The Art of Storytelling

Pitching an investment isn’t all about presenting numbers—it’s about storytelling.

Having a deal where the numbers make sense is the bare minimum to get investors involved. Table stakes. There wouldn’t be a deal without them. But as much as investing is (at least should be) mathematical, an investor’s “buy-in” is also emotional. Even at the institutional level. As an operator, it’s our job to tap into these emotions with context to “why here, why now”. You do this by crafting the story of your deal.

The essence of a great story answers the following questions: why here? why now? and what change? Ex: “We are buying a well-located, distressed operations property from a motivated seller at 80% market value with a plan to stabilize and renovate units proven out by nearby comparables”. We are here because the location, purchase price, and asset quality are strong. We do this now because the seller is motivated (perhaps a near-term loan maturity) and market fundamentals line up. The change is our improvement of operations and physical qualities (such as renovating to compete with higher quality assets). This is just the essence; we are missing some of the sauce like FOMO (fear of missing out) and exclusivity -so let’s dive into greater detail on how to tell our deal story.

The Introduction: Hook, Line, and Sinker

Your pitch starts with what you’re buying and why. A broadly marketed deal from a savvy, unmotivated seller with little to no upside? You better have the cheapest equity around, because 99.9% of LPs aren’t showing up. You need something that grips them from the get-go—something with clear upside. Picture these scenarios:

I am assuming the approach is rifle rather than shotgun. It’s a turn-off to go after “any good deal”. Investors want to know you have deep expertise rather than a broad-stroke understanding of markets. Furthermore, it helps to know what specific types of assets and execution styles you’re targeting - especially if you have heavy renovations (construction is no joke). For example: Targeting Class B+ garden-style, +100 unit, first-gen value-add, in fundamentally strong suburban submarkets of sunbelt major MSAs.

As far as motivation for the sale goes… the more dire the better. You want a seller who NEEDS to make a move. That doesn’t mean you gouge their eyes, but it does mean you have some level of certainty you can bring to your investors about getting the deal done. Examples:

• Rate cap expiration on floating rate debt.

• The seller’s going bankrupt and needs cash.

• The seller’s LPs (with major decision rights) need out now.

• Seller can’t cash-out refinance or pull together the funds for cash-in.

• The current management is sinking, and the operations are being cannibalized.

• It’s an off-market gem, straight from a long-term owner who is ready to sell.

• Children inherited real estate and want no part of operating.

Motivation is vital. There needs to be a willing seller to have a transaction. You as a buyer will carry reputational and financial risk while pursuing an acquisition, so you need to know why they are selling to start. This will play a major role in the pitch to investors on why they are getting a good deal.

Location, Location, Location

Next, let’s talk location. For many, location alone can break the deal. Life’s too short for unnecessary headaches. As much as you may turn the deal around, you’re not going to turn around the area. On the other side, we want to pick assets in great markets. Look for:

• Strong median household incomes.

• Barriers to development (this is key)

• Low crime rates.

• High property values.

• Quality schools.

• Proximity to growing job hubs.

• Excellent connectivity.

• Retail and amenities nearby.

Is there a Whole Foods nearby?

Location alone can break a deal for some investors. Life’s too short for unnecessary headaches, and as much as you may turn the deal around, you won’t turn around the area. On the other side, you want to pick assets in great markets.

High-end retailers do a lot of legwork to pick locations, as their entire model is predicated on the right type of consumption. They need support. A decent litmus test is seeing if there is a Whole Foods, Trader Joes, or other higher-end retailers to find fundamentally strong locations.

I love submarkets with strong barriers to development. At the end of the day, your ability to experience outsized rent growth will depend on the supply x demand dynamics. You need areas that will maintain mid-90% occupancy to have the pricing power. Areas where people have means and it's tough to build. Deals in these places will generally be premium priced. But over the long run, they will command greater yields - a great thing to position in front of capital!

Unveiling the Upside

Now, where’s the upside? Investors crave potential—or else they would put there money elsewhwere. You need to uncover the deficiencies and how you will do better:

• Is asset management a case of the blind leading the blind? You will be hands-on.

• Is property management a disaster? Your property management is lead by your elite team and you (hopefully) have a track record of performance.

• Are rents and expenses out of whack? Here is the data to support rents (through comps and historical information), and this is what market expenses are based on the current portfolio and nearby properties marketed.

• How does the current basis stack up against market comps? You need a stable of solid sales comps. Not 2022 peak pricing comps - no savvy money is going to pay much attention (though they may use it as a ceiling).

• Is there clear support for renovations? Provide a list of comparable properties that have executed renovations and establish the premiums achieved.

• Is the asset underpriced (both rents or purchase) based on physical attributes or locational benefits?

• What’s the strategy to outperform?

The upside is the execution plan. Lay out your strategy for enhancing the property, and back it with solid evidence. Show why this deal is a no-brainer—and why you, specifically, are the one to pull it off.

Where is the Money?

Investors want to know exactly where their dollars are going.

You need a detailed uses (and sources) list. The uses need to be meticulously detailed. That means itemizing out the capital budget and closing costs.

Break out the anticipated renovation (by item! and quantity!) costs, money needed to address deferred maintenance, and other closing costs like acq fees, financing fees, reserves, etc. Depending on where you are in the process, having bids and commission agreements is necessary information to back up your budget.

Being short money at the closing table is a terrible mistake, but being over-committed will piss some people off… detail out where the money is going.

It will help you and your investors!

How Does Everyone Get Paid?

We know what, why, and how we are buying the deal. The plan is supported with a clear upside. What happens after successful execution? There needs to be clarity on the exit strategy.

Ironically, the exit strategy can be a chicken-and-the-egg conundrum. Exits are predicated on the type of investors in the deal, while certain investors will come into the deal depending on the liquidity strategy. It’s confusing. But generally, underwriting deals from a 5-10 year hold perspective is the market standard. Whatever yield and IRR are projected in this period is usually a good enough metric to put in front of capital.

There are typically 3 “exit” events commonly pitched. The first is a straight-up sale at the end of the successful execution of the business plan, market-timing permitted. Meaning, an operator will sell at an opportune time or do so after the plan is complete. The second exit is a refinancing event. This can be included in the first sale scenario if the deal was purchased with bridge debt, but often a refinancing in years 2-5 will indicate a tax-shielded cash event where investors receive some amount of invested capital back with the expectation left-over equity will continue to season for longer periods. Lastly, I see forever holds. But this is rare to be pitched as capital is limited for these deals. Usually, family offices or other long-term money that doesn’t need a capital event anytime soon. Again, it’s capital-dependent but must fit an operator’s business. You can’t expect to continue running a deal if you don’t have any money to keep the lights on.

Sauce

The last thing I will hit on is the missing sauce. This one is earned over long periods of following through, integrity, performance, and growth. To get larger equity partners (specifically those who write $5-$50m checks) excited, they need to know it’s their opportunity. That they aren’t needed. You have other options and are not bluffing. You can point to a list of successful executions and realized returns with happy investors who refer your business. But, you have an opening and would like to build a long-term relationship. Not just some one-off slug.

This means you have to be legit. You can raise money with no problem and other partners are nice-to-haves. Your counterparties are incentivized to deploy capital with people they know can perform and trust. There are thousands of REPE groups, but how many are worth the risk? If you just consider probability (standard deviations), 50% are less than average. The next 34% are slightly above average. So, the competition lies within the top ~16% of performers (which doesn’t necessarily account for groups who aren’t top performers but attract capital due to their scale).

Recap

Your pitch needs:

• Why Here?

• Why Now?

• What Changes?

• A Good Deal

• Support

• Clarity on fund uses

• Clarity on Exit

• and over time, some sauce

Now go find some deals and execute.