[Music] The Hotel Investor Playbook. Your guide to building wealth and freedom through hotel and hospitality ownership. [Music] Welcome back to the Hotel Investor Playbook. I am Michael Russell, founder of Milama Capital and your host. On this podcast, we talk story about everything you need to know to make money investing in hotels and in hospitality assets. My guest today is Ryan Sudeck, CEO of Sage Investment Group. Ryan, welcome to the show, man. I am so stoked to have you here. Yeah, I'm stoked to be here. Thanks, Michael. Great. Listen, I want to jump right into the deep end here and here's what I've gathered. So you've built your entire company around a scenario that most hotel investors probably don't even think about. A hotel trades at what, three to five times it's revenue and an apartment building trades at, I don't know, seven to 12 times it's revenue, let's say. Same building, same walls, similar infrastructure. You just change the use and theoretically you force 40 to 50% in equity. I want you to walk me through that math. Is this really as good as it sounds or what's the catch? You nailed the math. We can recruit you into the investor relations team here at Sage, based off of that intro. You nailed the math. If you look at where hotels are valued, right there. If you look at cap rate for those listeners who might know what a cap rate is, maybe it's a 12 cap. That just means it's the multiple on its profits versus an apartment building. It might be a six or seven cap. And so you see that natural appreciation when you change from a hospitality used to an apartment use. And that's because investors are willing to pay more for an apartment building, the same profits, they're willing to pay more for it because with an apartment building, you don't have to worry about changing the sheets every night. You don't have to worry about managing a really large stat. Occupancy is 90, 95 plus percent each night rather than 60 to 70 percent. And so it's just a fundamentally different business that is really powers our investment strategy and what we've oriented the whole company around. Now there's a bunch in the messy middle that we can talk about and things that can go wrong. I wish it was simply snap your fingers and change the use and have that financial alchemy, but certainly happy to expand on all the things we've learned having done it now 30 times. Wow. Now, to be clear, we're talking about hotel assets that are underperforming because one of the main advantages of investing in hospitality is you have a lot of levers that you can pull and you can oftentimes produce way more cash flow than you would experience with multifamily or other commercial asset types. And so if a hotel is producing and working very effectively, then that's probably not your optimal conversion opportunity. Correct. What I gather is you're looking at hotels that are running relatively very low occupancy that perhaps are subject to potential pips from the brands which could, I mean, not quite bankrupt, but look, these days it could be really catastrophic for an operator to have to come up with this huge capital outlay. And so maybe you can walk me through then in simplistic terms. What is your buy box? What are the opportunities that you look for? Size, price, etc. Zoning. What else do you look for? Yeah. So in terms of our buy box, we're looking for hotels that are between 100 and 200 rooms. When we convert them, that we're typically converting one room into one apartment unit. So if it's a normal hotel room, one room, it's a studio. If you got a suite, maybe it's a one or two bedroom. So 100 to 200 rooms, we want these to be located in markets that have a strong wage growth, strong job growth, because we want to make sure we have good paying tenants. We also want them to be really located well within those markets. So near transit, bus lines, light rail, near commercial districts, we can all picture the commercial district that has hotels in it in the cities that we live in. And what's great for us when we turn those hotels into apartment units is all the folks that work in that area, now they can walk to work. For example, I'm based just outside of Seattle. Our office is in Kirkland, Washington. We're converting a hotel just down the street from our office here. And to get the rents that we're going to, that we're planning to charge at that property, you'd have to commute 45 minutes each way. And so for the folks that are working at Whole Foods across the street or the gym that shares the parking lot, that's a game changer for their way of life. So we want to make sure that there's good center of jobs around the properties that we're looking at. We like X-Year Quarter hotels because it gives the feeling of separation for our tenants, kind of have a feel a little bit more independent. You don't smell each other's cooking in the hallway. And it also reduces the construction time and complexity by probably about 25%. Because instead of having to go up and down stairs with materials, we're pulling things out or putting things in, we can offload, right? Over the balcony or out the front door. So that saves a lot of time. We'll go up to four stories, usually not more than four stories because again, that adds to the construction complexity and cost. In terms of markets that we're in and where we're going, we're in six different states right now from Washington state all the way to South Carolina. We really like the Southeast. We're in Texas as well. As we look at our acquisition pipeline for this year, we've got one, one deal in, or two deals in Washington state here in our backyard where there's just such a, such a need from an affordability perspective as well as we have about five in California. The East is in California is incredibly compelling just from an affordability perspective. Our end customer is a tenant that is looking for a brand new, affordable, naturally affordable place to live. We're not relying on any government subsidies to keep our rents affordable. Our basis is low enough that we can charge three to five hundred dollars less per month than the building down the street. I think the last thing you asked was just kind of a cost and basis. We've purchased hotels for as little as $25,000 per key or per room. And at most, I think we've spent about $110,000 per key. But a lot of where our work comes in is in the renovation and redevelopment. Yes, about zoning. We're not buying the property unless it's approved for changing the use from commercial to residential. Sometimes by right zoning exists. Sometimes we have to go through a rezone or some approval process with the municipality and we have team members that specialize in focus specifically on that. But we need to know that when we're going to buy the property or that when we buy the property, it's going to be approved for multifamily use. Yeah. Well, there's a lot to unpack there. And so I want to go back to this idea of how you're identifying opportunity. And I've heard you use the term that a lot of the hotels that you're looking at, they're experiencing this death spiral, right, in which the hotel goes from perhaps fixable to, all right, this, this is a conversion all the way. There's obvious signs of distress, but I guess you're looking at 100 plus key hotels. What are some of the signals that you're looking for? Are you only looking for properties that are on market or are you doorknockin and trying to find off-market ones for properties that maybe just look like they're run down? How do you go and identify not just the region and like the general market, but like the specific property? What signal do you look for this as this is a go green light this? Yeah. There's a lot of different ways. We're usually not buying on market. We're talking directly to sellers and my business partner Ross, our chief investment officer, leads the acquisitions team and they're fantastic about finding these opportunities. We built up a network of off-market opportunities over the course of the last 10 plus years where sellers, sellers know about us. We're in touch with them. Sometimes it takes two or three years before we agree on terms and we just stay in touch. But you started laying out that desk spiral and what we see happen earlier, which is occupancy drops. Maybe you've got competition down the street. A new property gets built and that takes guests down the street. You drop your ADRs. Your occupancy suffers. We've all seen the inflation epidemic over the last few years. The cost of materials, the cost of labor is gone up. The cost of insurance, property taxes have gone up. A lot less is falling to the bottom line as a hotel operator and you can't afford the pit when it comes down. Maybe you drop a brand to your, you go from area to something less than a Marriott and maybe you do that a couple times and then you're at independent. We've purchased properties all through that spectrum from independence through residents and other types of properties. We do look at publicly available data on leans and other signs of distress that are out there. Now what we're seeing is that a lot of the institutional investors are realizing that a good portion of the hotels they own are not going to improve. There's not going to be a turning of the market and we see them looking to sell, call it the bottom 5-10% of their portfolio. From a seller perspective, we're a great buyer because ultimately the end value that we can create is pretty substantial relative to continue to run it as a hotel. We don't overpay compared to what another hotel is going to pay. We're probably on the higher end of what a hotelier is going to pay and we've got the track record that we close so that helps us with sellers as well. We ask for their patience though because it's going to take us six to nine months to work through the entitlement process, the permitting process and our diligence process too so that we can understand what we're buying and that we can make sure that we can convert it. I can resonate with what you're saying because if you're looking at these deals and you're going through Crexy or LoopNet or CoStar and you're just eliminating all these deals because they don't pass.
because they're run down and dilapidated. I'm curious. Like, okay, well, this seems like really opportunistic, but then the skeptical side comes out and I'm like, well, if this is such a good opportunity, why doesn't everyone do this? Like who are your competitors? Is you mentioned institutional investors or you referred to, you know, you said the word institutional and it triggered me. Are there institutional investors that are opportunistic and can go in there and buy these things and have the resources to go and make these conversions in urban locations? Who are you competing against? Why is it everyone doing this? - It's really hard. And we exist in this really interesting pocket. There's, for those folks that are familiar with just value at multi-family deals. You buy an apartment building, you run the numbers like you were describing Michael and you say, all right, I think I can boost rents a hundred bucks a month, but I need to invest a couple thousand bucks to renovate, paint, new flooring, new appliances, et cetera. That's one end of this spectrum over here. And you've got like ground up development on the other end of the spectrum. We're somewhere in the middle. If you've had experience doing value at multi-family, that doesn't necessarily give you the experience you need to convert a hotel. It's not quite as complicated as building from the ground up, but it's pretty close. About 50% of the capex that we put into a property goes to things behind the walls and infrastructure. And the other half goes to like the unit integers that you'd expect from like renovating a property and putting the kitchens and all that. But we're upgrading roofs, we're upgrading fire suppression and fire monitoring, having to make updates that we hit energy code, sometimes increasing that the electrical capacity and the transformers that are going to the properties. Like there's a lot to do. And so I think that excludes a lot of folks that focus on multi-traditional multi-family investing. On the other end of the spectrum, large institutions, they like putting lots of capital out. For our properties, like I said earlier, we want to be between 100 units and 200 units. At 100 units, we get to have on-site property management. We've got enough scale to justify having an on-site property manager and delivering a great tenant experience. We don't want to go above 200 units because we don't want to over saturate the market with too many apartments at one time. We want to lease up quickly because that's how we make our money, right? People paying us rent. So as an institutional investor, if you're sitting on billions of dollars or hundreds of millions of dollars that you need to deploy, and you get paid when you invest, you want to put as much money out as possible. And so a lot of those investors have a $25 million minimum check size. Well, our projects only take $48 million in equity on average. And so we've been talking to a bunch of institutional investors. I'm probably talking about 11 or 12. There's a list on my whiteboard that I just clanced at. And they're very interested in the model. For them, it's just been a challenge to be efficient about their capital deployment and also find an operator that's done this at scale. There have been others that out there that some are still going some have unfortunately not pulled through because they paid too much, sometimes paying twice as much as we were for the same product in the same market, or underestimating how much it costs to renovate these properties. And we've benefited from being able to step into some of those projects that weren't doing so well, but it's kept competition pretty low. There's some good operators out there that share the same thesis, but they've done three to five deals. And whereas we've converted over 30 now. Hey guys, if you're getting value out of this conversation, do me a favor and take 30 seconds right now and leave me a review on Apple podcast or Spotify. It literally takes half a minute, but it makes a huge difference in helping other hotel investors find the show. Okay, now back to the episode. So you're accumulating knowledge and you're applying that. So you've got a competitive edge, not necessarily your first market, but you're definitely leading the pack here. You mentioned that doing a ground up development is more difficult than doing what you're doing. And I would actually argue maybe not that it's more difficult to rehab or do a performer conversion, but I would say it's more risky because you're working with a lot more uncertainty. Now if you look at a ground up development, and if we just use the hotel example, you go and you fill in with a brand, you partner with a brand and they give you a set of plans and they say build it to this standard, exactly this way, and you're just looking at raw dirt. And so you've got a map, you've got a plan, and you can just put all of the plumbing, the electrical, all of it, you can design it so that it's purpose built. It's relatively straightforward. You got to have experience, of course, and manage budgets and deadlines and all of this, but there's less uncertainty. It's dirt and you've got a plan and you go build it. What you guys do is you take this existing use and convert it to something that it was not intended for. So naturally, yeah, behind the walls, that's scary to me. And so having gone through a conversion to a degree a couple of times now where we've taken these dilapidated properties, put money into it, rehabbed, our budget, we blew our budget out of the water. I mean, that's just the hotel business in general, but I imagine with in your scenario here, this is a real concern, especially if I'm an investor, and I'm looking at partnering or investing in one of your deals here. My biggest level of skepticism is how do you know you're gonna be able to do so at these costs? You've talked about these really low construction costs or renovation costs. That's the biggest area where I'm like, wait a second. You have no idea what's in these walls. You have no idea like what's going on with the plumbing and all the stuff that can go wrong. How do you mitigate risk in that regard? - Yeah, no, I think you made a really good point there about certainty. I think there's two areas of risk. One is making sure that you don't have any on-bots gop that you know how much it's gonna cost to renovate. These, now having done 30, we've got this corpus of knowledge. That's one thing. But just because you've done it before doesn't mean the next property is gonna be exactly the same. We'll look at the same brands that look the same from the exterior and then we look at the plants that were like, oh man, like the plumbing is at a different location, like these are constructed totally differently. Even though from the exterior built in similar years, do you think they're exactly the same? No, not all hometowns and suites, in the same zip code were built exactly the same. So what we do is we do invasive diligence. So we actually get approval from the sellers that we're buying from to pull the sheet rock off. So look behind the walls, to look where the plumbing stacks are. And when we then go out to bid to contractors, we're usually getting three or more bids from contractors and then they can see behind the walls. And we'll have our designs and we'll spray paint on the floor. All right, here's how we're gonna lay out the unit. So that helps mitigate the risk dramatically, but we're spending 35 to $50,000 on renovation expenses. So we might spend an equal amount on the renovation cost to what the acquisition cost is just to buy the building and the land on it. So it's definitely expensive for sure. Though one of the things I'd say about risk though, if you're an investor thinking about it, is let's just take the multi-family example. Right, you wanna go build a new multi-family property. It's gonna take you three to five years from when you say, all right, I'm gonna invest in this to when it opens its stores. Let's just say three years conservatively. Gotta get the land, and title it, fix it up, go vertical, market it. For us, the conversion process takes six to 18 months, like on average 12 months. And so if I'm delivering in a market 12 months from now, I can have a higher degree of confidence on what I'm gonna be able to rent those units for, and if I've got a week, three years. - Yeah, yeah, no doubt. Let's talk a little bit about navigating entitlements and zoning. I imagine this is one of the areas that makes this hard, right, this whole process. Now you've, I've heard you say that you've got a rule that you're not gonna close on a property until you've already secured the change of use permit. I mean, that seems like a huge advantage, but how do you convince sellers to wait that long? Like what happens when a city says no? - It's a good question. We haven't had many cities say no late in the process. So our typical process is we'll talk to a seller, we'll get to terms, we'll sign it in LOI, your letter of intent, agreeing on the high level terms. At that time, we're triggering our planning team and our community relations team to start talking to the politicians. Sometimes it even happens before we get to an LOI. 'Cause we don't waste the seller's time, we don't waste our time, we wanna get to that answer as soon as possible. If it's in an area where there's legislation that exists that makes this easier or we've done work before, we know we can get it done. And sometimes it's just as simple as knowing that it's zoned by right. And maybe there's, we just need to apply for that change of use and we can go talk to them and in a few pre-deaf meetings, they'll give us the thumbs up, right? But our head of planning Jeff, an architect by trade, a him plus Whitney, who's our head of community relations, they are that advanced team for us. They're talking to the mayor, the city council, but then they're talking to the planning department, the programming department and all of those folks. We're trying to get bought by in from the community. We wanna educate them on what we are, the benefits that we're bringing to their local community. And that usually makes the process pretty smooth. And we can get that signal pretty early. Usually we get the signal pretty early, it's a thumbs up. And then it's just a lot of that time that I cited is just working through the process. There's some cities in California, I won't name names right now, but they're like, it's a six month process or a nine month process, minimum to get to a building permit. It's like, well, I don't wanna own a property and hold this hotel that's not doing well or shut down this hotel and hold it for nine months. Like, I'm gonna wait, right? 'Cause I wanna start construction on day one. - Yeah, so I'm the seller and I get that, I empathize with you, but I've got this beat up property and it's distressed for a reason. I want my cash and I want certainty. Oh yeah, I'll go under contract, but what do I get to make sure that nine months from now, I don't just get left with back to square one and I don't get anything. How do you position this or negotiate that this, so that the seller, they're eager to go onboard? - For sure, yeah, I mean, we'll put earnest money up against the contract and once we clear certain milestones the seller could potentially be entitled to that, but we're gonna need at least three months to do our diligence, right? To make sure that everything's gonna be all right. But then we're pretty locked in. We'd never left anyone at the altar at the end.
And so to say, and so I think we've got a good reputation in the market. Well, let's say you buy a million dollar property. So when that range, you'd probably going to have to put in, like you said, if it's a hundred unit property, maybe another three to five million dollars of renovation, but that comes afterwards. So that first five million dollars, you're going to tie that thing up for, let's say, up to nine months. What kind of money goes hard and how much money will go hard and when does it go hard? It depends. It depends on the deal and the situation. I don't want to negotiate myself to be totally honest or for my acquisitions team and in a zero, the seller's just jump on blue now. We've been flexible where we'll put more up and have it refundable on a certain period time. We'll put tranches up as we clear milestones like we're flexible to the seller's needs and we're not like ultimately if they are in distress, we need to make sure that they can meet their dead obligations and that they're not getting leans on the product. That's just going to complicate our ability to go forward with the transaction. Each situation continues to be very, very, very unique. Yeah. Let's go back to how you got started in all of this. Take me back to 2019. Tucson, Arizona, you found this 175-unit hotel near the University of Arizona. What was the original plan and then what happened when COVID blew that plan up? Yeah, it was going to be student housing. So half of the 175 units had already been converted to student housing for University of Arizona students. And we were going to convert the second half because surely students would live in 350 square feet. But we delivered it as you mentioned. We delivered it in the summer of 2020 and there were no students coming back on campus. We were in the middle of the pandemic. Everyone was virtual in remote. And so we had a pivot from a student housing play to multifamily and it was the light bulb moment as we say and the inspiration for us committing to the business strategy because we leased up 174 of the 175 units. We had the malleate at left and it took us three months, which is incredibly fast for multifamily standards. And it taught us two things. One, you know that there are a lot of people that need a naturally affordable place to live. And if you design the properties really well, give them amenities and make them feel and make them brand new effectively, other than the infrastructure, they're going to move there and drove us. And then the second thing that it taught us was when we sold that property 19 months later, is that there is a real investment strategy here because of the things we were talking about at the beginning of our time together on the distance. So wait a second. You had a 19 month turnaround. Is that correct? Yeah, we sold it within 19 months, that's correct. So that's incredible. Not to knock too much on hotels here, but when someone goes full cycle with a hotel, it typically takes a lot longer than 19 months. And that's an interesting component. So maybe you can walk through more of the specifics. Like for this particular deal, what did you buy it for? What was the all-in basis and then what did you ultimately sell it for? Yeah. So this property, we purchased it for $8.5 million. At the time, it was generating about $288,000 of NOI. We put $2.7 million into the renovation. That renovation took about 12 months. Our total basis or total cost all-in was about $11.2 million. And we were able to sell it as apartments with an NOI of $823,000 a year for $18.99. $10 million in 19 months later. So we saw 120% equity growth. Annualized return was 38%. Holy heck, that's incredible. Yeah. Was that just a one-hit wonder? Was that like a one-off, was that an anomaly? Or is this something now that you're seeing consistent? We're certainly seeing the value increase still be there, at least a 40% increase over our basis. We haven't sold a lot though. Because in '22, interest rates went up, relation increased, it hasn't been a great sellers market in real estate. We've been buying a lot though. It's been a great buyers market. And so we're still seeing the underlying valuation fundamentals be the same. Appraisals are coming in. We're doing cash out refives and recycling our equity into the next project. We haven't sold a lot. We're structured as an Evergreen Fund, so we're not four sellers. Our normal business plan is somewhere between a three and a five-year hold. This is just our sweet way. We want to get into this Evergreen Fund. We want to hold that thought, but sure, a quick math here. I want to go back. You bought this thing for eight and a half million. At the time, there was $288,000 of NOI. Just quick math that's around a 3% cap rate. I guess my expectation was you were buying these things that like 10 to 12 cap rates. Granted, this was your first one, so maybe your intention was different at the time. What did you end up with your cap rate when you ultimately sold it nine to months later? It was a high-force cap rate. It was consistent with slightly above where multifamily was trading at the time. This was in 2021. The market was super high. You might say, to your point, is this repeatable? You kept the benefit of market tailwinds. What I tell you is that same property has already gotten offers higher since we've sold it. We've seen NOI growth be super strong there in the average tendency is like two years. That's the exit cap rate to come back to your question was in the high force. We see the cap rate for these, we underwrite to at least a 70 basis point premium over multifamily. Just be conservative, right? We're a hotel at the end of the day. We started as a hotel at the end of the day. We weren't in purpose-built multifamily. So acknowledging that we want to be conservative when we're underwriting. I think you got to be worried about saturation too. I'm not a multifamily guy, but I'm aware that when you develop a new apartment complex, 100 plus keys, for example, you got to look in the neighborhood and understand, is the market already, is there enough availability in that particular market? How do you make that determination when looking at these hotels? What are some of the metrics that you can feel comfortable making this conversion? We have the same issue with hostels where because we charge less than competitors, you're charging a lower cost per rent or you're charging less rent than your competitors. But you have all single one studios. So there's like, you need a high volume of renters. It's the same thing with the hostel business, which we operate. How do you know with confidence that when you go and make this conversion, you bring 100 plus more rooms to market that the market isn't oversaturated? Yeah. Two things. We want to be at least $300 to $500 less per month than the purpose-built class A studios that are in the area. So here in Kirkland, for example, studios are renting for 1900. I think we underwrote to like 14, 14, 50. Just one example. The second thing we do is we call around to, and secret shop, all of the multifamily assets in the area to understand what's your occupancy, do you have wait lists, all of those things. So just knocking on doors, making phone calls, and by and large, what we find is that there's very few studios, and usually there's a waiting list for them because it's the cheapest product. Yeah. Makes sense. So you bought this property in Arizona, and you sold it 19 months later, and then you're like, wow, okay, I think we've got a plan here. I want to talk a little bit about this fund that you've got, because you mentioned this that you don't do this indication model. So you've got an evergreen fund, so you're not forced to sell. How does that work? Yeah, basically all investors in Sage own a portion of all the properties that we own. So we have 32 properties in our portfolio right now, with a little over 3,000 units. And so every Sage investor is invested just like I am, as a limited partner, and we all own a piece of those properties. So we raise capital each year to go buy new properties. And we didn't set out and kind of raise a big mountain of money and go try to deploy it. So we don't let meet our criteria, and then we go raise the money when we like them and bring folks into the fund that way. And so new investors benefit from stepping into something that's already got assets in it. It's already diversified. Other distributions that are paid, but it's also a design to be something that achieves a really strong rate of return because of the forced equity appreciation of the model as well. Understood. So people buy into a fund. They don't own one property. They own a multitude of them. But how do they get their money back? Right. If you buy syndication, okay, this property when it sells, here's your money back. How does it work in this scenario? Why would an investor want to be part of a fund instead of a syndication? Mm-hmm. A few reasons. Well, one is the diversification, right? Not a single property, less risk. Two is if you invested in a single property of ours, it might take you 18 months, 24 months, before you're getting consistent distributions because it takes us 12 months to renovate and convert. And then another six months call it to get the property fully occupied, whereas coming into the fund, you're eligible for distributions on day one. So for investors who like that balance of cash flow and appreciation, that's a really great benefit of investing through a fund model rather than a syndication model. In terms of getting out, tasks are investors for a five year commitment. So at the end of five years, you have the right to request a redemption for your shares. So basically sell your shares back to the fund in exchange for cash. Okay, so then you would sell those shares to a new investor, right? And then more of the fund would buy them back with cash on hand. See this is the part I'm totally confused, man. It's like very unclear to me, right? I understand as simple syndication, it's clear. Okay, we're going to give you a 8% preferred return or whatever it is. And we're projecting a, let's call it a 18% IRR. And we're going to sell in five years. Here's the plan simple. With the fund, it's like, wait, how much are my cash on cash expectations? And then how do I get my money back? And this is still like, it kind of feels like, well,
someone buy buy it or the fund might buy it and it's unclear can you give me a concrete example of someone who's done this before who's exited yeah for sure we haven't had many people exit and that's because I think we've been doing pretty well we've been producing about a 20 20% annualized return since we started five or six years ago now so yeah I mean it's taking your syndication analogy imagine one of your partners wanted to get out and your reserves were enough to buy them out and then everyone else's everyone just got to split the pie right and like everyone else's equity percentage went up right because the property bought out that other investor that's kind of kind of the analogy I would use here so I see yeah I mean yeah so each year we have a share price think of it like a stock where we revalue our properties or CBRE rather every values our properties we determine the share price of our fund right now it's a dollar 99 so let's say it's four dollars in the future sell your shares for four dollars the fund pays you you buy a hundred thousand shares you invested for $199,000 you get $400,000 when you exit okay understood what your actual cash on cash like what is someone's dividend because in this case they own basically share they have a stock in this ownership what are people what can they expect to get annual annually in cash flow yeah for new investors coming in 4 to 8% in the first year and then we expected to grow from there so we kind of paid up to 11% in past years yeah setting expectations at 4 to 8% for new new investors coming in if you'd invested it's called in 2021 $100,000 $100,000 grew to just about 200,000 $199,000 technically and you would have received about $41,000 of distributions over that period so that's how kind of the last four years of shaking out okay well I want to stack upon what we're talking about now with another layer of complexity but I think it's really intriguing and important okay I want to talk about the way you set this up to where when you are negotiating with a seller one of the options that you roll out is the opportunity for the seller to instead of receive like direct cash compensation to be able to roll their investment proceeds are from the sale directly into your fund and I think this is extremely important because a lot of times sellers are eager to get out from the operations of a business but where they're at in life might mean that they still need to pay for their life they need to ongoing cash flow so this idea of allowing them to roll in your fund seems intriguing how does this actually work can you explain this to me in like simple terms like I'm a five year old sure maybe a 12 year old I need to give the disclaimer I'm not a CPA can't give you tax advice talk to your advisors that's you know 1031 exchanges are really powerful tools to defer capital game certainly contributions of property into our fund or something we can also do through a seven twenty what's called a 721 exchange and so I think I'm going above the five year old five year old Michaels head here section 721 of the tax code basically allows you to contribute property I'm paraphrasing here in exchange for units of a partnership and so that's actually how we started sage was through it's also known as an up week but basically for it we brought together 13 individual syndications into the fund model to simplify and for the reasons that you you said earlier Michael but yeah for new hoteliers who might be looking to to partner up with us there are a few ways we can do that one you know we can buy the property from you too if you wanted fewer believer in our investment thesis and our strategy we could talk about what that looks like to participate or if we wanted to a code developed together and have our team and our construction management team the team over 30 people here at sage kind of improve your property we can talk about that too well percentage of the sellers do you think opt for this up week that you're describing a very few most folks just want to move on they just want their cash and they're out they don't want to keep you okay yeah I think there are there is a large swath of our investors though that fit the mold that you're describing where they want to get out of active management they want to go more passive that's where I was to I started with a six flex than any flex in the 16 to 30 unit and before I even joined sage I had I had gone just passive into a fun model because I wanted to outsource all the hard work I would say there's no such thing as passive income like someone's always doing the hard work otherwise the investment's not going to go super well and so I think there are a lot of folks out there that other done trying to find the next 1031 opportunity or they don't like they don't like other options in the market right now that end up finding their way to us and we've benefited no we've got over 500 investors in the fund you've completed 13 conversions in 2025 alone is that correct you know last 12 months I'd say okay that's an insane pace how do you manage that many active construction projects across multiple states simultaneously massive team that sits alongside me so we've got over 30 people we've got a construction management out of Atlanta and out of a here near Seattle and those construction managers are can manage call it three or so projects per person over the course of a year not all in the same phase at once because each project's got its ebbs and its flows but the bulk of our team and one of the most critical parts is in construction management and we've got a fantastic leader of that team that's really built a platform and now you know more repeatable process rolling forward all the mistakes and learnings that we've had from the past to to make sure we don't make the same mistakes in the future so yeah it's it's about being staffed appropriately with folks who bring construction management experience and can hold our general contractors and our subcontractors accountable well as a single most impactful thing maybe that you delegated that has unlocked this level of growth for sage feel like I'm trying to learn that lesson every day and learn how to delegate more it is challenging right it's a challenging thing and I want to make sure all of our employees are thriving and that they're working on the right things and yes give up the single most important thing to delegate I don't know that there's one and and I be remiss if I didn't talk about my business partner who founded sage Ross and his wife Emily who also founded sage but we've all had my three years here I've worn a hundred different hats and at any given time there's maybe four or five hats stacked on top of my head figuratively and so it's it kind of depends on the season right we stood up our asset management team we were having the same people doing construction management and asset management like well we had to like find an amazing leader which we have in Dina to help build out that platform then we brought legal in-house and planning in-house and so it's been this as we've grown and scaled it's been finding the right basically creating the right departments for the right need right construction management was so critical but then once you finish branches got a good list up so that it was asset management but you know there's the entitlement and design and planning side of things and so getting a planning and design team right we've got ahead of design ahead of planning that are great at their job and now we're doing a lot of deals we brought in a legal council we've a general council now and so I think the IR side has been also a huge unlock finding folks finding the right folks that can tell our story and help tell the story in an authentic way for us is really important I think I was on 95% of the investor calls in 2024 I think this year I've probably been on 5% of them and the team's doing doing a great job there so I see that for this team though like is the team paid from acquisition fees or asset management fees yeah we have acquisition asset management fees a lot of funds will charge an equity under management fee we don't do that we don't think it's a good alignment of interest we actually used to and we did away with it very early on so there's that and then kind of investment for myself and my partners to continue to grow and scale the team ahead ahead of growth because we need to make sure we have the people to do the job so that we can perform well you know we continue to reinvest and just break down on a personal level here so look we had a team relatively small team in comparison we'd have 30 people but pay the overhead to keep our team it's costly and we weren't buying enough deals to be able to collect acquisition fees to be able to keep them on board and particularly now with AI we could talk about that there's plenty of advantages but what we we made the strategic decision to reduce our team as a result of not having enough deal flow and and acquisition fees and so when I think about 30 people like you guys got to get paid too so it's not like you can just fund us all yourselves unless you're just like super wealthy and that's what you want to do but ultimately like if I'm putting myself in the shoe of someone just like me who's like hey I want to grow and I need this team and I want to do what Ryan's doing but like how do I pay for the staff quite simply is it typically just acquisition fees that helps to keep the lights on yeah acquisition fees help keep the lights on and then asset management fees so we take up for percentage of the revenue once the property starts generating revenue so yeah that's what keeps the lights on gotcha are you just self-managing like once you stabilize a property you renovate it more appropriately do you guys hire third-party managers or manage it yourselves we do yeah we hire third-party managers and then our asset management teams job is to find the right property manager hold them accountable to their budgets chatting with them weekly certainly during the lease up but yeah we want to find the right usually a scale regional operator yeah I want to shift gears a little bit here before we wrap up because I imagine what you're doing can have pretty significant can have an impact on the community in a positive way because I doubt you're buying the beautiful Marriott that's already just humming along you're looking at these distressed properties that I would assume sometimes are ridden with crime or there could be drug dealing going on things of this nature and so you guys go in you clean up these properties you really make them nice you put these murals on them and they just make them decorative they look really like inviting places to live can we maybe give us an example of like a project that you took on that that really
made an impact in the community for the positive. - Yeah, I think the easiest case study for me to talk about is what we did in Tacoma, Washington. So for those of you who don't know, Subur City, just south of Seattle, there's a street there called Hosmer Street and the District of Hosmer accounted for 10% of the murders in the state of Washington. - Wow. - Yeah, so we bought our first property there, I think in 2021 and there hasn't been a single murder on the street or violent crime on the street since then. There was, we ended up buying a collection of four hotels on that street and converting them into apartments and it's just totally transformed the community where there was open-air drug dealing, drive-by shootings. There were some really hard criminals that were in that first property that we coordinated with law enforcement to get them out and it's just totally set a different tone down there. Now it's not a luxury market, but it is now a safe neighborhood. The police officers used to respond with three squad cars, three officers, anytime there was a call in that area. Now they respond with one. And so I think that's probably the strongest indication that things have actually really changed there and we've provided housing to what? Probably seven, no, sorry, 600 people or so. - Wow. Do you think that your investors, this community transformation angle, do you think this helps you raise capital or do you think investors still really just lead with like what's the bottom line? - Yeah. I mean, we believe it to our core that we've got something unique and that we can do good and also have a big good business. Many of our investors resonate with that. I say a lot of our employees that have joined us over the last couple of years also really resonate with that. But when you make an investment trying to generate a turn, you should ask all the diligence questions first. And certainly there are those who, if you combine the returns with the feel good side of things, I think that's just, a match made in heaven and I'm certainly biased 'cause we have that here, but it's been great to attract investors that lead with the mission and really believe in addressing the affordability crisis that all of us feel and also in the community aspect side of it too. - Yeah, I do believe it makes a difference. Obviously people do care about making money, but particularly for folks that are investing in hospitality, like traditional hospitality, there is a feel good component to it. And I think people want to be part of that. I think that's inherent in human nature. And so yet granted what you're doing is not providing people with short-term accommodations for their vacation, but there is a similarity there in that investors do like to get behind something that's a transformation that is positive that they feel like, "Wow, I have something that I own that I can be proud of." So I think that there's some real truth to this and I think that is an important part of the story from investors or for investors. Can I ask you then, 3000 units is a significant amount. You want to get to 15,000. What's your why? Why do you want to get to that big? Why do you want to scale to that level? What is it that's driving you to want to get to 15,000 units? - So it means we're going to get housing to 20,000 people that wouldn't have otherwise had it, right? We're creating new housing. It's not getting big for bigness sake is to have the impact on people who really need it. Purpose is like, I want everyone to thrive in their lives in all aspects, right? And so it can start with just having a roof over your head, but it can grow from there to be making friends, having a short commute to your work, having a good stable job, and I think with our business model, we have the ability to kind of start people on that path that might not otherwise not be on it. - There you have it. Cool. If someone listening owns a hotel that they think might be a good conversion candidate or they want to perhaps invest passively in what you're doing, what's the best way to reach you? - Yeah, you can email me,
[email protected], you can find me on LinkedIn, look up my name, work at our website, sageinvestment.com, you can fill out a forum and that'll get to me as well. - Awesome. Ryan, I love this. Thanks so much for being on the show. This has been a real treat, something different. Appreciate it all, the insight. I wish you the best of luck and what you're doing. It's exciting. I'm gonna be following your journey for our listeners. Thanks so much for tuning in. We will catch you again next week. Aloha. (upbeat music) (upbeat music)
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