An Agile Approach To CRE Investment, With Grant Humphreys

The only constant in life is change, which can occur gradually, or suddenly. Of course, change in the commercial real estate market could be viewed as an opportunity for enterprising investors.

Grant Humphreys, president of Humphreys Capital, joins the show to discuss his firm’s agile approach to CRE investing, and how this agility has contributed to the company’s ongoing success.

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Episode Highlights

  • Background on Humphreys Capital, and the company’s unique strategy and product offering.
  • How Humphreys Capital partners with experienced developers to acquire, develop and operate income-producing properties.
  • The story of how the company invested heavily into industrial real estate in the past decade, and then locked in gains during the frothy 2021 year.
  • Why the company’s background as a real estate developer has enabled it to have a unique, “bottom-up” approach, differing from that of a large institutional player.
  • How Humphreys Capital views relationships as a core piece of its value-add, and why the firm stresses a long term viewpoint that is similar to that of many family offices.

Today’s Guest: Grant Humphreys, Humphreys Capital

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to “The Alternative Investment” podcast. I’m your host, Andy Hagans. And today, we’re talking about an agile approach to real estate investing. And joining me today is Grant Humphreys, who is president of Humphreys Capital, and we’re gonna talk a little bit about his company’s unique approach. Grant, welcome to the show.

Grant: Thanks, Andy. Glad to be with you.

Andy: So, to kick us off, can you give us a little bit of background on Humphreys Capital? How long has the company been around?

Grant: So, Humphreys Capital is a multi-fund manager based in Oklahoma City. We’ve got a team of 25 people. And I’m a third-generation real estate investor and also a developer. Humphreys Capital came to be about seven years ago to manage the Humphreys Real Estate Income Fund, what we call HREIF. And HREIF actually came together just over 10 years ago when we rolled up several dozen family partnerships that we had had since the early ’80s. And we put those together into one diversified fund and then continued to grow it out of that, and we can talk about that as we get in. It started as a $50 million corpus or kind of, you know, initial set of properties that were primarily triple net lease in the convenience space, and it’s grown to over 1.2 billion in AUM now.

Andy: Wow. Okay, that’s quite a bit of growth. So is the fund open-ended? Is it an ongoing open fund?

Grant: Yeah, so we’re one of those unique unicorns, and I just say that and just in that we didn’t fit into the mold initially. And it’s an open-ended, private REIT, held by a partnership. And so we’re perpetual life. And we’ve got a quarterly valuation process, but we’re not publicly traded, or NAV. And intentionally as an income fund, we focus on providing a strong distribution. So we pay out an enhanced dividend and have since the beginning of every month, our investors are receiving a distribution check. And we think that putting that income back in the hands of the investors is kind of a hallmark or a central element of HREIF.

Andy: Yeah, you know, that’s music to the ears of a REIT investor, you know, returning income in the form of dividends. So one thing that I think is interesting about Humphreys Capital is, you know, from your website, you’re partnering with experienced developers to acquire, develop, operate those income-producing multisector properties. And I know you operate in a few different sectors, industrial, multifamily, office, and retail. So right off the bat, like you said that the unicorn diversified into all those sectors. But I have to ask, you know, given current market conditions, those four sectors are sort of all over the map. Is there more of a specific focus right now, you know, at the end of 2022?

Grant: Sure. Well, you know, in the last couple of years, we’ve adjusted, and this has been something we’ve done from the beginning, when HREIF was first formed, like I mentioned, we were 100% allocated into triple net lease space. A lot of those deals, those partnerships were first put together in the ’80s and ’90s when Cap rates were at 11%. So 10% and 11%, something that, you know, at least a generation or two can’t even fathom, but that’s where it was at the time. And we put that together. By 2012, the cap rates had come down quite a bit. And we thought we need to diversify away from just triple nets and we need to look for opportunities in other sectors.

And so we started to evolve. And I think that’s probably what this conversation will be about as how important it is to have agility in a real estate portfolio that can diversify its risk across markets, across strategy, across sectors, so that it has the ability to pivot with market fluctuations and economic cycles. So when we started in 2012, we were 100% on the triple net lease side. By 2014, we were moving into multifamily. We liked the multifamily space. That’s grown to now about a 70% of our total portfolio right now is in multifamily. We also took a big play into the industrial space. Industrial was strong. As a family, we have a long history and the warehousing and operations businesses. And so we were familiar with industrial. We liked the product sector. We thought it was undervalued by capital markets, and we saw some outpaced performance opportunities there. We moved into that space strong through 2015, ’16, ’17. We built up some portfolios in Dallas, Fort Worth, and Phoenix, and come 2021, we thought the market was as good as it was gonna be. So we exited from that space, and we’re able to rerecord fully…

Andy: Well, I gotta just stop you right there. I mean, talk about pretty good timing, that sector, those locations, those entries, and exit points, I mean, I gotta say, I’m pretty impressed, you know, to see that clearly. That’s pretty impressive.

Grant: I think some of the best advice I received…one time, I was in the self-storage business for seven years, from 2000 to 2007. And I remember in 2007, it felt a lot like 2021. And I was talking to a guy that was ahead of ULI Boston’s chapter, and I told him, I said, “You know, I’ve got this portfolio.” We had 14 properties, 14 facilities. I said, “I’ve gotten offers that just don’t make sense.” And he says, “Well, are you gonna take them?” I said, “I don’t know. I mean, I really liked the business. I liked the place that we’re in. The goal is to continue to build up, you know, residual cash flow, and we’re doing well at it.” And he says, “If you don’t sell today, then you’re buying it today at that price.” He says, “In every day, you’ve got to make that decision. I’m gonna get out of bed, I’m gonna see where the market is, and then make the decision, I’m I gonna buy it again today at this price or are we gonna sell?”

And so I think sometimes there’s moments where there’s clarity. And the last two years, I wouldn’t claim that we had divine insight or great clarity is probably the most unclear time that investors have seen and the real estate practitioners have seen in a long time. But there gets to be a point where it’s so frothy, and you just think you know, “This is taking a win. We don’t think that it’s gonna get better.” We had some real concerns on the macro level with the Fed’s actions and where interest rates were going, and we wanted to hedge into some positions that were more of a inflation-hedging characteristic. And so we saw self-storage and multifamily as the best, you know, sectors to be in for that. We saw some opportunities…

Andy: Yes, I’m sorry to interrupt. That’s always my question, though, like as an LP, as an investor, not as a developer, but as an investor, I totally agree with you. Wake up every morning and look at your portfolio and say, “Would I buy this again today?” You know, to the extent that it’s liquid, at least, it’s not always liquid, but to the extent that it’s liquid, would you buy every element in it at today’s market price? The problem is, though, when you cash in, when you exit something, if you have to go buy another asset if it’s equally as overpriced…and that, you know, in 2021, it just seemed like everything was overinflated across the board. But sounds to me like you’re saying, there was relative value in self-storage and in multifamily as compared to those positions that you exited.

Grant: I think that’s where the agility comes back into play, that if you have a pipeline of opportunity that’s spread across geographical markets, across multiple real estate sectors, and across different strategies, so we’re active in core-value-add and ground up opportunistic. If you have key relationships that are bringing that pipeline of opportunity in and you have line of sight to see where the market is, you can find some dislocated performance opportunities. You know, you can find where the capital markets have read the headlines, and usually, the capital markets are 6, to 12, or 18 months behind.

They’re seeing the headlines that, you know, industrial is the best thing ever and is never gonna go down, it’s always gonna be great. They’re continuing to…and then they decide, “Hey, let’s put together a specific fund for that. And let’s go out and raise, you know, $30 billion so that we can push it into the industrial space.” And that flood of capital that’s pushing it in just smashes down the cap rates, drives up the property values, and helps tell the story for a season. And I think there’s some big macro things that are happening in industrial that are gonna keep the music going for a time, you know, when you’re talking about…

Andy: Yeah, would you just…it sounds like what you described was almost contrarian. Like when you saw people running for the entrance to that market, you’re sort of ambling for the exit, you know, rather than then going along with that crowd.

Grant: We were already in the space because we liked the product. We liked the property sector. We were already an industrial, and I think that that’s kind of our fallback position is to come into things that are more utilitarian, less trendy. You know, I started out as a retail broker and retail changes its face every three years. It’s hard to keep up with the evolving face of retail before it becomes functionally obsolete in some way. Industrial, it has a lot more grace built into it for its owners over the longer term. So we had built up a portfolio of second and third-generation industrial properties. And because of that push of capital that was coming into the industrial space, it got to the point that it was hard to say no, and we felt like it’s in the best interest of investors to go ahead and take a win.

Andy: Yep. So I think I get it. So you’re saying, “Hey, look, by default, we like the industrial space. It’s our kind of space. But at a certain point, the market gets so frothy. It’s almost dumb not to sell.” And, of course, you never know, you might be back buying the same asset or similar assets five years later for, you know, a discount. So I have to ask, though, of those sectors. We talked a little bit about industrial, multifamily, and retail. What about office? Is office dead? I always ask that. Anytime I see office, I have to ask, “Is office dead?”

Grant: I’d say no ops is not dead. But it certainly has been impacted by COVID. And it’s to be determined on how much of an impact that is over the longer term. You know, I think people learned a lot through the COVID experience, we learned what to do and what not to do. And our expectation is that people will always need a place to work. You’re not gonna change thousands of years of civilization in human history, that people when they come together, and they have a free-flowing exchange of ideas, it’s better if you and I were sitting face-to-face right now, Andy, we’d have a richer conversation because this is…we’d have a better conversation because those social cues, those nonverbals, those are important. And that’s the way real collaboration and idea generation takes place.

So you’re always gonna have an office component to it, where people are coming in for the face-to-face. But I think we learned a lot about what a blended model might look like. It’s certainly gonna be a reduction overall to some extent in the office sector. But we don’t know where that’s gonna be, how much that’s gonna be. And, you know, one thing that I’ve seen in the past when you go through a correction cycle, it doesn’t impact all properties the same, all sectors the same, all markets the same. There’s islands of value preservation, and there’s clear winners, and then there’s also large swaths of the commoditized, less appealing, less amenity-rich, less well-located, where the fundamentals just aren’t there. And the majority of the devaluation takes place in that property that just doesn’t have the fundamentals that need to continue to stay competitive.

Andy: Would you see Humphreys probably staying away from that sector for a couple of years to see that play out, or are you actively monitoring, you know, potential deals?

Grant: We look at everything. So we took a play last year, we took a position in a great office asset. I was there two weeks ago in the Phoenix market. And so it’s up on Camelback in a great class A new office building that we had conviction about, and we feel like over the long-term will be one of those locations with the amenities, and the quality, and the surrounding demographic strength that it’s gonna be a winner. And because the headlines were so out on office, and everyone said, “Office is dead. COVID killed office, it’s never coming back,” we thought that there was a good play there where we could pick up a little bit of a basis point spread because some of the other capital players weren’t as aggressive about that just because capital markets were out of office at the time.

And I should say, you know, our position, we don’t define ourselves as a contrarian firm or a contrarian strategy. That’s not what we’re about. We really just look at the deals on the fundamental level, at the sub-market level, and we combine a quantitative understanding of the analysis of those factors, which you can see on paper and you can see just by going in and doing a close market study with the qualitative elements of a great partner. And so we look for deals that are originated through those relationships with people that we trust, where we have values that lineup. We’ve done a lot of deals with a lot of great GPs that are out there, development partners, and folks that are in different sectors and different strategies across the country. And about 85% to 90% of the money that we put out over the last three years is with repeat partners. So it’s folks that we’ve got track record with, we know them, we trust them, we’ve got scar tissue together by working through tough deals together. Those are the deals where we’re seeing opportunity. And that happens sometimes to be viewed as contrarian. But for us, it makes good sense and it’s good common sense business.

Andy: Yeah, maybe contrarian isn’t the right word. Just, you know, like all that money that was flowing into industrial from big institutional players, it’s kinda like players that are showing up at the sixth inning of a ballgame or something. And it sounds like, you know, you all were just earlier in that space, you know, but playing the earlier…you were the starting pitcher playing in those earlier innings, you know, correct?

Grant: It’s been a…

Andy: Go ahead.

Grant: You know, Wall Street kind of has a habit of doing that. When we formed HREIF, when we formed our income fund, we said, “Let’s look at the Sun Belt markets, which at the time were considered second-tier, and third-tier, or tertiary markets. And we’re not talking about small towns, we’re talking about, you know, Dallas, Fort Worth, and Denver, and Phoenix, and Atlanta, Charlotte, markets that are strong.

Andy: How long ago was this? I mean, it must have been a while.

Grant: 2012.

Andy: Wow.

Grant: No, I’m saying in 2012, when you talked about putting out, you know, good money into real estate, you had your gateway markets. Okay? And gateway markets for New York, L.A., Chicago, and then San Francisco, and maybe Seattle would be thrown into the mix in the discussion, Miami. But markets like, you know, DFW, Atlanta, Nashville, and Austin did not get the traction that we believe that they should 10 years ago. And so we really just started focusing on those markets. And we’ve had some good returns and performance in those markets.

Andy: So, again, yeah, back to that baseball analogy, we might be in the sixth inning, or maybe the fifth inning of that heavy investment into the Sun Belt. But, I mean, you know, I don’t know where the supply curve is, where the demand curve is. Do you think that, you know…is that trade getting too crowded? Is there going to be, you know, so much investment that there could potentially be an oversupply that, you know, overtakes the tailwinds?

Grant: There has been a lot of additional emphases, a lot of additional investment placed into those fast-growing markets. But for good reason, there still is economic growth, we’re still seeing, you know, job creation, startup businesses continuing to grow, those economies continuing to diversify. The thing that’s interesting, and we were talking about industrial earlier, you know, there was a time pre-COVID when you looked at across the markets and you would see…I think the number was a 29-month supply or absorption, you know, that was under development at that time, that it would take about 29 months for what was currently being developed to be absorbed into the market and across the whole country.

And then, since COVID, with the big wave of industrial growth, we’re up about…and this is as of about three months ago. So now, it’s definitely slowing down. But this is up about 60% to 70% additional industrial growth. But that inventory number had dropped down to 21 months. And so what you’re seeing is huge growth, but also an increased demand because of these growing businesses that are continuing to absorb at a faster rate the product that was coming up.

Now, that’s not gonna last forever. You’re gonna have a correction across different sectors at different times. But what we’ve seen so far is a very encouraging resiliency in those what we call second-tier markets or fast-growing U.S. economies. We’ve seen a very resilient market with a diversified economic engine, good job creation continued, you know, stickiness in terms of housing values, and rent rates up until now. Now, we think that we’re gonna be in and we just had our investor meeting, our annual investor meeting last week, and we were really transparent with folks. And we said, “Look, we look ahead and we see with the changes that you’ve had in the federal funds rate, and response to inflation, you’re seeing an increase in cap rates. We’re gonna be in for a rough time. It’s gonna be a couple years, it’s gonna be a few years. There’s gonna be a challenging place to find real returns and book wins. And we think that no one’s gonna be spared from that. Everyone’s gonna be challenged.” So I don’t wanna be overly optimistic or have rose-colored glasses, but I will say that, you know, over the last 10 years, those growing economies in the U.S. have continued to show resilience and have been a great place to be.

Andy: So you see the rough patch, you know, it’s almost everybody agrees that we’re in the middle of in the beginnings of this rough patch. You see that taking 24, 36 months to kind of work out of our collective economic system out of the market where it gets a little more balanced?

Grant: I would say I see it being a prolonged time of correction. There’s so many things at the macro level that you can’t control, that you can’t predict, or, you know, forecast, that it’s…I don’t put a real strong confidence in the ability to look out and say, “This is how long it’s gonna take. And here’s what’s gonna happen.” So I’m just saying right now is we look ahead, we know that inflation is still strong. The Fed’s actions while they seem really aggressive over the last eight months are nothing compared to what we saw in the ’60s and ’70s, up into the early ’80s.

Andy: They can go for Volcker, right?

Grant: It could, it could. You know, the other day, this is in October, I looked back and I thought, you know, 300 basis points in five months, that seems like a lot of activity in Fed fund moving. But, you know, there’s actually been 23 times where the Fed moved 300 basis points in one day. And it’s not in my lifetime, it happened through the ’50s, and ’60s, and early ’70s. I was born in ’75. And so we’ve got a whole, you know, 40 years stretch where people have been coddled and numb to what this kind of environment looks like. And I think it could be pretty challenging for some time.

Andy: Millennial inflation assumptions may not be the foreseeable future necessarily. Yeah, I mean, I have to say it looks like some leading indicators, it looks like inflation is beginning to roll over, not that it’s going to return to 2%. The CPI will return to 2% anytime soon, but it might get back to that 5% or 6% range. But the interesting thing to me is, you know, talking about cap rates, you know, you mentioned seeing triple net leases, I forget the exact number, you know, within 11 cap, or what, you know, just numbers that seem crazy now, do you think that the market is ever gonna get back there? Or I should say, in your and in my lifetime, are we gonna see corrections or valuations, you know, anything like that, or do you think they’re just kind of permanently shifted?

Grant: Well, I would just say that what we’ve been living in for the last, you know, 25-plus years is not normal. So we’ve had a great run, and especially the last, you know, 10 years post-global financial crisis. You know, the last 10 years have been a great time in real estate. But really, the last 25, 30 years have been a time that is not typical. And we’re at a different place as a country now than we were in 1983. And there’s a lot more national debt, there’s a lot more of, you know, interesting and just really challenging situations that we haven’t had to deal with yet. And so the world’s changed a lot over the last 30 or 40 years. So I don’t know what’s coming up. But I will tell you that the season that we’ve been in has been a charmed season, and it’s not gonna last forever.

Andy: Sure, if you’re a value investor, then, you know, because I would say if you’re entering a rough patch, whether you’re in real estate, or really in anything, you know, if you buy an asset for income, and you’re willing to hold through ups and downs, you’re pretty well positioned. Is there any value right now? I mean, is that even possible to buy value in this market?

Grant: Well, now, I’ll tell you, there’s times that you take ground and you’re able to take steps forward and you’re able to grow, right? And then there’s times that when the economic headwinds are against you, the best thing that you can do is to hold your ground and to not lose. And I think what we’ve tried to do is position, in our case, 85% of our portfolio is in inflation-hedged positions right now, where we’re seeing day-to-day or month-to-month rent rate adjustments and the ability to flex with inflation.

So we try to hold that. We look at the macro housing supply-demand dynamics, and we feel like that should hold housing values. I think there will be some correction to housing values, but it’s not gonna be like what you saw in 2008, you know, just because the supply-demand dynamics are so out of whack. So we think that now’s the season, and for the next two years, it’s a season if you can hold your ground, you know, we’re paying a 7% dividend right now, it’s a high dividend for a real estate fund. But if we can continue to perform on that dividend to make that dividend, to make that payment to investors as we have for the last 10-plus years, then we think that that is a strong win. We don’t expect to see, you know, double-digit returns. We’ve had 16%. In the last 12 months, we’ve had 10% plus in the last three and five years. I don’t expect to see low teens kind of returns in the next few years. I think it’s gonna be a hard time to see high single-digit returns. But that’s what we’re shooting for.

So you adjust and you flex. I think the moral of the story, where we are right now is we just say, “Hey, we’re in a time where we’re going into the storm. It’s gonna be a long storm.” We think we’re well positioned for it. I’m not losing sleep at night in terms of value to find and, you know, harvest is to win. It’s not that season right now. Right now is the season where we’re gonna stay fairly hunkered down. We’re still looking at opportunities, but we’re not aggressive. And we’re thankful that because we’re a perpetual life vehicle, we’re not gonna be pressured into a sales posture that makes us put into a market where value is unknown or doubted. So we’re able to hold and continue to preserve.

Andy: So when you mentioned hunkering down, I mean, you know, as a fund manager, what does that look like? Is that, you know, managing, you know, debt ratios, is that being conservative with underwriting? You know, how does that kind of change, let’s say, the strategic planning for 2023?

Grant: You know, for us, the posture of conservative underwriting, that’s just how we’ve done it. We’ve underwritten for cap rate expansion for six years now. We’ve never seen it. But now, finally, our underwriting for cap rate expansion…

Andy: You may finally see it now, right?

Grant: …is gonna come into play. You know, in terms of debt, you know, in the last couple of years, we locked in as much as we could either with a locked rate or with a rate cap, and so 85% of our debt, which is around 50% or less at the fund level, you know, overall, 85% of that is capped or locked. And so, you know, we’ve taken the steps that you can. I think you got to be prudent. You know, cash is king in this kind of a season. So we always keep a buffer, but we went ahead and, you know, eight months ago, put in an additional buffer in terms of our cash so that we be well positioned. We look at every deal. The way I put it is when times are great, everybody looks at the upside potential. When times are really down, you really look at that downside risk. And you look as if these assumptions don’t pan out, you know, if these assumptions don’t prove true, are we gonna have the ability to continue to perform? And I feel like we’re well-positioned to do that right now.

Andy: Right on. So, you know, one thing that I think is really intriguing, you already alluded to this earlier in our conversation is that your fund includes projects that you categorize as core as well as projects you categorize as value-add and opportunistic. You know, I think it is cool and it’s a little bit unique to see these different risk-return profiles under one roof, let alone in one product. Is there tension, I guess, with having those different strategies all in one product? I mean, you know, like at an institutional level, I’m thinking of, you know, pensions or institutional investors that generally want to invest in things that tick a box that are sort of easily categorized, that they can kind of permanently categorize. Whereas this is totally different. It seems to me it’s more based on your track record, and your ability to add value with that active management. So, you know, do you find that from the product perspective? Is that an advantage? Is it disadvantage? Is it both?

Grant: You know, there’s a lot there. I think, you know, the thing that we see as a real benefit that as we’re talking to investors, we say, “This is something that gives us optionality at a time when the market is moving on you quickly.” And that optionality gives us resilience because there is this agility to pivot, and I’ll use two examples. I mentioned earlier when we got out of industrial and we pushed hard into two different positions, one was going into self-storage because, you know, I was familiar with self-storage, I liked the product type, day-to-day rent adjustments in real-time to inflation, diversified rent rolls, we saw opportunity to move in not by going and paying, you know, four and a quarter cap on the street with, you know, direct ownership position. But through key relationships going in with existing portfolios, we became an LP and equity partner to an existing operator, and just had a great what we think would be a long-term relationship there and good initial performance.

So better return that was in part due to the analysis and us looking at the macro level in the picture and where it was going with inflation, but the opportunity was made through this relationship. So that’s one piece that couldn’t have happened if we’re a single-strategy fund. The other thing is, you know, we were active in multifamily development and doing a lot of ground-up. We are equity partners with ground-up developers across multiple markets. We currently have, you know, 85 positions that we’re in as a firm, 71 positions that we’re in with HREIF. And of that, if you’re looking just at the multifamily piece, we’ve got 30 different positions across, you know, 15 markets, 12 states.

And so that was our kind of exposure in terms of multifamily. But when COVID kicked in, remember how the construction commodities pricing just went absolutely volatile? I mean, prices went through the roof. And we thought, “We need to actually shift into value-add.” Thankfully, we’ve got a few sponsors that are great value-add performers, and we’ve done 15 deals with one. And we said, “We need to really focus on value-add so that we can skip out on that construction commodity pricing volatility.” And we made a big push in 2020 and 2021 to place dollars there so we could find that yield, we could find the existing performance, and still see the upside potential that can put you into a strong return profile.

Andy: Interesting. So when you come in as an LP in the deal, you know, due to, you know, the size of your fund and the amount of capital that you can deploy, do you get enhanced economics as an LP, or GP, LP economics, anything like that?

Grant: I think you can look at our track record and see that we’ve had enhanced economics, enhanced performance, and we’ve tried to come back and say, you know, “What is really driving that?” If you’re looking at, you know, like a value creation profile, like a private equity firm would use on a company. There’s a portion of it where you have, you know, preferred debt structures because you have lenders. We’re at a time in the market right now where the folks that are gonna be able to move our people who have reliable, preferred debt structures to have access to debt markets that others can’t touch.

If you think you can go out and just kind of float it out, run it through a debt broker and find, you know, who’s gonna bring you the deal and shave off two basis points on the rate and have that type of an approach to debt origination, you’re probably gonna be without a debt partner for the next 12 plus months. It might not take that long, but it’ll take some time before the debt markets unfreeze. So we think one is having, you know, preferred debt structure. Another is having the ability to write a big equity check and move quickly. So it’s that ability to move and respond quick. We’re a small shop that grew out of a family office. We have given, you know, firm commitments on equity checks, anywhere from $15 to $40 million within two weeks.

And so we can move very quickly when we know the partner, we understand the dynamics of the deal, we’re already familiar with that market. But I think the thing that’s the most impacting if you’re looking at that correlation to success, it’s having a relationship with a best-in-class GP, where they see you as the preferred equity partner. So you get the first call. And so we think that that first call, if they say, “Hey, I’ve got an opportunity, and I’m gonna call…” You know, you gotta call somebody first. And if you’re that first equity partner call, we think there’s probably maybe 100 to 150 basis points of total lifecycle IRR in terms of that yield because you’re able then to have pick of the litter of the opportunities that they’re seeing out in the field. And if you’re the second or third equity partner that’s being called, you’re taking the leftovers that have already been passed over by somebody else.

Andy: Yeah, no, that makes a lot of sense. It’s almost an off-market deal if you’re the first call, right? There’s not a market until there’s two calls, right?

Grant: Right.

Andy: Right.

Grant: And most of the opportunities we find, we’re not looking on, you know, LoopNet or anything like that and seeing where opportunity is. We’re looking ahead with these key relationships, and we’re saying, “What do you guys see 12 months, 24 months, 36 months down the road? How can we serve you well? What do you need from us as an equity partner? How can we make your life easier? And then you can work us into that plan, and we can become kind of a long-term strategic capital partner for you.

Andy: Yeah, but, you know, the two themes that I’m hearing over and over, number one, just the agility, you know, the ability to move based on market conditions, what you’re seeing on the ground, you know, with your partners. And number two, just the partnerships and the relationships themselves. You know, you already mentioned that you’re a third generation, I believe, in real estate development? And it seems to me that you’re…you know, the Humphreys Capital, the whole philosophy, or at least as you described it is sort of almost born out of that viewpoint, you know. I can’t quite put my finger on it. It’s just a little bit of a different perspective than, like, an asset manager, someone who is just top-down from that asset management world. It’s a little bit more, you know, bottom-up or street level. I’m just kind of searching here. Maybe you can help me find the right word.

Grant: No, I appreciate that, Andy. You know, I’d say we are…this is something we have to balance. We’re from Oklahoma. My family’s been in Oklahoma for five generations. There’s a rootedness if you’re from this part of the country, Midwestern values, family values, common sense, but there’s a rootedness that you have. And so you approach your business with a real understanding of how important and how dependent you are on relationships, okay? If we can’t do relationships well, if we can understand what it looks like to craft a win-win structured partnership that creates alignment, not only in good times but partnership alignment through times of challenging situations, and if we don’t trust the other person to do the right thing and not just scalp us, you know, and find a way to cut a bigger piece for them and to leave that with us or for us to do the same to them, I mean, that’s not the kind of situation that anybody wants to be in.

So you wanna create structures of alignment. And we try to game theory these scenario tests. You know, what does it look like if this happens, or if that happens? And we do that as we’re putting together waterfalls with our GPs. We do it as we’re putting together, you know, just different elements where we can look at different exit strategy options. What does it look like to have control of refi decisions, change in management, take it to the market, having a seat at the table at those decisions that really help direct the overall impact or performance of a deal.

So we’ve spent a lot of time doing that. And I think we looked at it the other day, and since the 1970s, we’ve done well over 100 different partnerships. And we’ve learned a lot about what makes good business good, you know, and what makes… We believe there’s good people out there, there’s good actors, there’s some bad actors. We can talk about human nature, but a lot of times the structure of the deal is gonna guide and direct the steps of the parties.

Andy: Yeah, you know, that’s really interesting. And one fascinating thing you alluded to with a partnership, you know, human nature, incentives, and just structuring things in the correct way, of course, but you kind of alluded to, you know, leaving a little bit of meat on the bone, you know, making sure that both partners have a win because if one partner sort of finds a way to legally or not, you know, finagle all the profit for themselves, there’s not gonna be a second project in that partnership, there’s not gonna be the third project in that partnership.

And, you know, you mentioned that Humphreys Capital was kind of born out of a family office. So when you talk about those sorts of things, I’m seeing that really long-term mindset that I think is really common with family offices that’s thinking about preserving and growing wealth over generations, not just over the next year, or two, or even just for the next market cycle.

Grant: Yeah, that’s right. I think that long view of relationships, the long view of expectation in the American entrepreneur, you know, that entrepreneurial spirit and a good pro-business environment is gonna create some flourishing that wins over the long-term, but on the relationships, you’ve got to have the long view of relationships. We put it as, you know, the difference between people that are transactional, they try to win the deal, and they try to take as much of the cookie as they can on that first cut versus people that really just think, “Okay, what’s it gonna look like for me to have a great long-term relationship?” They walk away from it, and they think, you know, “I wanna do another deal with them.” There’s relational equity that’s been established, “And they treated me right. I trust them. We wanna do it again.”

You know, so we approach business that way, and that’s been something that’s been a key for us to establishing good relationships, not only with GPS on the development side, or the value-add side but also with investors. You know, we’ve got 640 investors. Most of those are high-net-worth individuals, and, you know, people like us who are looking for a way to get access into real estate. We have a few larger institutional investors, but very few and their foundations, endowments, and things of that nature. And so most of our investors that have come in are people that have owned their own business, or it’s a family trust, or it’s folks that are taking that long view, and there’s…relationship really counts there.

Andy: Absolutely. And, Grant, I have to say that that overlaps heavily with our listenership and our viewership. You know, our viewership for the shows is mainly LPs, accredited investors, as well as families and RAAs who are interested in illiquid or alternative investments. So that being said, could you let us know where our viewers and listeners could go to learn more about Humphreys Capital and your offerings for accredited investors?

Grant: Sure, be happy to. Thanks, Andy. So our website is humphreyscapital.com. And you can look us up there. Also, in, you know, ways that you could reach out, you know, for me, I’m [email protected] I’ve got an investor relations team. We’ve raised all of our equity to date through our internal team. We haven’t worked with outside placement agents or broker-dealer networks. And so we have worked, we’re on 11 different platforms for RIAs, and we have had some significant growth in the last couple of years through that platform. But we have a great in-house team of investor relations professionals that have come from, you know, financial advisor backgrounds or institutional investor backgrounds and can speak the language and know how to take care of folks on a one-to-one basis.

Andy: Absolutely. And I’ll be sure to link to that website in our show notes as always, which can always be accessed at altstv.com/podcast. Grant, thanks again for coming on the show today. I really enjoyed, you know, hearing about the agile long-term philosophy of Humphreys Capital, and if I may, you know, a little bit of the Midwestern charm. You know, it’s a little bit of a refreshing, a different tack than the normal Wall Street angle.

Grant: Hey, I appreciate the opportunity, Andy. Thanks for letting me come on today. Appreciate the chance to talk.

Andy: Thanks again.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.