Crafting a Flight Plan for Real Estate Success, with Christopher Finley
Feb 06, 2024Season 3Episode 105
Clark St Capital
Welcome to The Real Estate Underground Show #105!
Today, we're privileged to have Christopher Finlay, a seasoned expert from Lloyd Jones, a diverse real estate firm specializing in multifamily, senior homes, and hotels, with additional expertise in development and construction. Chris, originally a commercial pilot with Eastern Airlines, shifted from casual investing to shaping the Finlay Company into one of New England's largest real estate firms by 1983.
In this educational episode, we will delve into:
The origins of Christopher’s real estate journey and what sparked his interest.
Christopher’s philosophy on market timing and a contemporary outlook on current affairs.
The compelling reasons behind considering multifamily as a phenomenal asset class.
A deep dive into Llyod Jones’ current emphasis on Senior Housing.
Christopher's perspective on interest rates and their historical context.
Key considerations in deal analysis, focusing on loan-to-value and loan-to-cost ratios.
For a deeper understanding of Lloyd Jones LLC or to connect with Christopher Finlay, explore www.lloydjonesllc.com. Join us for an educational session filled with insights from a seasoned real estate professional!
Today, we're privileged to have Christopher Finlay, a seasoned expert from Lloyd Jones, a diverse real estate firm specializing in multifamily, senior homes, and hotels, with additional expertise in development and construction. Chris, originally a commercial pilot with Eastern Airlines, shifted from casual investing to shaping the Finlay Company into one of New England's largest real estate firms by 1983.
In this educational episode, we will delve into:
The origins of Christopher’s real estate journey and what sparked his interest.
Christopher’s philosophy on market timing and a contemporary outlook on current affairs.
The compelling reasons behind considering multifamily as a phenomenal asset class.
A deep dive into Llyod Jones’ current emphasis on Senior Housing.
Christopher's perspective on interest rates and their historical context.
Key considerations in deal analysis, focusing on loan-to-value and loan-to-cost ratios.
For a deeper understanding of Lloyd Jones LLC or to connect with Christopher Finlay, explore www.lloydjonesllc.com. Join us for an educational session filled with insights from a seasoned real estate professional!
Greetings and salutations. Real Estate Undergrounders. This is Ed Mathews with the Real Estate Underground podcast. Thank you so much for joining us today. So today is OG Day in the real estate world. I am joined by a gentleman who has been there, done that across multiple asset classes, multi-family, senior living, and hospitality. The list is actually quite extensive and it is an honor to have Christopher Finlay on the show today from Lloyd Jones. So, Christopher, thank you very much for joining us today. It's good to see you, sir. Thank you, Ed, glad to be on. Yeah, so for those of us who don't follow Lloyd Jones and may not know who you are, why don't you give us a little bit on who you are and how you got here?
Christopher Finlay:
Sure, well, we're focused. We're a real estate investment firm, we have a number of verticals that are wholly owned subsidiaries, and we are investing in multi-family senior housing hotels, and we also have a development arm and a construction arm and a senior housing operating arm.
Ed Mathews:
So all of those are under the umbrella of Lloyd Jones, excellent, and so it keeps you rather busy, you and your team rather busy, say the least, yeah. So let me ask you. Obviously, you were originally, you were a commercial pilot, if I remember correctly right, right, exactly, it's already.
Ed Mathews:
Eastern, yeah, and so you know, obviously that takes a high level of intellect and also an even keel from a personality perspective, you'd hope, right? So somebody like me, who tends to be a little more mercurial, is probably not cut out to be a pilot, but thankfully there are people like you out there. You know, in terms of choosing real estate, right, you know obviously you could do anything, and so I'm curious you know why real estate? Why did you know choose this world?
Christopher Finlay:
Yeah, you know, my father-in-law was in real estate, so I got exposed to it through him and then I started making an investment with him and I got the bugs, so to speak. Oh yeah, and you know, the unique thing is we were living in Connecticut at the time and I was flying out of LaGuardia and Kennedy and I fortunately, in those days you could fly two days a week and cover your full allotment, you know. So you really have five days a week off. And somebody suggested I should go work with this brokerage firm called William Pitt you may have heard of him Sure Down in Fairfield County. I worked in their commercial group as a broker. For, you know, a year and a half, two years before it, we moved up to New Hampshire and started our own. So it was an opportunity. I did both, you know. I was flying on the weekends and I was a broker during the week, learning the business Excellent.
Ed Mathews:
Well, that's a heck of a life. You were seeing the world to a certain extent, right.
Ed Mathews:
As much as you know it's always funny. I used to travel for my own job. I was in technology and you know my kids always thought, wow, you see the world, you eat at fancy restaurants and amazing hotels and I'm like you know, most of my night's kids are sitting at the end of a bed eating a quesadilla that I got from the hotel, commissary, and it's at a courtyard. Mary got somewhere in the world. This is not a glant, you know my life was a risk so. But you know you see movies like Catch Me If you Can, or you know some of those other movies, and you think, wow, what a life that was right.
Christopher Finlay:
Yeah, it was pretty good. I got to say, yeah, that's good In those days. Yeah absolutely.
Ed Mathews:
Yeah, the world's changed about 10 times since then, right? So let's talk about the focus in terms of the various divisions I'd love to unpack. You know multi-family, and we can get into senior living and hotels as well, but I'm curious about multi-family. You know one of the things when I was doing my homework for this, you know a theme kind of jumped out of me that and you actually explicitly say something to this effect in some of your marketing materials that you know you're not too concerned about the ebbs and flows of the economy, or you know and I talk about that in terms of recession, non-recession, but also you know low interest rate, high interest rate, historic interest rates, and so I'm curious if you can share with us your philosophy on the business in terms of timing, the market, which, and also in terms of how you look at the current state of affairs and where we are today.
Christopher Finlay:
Sure, look, in my opinion, multi we got into investing in multi-family in a big way in 2010 and just rode the wave Right. It just was an amazing time. You had a big demographic tailwind involved here, which were the monials that were feeding that demand factor and there was an under supply in 2010. So it just never caught up and it allowed for prices to just continue to rise and I think that's peaked Right. Frankly, I think we saw 21, when rents were going up 2% a month and going crazy and you could sell a C plus property of three and a half cap in Florida. I said, hey, I've been here before, so I gave the order to sell everything in our entire portfolio and we ended up selling about 80% of it. The other 20, we had it under contract where people tried to retrade me and I said, no, I'm not doing it, stupid me, because now it's for 20% less.
Christopher Finlay:
But anyway, I think the cycles you see cycles coming through and I think demographics is a big thing to me I think, and look, there's still an under supply in multi-family, although there's a huge number of apartments being built now and so forth. But this will get flushed out next two or three years and then multi will start coming back and it's always a great asset class. If you're a long-term holder and you don't over leverage on these and you have a good capability of either asset managing or managing multi is just a phenomenal asset for a very long time. You may have some ups and downs, but even the downs are pretty shallow in multi-family compared to a lot of other classes, so still a fabulous asset. We're now focused on senior housing and the reason for that is even prior to COVID, there was starting to be an opportunity there. It was a little overbuilt. 2018, 2019 market. They overbuilt it. It was starting to get soft and we felt that there's a huge baby boomer generation coming along.
Ed Mathews:
That's going to be massive, yeah, massive.
Christopher Finlay:
And so we thought, 2020, we're going to get into this in a big way. And then COVID hit. Thank goodness we hadn't bought anything and we sat on our hands, focused on multi. And then, when it got at the end of COVID 2021 and 2022, we just saw some great opportunities to buy, because COVID really decimated the whole industry and you could have been the best in the world or the worst in the world. You uniformly got slobbered just beyond anything anybody could handle. So those assets are now being sold and we just feel it's just an unbelievable time to enter that market and we think it's I tell people it's multi-family 2010. And you could go back and buy a nice B apartment at an eight and a half cap. Well, we can buy a very nice senior housing at an eight and a half cap, so it's just a pretty good strategy as far as we're concerned.
Ed Mathews:
You, sir, have my attention. 8 caps no-transcript. You know it's interesting. I'm curious what your take is on the interest rates and where they sit now relative to history. You know historical numbers.
Christopher Finlay:
Yeah, well, that's a great question. You know, when I opened my business in 1980, the prime was 19.5%, 19.5, ed. So you know it's hey. Look, interest rates are up there but they're still not. You know, on a historical basis they're not crazy. You know they're high. But you know, look, I think we all realize we're getting towards the end of this and there's going to be a couple more hikes in my opinion. But but look, I, you know, I think we're getting close to the end.
Christopher Finlay:
And if you buy a floating rate, you know, get a floating rate deal, you run it down and he instantly make money on the down track. So you know, I think interest rates, certainly interest rates, factor in. And you know, I tell, I tell our guys, it's part of your underwriting right, you're under. You need to be able to buy the asset to, you know, be able to support the debt. And there's a number at which it supports the debt If it's at 7% or 8%, and there's a number it supports the debt if it's 4%. So it's really a price adjustment right. And so you make your decision to buy based on what gives you a reasonable return at today's interest rate or you don't buy.
Ed Mathews:
You know I had this conversation, so we're very active in the market here in Connecticut. I have this conversation at least once a week with a seller you know is hanging a you know 2021 price, ignoring the fact that it's 2023 and that the interest rate has gone from prime. Well, base interest rates have gone from you know three and a half to seven.
Ed Mathews:
You know six and a half to seven, right? So you know the conversation goes something like I am happy to pay the price you're asking if you give me terms that also reflect 2021 terms, right, if you're going to allow me to acquire the property at three and a half percent, happy to do it. But you know, if you're, if the, if my cost of capital is six and a half and you know you're asking for, you know, four or five cap in terms of price and that doesn't work.
Christopher Finlay:
So you know, I think that's where you see the multi. You know, I just read a report where I think in May multi-family sales were off like 70%, and I think it's just to you know the adjustment hasn't been made. Everybody's waiting for it to be made. So you know, everybody thinks sooner or later there's going to be an adjustment to the pricing. But it hasn't been made. So it's your deal on that, yeah.
Ed Mathews:
And I think the bridge loan situation is going to have a pretty big impact on this as well. Right, you know I saw or I've mentioned this in previous episodes, but I saw a report from Moody's that 23% or so percent of the adjustable rate mortgages that are being repriced or need to be repriced this year won't be because, you know, obviously they don't pencil anymore.
Christopher Finlay:
Correct. That's where the adjustment is going to happen. I think over the next, you know, the next 12, 18 months, I think there's going to be a big adjustment and people get to the end of that loan and try to refinance it.
Ed Mathews:
So, when you want to a couple more questions about multi, and then I want to talk about senior living, the you know, as far as multi goes, when you acquire them, you are managing them yourselves. As Lloyd Jones correct, you don't hire local property.
Christopher Finlay:
Well, we did initially do it all ourselves, and so you know we'll move, building the portfolio. Subsequent to selling off 80% of our portfolio, we decided to put it out to you know. Outside management.
Christopher Finlay:
You know I think you have. It's very difficult to, I think, manage a property you know as a small outfit. I think the smartest thing you can do is find the best manager in that market and then intensively manage the manager. And that means you know being on the property, inspecting the property, going over the financials with the manager on a monthly basis, you know interrogating every line item, just micromanaging the manager. I think that's the best. When you get bigger, I'd say like a thousand units, then it may make sense to start your own management arm. Let me tell you, it's very difficult. Managing is our hard business.
Ed Mathews:
Yeah it's. You know. We actually have a slime well below a thousand units and we manage our own properties today and we figured it out. But there's a reason why I have gray hair on both sides of it, because I'm a you know father of two teenage daughters, so you know there's advantages to that.
Christopher Finlay:
You control the whole thing and, let's face it, it's your dollars and chances are you may be able to get it and chances are you manage it more cost effectively than a third party manages it without a doubt. So you know you carry your hearts into it and so that's you know, if you have the time, the capability to do that, it may make sense. But you know it's a very tough business.
Ed Mathews:
It is indeed so. So let's take that and talk about senior living now. Now you mentioned that you have a management company or an operating company. Now, do you just operate your properties or do you do this on a third party basis as well? We do both.
Christopher Finlay:
Yeah, and the reason why we so heavily invested in and you know we have about 1500 units of seniors currently, which is, you know, small. But the senior housing business is 95% managed and operation. So you know. So the there's a real estate investment component of it, of course, but you make it or break it on your operations. And the operations are even more intensive than hotel operation. You're, you know it's 24, seven. You've got, you know, all sorts of staff there. You know a hundred unit property could have over a hundred employees. Right, you know it's just a huge operating business and that's what the focus has to be. So we felt we're going to get into it, even though you know we only own a few hundred. It's time to get in there and manage it yourself and be hands on and create the brand strategy that you want to put on that asset. You know it's very important to that. It's the key.
Ed Mathews:
The operations key is the business.
Ed Mathews:
Well, yeah the fact is, I would imagine you know, having some folks in my family who've moved into senior living over the years, you know brand is enormous, right, the customer experience you know it's. If I learned anything about that business and I don't know, I don't know a lot about it. To be honest the you know the experience of the of your residence basically sells the next generation of residents, right by mother-in-law and father-in-law giving tours of their own unit and talking about what it was like to live in the place that they were living you know, and it was you know.
Ed Mathews:
I'm sure there was a sales process as well, but I think the thing that typically drove it home for prospective residents was the experience that your current residence 100%.
Christopher Finlay:
Yeah, and that, just you know, produces a reputation for the whole property.
Ed Mathews:
Sure, absolutely. And so now, are you developing these properties, are you acquiring these properties?
Christopher Finlay:
both yeah Well, we, we started a development actually in 21,. You know one senior facility. It's an independent living high end Port St Lucie, florida, and, and you know it's really great, it'll be completed in about six months and 160 unit property, really gorgeous property. So we've done that. But you know, subsequent to COVID or after COVID, there's such great buys that even we can buy new properties well below replacement. So you know, so it doesn't make sense for me to build when I can buy too expensive. Why would you Exactly? It's 70, 75 cents on the dollar. I can get a brand new property and all the risk of development goes away. And you know development's a very high risk business.
Ed Mathews:
Yeah, it is. It is not for the, the faint of heart, so they say, so to speak.
Ed Mathews:
And so you know, in terms of your senior living business, you know, obviously, baby Boomers, 76 million people, it's the single largest transfer of wealth in the in you know human history, which says a lot, and I'm curious, you know, in terms of the market size, you know, obviously, all 76 million, you're not going to move into senior housing, and you know. So I'm curious. You know how do you look at a market and quantify? Okay, you know, I know what the population is and you know how do you look at the demographics of an area and decide, okay, this is a place where I want to acquire a property. You know, it's obviously very different from the multifamily world because I'm, you know guys like me, you're looking at job growth and you know diversity of employers and you know, obviously, immediate income both for individuals and families and things like that. But that's probably not what you're looking at, right.
Christopher Finlay:
No, you know there's demographic, great demographic information out there and you do your study based on a three and a five mile radius. So these people you know really generate a very local. It's very local. Now, as part of the study, you're also measuring, you know, the 45 to 55 year old population and what their income, yeah, and what their income stream is.
Christopher Finlay:
Because chances are, when mom and dad get really, you know, older and need to be close, they want to be close to you. Sure, you move to them, but chances are you have a job so they move close to you to be here you and and near the grandchildren and so forth. So that's the part of the demographics that you study. But you have, you know the independent category is usually 75 to 80. And then assisted living, memory care is 80 plus and there's demographic studies you can get and then you really are basing this off of a very slim percentage because everything we do is private pay and so you know you have to have, you know you have to have to wear with all financially to be able to afford this. And then you also look at the kids and that demographic and see what the income is for your market. And then demographics, so there's children that can help pay and you know and that's part of the research and the study you do on what market you want to be in.
Ed Mathews:
Yeah, and, and so taking it one step further, you know the kids, the 45 to 55 year olds. They're also your future customers. Right, correct Down the road right, exactly. So you know, not only do they need to wear with all to help mom and dad, but they need to wear with all to help themselves. Right, correct, okay.
Christopher Finlay:
And you referenced the baby boomers. Baby boomers, Think I read somewhere it's going to be like a $60 trillion transfer of wealth or something like that. A trillion, it is just a massive amount Huge, unbelievable, massive transfer of wealth from that generation to the next.
Ed Mathews:
So this world won't look the same 25 years from now, but you could say that of 25 years ago as well. So, yeah, yeah, you and I haven't changed a bit in those 25 years, but the world around us changed quite a bit. So, and so when you look at a senior living so you are not it's obviously you know, in part it's a multi-family right. You're providing housing, but it's also a medical facility. Yes, Correct.
Christopher Finlay:
Yeah well, it's a care facility, it's not a medical facility. So, you know, we're providing basically ADRs, which are assistants in daily activities, and so it's not that we can, you know, do medical procedures or that kind of stuff no yeah, no, none of that, but just you know, you just help with their lifestyle, help them and keep them healthy.
Ed Mathews:
Now do all of your facilities have that kind of next level of care. You mentioned memory care, for instance.
Christopher Finlay:
Yeah, but most of the facilities we buy are assisted and memory care. Sometimes we, sometimes they include all three independent, assisted and memory and that's a nice concept. But I would say probably 80% of our assets are, you know, assisted living and memory care. And memory care, you know, is becoming more and more, you know they're full, they're, you know, treasured.
Ed Mathews:
Yeah, it's interesting. You know, here in Connecticut there was, there is, a lot of independent and assisted living, but the memory care you know that next level here is, for whatever reason, is very hard to find. Yeah, in a lot of places. Yeah, and so you know when you look at, so, when you invest in senior housing, is it the same model? You know, everywhere where you're going to provide assisted and memory care, that next level or, you know, does it depend on the demographics of the area?
Christopher Finlay:
Yeah, no well, we're buying existing, so if it has an existing assisted memory care, you know we would do that. Sometimes we have land next to it that comes with the deal. We might put an independent living next door, so to speak, and that's a really nice concept. So, but we normally, you know, it's normally pretty much what we buy and that's licensed to these facilities or licensed.
Christopher Finlay:
Yeah, thank God so yeah, exactly, and you have to have a licensed administrator running them. So you know the executive director of each one of these facilities, you know, has a license.
Ed Mathews:
Yeah, excellent, and so. So we're coming up on the last lap of this conversation, so I want to bring you into the final four, and these are four loaded questions, and I can't wait to hear how you answer them. So, chris, you know, in terms of your experience, you know, obviously you've been a mentor to many people, but I'm sure you had mentors along the way, and so I'm curious about the best advice you ever got, and who gave it to you.
Christopher Finlay:
You know it was probably Bill Pitt. It was, you know, william Pitt who founded that company and his feeling was, you know, always be cautious about leverage. You know, back in the days when, you know, after the 2008 meltdown, I think everybody got the lesson that it's not too wise to get 95% financing right. So in those days it was just loaded on Right. So you know, so you really have to, I think, be careful and not over leverage your property. That's because if you hold, if you can hold the asset and not lose it in a down market, it's coming back and it's going to come back stronger and be worth more than it ever was before, even at the peak before. So be prepared to weather the storm. If you weather the storm, you're coming out fine and you're going to make money, but if you lose it, you've lost it.
Ed Mathews:
Indeed, and I know plenty of people that did. So. I'm curious when you talk about leverage, you know, obviously a standard in my world is well, most people say 20% or 80, 80, 20 loan to value. I'm more of a 65, 70 kind of guy, you know I'm curious about. You know your operation and your view on leverage. You know what do you look for in a deal when you're you know I know you're raising, I know you've got a senior note coming up. So I'm just curious, you know what. You know, what do you look for in terms of loan to value or loan to cost?
Christopher Finlay:
Yeah, we're seldom above 65. It's, you know. Now, when we did Monty, you know we may have gotten up as high as 70 on Fannie, but we never put, we never layered on additional, you know, mezzanine financing or preferred equity or anything else to get it. You know, push it up there. So most of our Monty was Fannie or Freddie. They're usually at 65, sometimes a little higher, maybe 68. And now what we're doing, as well as you know, maybe 60, 65 range with pure equity above that. So you know, so that's that's what we think is a reasonable number today and especially at these rates.
Ed Mathews:
Yeah, and it's certainly going to support your cash flow, right, even if cash flow takes a nosedive, like you said earlier, you'll weather it just fine. Very smart, very smart, okay. So I see that bookshelf behind you For those of you who are listening to this, chris is sitting in front of a gigantic shelving unit of books. So, you know, I'm always curious. The leaders are typically readers, right, and you know, these days that can be audio books or physical books, like the ones behind you and the ones scattered around my office here. But also you know YouTube videos and podcasts and seminars and webinars and all that. So I'm curious about two things. One is how do you sharpen the saw? How do you take in information? And then I'm also curious about you know, what are you? Who are you paying attention to these days? Who are you reading?
Christopher Finlay:
Yeah, so so I'm a reader, I love to read and I probably read at least two books a week, so you know, and there's 1000 books here, by the way, over 1000. So I really enjoy reading and I like the hard copy best. I you know, I take my Kindle long trip, of course, but I love the.
Christopher Finlay:
You know I read a book recently I know you mentioned this question. It was called the book is called your Next Five Moves and it's by an English gentleman called Patrick Bet David and it's a really great book. It's a down to earth good advice. That is is some of these books just get so, so over the top and so complex and this is just down to earth, great strategy and advice. So I, you know, so that's a great book. But I, you know I love to read. You know, look, I look at videos, I watch some videos.
Christopher Finlay:
Sequoia, which is the, you know, the venture capital firm, yeah, well, they do. They do a great job of putting out information and on the economy and what they see coming down the pike, they were the first, in my opinion, to call what was going to happen at COVID, and I don't know whether I think that was a result of they probably had a lot of investments in China and so they got a hint of what was happening before we did. But they warned all of their startups to go into a very defensive mode way before everybody else. And I read that memo and I thought, wow, these guys are being really extreme. So I sent it to my son and and he read it and he said I think they're dead on them, I'm going to do exactly what they said. And so you know they were ahead of the pack for doing it. So they that's to me one of the best newsletters out there, you know. And then Howard Marks he's another great commentator on the economy, business, so you know yeah, but I love to read.
Ed Mathews:
Well, there's a gold nugget for me. I did not occur to me to look at Sequoia and their newsletter. That's, that's absolutely brilliant. So let me ask you this See, here's the big loaded question. If you had to start over, what would you do differently, if anything?
Christopher Finlay:
Wow, that's a tough question. You know, we, we grew. You know, during the boom cycles we grew pretty fast and rapidly we grew by recruiting a lot of young kids out of college.
Christopher Finlay:
So we hired a bunch of young people and trained them and you know that was great for them and you know, most of them last about two, three years. Then they go up. You know, I feel good about it quite honestly because they, you know, I feel like, hey, I've done something good for them and they've moved on and these guys are, you know, leaders and done tremendous. So you know that's a good thing. But I think when you're building a business, especially a small business, be careful about how many junior people you have, because they can consume a lot of time, a lot of money and a lot of effort. Yeah, and then they're gone, exactly so you know. So if I had to do it over again, I think I would probably operate with a very lean but elite team of top players, and you know you pay a lot more for them. But they don't need any handholding, they don't need training and you know, and they stay.
Christopher Finlay:
Exactly so. That's the lesson I learned.
Ed Mathews:
All right, well noted. So, chris, I'm curious about your personal life. You know when you're not in real estate mode what do you do for fun?
Christopher Finlay:
I have a bunch of grandchildren, I have eight. I love to go see them. I go love to go watch their games and visit them in colleges and stuff, and so it's a lot of fun to travel all over the darn country, from Wisconsin to New Jersey, to Rhode Island, you name it. You know we've been there, so it's awful lot of fun. When you become a grandfather, then you really you're living life.
Ed Mathews:
Let me tell you Someday. I keep telling my daughters, you know my, I have a 20 year old and a 50 year old. So I say, you know, it's not a race. It's not a race, I'm happy to be. Yet, you know, right now my 20 year old has a dog and so I'm a dog grandfather and that's fine, perfect.
Christopher Finlay:
Yeah, absolutely, absolutely.
Ed Mathews:
So, chris, I've really enjoyed our conversation today. Thank you again for you know carving out some time in your very busy schedule. If people want to learn more about Lloyd Jones or you or the offering that you have coming up, you know what's the best way to get a hold of you.
Christopher Finlay:
Sure, it's Lloydjonesllccom, and that puts you right on our website and everything's here.
Ed Mathews:
All right, christopher Finlay, thank you so much. It's a pleasure to see you and speak with you and, once again, I appreciate your time and your willingness to offer your experiences. Hey, my pleasure.
Christopher Finlay:
Thank you very much. That's great chatting with you. Likewise, thank you.