Intelligent Partnership’s Post

Transcript

So I'm here with Tom Lloyd Jones, who's a partner at Sendik Capital. Delighted to chat to you. Say thanks a lot. So, new kid on the block, enter the BR space. It's a busy space. Yeah. Have you been finding it? We've been really delighted actually with the with how the product has been received by the market. We launched it about three years ago and we've had great response from from both investors and clients and the performance of the product has been superb without sort of wanting to blow my own trumpet in the 1st, 2 minutes. So yeah, it's all about it's been the, I think it's been the top performing real estate driven IHT product for the last three years. Yeah, we returned 6% since inception in 2019. There's this sort of clear delta there between US and a lot of other providers where I think the sort of the median return is around 3325. So we're quite proud of that. Great. And real estate obviously. Yeah, broad spectrum, what's your specialism and how long you been, how long you been working in that market? Yeah, yeah, great question. I mean that is one of the things that people fail to appreciate is thinking that real estate is a single sector. We're actually it's I mean we chart chart upwards of 30 subsectors to find value. On almost a weekly basis. So we're assessing these sectors in terms of their operational fundamentals and their pricing. Where we've tended to focus is in sectors where we think there is the strongest growth potential. We want sectors where the growth and the value is to come. We don't want to finance sectors and pay a top price or lend at a most competitive from a borrower perspective, competitive sense when we feel actually all the value in that asset is priced in. So what that's meant in practice is we focused on bed sectors. Where strong democratic forces are driving that, driving that growth. So things like residential PSA which is purpose built student correlation, one of the few sectors where the UK is a genuine market leader in provision of tertiary education, hotels and service departments. And the new sort of growing PRS multifamily product which is an established feature of European and US real estate markets. But in the UK it's been typically the provision of rental accommodation has been a mom and pop type. That job it, whereas now you're seeing an advent professionalized professionalized landlords offering bespoke rental accommodation and obviously that's a huge demand for that product at the moment because due to recent tax changes we've seen in the departure of amateur landlords now from the sector, myself included, creating a death of a death of proper rental project. So we hope in some small part that we can contribute to the development and what stage are you getting in at? You mentioned the development of that. Are you getting in at the early stage of element you taking? Them at risk with that on some of our transactions, absolutely. Yeah. So I would say we cover three main scenarios, which is acquisition, development and then what we would describe as equity release, right. So the real estate is built, it's already acquired. So it's not an acquisition or development play. The developer or the real estate group seeks to have additional liquidity perhaps to go buy more assets and what we offer there is essentially A relatively short term product, typically 12 to 24 months lending where if they've got a deep balance sheet. That we can underwrite and we can get comfortable with that. It can support additional debt capacity then we'll lend on a short term basis for them to use that capital typically acquisition or other stuff. We're not talking about a two-bedroom apartment in Burnley here are we? We're talking about big, big multi-purpose sort of development sites in Leeds and things like that exactly. That is what the PRS shift is about is going from the two bed flat in Burnley to as a minimum 7500 unit apartment block. Yeah you have one site amenities and a specific block tailored to renting. Yeah the problem often with the two bed apartment wherever is originally was designed as a single family residence and it's had to be cut up to cater for multiple occupancies and it's just not suited to it. In terms of the design of the house, the layout, heating, the noise permeating between between floors, none of that was thought about at the time the building was built. Need to I can take a lot of responsibility for that. Used to work for a company in Leeds and we were masters at turning 2 bedroom properties. Into six bedroom HMO shoving, shoving the students in the basement where possible. So yeah, OK, great. Well look that gives me kind of a sort of sense of the special. Give me a little bit of background to the team and obviously you've been you've been doing this for a while before formally entering the advised business relief space. Yeah, like yeah, I mean so founded in 2013 all the team has drawn from real estate credit backgrounds. So that's one of the things that sort of marks us out we think from maybe other IHT driven. Strategies is that we focus only on real estate. We don't cover any other sector. And we felt that there was a gap in the market for that degree of specialism. If we look at the institutional level where investment funds, how they're structured and how they're and what they offer investors, they are hammering on specialization. They aren't generalists. They focus on an area that they know and they understand and they can outperform. And we wanted to replicate that in the business relief space. Yeah, so the team is drawn from. I would say this but top notch, top notch team drawn from the likes of bar caps, CQS which was a world leading hedge fund. ICG Brookfield. I myself started off life as a lawyer so I trained Mcfarlands which was a fantastic, fantastic training there especially I didn't realize at the time fantastic background for finance, understanding the legal process because ultimately everything in finance at the bottom you have to understand enforcement and to understand enforcement you have to understand the legal side of it. Yeah. So free plug there for McFarland. Yeah, yeah, absolutely. And obviously with one of the things with my other hat on, we look at a lot of due diligence and a few years ago nobody really cared about whether there was gearing in business relief strategies. And then it's become one of the key considerations in around the sort of level of risk that you might be taking on with gearing. Has the interest rate environment affected affected the business? Great question. It's, it's actually turned out touch what available wood there is actually turned out to be actually quite a boon for lenders. OK. What it's done in the past nine months as you've basically had a 400 basis point increase in the price of senior debt and I think senior debt was too lowly priced for many for many, many years. And I don't think it, while it may sound like a great thing, cheap leverage and everybody can pay very, very little for money. Incentivizes bad decision, agree. And the and two willingness to assume risk. Yeah and I think it's been a helpful in two regards. Then I think one, obviously it is now much easier to earn a decent return of senior positions. And secondly, I think the mindset slowly of people of borrowers will shift to having more prudence in the leverage that they take and to putting more equity into schemes which ultimately reduces the risk of them. So there has been the flip side of this is that there's been compression in asset values for sure. Which is an interest rate rise as is like financial gravity really it's it weighs down on any asset not just real estate. All asset prices will be reduced because ultimately what the interest rate really is almost is a proxy for a discount rate on those future cash flows. If you increase it, present value comes down. So there have been obviously for people who hold assets that's not pleasant. But for in the lending environment, I think it has been an overdue correction and one that is positive for both lenders and borrowers, not a 0 sum. Yeah, it's good for us, it's bad for borrower, it's not like that. OK, good. Well undoubtedly specialist in real estate and I do have to agree with you, I think there are there is room in the market for this. You know if you look across the business release strategy, the business relief for landscape, there's a lot of providers that are offering very similar strategies with similar sector allocation. That's hard for advisors and you know the likes of Puma and who are doing something different should probably who are doing something different. They're often seen as diversifies. Yeah, in the market. So in the conversations that you've been having with advisors, are you finding that you're a product that's sitting alongside some of the more established players to provide that? Reduce concentration risk across sector allocation, absolutely. We see that. We see that an awful lot both within real estate and across. So some investors, some advisers will come to us and say we're making an allocation into XHTML product provider because it goes across forestry and other sectors. But we want a specific real estate component and there we're going to make an allocation to Puma or whatever Alex percent and you for the remainder. So I think it offers a diversifier. Um, because if you, there are so many other product providers who can give you exposure to the other asset classes. Yeah, there's room for somebody like us in our, in my view to say we're just going to do real estate. And by the way, you can get a 300 basis point to pick up on what some of the other, yeah, And so think of that. Most effective. Is it cost effective to come into you guys? Are you competitive with these? Obviously, you've got a strong team there. Good performance. Yeah, yeah. So we're very competitive on fees because we have broader capital that we manage. And So what we're not looking to do here necessarily is to price the full cost of our business into this product because we want to gain market share. And so one of the ways that we're trying to do that is through a competitive fee structure where we don't take any management fee until we've delivered our target. Return of the six and that's good. Yeah. It means that we have in the true sense skin in the game. Yeah, we are. We are backing ourselves to perform to that level and we will back that promise with the commitment to take no fees out of the structure into sort of, OK, great. And. Yeah, thinking about the sort of trajectory of the product, are you finding yourself getting onto panels now? How are you finding the advisor market being open to A to a relatively new entrant? Slowly but surely. Yeah, it's not an overnight thing by any stretch of the imagination, but we are in the process now of submitting applications to go onto panels for a couple of well known names, which if we get them, fantastic. But the direction of travel is certainly that we are being invited now to pitch for panels right before we were knocking on the door. Can you please, yeah, now we're being asked and so hope long may that continue and that is a key part of our growth strategy is to build the AUM, get onto the panels and capacity to do that runway for lending good. Yeah, I mean at the moment that is the other in terms of pipeline demand for our capital, the bank the interest rate rises are sucking liquidity out of the system is everybody's as everybody can see banks are retrenching in part due to interest rate rises perhaps but also I think fear about asset. Values, Yeah, I think they are concerned. Whenever there is concern, the bank reaction typically is to err on the side of extreme caution and retrench until it's abundantly clear that the worst has passed. Yeah. Whereas actually what that provides an opportunity for people like us who spend day in day out underwriting asset values to step in and being able to offer credit on better terms, better risk adjusted terms because some of the competing capital is retreating, not because of. Market assessment, yeah, because of that sort of just that, that fear, yeah. And so we are, we are seeing an enormous amount of inflow in terms of deal deal requests. So pipeline for the moment and I think for the next 1218 months, it's certainly will certainly not be an issue, which is good against a backdrop of rising IHD receipts that growing at a billion a year. Yeah, I mean it's frightening really, isn't it? I mean there was recently a Telegraph launched. A sort of campaign to abolish it because they think it's getting to such a level now in terms of receipt that yeah, that is no longer a sideline issue affecting the Super wealthy. And that's, and that's certainly the case with the freezing of allowances. I think out to 2029 that number is going to go up and up and up. No .1 point, 1 billion a month. I think it's raised. Well, look, I think it will very well placed to benefit benefit from that. Obviously you've been in the market for three years, but I think what you're doing is is genuinely interesting and different. Thank you. And I'm, I'm pleased to be able to bring it to our audience of advisers. Great. I've learned a lot about real estate and I really enjoyed talking to you likewise. Brilliant. Thank you very much. Thank you. So there we are. That's a wrap up with Lensic Capital.