How Smart Investors Structure Real Estate Deals for Better Returns and Lower Risk | Ian Drewe

Ian Drewe (00:00)
If you think of an underwriting and you look at your typical pro forma, everything, it’s all well and good to say we’ve got the best business plan in the world. And we’ve seen this time and time again, you can have the best business plan in the world.

But if you don’t have the person there to execute that business plan, every one of those numbers in your pro forma is redundant and it’s you’re dealing in fantasy land.

Scott Bursey (01:54)
Welcome back to the Real Estate Pros Podcast powered by Investor Fuel. I’m your host Scott Bursey and you know we bring you the heavy hitters who are actually shaping the future of the market. And today is no exception. We’ve got a powerhouse in the world of capital and finance. Our guest, Ian Drewe of Avoca Capital. Ian brings the kind of analytic discipline and strategic thinking that is pure high octane fuel for your investment strategy.

diving deep into where the smart money is moving and how to navigate today’s complex capital markets. Ian, welcome to the show.

Ian Drewe (02:29)
Thank you Scott, thank you so much for having me.

Scott Bursey (02:32)
We’ve got a ton of pros listening in, eager to learn from your experience. To kick things off, for those of our listeners who may not be familiar with your journey, how did your career begin and what is your main focus now?

Ian Drewe (02:44)
Goodness. So it began a long time ago. I’m 57. I’m an Australian living here in New York. I’ve been here for about a decade with kids here. But I guess my career started in Sydney, Australia, where I started life as a corporate attorney.

About three years into that, decided that I wanted to be the person issuing the instructions rather than following them. So I jumped across the table into investment banking ⁓ and I’ve been incredibly lucky.

In many ways, I’m a walking Australian cliche. I was working with a German bank in Sydney and we were having a fabulous time acquiring all kinds of assets when they asked me to go to head office in Frankfurt. ⁓ I was supposed to go for a year that was in 99. It’s now 26 and I’m still going. So I’ve been very fortunate to have lived and worked in most of the major financial centers around the world. ⁓

being Frankfurt, London, New York, Hong Kong, and then back to New York. I guess if I was to encapsulate my career, we raised with the institutions with whom I worked over $800 billion, investing a couple of hundred billion ourselves. I’m very proud to say we didn’t lose a penny for our clients or the institutions with whom I worked.

from Morgan Stanley here on Wall Street in in 22 I formed my own firm, Avoca Property and I guess I started with some colleagues doing multifamily investment. However, relatively recently, I would say around a year ago, I switched the emphasis of my business to something with which I was more familiar and that is working with institutions and family offices.

to, I guess, work with them to place them into some really interesting investments. We tend to focus on real estate, a lot of great energy transactions out there, some fascinating infrastructure transactions. And essentially, we look to work with our clients to structure transactions and to mitigate risks before the transaction hits their desk. So they know that the transaction

is shaped in a way that they want to see it rather than just receiving an email which has been forwarded ⁓ and hasn’t been examined. So that’s essentially our business at the moment, Scott.

Scott Bursey (05:56)
That’s an incredible path. And Ian, what caught my attention about you was the way you’ve been able to translate the complexity of investment banking into a scalable real estate model. You’ve essentially taken the billion dollar global mindset and applied it to the multifamily space in a way that gives everyday investors institutional level security.

Ian Drewe (06:19)
Yeah, again, what we found is the trick is to get to work with the developers and sponsors who are seeking capital and to work with them to structure the transaction so that risks are mitigated so that it is more palatable to investors by the time that it reaches the market.

And I think that’s something where we’ve been able to bring our kind of institutional experience and the techniques that we’ve learned there. ⁓ And we’ve actually devised some really interesting products at the moment that investors are getting quite excited about that is enabling them to fund a greater proportion of the transaction. The developers love it because they’re giving up less equity, less capital. Our guys are getting a higher payout for a

lower level of risk. so yeah, it’s really interesting times. There’s some some great stuff on the market at the moment and we’re enjoying it.

Scott Bursey (07:13)
And Ian, along that note, where do you see Avoka’s greatest competitive edge right now?

Ian Drewe (07:20)
Well, I work with a couple of partners and we, my firm is a vocal capital. Our partnership is called the Sakari Partners. I think our competitive edge is on two fronts. It’s the ability to do the due diligence on the participants in the transaction, which I think is something that needs to be done.

At the moment, there’s obviously some wonderful, wonderful developers and sponsors out there, but there are also some potential counterparts that are less than stellar for want of a better term. So we make sure that we do a high level of due diligence on the people with whom we are dealing before we even consider bringing them to our investors. I think the second part is the fact that, you know, we think there’s a lot of opportunity at the moment to

devise

products using various risk mitigation techniques that are allowing our investors to look at assets, to look at transactions that otherwise may not have fit their risk profile. But the way in which we’ve structured certain investment products is allowing them to get involved and look at assets and transactions, as I said, that otherwise they wouldn’t.

we’re finding that we’re being able to structure these products so that the level of risk that our investors are taking is more than acceptable for them. And we’re negotiating positions whereby their return is greater than the risk return profile would otherwise have been by virtue of…

our ability to negotiate an outcome for them. So that’s how we’re trying to add value for our clients, both in terms of risk mitigation, but also in terms of their returns through negotiation.

Scott Bursey (09:05)
That is a discipline focus and that’s the bedrock of success pros right there. Eon, interested to know what’s the biggest inherent risk in today’s debt market for real estate investors as you view it?

Ian Drewe (09:20)
Well, mean, right now, it’s I think it’s it’s the macro position of of where the world is. So I think that investors quite quite understandably are sitting and waiting. So we do a lot of we do a lot of energy transactions. We operate in in the fuel markets as well as more, I guess, tangible energy assets. And given the state of world affairs at the moment, I think people are quite

rightly nervous about you know where that’s all going to pan out.

And I think that’s had a flow on effect throughout the community. Lots of deals are still getting done. But again, that’s when you’re looking at a level of, I think, global and macro uncertainty, you have to be very, very careful, very, very astute at how you structure the risks to make sure that you really plan for any eventuality that could occur. there’s any number of risks that are out there at the moment that need to be taken care of. Yeah.

Scott Bursey (10:58)
Absolutely. And you hit home on a couple key points. Timing and flexibility are non-negotiable for our pros. Excellent. Excellent breakdown. And Ian, if you could walk us through this. Beyond the usual suspects like multifamily, what investment class holds the most untapped potential today?

Ian Drewe (11:20)
Goodness, great question, Scott. I think that we are seeing more and more transactions that essentially are derivatives of…

The data center phenomenon if that makes sense. Everyone has a view on data centers themselves What we are doing is we are focusing on the industries if you will that have sprung up to support The advent of the of the data center. So we’re broadly finding two things with we’re seeing The property is now being valued differently You’ve got to almost do two valuations now. You’ve got to do the classic cash flow valuation

but also you need to look at the potential for any given piece of property on its accessibility and ability to be attractive to data centers potentially. We’re also seeing a lot of industries springing up that are needed to support the data centers. There’s a lot of infrastructure that needs to be developed. There’s a lot of…

I guess, minerals and mining transactions that are springing up that are looking to support the assets, if you will, that rely on data centers. And so we’re seeing a lot of stuff come across our desk that is really new and exciting that simply wasn’t around five years ago.

as people look to, I guess, take advantage of the need now for various minerals and various other asset classes, if you will, that are needed to support what is in turn working with data centers, if that makes sense. It’s a very broad explanation of what we’re seeing.

Scott Bursey (13:01)
It makes total sense and I agree. The shift towards niche sectors like specialized industrial or data centers is a massive opportunity right now. It’s smart, it’s just a smart way to go for smart capital.

Ian Drewe (13:16)
Yeah, we also, I also like flex industrial. I see that as an asset class, which we’ve taken an interest in, I think, over the last year. It wasn’t something that was necessarily on our radar, but I think for various reasons, which I might go into now, the need for storage is greater than it’s ever been.

Again, the way that the world is evolving. And I love the asset class because in a sense there’s a bit of an arbitrage play there. On the one hand, these things aren’t particularly difficult to develop, but I love the fact that effectively you’ve just got a string of triple net leases, which in the sense, and yet the returns that are being offered from these developments underpinned by

what are a string of triple net leases are really really healthy and so again you look at the risk return profile we see it as an opportunity in an asset class that we really like.

Scott Bursey (14:49)
Absolutely. And let’s shift gears just a bit here, How does continued interest rate uncertainty challenge long-term capital preservation in your view?

Ian Drewe (15:01)
Okay, great question. the answer is that it does. It’s one of a number of factors. I don’t know necessarily that interest rates are any more challenging than they have been. What we have done to

I guess to get people out of the realm necessarily of doing what I would call naked equity investing, which is the more difficult. It’s just an area at the moment that obviously has a lot of people nervous. What we’re trying to do is to get people ⁓ investing more as debt players, taking debt positions in assets and therefore getting the security that senior debt offers.

and we’re doing that by a number of different techniques to enable them to effectively fund in certain cases 100 % of the asset, 90 to 95 % of the asset depending upon where having that protection

that senior debt has provided. as a result, and in addition, we’ve got some various techniques and wraps and various other ways that we’re looking to protect our investors. The win for them is that they’re because they’re also getting some equity. On top of that, they’re getting a return which is higher than debt is classically. So in that sense, if they’re lending on a fixed rate basis, the interest rate risk is protected. The credit risk is protected by virtue of insurance.

and other wraps and plays that we put in there, but they’re getting a return which is higher than a classic debt return. So their position from an interest rate perspective would then depend upon how they themselves are getting funded, but assuming that they have that covered, that’s a way in which we look to protect them from both an interest rate, a credit, a market and other perspective.

Scott Bursey (16:49)
If I’m hearing you correctly, it definitely forces reevaluation.

Ian Drewe (16:54)
Yeah, well, I think that the I think that the entire market is is going away from, as I said, what I would call naked or unprotected equity investments. Obviously, they’re still being done and will continue to be so. But we’re trying to steer our investors away from that position simply because at the moment, the way that the market is generally

the risks are simply too high for many of our investors and so they’re seeking a situation where they are protected as a debt investor again but getting returns that are somewhere between classical debt and pure equity.

That’s the way in which we’re dealing with that risk. And it is an issue because there are obviously still highly respected and wonderful institutional and other players out there that are investing in equity. But I think people are looking for a greater level of protection than they have received ⁓ previously simply because of where the state of the world and where the market is at the moment.

Scott Bursey (17:56)
And it is an issue and that was an excellent breakdown, Ian. And curious about this, what emerging regulation could unexpectedly impact real estate debt providers?

Ian Drewe (18:09)
Goodness. Well, hopefully nothing in the foreseeable future. I think that…

If you were to, again, you could wax lyrical about this for many hours that I don’t have it. I don’t want to bore your listeners, but suffice to say that I actually think that domestically in the US, as it pertains to real estate, the regulators have actually been pretty good. You know, in the multifamily sector, we’re seeing the various depreciation provisions being brought back.

there’s a has been, and this has been around for a while now, but there’s been a real effort to divert capital into, I guess, green and, you know, areas that are sort of politically acceptable in terms of renewable energy and various other.

objectives that regulators are seeing as something obviously that is socially palatable. And so if you are an investor that wants to be a part of a movement and make a statement that you are investing into assets that are, for want of a better term, good assets, there’s many, many ways now that are well…

understood that you can do that and through whether it’s through direct tax methods, through opportunity zones, through green bonds, through a host of other municipal and community bond developments, there’s lots of ways and means to invest your money.

in ways in which your objective is enhanced and hopefully, depending upon what it is that you want to do, succeeded. I don’t see too many right now, and that’s a better question for the lawyers, I think. I don’t see too many threats, but people who are better versed in the applicable areas of law will have a better answer to that. I actually think the regulators have done a pretty good job, and they’ve given us all of the tools that we need to channel money into

areas that again have been incentivised by the government to do so. So I see lots of opportunity there. Someone better versed than me will come along I’m sure and say, well hold on, here are the risks.

Scott Bursey (20:19)
Absolutely, you must stay ahead of the curve. And Ian, this is where our pros get the secret sauce from you. This is a must know. When underwriting a deal, what is the one key metric or pro secret data point that immediately tells you this is where the real money is made, that many investors completely overlook?

Ian Drewe (20:41)
Goodness, what am I saying that many investors will overlook? In terms of a metric, I tend to find, I think that a lot of people don’t seem to look at who is actually operating the asset.

once you have done the investment. So one of the things again that we do is we tend to stay with our investors throughout the life of the transaction to assist in the monitoring and reporting and all that kind of good stuff.

If you think of an underwriting and you look at your typical pro forma, everything, it’s all well and good to say we’ve got the best business plan in the world. And we’ve seen this time and time again, you can have the best business plan in the world.

But if you don’t have the person there to execute that business plan, every one of those numbers in your pro forma is redundant and it’s you’re dealing in fantasy land.

And so I’m sure most people will have said, will have seen, unfortunately, instances where the projections don’t match reality.

And that can be a combination of things, one of the things that we take in an ordinate amount of time is to speak with the prospective operator of any asset. And I tended to find, particularly in the multifamily class, that it was just assumed that whoever the property manager would be or whoever was tasked at actually executing the business plan would do a great job. And we were obsessed by…

the quality of the property manager. And right now we are obsessed by the quality of whoever is tasked with actually executing the business plan. And again, people, to me it should be inherently obvious, but I don’t think that enough time is spent actually really analyzing and getting to know the people who are gonna be tasked with operating the asset that you’re investing.

Scott Bursey (22:31)
Pro’s, that is the secret sauce right there. And Ian, is there any golden nuggets or takeaways you’d like to leave with our listeners today?

Ian Drewe (22:40)
Yeah, I think that if you’re seeking capital, I would get an understanding of what an investor wants to see in the way that you are presenting your transaction. would also get an understanding before going to the market.

of what an investor will expect in terms of ownership and in some instances control so that it’s not a shock when you hit the market that investors come back with the requirements that they have. On the investor side what we try and do is if there’s a transaction that comes to market

And we think it’s inherently a good transaction. We try and work as much as we can with a potential sponsor to iron out the kinks and to manage expectations so that they are ready for the requirements from an investor when an investor says, yep, I’d like to put in 100 million bucks, but here’s what I’m going to need for it. Likewise, on the investor side, we have similar conversations and we try and get them to understand

the nuances and the requirements of the sponsor and every sponsor is different every transaction is different, you know and in certain instances It’s it’s just doesn’t make sense if an investor takes control away from a sponsor because the sponsor may generally Have a particular area of expertise. So we try and and and bring both sides together before You know serious analysis and due diligence is is done on the investor side as to whether they want

to want to invest or not. If we can get everyone together and over that pump and if we can structure the transaction in a way that we know our investor is going to accept and is going to like, that work has got to be done before that transaction reaches the investor. Otherwise, we found that you may be in some trouble.

Scott Bursey (24:38)
Ian, this has been a wealth of information. And before we sign off, for our listeners who are always looking to connect and collaborate with the best in the business, what is the best way for them to reach out to you?

Ian Drewe (24:51)
Yeah, we’re currently redoing our website. So we don’t have a website out there, which never helps credibility. But my email is info at, and this is all one word, Avoca Property, A-V-O-C-A-P-R-O-P-E-R-T-Y dot com. Alternatively, if you look me up on LinkedIn, Ian Drewe on LinkedIn, and reach out there, I’ll be sure to respond.

Scott Bursey (25:19)
Awesome And pros as Ian highlighted when seeking capital don’t just present the upside stress test your business plan by showing the capital provider three clear exit strategies under various market conditions. Confidence in your downside protection is your best negotiation tool. Ian, thank you for joining us here today.

Ian Drewe (25:41)
Thanks for having me Scott, it’s been fabulous, thank you.

Scott Bursey (25:44)
It has been more than fabulous. And to our listeners, we appreciate each and every one of you. If you got value from today’s episode, please subscribe. We’ve got a lineup of exceptional guests, just like Ian, who are making huge moves in the market. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.