In an interview with Kat Jennings from Tax Connections, Sortis Chairman Paul Brenneke speaks about market trends and real estate opportunities. Read the full interview below.
Kat: Tell me a little bit about your background and the experience of the Sortis team.
Paul: I came up as a real estate developer and have built almost every product type (land development, residential construction, multi-family, office, hotel, retail/mixed use.) I’m currently wrapping up the redevelopment and retail leasing of the downtown Seattle Macy’s building. That was a $500 million project with Starwood Capital and we put Amazon into that space. We have project management teams that can handle that size and complexity, so the smaller stuff we may take on with our Funds is easier to mange internally. It also allows us to handle any sort of distressed real estate in any state to monetize the opportunity for our investors. During the last recession Michael Sander and I ran a firm that specialized in distress assets and helped move over a $1 billion in loans and real estate from bank balance sheets to private buyers.
During that process we met Jef Baker, who was running a bank that we ultimately invested in. We sold that bank in 2017 and migrated our bank holding company into Sortis Holdings and continued with lending and investment, only in the private sector. I serve as the executive chairman of the Board of Sortis, while Jef Baker serves as the President and CEO of the holding company. Mike Ferguson, a 20 year Bank veteran joined us as President of our lending subsidiary and oversees much of our Fund’s loan portfolio. We have several other key management members with many years experience in distress, asset management, and investment banking. We were built for this current environment.
Kat: Given your deep industry expertise in real estate, opportunity zones, where do you see opportunities for investors in today’s market?
Paul: For those who are looking for stable returns or cash flow, we see the Sortis Income Fund as a highly secure place for investors to be. As banks tighten up, typical of this type of environment, funds that utilize leverage don’t have access to financing(the Sortis Income Fund is unleveraged). We are seeing a heightened demand for real-estate loans – this actually allows us to be even more conservative selecting real-estate loans at attractice terms for our investors.
For those looking for once in a cycle type investments, the Sortis Rescue Fund is focused on acquiring at steep discounts. You will never see us bidding on an asset. We seek out and source deals and wade into complexity where we believe our experience will allow us to build a strategy that will drive significant returns. The Sortis Growth Fund also offers incredible opportunity through our disciplined model of investing growth capital targeted at enhancing online sales for profitable growing companies.
And of course for those with capital gains, we have and will continue to leverage our significant real-estate development background to create opportunity zone qualifying projects. Not only will the fundamental real-estate investment be attractive, but layering on the tax benefits produces a yield that is hard to beat when compared to other real estate investment options.
Kat: How have things been going with your Opportunity Zone Funds?Paul: All things considered, we’re doing great. Our Opportunity Zone Funds and the projects we’ve taken on are still moving forward, which has allowed us to focus on a more holistic approach to our COVID-19 strategy. The best way to measure this has been the response from our investors who are excited and supportive – we’re all optimistic that we will be able to out-perform our long term projections. We’re continuing to take on new investors in our multi-asset fund as we’ve seen increased demand for diversification across a variety of projects.
We’re excited for our next project specific fund which should open next month. Being based in Portland, Oregon where there’s a strong demand for medical research and no available qualifying leasable space, it makes sense for this next project to be a Life Sciences Building. We anticipate it will be largely released prior to breaking ground later this year.
Kat: Sortis manages several other funds as well, right?
Paul: Yes, we have several funds and this COVID-19 environment has only created more opportunity. Our flagship fund, the Sortis Income Fund, is over $50 million in size with 350 investors. We just distributed our Q2 earnings of 10.2% annualized to our investor base. Needless to say, they are very pleased with those returns, while appreciating the 64% average loan-to-value on the real estate loans that make up the Fund. With close to 4 years of earnings over 10% and no losses, this has been a great cash flow investment opportunity, while consistently protecting investors’ principal.
We just launched the Sortis Rescue Fund, which is focused on distress and rescue opportunities resulting from the COVID-19 economic fallout. We acquired a company out of bankruptcy and were able to not only bring ownership back to the Pacific Northwest, but inject $4.4 million of PPP forgivable loan funds into the entity. This has allowed the company’s 20+ stores to begin reopening with newly implemented hygiene and safety protocol. It’s nice to acquire an entity that effectively has more cash than its purchase price.
We closed our second bankruptcy acquisition this last week and were pleased to have Bain Capital co-invest with us. Additionally, we have a third acquisition lined up in the coming weeks. This strategy is both opportunitistic (pairing our bankruptcy expertise with PPP eligibility) and necessary for the Pacific Northwest’s ability to weather the current economic storm. We are beginning to see real estate-based deals surfacing and are looking forward to incorporating those deals in our portfolio.
We also launched the Sortis Growth Fund earlier this year – a few weeks before the COVID-19 shutdowns began. The timing for raising capital has been a challenge, which is a shame as the timing for the investment deals is off the charts. The Growth Fund focuses on accelerating small yet profitable consumer brands who are able to leverage the shift to e-Commerce. We saw a gap in opportunities for investors who want to avoid the risks of venture capital but still participate in the next frontier of retail. Our investments are in companies with demonstrated profitability and strong relationships with their customers. We inject capital and a digital strategy to generate demand and revenue in partnership with WLCR, a world-class digital e-Commerce agency. Pre-COVID-19 shutdowns, e-Commerce represented 10.7% of US retail sales and more than ¾ of overall retail growth – we expect changed consumer habits in light of ‘stay at home’ orders will push this even further. We placed our first investment in Happier Camper, a challenger brand in a $20 Billion + marketplace that brings modern utility and ease of use to outdoor activities. A company like Happier Camper, an RV company providing an alternate vacation option for Americans, has significantly increased in value given this environment.
Kat: This is a smart idea since so many families are moving to the safety of RV vacations due to the pandemic. Just this morning as I was watching the national news, and there were two national newscasters discussing the fun they had taking their families on RVs for vacation.
Kat: By the way, what sort of investor comes to Sortis?
Paul: We recognize that from day one we need to earn the trust of investors. We started small, with a $25,000 minimum investment in our Funds from accredited investors. Despite our growth, we’ve decided to keep that approachable investment level. We have several registered investment advisors that allocate to our funds and we’re now achieving a size where larger investing entities may consider entering our Funds.
Kat: What is the best way to reach you?
Paul: I’m on the phone 24/7 working and negotiating our various deals. Jef handles most of our investors and can be reached at firstname.lastname@example.org or 503-320-8389. For any Opportunity Zone inquiries, Michael Sander on our team can be reached at email@example.com or 503-805-5524.