, but they were priced like a bond because they were flying to quality super well located, and you had to pay up to get that. And so we all know what bonds did. That's what's happened. You've lost pricing power, had issues with the expansion of cap rates, and were diluting the value.

And so those couple deals will be my problem children for a little while, but we've got a plan in place, and rents are picking up. One of them happens to be in Fort Worth. Fort Worth has caught fire in the last three months. You may have seen something, but supply and permits completely fell a cliff absorption caught up.

And the last three months, Fort Worth has gone bonkers regarding runs and occupancy, which has been excellent.

Chris Powers: I didn't know that, but that's good to hear because Dallas has had it for so long.

Scott Everett: It's had it for a while, but it's good.

Chris Powers: Okay. When we started or chatted in February, you were either closing your first fund or moving from deal-by-deal syndication to a fund.

In talking to you and even as far as we've gone, you're clearly in tune with what will happen going forward; what's equity, debt thinking? You're about to raise your second fund. With all that we've already discussed, what will Capital look like coming back in?

What do they say they want to see, or do you think it's another 12 months of sit-and-wait before the action starts?

Scott Everett: It is currently the worst fundraising environment in 20 years of tracking for PitchBook. So they track Q1 closings and all the fund volumes for private equity real estate.

For the last 20 years, you've always achieved above 450 fund closings in a year. And they're tracking right now to less than 200. You raised about 12 billion in q1, and if, like this year, we raised 55 billion last year. And you generally are going to it the math is just, it goes on and on, and it's all about.

Everyone talks about this magical liquidity bucket. First, it's sitting with Blackstone, so decide what they will do. Second, magical liquidity is entirely false; the system has no liquidity. Talk to the biggest; we talked to all the big boys, right?

New York State, familiar Texas teachers, you, Tim Co., Whoever you want to talk to, South Korea, the Middle East, and various European markets. Everyone has been crushed by the denominator effect, which you'll hear repeatedly and is essential. All of this runs on portfolio allocation models.

If you're managing 500 billion, you are accountable for what your board approves. And it might say I can allocate 10% of my dollars to private equity real estate, and I want 50 different strategies with all these managers, whatever 10% is acceptable. When the market is sitting at 4,600 on the S&P and your bond portfolio was sitting at par when you bought it at one and a half, ten years, all of that collapsed 20%.

So now the 50 plus percent of my liquid public equity, public credit vehicles, that has gone by, that has gone way down. So it's screwed up all my allocations. So all this private equity allocation went from 10 to 13-14% on the other side. All my exits that were planned in 22 and 23 that I was planning to use to fund my commitments.

All of that went away. And so it's compounding. You got one falling off, and now you're over-allocated; you've already allocated those dollars because you're always trying to catch up on what you anticipate to recycle. So then you look up, and you're like, holy shit, I am billions of dollars over-allocated to all these strategies.

So what they tell you is, please don't call me. We'll meet and talk if we get a whim to say we want to take an opportunistic approach right now. Well, guess what? Private credit looks much better than levered 15 returns in multifamily or industrial.

And so you'd say, okay, I'll give it to kk. I know I won't lose my job, and I know others do what they're supposed to and generate 14, 16% nets right now, first lean position credit. And so if you're an equity fundraiser right now, it's the worst environment.

Probably before the GFC, I'd say, we have a person in Connecticut in New York who runs fundraising for us and's done it for 25 years. So this is by far worse than the GFC. The GFC was great because it was Goldilocks until the very end, and then it was like, holy boom, it's all over.

And then you pick up your pieces and say, what will we do? Well, I'll do an opportunistic vehicle, I'll do special situations, I'll do whatever. But at least there was a path forward to raise money and transact. Right now, we have nowhere to go. We sit with you, and you can buy five and a half percent one-month rolling T-bills.

Well, that's nice. So if I'm a pension fund, I'll put more into that because I need to hit a seven to match my allocation or liabilities. But if I want a little extra juice, I'll do private credit. So there's no place right now for a value add or opportunistic equity because if I say, Hey, I'm going to raise an opportunistic vehicle, what opportunities are you seeing?

Well, you have yet to learn because no one can sell anything because they're not worth the debt usually. Okay, call me when you can do something and get kicked down the curb. So it's like, it's that constant fundraising issue that's going on everywhere. And the liquidity is, everyone says, well, this group raised 7 billion.

Well yeah, but that was on commitments that the system is calling, saying, Hey, I'm not ready to fund. Let's wait a little bit; let's be measured. I got a lot of issues. And if your largest LP calls you and tells you that, you slow it down slightly.

Chris Powers: When we were at that Y P O deal, you said everybody raising money is raising money on the notion that there are all these opportunities.

And then the manager told you. Yeah, and every fund we're already in is coming and saying there's no opportunity. Yeah. So which one is it?

Scott Everett: Yeah. And it was a good point. A large pension fund tells me we go through the whole system, a whole spiel about what we're getting ready for and why we are fundraising.

And he says, what are you doing? And I said this is what we're expecting. He goes, well, that's great, but everybody you know wants my money essentially says that. I'm raising this money for this great opportunity, but everyone with my money is saying we can't find the opportunities.

And so it's basically, it's reality. Like there isn't anything that's that exciting, we got a deal that was foreclosed on that we couldn't even make work. It was a foreclosure. The basis was 70, the debt was 50, and we were at 37. And so we still couldn't even get that to work.

Chris Powers: Assuming there was a deal today, what would the debt markets tell you?

Scott Everett: Well, you have two options. You either go low leverage or go agency. You could, and it depends on what you're buying. If you're buying like we are, we've contracted on a couple of deals that we're selling at a mindboggling buy, mindboggling cap rates like a four, six, or something.

And I can understand why they're doing it, for all the reasons we believe in it. It's tough in the credit environment today when you need an eight debt yield to get financing. And so that points you to 50% leverage and maybe 55. And so you're at 55% leverage.

You may be doing a fixed loan at 6%. So you're buying a four-and-a-half cap, six, you're half leverage. You may get squeaked out. If you want some higher octane stuff, it's 375 to, if you're a good borrower, and if you're a terrible borrower, it's probably 450, 475. So, and that's floating 5%, you're 10%.

It just doesn't make any damn sense.

Chris Powers: Okay. If you described rates might be at the top, and not you, but Powell has said the markets have a consensus, we're here. So then you said it starts dropping within eight to 12 months, which could be a bullish signal, or it's dropping because we're in free fall.

We've gotten to a year, and yeah, many tech jobs were lost, and you commented; what'd you say? You just said people don't have come to grips with how much value destruction has occurred, then you said in oh eight. It was amazing. And then we fell off a cliff and just knew where we were.

We're just in purgatory right now. So now I'm going to take it back to very bearish. What causes things, in your opinion? And we can leave it to real estate, but you can take whichever to start getting much worse, just starting to bleed out these dead animals and letting it flush out.

Or is it like a fall or a steady decline? I'm holding you to this anthem because you can predict the future.

Scott Everett: Yeah, That's fine. That's why I come here: everyone on Twitter can yell at me a year later.

Yeah. And so look, if we have a crystal ball, which we do not, and take this for what it's worth, we have to make decisions based on all of our research and what we believe will happen. And so this is what we believe. Peeling back the credit layer, generally, the system breaks after you get accurate rates above 1%.

We sit at two today with two x the debt we did in o eight, and we sit 50% higher than we were in 19, when, if you recall, two and a half percent broke the system, didn't cut rates, and this was before Covid. We were already entering a recession, but it took, they did it for two and a half years, so they did it 25 every quarter, all the way up.

Generally, the system breaks after 250 to 300 bits of rate movement. We've gone 500. It happened so fast, so rapidly. People have yet to even absorb in reality what it means. But you're starting to see the crack show. You're starting to see revisions to the employment forecast. You're starting to see I highlighted on LinkedIn the sleuth survey, which generally is a hundred percent prediction rate.

Chris Powers: What is the sleuth survey?

Scott Everett: It's just a senior lending officer survey.

Chris Powers: You must be cool to read the sleuth survey. Suppose it's outside your regular reading material.

Scott Everett: You need to nerd out on some sleuths. But it's perfect. And it needs to be more bearish and go very negative. And historically, when it goes to this point, it's a hundred percent hit rate for a recession. We have some excellent insight into talking to regional lenders.

We are heading into March, and we had 26 lenders for our SUBLINE lined up. We were competing for your fund, our fund, and 200 million sublines.

Chris Powers: March of 2022 or March of this year?

Scott Everett: This year.

Chris Powers: Okay.

Scott Everett: Heading into March. So we were supposed to be closing in mid-April on

Chris Powers: On fund two?

Scott Everett: Fund two Subline seven 50 fund two to 250 million Subline.

A Subline is a subscription line that allows me a line of credit against our fund commitments so that I don't have to constantly when I'm closing, I don't have to call the Capital down and do all this kind of headache for the investors. I use my subline to smooth everything out. I have 180 days; I call it all back and pay it off.

So it's a very safe loan because it's guaranteed by the requirement to fund from our investors. So as easy as a layup, as you get 26 lenders to come April, it was 15 come April, mid-April down to one, every single one pulled out. Now the market pretends like nothing's happened in the regional banking system, but you've had three of the largest, three of the top four most extensive bank failures in history back to back.

And we're just sitting here like, oh, well, it's just lousy risk management. Well, it's not bad risk management; things break when you go from 0 to 5%. So in 12 months, they broke because they bought mortgage-backed securities and long-term data treasuries. The bank regulators require them to own these securities.

Now they should have done a slightly better hedging strategy, and Silicon Valley Bank should have done better on its hold-to-maturity accounting and all its different hedges. But First Republic was an excellent bank, and we did a lot of stuff with them, and we talked to them all our stuff.

We even talked to Silicon on Subline. We knew all these players; they were not just throwing money out. They did a lot of pretty intelligent things. And this whole system has collapsed. It's made JPM and Bank of America more significant and better. But generally, it means that the regional banking system is completely frozen.

If I can't get one person to show up for a subline, the safest, most accessible loan, I feel like it's in the wrong spot.

Chris Powers: And quick, are they making that decision more as a cover your asset? We'd instead do nothing and be wrong than do something and be wrong.

Scott Everett: Well, because you need to know what headline and earnings will set off a run. And so all you're doing is you've got the regulars down your throat with every detail of your accounting. And so the last thing they want to do right now is to go out and try to drum up new business. It's all about battening down the hatches, protecting the moat, survive.

 And that is going to lead to a significant credit crunch. The other thing is, like, people aren't talking about, we talk about this QT and so f r and rate rise and all that fun stuff. But the only reason we survived that March timeline when everything started getting wonky in April was that the Treasury general account pumped like a trillion dollars into the liquidity system.

Kind of very quietly. Now that's very different from the Fed Balance sheet. The TGA is where you deposit all income for the bank and the entire government. Well, they had a massive overflow from Covid, and as they started QT and taking bonds, a hundred billion a month off the balance sheet from the Fed.

The TGA started pumping liquidity in little pocket areas we're distressed. They open up the repo lines. If you need to dump all your bonds here, go ahead; we'll do it on the feds line. So the repo lines are wide open. Those things skyrocketed. Then you have the TGA account pumped about a trillion dollars in liquidity.

It's now down to like nothing. So it's got no more liquidity left. Then the fed reversed QT in March and April of this year when the regional banking system hit; they pumped another 400 billion, reversing 12 months of QT overnight. Now they've caught back up again. They're working it through the system, but it's all these little mechanisms.

It's like the airplane's falling apart, and you keep duct-taping everything. And with credit evaporating, that will be the final straw. You saw the surge in bankruptcies over the weekend, mostly in corporate banking, because people can't either service the debt or refinance and so they're just thrown in the keys that will start to work its way out.

Housing is always the first to go. It's the first wave. It's most people's net worth. So, its rates are going to move, re refinances. People have to move. They can't afford a home, so they start doing fun things. It's all working. It's through the system. It just takes time.

It was an oh-five problem for the GFC when people realized that mortgages might not have been as good a credit as expected. Then it was like, oh six was like, Hey, pay attention. We have some serious issues. And then it was like, oh, seven was when it shit hit the fan.

But still, the market held on until that very moment, and that's when they cut rates, and everything dive-bombed. And that's when unemployment skyrockets. That cycle plays out over and over back to the thirties. It's not I can't, and I'm dumbfounded when everyone sits there and goes, well, the consumer's strong, and unemployment is substantial.

They're always strong, and they're always the strongest before it ends. I don't know why that's even an indicator anybody points to, and it's like, it's just lip service. So you have to pay attention to the leading economic indicators, the slew surveys, and the PM I index, which will generally exceed. CPI is being held up by inflation on shelter, which is just bogus.

It's 12 months 15-month lag. We're in a deflationary environment, and we're in a natural stagflation environment for assets. And I think the last shoe to drop will be, we'll start to see unemployment tick up, and that will be the moment where the Fed says, oh shit. And people are holding onto hope because they think that's a bull signal, generally last eight recessions.

It's a very bear signal because of interest rates and input, and you can fix it. Demand is not you; you need to figure out what to do. And that's when things start to get wonky.

Chris Powers: And to hit 6% unemployment, which is worth, Powell started, we're still like four, four and a half million jobs away from that need to be lost before we even get close to that.

And last month, we added 250,000 jobs.

Scott Everett: Yes, but revised back to 120,000. So they keep; what's that mean? They keep going back after they f figure out the data. Oh. And 30 days later, revising everything. And they've revised them almost 50% downward in the last three months.

And no one talks about it. It's like, oh yeah, but it's on the BLS website. And it's just stuff you must geek out on, dig, and pay attention to because 99% of data and facts seem incorrect now.

Chris Powers: You just talked about them, but if you had to sum that up and just said, like them, talking about the consumers, not the indicator you should be watching, what does Scott Everett look at? What data points matter to you the most?

Scott Everett: Yeah. After my wife's credit card bill, it's all portfolio stuff for us, right?

Like for me, every day. It's just

Chris Powers: But even macro, okay. You could do it at your property level, but at the macro level, you read the paper and care about what's happening when you get up.

Scott Everett: Yeah. Everything revolves around credit for a credit society. So all I want to know is what we do a weekly index tracker internally, just tracking all the macro data I care about; we sift through all the REIT returns, so we want to know what the REITs are seeing every day and what they are preparing for on their credit side.

We're tracking bonds; corporate bond spreads are the most important, and we track those probably day-to-day. You'll get your first kind of glimpse into recession if you want to avoid paying attention to triple A's are just, it's like apple B bonds. Apple spreads are always going to be good.

You want to pay attention to the Triple B's. The Triple B's generally reflect they mirror cap rates to an extent. And so, in a recession, those spreads will expand quickly. So you want to watch that?

They are paying attention right now to the CPI headline, And then we have a tracker of all things consumer unemployment and retail you might have seen today.

Retail spending came in way below consensus. And so we're paying attention to various reports and figuring out, what does it all mean? It's usually just as fast as some of this stuff goes up; it's usually just as slow and tedious until one day, it's not.

And you'll start to get little titbits of data that come out. And so that's what we monitor.

Chris Powers: We had a guy here last week, Gabe. And he was going through his investing principles. And the second thing he learned after 20 years of Wall Street is never to fight the Fed. And he just brought up a good point.

He is like, if you had just listened to Powell this entire cycle, he told you exactly what he would do.

Scott Everett: Yeah. But Powell came out in December and said inflation's transitory. And we have no intention of raising rates. And you know what, people, I was watching CNBC probably two or three weeks ago, and this very high horse lady is bashing some private equity real, investor people saying, what'd you expect free money forever?

You guys leverage up and try to go for significant returns and make all this money. And what people need to realize is we serve a purpose, and private equity serves a purpose. Obligations that we are the predominant amount of Capital in this world has some massive liability to either a pension system, which is employees and teachers, et cetera, hospital workers, or firefighters.

And they generally have, if they have a hundred billion dollars, they have six to 7% that must distribute to cover all their liabilities and overhead. Whether it's the medical system, Mayo Clinic, or Kaiser Permanente, all these groups have these massive balance sheets, but they have to figure out ways to get 6% to 7% into the hands of their employees.

Cancer research, whatever it may be. So when everyone goes, you just kept buying deals and investing when you knew rates were low. And that meant things were frothy. The Fed guided us to a 1% SOFR curve through 2024. So in 21, in 22, inflation's running 10, 12, 14%.

The Fed says we're fighting Covid and are prepared to stay lower longer. If you are the pension system that has to pay out 7% or the cancer research system that has to fund these liabilities, you must make a day-to-day decision on where to put your Capital. And so we as PEGPs have to go out and produce the best deal flow for the investment to produce returns that help these people hit their obligations to their constituents.

And so we're saying, if you do nothing at the time, you earn in a 1% T bill and get 10% inflation. So all of your programs are entirely upside down and destroyed. And that's why they go, okay, well, I'm going to load up on private equity real estate, and I'm going to load up over here on growth equity over here, VC capital, whatever.

It creates chaos. But the problem is, the Fed once, in March, indicated that we are going for 0 to 5% to conquer inflation. Now, if you. If you had felt that, in June of 21, you should have said, Hey, inflation's out of control. We will probably beat inflation by 2024.

And generally, inflation-beating means I need to get SOFR above the sticky core inflation, which currently sits at four and a half percent. It was seven and a half. And so then it's a whole different ballgame. Now you're saying, well, hold on, I got to figure out a different strike. He said that in March.

And that's the issue: you made all these decisions for the moment of 22, and that was the worst-case scenario for retirees, the pension, and all these cancers and et cetera systems. And they got blindsided.

Chris Powers: Chapter one of S two. We can call you getting started to call it the end of the first cycle.

Legendary run. Very inspiring. Now we're at the end of cycle one. You've grown up, learned much, and got more resources. And now we've talked about what the world might be brewing. Chapter two looks like two identical deals for us. Are you doing things differently?

What's the strategy going forward?

Scott Everett: Yeah. I keep telling my team this is the most exciting time for us. There's nothing fun about competing for a three-cap deal that might make a 15—and having to put up 5 million hard days one and wave all due diligence. Like, that's not a good environment to buy in.

That's a great environment to sell in and buy-in. The difference is now we have experience, a track record, and a balance sheet, and I'm still 34, and I've got some good runway.

Chris Powers:  I Think at least ten more years.

Scott Everett: Yeah. At least. And so I look at it like it's been a ton of fun, but we feel like we're just starting. Yeah. And that was a big way, that was a big reason that, in 21, late 21, 22, we went into the fund route and the institutional route. We're now an RIA, which blows my mind with the amount of regulation around that.

And I must copy my archive system on every text message around work. And so, there's just all this silliness, but it's part of growing up. And we had a great year. We had fun doing 45,000 units across the last 11 years and doing all these syndications. 40% of that was with Penny Backer, which was awesome because they're basically, an institutional fund manager that, in the beginning, when we first got involved, They were just an SMA, a part of the emerging manager program for Texas Teacher Pension Fund.

So from the beginning, we had to learn how to be institutional in our reporting, underwriting, and operations. And so that was a huge growth curve for us. First, early on, and now with our vast growth curve, I must learn how to answer this institutional Capital into our fund vehicles.

The beauty of that Capital is very sticky. Once you have it, they only want to do a little work on new managers, but once you get them in, they repeat as long as you aren't just terrible at your job. And so our goal is fund two will be somewhere between 700 and 800 million.

We will continue to run our value-add-on opportunity vehicles. We would love to, one day soon, get into credit. We have flexibility in fund two to buy credit. So we can do rescue cap, but we can do development, and we can do. Credit investing as long as the returns yield what our fund metrics are.

And so we want to institutionalize into an actual real estate private equity shop. I don't think multifamily would be the favorite asset class for the next 50 years. We will have to figure out how to diversify at some point, but over the next five to seven years, Capital and experience will be in vogue again.

Being patient, methodical, and an excellent operating partner will be fantastic. And that's what we hear from Capital now; they like the allocator and investor, which would blend and diversify with things starting with shit, hitting the fan a little; they want sector-specific GP-led operator models and experts.

I want to know that if you're going to get into a hairy deal and have my money, You are the best person to be in that deal. You're not just making little mini bets everywhere to blend out a diversified portfolio because things will get tough. If you remember, all the way up until 2016, we were buying deals that were still 30, 40% down units.

Maybe a fire building happened for some sketchy insurance claim, and we don't know. But that may or may not have been an actual situation. Yeah. And so all these opportunities come up with really heavy lifts. And that's exciting, and that will happen again; we're already seeing it.

Like, if you have zero cash flow or worse, you have massive negative cash flow. It is what always happens if you start to cannibalize your units. If you're a poor operator and you need to be more capitalized. That means, that means, I've got one person that's moving into this three bedroom.

 And I've got a vacant bed. I don't have the cash flow right now, but I need this person to move in to have the cash flow. So in the interim, it's always in the interim, I'm going to take all of these appliance sets, and I'm going to take maybe even an AC condenser, and I'm going to put it over here and get this ready so that I can get someone to move in and get cash.

And once I get cash flow again, I'll refurbish this one. Well, generally, it doesn't ever go that way. This one starts to get canalized now. You can't lease hit, and the next person moves out. Now you start CANALIZING again. Then all of a sudden, you look up, and you have 25% of your units down or, in some not non, make ready.

And that's usually the last shoe to drop where you're just like, and I got no way out. I got no way out.

Chris Powers: All right. I have a lot of questions. You said permits are down 80% in Fort Worth, but the question's broader. Like when I think about industrial. Many people are like, and there's more industry being built than ever before.

I'm like, yeah, that's a Class A big box with nothing to do with my 10,000-foot tenant in Class B. But it's more complex and multi; if you build a gazillion class A units, it impacts the Class B market significantly. So the question is, with permits dropping and construction going down, I know there are a lot of units still to be delivered, but what do you think about both asset classes and how they work together, and what will that look like going forward?

Scott Everett: Yeah, so your question is around just supply of A, B, C, how's it all?

Chris Powers: Yeah. The more A comes on, How does that impact B? And then as a drop-off, how does that impact B?

Scott Everett: Let's take recession out of it because that's an unknown. Generally, the killer of growth markets that we operate in is supply.

If you're in Dallas, that's great. You're going to have a hundred thousand jobs. That's roughly 30,000 new apartments needed. Two-thirds go to housing, and one-third go to renter. So that demand has been solid. The problem is, if you start building, we have 700,000 units in Dallas.

So if you start getting close to Austin Numbers, Austin's running around 12 to 14% of existing inventory under construction, that'd be like 80 to 100 thousand units. That would be a severe issue. Like you got 30,000 people, and you got that will crush rents.

And that's what you're seeing in Austin. That's what you're seeing at Phoenix. Phoenix rents are down in our math, about 12% marked from peak to start, and they're not seeing, we're not seeing any signs of them slowing down. Austin, same thing. The country's worst housing market is probably a similar 15% drop from the peak.

The problem is there's no way to, is all that. The problem is as all this inventory delivers, I have to fill it up, and you have different incentives at the top end; the developer has a guarantee, usually some recourse involved. They are very motivated to fill up this property. They tend to have some stabilized occupancy release on their guarantee, and then they will dump it and get out of the 50 million note that they're guaranteeing they damn to be the equity.

Damn, be the returns. So they will offer 1, 2, 3 months free rent, whatever they need to do. They will lower rents that usually only have a six to $800 spread a B to C., Right? So if they're giving away two or three months, that might be two-three grand a month in rent. You average that out over cross; it starts to eat into your top B rents.

And so it all starts to slide downhill. And so we will have a massive effect; the flip side is that single-family is more expensive than it's ever been in terms of rent prices with rates where they are. Buyers of single-family are cut out of the market.

So they have to rent, they generally are going to rent in that kind of 80% AMI to 120% AMI, and that's not where the new deliveries are, so as long as you're in a market where, like Dallas building Reddit, 3-4%, 35,000 to 40,000 units under inventory, we continue to absorb 30,000 units because jobs are firm here still.

And that will continue to work itself out. The flip side is that the inventory under the permit is dropping off dramatically. Now that's an excellent thing for us, and that's why we like existing assets. Inflation brought your cost up too much. Rents are falling on the market rent level, and your credit is complicated to find and expensive.

So it takes work to pencil development. So it's a bullwhip, it all fills up, and now there's nothing in the back end. That's when rent starts to skyrocket, and developers become active again. But you see a healthy demand-supply for the DFW Atlanta's Charlottes of the world or Floridas.

And so that's good to see. The Phoenix, Austin, Raleigh, and some of these other markets, supply will be a problem for a while, and it will put a pretty big ceiling on rents, if not cut into market rents for quite a long time. And you don't get any relief on expenses.

That's the issue. Your insurance is still up, and your property tax is still up. Your reserves and cash flow are way down, and it's a death by a thousand cuts.

Chris Powers: If you just said took the Sunbelt in general, and you've hit on several markets, is the Sunbelt still for the next ten years the place to be in your opinion?

Scott Everett: Yeah. We think so. There will still be an opportunity in some coastal markets as they've become almost price agnostic to the cap rate, and it's still challenging to build in those markets. Everything runs in cycles, and being in the urban core became uncool.

It became very cool to get outside of those markets and move. People are moving to Texas, Atlanta, or North Carolina for a different reasons. They usually follow corporate reloads driven by tax and friendly business, and that's mostly the same for a while. But people generally want to be, especially the younger generation.

They want to be in the urban core and the coastal markets. I hope San Fran gets back to being a great city. It's not good for America to have this fantastic city with so much history, capacity, and potential. And the tech, it's the best city in America after maybe New York, but it's fallen so badly.

One could argue the contrarian, and you would say, keep letting it fall slightly. But there may be some point where people step into that a little bit and start to try to bring it back, and the cycles will turn. New York is now leading in rent growth and took it right on the shorts, like down.

It is coming back up. It's leading the markets in rent growth. Florida's had fun in the sun, a sunny place for shady people. And the growth markets will continue to be steady, Eddie.

Chris Powers: All right, so you said we got 750 million. You lever that up; call it a couple of billion dollars worth of purchasing power.

You said you could invest across the stack. Is it fair to assume that credit and things of that nature might be the first ways to deploy money until the deals get low enough to where you can start buying them? Or, like, how do you think about pacing through that Capital?

Scott Everett: We will remain patient on deploying the fund until we have clarity on the economy and fed rates.

Everyone's pitching this rescue capital, and it's not rescue capital. You're replacing the equity on the basis that's still elevated above its worth. And that is not worth a 13 or 14% return today. We do have the ability to do that, and we can buy notes.

We can buy credit and take over the asset that has yet to play out, but we'll start to play out in the first half of 24. We should put out 5 to 10% of the fund by the end of this year. We are starting to see exciting opportunities, and the stress building in the system will start to show its cracks here and become an opportunity heading into 24.

And so, while we have the flexibility to invest rescue capital, we can invest in development, etc. The returns will come from having that dry powder for being in the equity position. And generally, the best fund vintages are assessment vintages.

Chris Powers: Okay. It would be fair to assess that, at least on the act deal activity level, it will be a slow rest of the year on creating action.

It is more of a leadership question. What's, what do you tell your company? Do you tell them, like, let's keep underwriting and staying in the market? What do you think about it from a company perspective?

Scott Everett: Yeah, it's a tough one. Most of them understand my thought process. We do a lot of weekly leadership meetings with acquisitions.

There are two different sides. Like asset management operations, they're more intensely motivated and focused than ever because it's never been more challenging. And so they're very motivated and focused. The acquisition side and even the fundraising side because it's challenging right now.

It's all about they are just leaning on you for your expectations. If my expectations to them are I want you to find a deal that's 50% discount, and I want them now, they will feel a lot of pressure and stress to deliver. They're going to look at everything, and it doesn't exist. And so they will get frustrated and either leave or order, do something different.

If you have them incentivized for more of the long term and explain to them why we're being patient and what we think will be available, this next ten-year run for us could make the last ten-year run look poultry. So it's all about keeping them focused on the long-term goals.

They also understand that if we are early to deploy fund two, A: we have seed assets that could be looked upon negatively. And as new investors are coming in, they might not want legacy assets if we enter a recession. So you have to weigh a lot of different measures in the fund business, but at the same time, if we can get our 600 to 700, 800 million pros, they know they will make a lot of money putting that to work in some environment over the next two years.

And so they have to be patient. And if they all know this, you are not willing to be patient for what could be a great 10-20 year run with us, and these next 12 months will make or break people. And so you just got to be intensely focused on surviving.

And we keep saying survive the 25. It's just the focus for everybody. Your capital distributions have decreased whether your acquisitions or everyone else's interest has decreased. You just got to tighten the belt and be prepared.

Chris Powers: I keep time back to this. We've hit on it ten times.

Fundraising takes time. I don't think I asked the final question, which is your opinion. It may be your opinion or what people say; what is the signal because Capital moves together? There are no creative thinkers in the big capital world, but what would happen for they to say we're back in?

Scott Everett: You must return to healthy risk-adjusted returns relative to the fixed-income markets. That's okay. Ultimately, what drives every investment decision in private equity, is if I can get a five to 7% in fixed income public credit, I do not need 15% equity levered If I can deliver a 14% private credit because everyone's desperate for debt because the banks aren't there, so I can get a 500 spread and make 14% debt, I don't want equity.

So until those returns come down to earth or the equity returns become way outsized, we will have a flat environment. It's just good finance. And so, one of two things will happen. Either people will start to go, and the system has broken me. I'm throwing back the keys. Now I can buy something for 40% off.

So instead of trying to get a 15% equity return, get a 25; time me up; I would love to have a 25 while I get 7% of my fixed income. That's freaking great. And that will draw back off the sidelines. Conversely, we go back and cut rates, and generally, they cut rates three 50 pips in a recession.

So if we get back to a one and a half between a one and a half 2%, SOFR, that is probably the healthy landing spot to say I'm buying a five and a half cap, I'm taking it to a seven, and a half. The demand in fundamentals is still okay, and fixed income returns and alternative returns are back down to the mid to low single digits.

I'm willing to return on the equity side for a 15 net. And one of those things will have to happen, and they will happen. We're not going to sit in this environment forever. You, what feels like an eternity when you're in the moment, look back on the GFC, for instance, and it's a three-year cycle of this.

It is what people have to go through; patience is the most critical point.

Chris Powers: When you think about it now, I love the conversation. The flavor of the week for the last two months has been AI. Do you even think about that? Like in where you're at?

Scott Everett: The whole team is on it. I won't say too much because we've spent much money on it and are very involved. But AI is like looking at the internet for the first time; what you can accomplish is mind-blowing. Will you believe AI would replace Goldman's 70 million jobs? Do we believe that's incredibly deflationary?

It could be right away crush inflation. I am still determining what it replaces, though; like, does it replace it? It could replace all the jobs that require easy intelligence. Like, if you're a doctor or not a doctor, like an attorney, your job is to know all the complicated stuff AI can now learn.

What does that mean for tenants paying four grand a month that might be an attorney? What does that mean for the demand? We're trying to figure out what it all looks like. We could have better answers, but we are trying to build out a; we're spending a lot of time and money on just building out all the different data, a Linux, predictive AI into our operating portfolio.

Because it's very cool and you will be left behind quickly if you're not paying attention.

Chris Powers: Well, on that note, can you and I underline this twice? It's how we think a lot about it. And you said operations, and we've paid attention to it for a long time, and you can hang your hat on operations, and I'm off the backs of AI.

Is there anything you see going into this next cycle, like how things will be operated differently, or is it now just cheap? Money will not save destructive operations anymore, and only good operations can survive.

Scott Everett: I think either way, good operators will be the only ones that survive the next 12 months, but I think what you'll find is AI, people who are first into AI and data analytics, in general, will be the ones that attract the most Capital because they'll have the most insight and the most, exciting macro reads on different submarkets, in terms of like operations.

I wouldn't say that we think of it as anything that can be automated as a back office function for people that can enhance how they do their job. So we've looked at every workflow for every position in the company to figure out what can be automated by AI and how we enhance these people's roles.

And you almost think of like onsite, and we'll go away from all these lease management and follow up on collections and all this nonsense. And you'll almost think of people on site as tenant concierges. They are there to serve the resident with all their needs, but all of the day-to-day back office, all the day-to-day management of paperwork and tasks, and workflow will be built into some enterprise system that is a data technology and predictive AI.

And it will probably be a lot of mistakes along the way—a lot of issues. You're starting to see A lot of different AI apps and various things. You got to be careful. You will ruin your operations if you start just freely launching every sort of excellent AI app out there. And your tenants will feel frustrated when they keep getting notifications of a new service and then change and back and forth.

So you must slow down, build an excellent process, and have the right people in place. But you'll get left behind over the next two or three years if you're not paying attention to it.

Chris Powers: All right. Now I'm going to go back again. How do you generate that deal flow when you think about buying like a busted development, buying credit, and doing things that are not just buying the property?

Is that just having great relationships and having them contact you when they hear of something? Are those hires that you're going to make that are already?

Scott Everett: Yeah, it's the same. However, you've got different brokers for different things when trying to sell a credit portfolio from a failed bank.

That's not generally not going to be JLL calling you or North Mark, and it's Moliseror, somebody else that maybe is working as an ib. The credit flow is through the special servicers; more importantly, the attorneys manage that. They will be the first ones to know where the issues are and start working with the services.

The services could have been better for 12 years regarding who's paying attention. They will start to be everyone's best friends again. And so, the best brokers will be the first ones at the end of the day. They will have, they will win the trust of whatever servicer is dealing with delinquency or foreclosures.

And they will be the ones that will know who to bring deals to. And ultimately, it will come down to capital and execution ability. It is a different environment than we've been buying credit or distressed property, and you're dealing with basis creep, and you're dealing with negative leverage.

You're dealing with negative cash flows. You are dealing with someone in a lot of pain, possibly outraged, who feels like they're being wronged. It's no longer friendly. It isn't like you make money high five; I make money high five. It is like you're trying to take what's mine, and I hate you for it, and I'm going to do everything I can to stop you, but at the end of the day, it will happen either way; the lender is coming for it.

And so we have a great general counsel. You have to have an excellent credit investing team and be willing to get dirty because the people suffer, and the residents are where this thing's just running under the ground.

And so the cities started getting involved and launching lawsuits against the property. So you're absorbing all that. And so it takes Capital because you might have to close in 30 days, you might have to close all cash, and you might have to do financing afterward. So, many different things go into buying these assets, and Capital will be critical.

Operations be critical, and the relationships will be more critical than ever. But that's when you're going to produce the best returns. Our best deals were when we had to fight the city and come in and repair 50% of the down units. But you'll get a reasonable basis, and if you know what you're doing, you can hit it out of the park.

Chris Powers: So, on that type of transaction. You're underwriting the real estate and the fundamentals of it, but then you're also underwriting the legal ramifications. Who the seller is, and everything you might have to deal with in the courts.

Scott Everett: You might get sucked into time, sucks, depositions, legal costs, millions of dollars blown away.

And so you must have a clear path to the title if you're getting into an ugly situation. And credit. Where you've got a combative seller and a very murky outlook, you will find yourself in a lot of trouble, and you can burn millions of dollars with no outcome. More important than the money is the time suck on your team and yourself trying to get this thing across the finish line.

So we are picky. We want, if we're going to look at anything, I mean we got to have a clear path to the title, and generally the ones that you want are the people that have realized that I'm burning all this cash, and I don't want to burn cash, help me get out of this. But it might require creativity to buy the credit side and work with the lender.

And so just, you got to have it all on your repertoire

Chris Powers: And on development, do you think about ground-up, or you're just saying about buying busted developments or ground-up deals being delivered that miss the mark?

Scott Everett: Yeah, we would do some ground-up. We're starting to see some good land discounts.

But generally, we feel like existing assets will be the best opportunity—more importantly, 60, 70, and 80% of developed deals that goes to foreclosure. We've probably seen four or five of those, and we think we're still really early.

Chris Powers: And that's just because, like, debt AUM alive during floating rate debt AUM alive during the development.

Scott Everett: Yeah. Floating rate debt, eat them live in the developers had a tough run. They absorbed all the inflationary costs of 21-22, paid high-line prices, and absorbed all the credit rate increases. They're coming into an environment where liquidities dried up.

Core plus or core returns are not generally attractive right now. You can get the same return in a money market account. So you've lost your pricing power, and you're delivering into a market with some pretty soft market rents for that product. And so many of these scripts are saying, just run the math.

Like, where do I get out of this thing? I need to get the equity back on some of this stuff because I had a 10, 15, and 20% price overrun on my hard costs. Now, my rents were supposed to be two grand or 2,500 or 2200, and I'm stabilizing at a six that I need an eight to refinance, so I'm just going to lose it either way.

Why do they want to bleed out a million dollars? So they'll do like or some ability to avoid foreclosure or avoid, trying to continue to fund this thing, pay down, or whatever to get off the recourse mainly. But we've looked at a couple of deals where they were in it, probably 80% done, had no path out, and needed to get out of the burn and throw it back.

And so they did. And that will continue. If you need to deliver north of a 6% return on costs, you are probably starting to figure out what my extra strategy looks like.

Chris Powers: Hug your local developer. It's a brutal business.

Scott Everett: It's tough right now. It's

Chris Powers: It's brutal.

All right. If Scott, chapter one, built the business, you said that the next ten years might be your best ten years, but what do you think you'll be working on for you? Like, what consumes your day over the next ten years? Are you no longer fixing toilets and being onsite every day?

Scott Everett: Occasionally. Yeah. Look, we've scaled; we've got 80, 85 people at corporate on the investments team. We've got an excellent executive team. So we've got all of our bases covered. Right? And day-to-day, Mark, my brother, runs really; he's COO, so he runs all property management and corporate operations.

My focus and I've got Megan, and she runs all financial accounting and everything for the funds, and then Patrick's fundraising, and then we've got a great general counsel, so every base is covered. So if Scott says, I'm just not going to show up to work today, the only thing that would stop happening is we stop growing.

So that puts all the onus of growth on me. And most of my time will be spent perfecting operations to make sure that we are scalable with whatever we're going to do. But generally, the day-to-day is in good shape, focusing on new strategies for whatever Capital is available that is an opportunistic strategy.

So, and then building out, still chairing IC. So I'm very involved in the investment acquisitions front and then fundraising, trying to figure out the right strategies, whether it's a value add vehicle, opportunistic credit, or getting out of residential in 10 years. Who knows?

Like there will be different things that come our way, my job is to ensure we stay on the forefront because we've built up all this infrastructure. Now I've got to ensure we have Capital and resources to do what everyone's supposed to do.

Chris Powers: To the extent you're willing to share.

What does your relationship with Patrick look like? He's head of capital formation. You said he is out raising money. You're raising money even in an environment like right now; why did you hire that role, and how do you think about that In the tenure vision of what's being built out there?

Scott Everett: It's a top three or positioned role in the company.

He is critical to our long-term success, and he's also brought a lot of great relationships. And while it's a challenging environment to fundraise in, we're having the right conversations with all the right groups. So whether it's a commitment today or it's a commitment in fund three or four or five, these are people that we want to know, and we want to get in front of.

And so that's his entire job, and he's done great at it. My job is to ensure everyone feels comfortable investing with us and understands the story of S two, how and why we do things. And ultimately, they want to know how you view the world and do you view it the way you view it. And if so, then it becomes, okay, check that box now. Can you execute it?

We've got an excellent track record of executing. And then, these groups have to decide if they like the strategy. And many of these groups have multiple relationships, so you're just trying to figure out who the 1, 2, 3, 4, 5 are. These are 30 to a hundred million checks. You don't need a hundred friends, but you need to build out your five to 10 that you can rinse and repeat.

We're very fortunate; all of our fun one LPs have re-up, so we have a good base now. We just got to grow. And then, if we get down the road and think development's attractive again, or credit, or SFR or BTR, whatever you want to call it, that's my job to make sure that we're paying attention to it and focused on it and continue to scale.

Chris Powers: If you achieve your goals over the next ten years, we'll be on an episode like six by then. What might S two look like ten years from now?

Scott Everett: We want to hit 50 billion in transactions.

Chris Powers: Okay. Where you're at now?

Scott Everett: We're at 10. We spent the first five years of our 11-year run doing nothing.

CauseI was figuring out what the hell I was doing. So it started to click after five years, like, ah, okay, I got it. And then now I can see a vision to like how I want to grow this thing. And then I felt like 22, and I had my next aha of what we want to do in the next ten or 20 years.

And that's where we're entering. We're entering that. It's the third chapter. In the second half, we're in better shape with capital connections and resources. Greystar is certainly not; we don't want to manage third-party anything, but if I looked at a shop and said, who do I admire?

Who does it, right? Greystar and GID are two of the spectacular ones. They've got a development platform, credit platform, they've got Core plus SMAs, they've got core open-end vehicles. They've got valued vehicles, opportunistic vehicles, unique sets of vehicles, all built around usually some residential strategy where we want to sit.

We want to sit within private equity, six to seven strategies over the next 10-20 years. All in residential, which is a trillion-plus dollar industry; pretty easy to build some A in there.

Chris Powers: All right? I would not be doing myself a service because I miss you dearly on the Twitter platform.

Why are you not on Twitter? For everybody is wondering; there are a lot of people wondering.

Scott Everett: Yeah, I'm sure there are the other people. We became an RIA, a registered investment advisor, and started the application in mid-22; we just got our formal approval at the beginning of 23.

My general counsel and chief compliance officer were having a few hearts attacks daily and texting me, like screaming at me. And the main reason is the SEC is, especially as a new RIA, the SEC is just watching us with a microscope. I wouldn't say I like that because I love the transparency of sharing things and talking about what we see in the environment and market.

I feel like there's just a lot of, like, don't look at my shit. I'm going to hide it over here. And I post a detailed track record because I would love every other operator to share what they look like, right?

We operate in this private real estate environment where it's like, look over here, don't look over here, and bringing some transparency to the industry would be great. I posted that I got six phone calls from all types of people that ripped me. And, the other day, I had to make a business decision.

Iwant togrow, Iwant tobe an RA. When Starwood asked me, please don't talk about this on Twitter, that was starting to become a business decision of, okay, people are paying attention. People are upset about me sharing things, and the SEC will watch us. I just deleted the whole thing.

You also wouldn't believe the amount of technology these investors have to run technology backgrounds on everything you've ever posted, liked, commented on, or even viewed back to the beginning of your childhood. I was 17 when I got on social media for the first time like on Facebook.

I deleted all that because I was getting all these; here's your report of everything you've done and liked, and this is how we've graded you. And I'm like, and I was 17, come on. So I just cleared it out and said I'm done with it. And once in a while, I'll post on LinkedIn, and then I'll just come to talk to you on the podcast.

Chris Powers: We miss you. I'd like to know if I'll end up in your bucket one day. We're still determining where you're at. The conversations with some people, you need to tone it down, or you need to be thinking about these things. It's been on my to-do list for six months, going through every tweet I've liked and unwinding them all.

Scott Everett: Yeah, do it now if you're ever going to do it.

Chris Powers: I'm a sucker for a spicy take.

Scott Everett: I agree. That's why I love Elon. God bless him.

Chris Powers: All right. We'll end it there. We'll do a trilogy eventually. Thanks again for everything.

Scott Everett: You got it. Thank you.