Strategically Investing and Navigating Through Market Volatility with Brook Scardina, Managing Partner - Capital Markets & Investments, Oak Real Estate Partners

Welcome everybody to another edition of ATL Alts, and I'm excited today to welcome a local Atlantan here in Georgia, Brooks Scardina, who leads the consulting and implementation of an external strategy focused on solving and delivering alternative investment solutions at Oak Real Estate Partners. So welcome to the ATL Alts and Asset Backed podcast. Brook.

Thank you, Andres. I'm happy to be here and share the time together.

Yeah. I wanna read a little bit about your your background. You know, you you support the consulting and implementation of the of the real estate strategy at Oak Real Estate Partners with a real deep institutional background. So I think our guests are in for a real treat as we talk about private credit, private real estate, asset backed debt today. You focus on risk return objectives of foundations, endowments, family offices, corporate and public plans, and also sovereign wealth funds.

So clearly a lot of institutional clients. And prior to joining your firm, Oak Real Estate Partners, served, and this is what I was excited to hear about, you talk about today was you served as the managing director managing director, pardon, for leading and directing the financial and investment complexities for organizations such as the Georgia Tech Foundation, which is effectively the endowment at Georgia Tech here in Atlanta, UNC Management Company, which is the endowment for the University of North Carolina system, and the UPS retirement pension plan. So you clearly have a deep institutional background, and you've been involved at those organizations in underwriting and deploying billions of dollars of capital. So with that, I'm super glad to have you. I know we've had a couple of conversations, had an opportunity to get together in person.

And so I appreciate your time today as we dive into private credit and real estate. But before we do that and talk about what you guys are doing at Oak Real Estate Partners, which I think our guests and advisers listening to the show will find really fascinating and interesting. Tell us a little bit about you and your background and kind of what brought you to where you're at today in your career.

Yeah. Happy to share, Andres. And so as you kind of highlighted, I spent principally most of my professional career at UPS with the latter half managing the pension retirement plan. I think what was unique about that is when I started, we had a very small group. So it kind of afforded you the unique opportunity to be involved in all facets of portfolio management, structuring to underwriting, capital deployment, really strategic and tactical asset allocation modeling.

It's been several years there, obviously then rotated over to the University of North Carolina Management Company, which was a privately held company that was commissioned to manage the endowment dollars for the University of North Carolina and most of the North Carolina system affiliated schools. So I had a team, you know, and worked alongside, you know, a lot of my respective partners and really working to help optimize the performance on run it as a best in class endowment. Had an opportunity to come back to Atlanta to help the Georgia Tech Foundation kind of further institutionalize and optimize their investment program. So I've been involved in really all facets of portfolio and asset management, touched a lot of different strategies from an asset class perspective. And it kind of brought me fast forward to where I am today.

I really spend there's time to talk and the time to listen and just taking the time to better understand what many of these groups are trying to solve for from a portfolio optimization standpoint because private credit has a broad utility and a broad application, right? It can be served as a diversified strategy. It can be a more optimal alternative to traditional fixed income. And we'll take a little bit of a deeper dive into that and some of the structural advantages down the road. So I really enjoy the opportunity to interface and interact because everybody's trying to solve for something a little bit differently as it relates to their asset allocation mix and where a strategy like this may fall in as it relates to their investment policy statement or opportunistic investing.

So there's, again, there's a broad application and a broad utility. So I'm excited to be here alongside you. I really want this to be educational and informative for the benefit of the participants. There's certainly a lot to delve into.

And this is a dual show today, so it's a little unique because ATL alts is really focused on educating advisors and family offices and individuals around private markets and alternatives. You talked about portfolios, so integrating and how to integrate alts into their portfolios. Asset Backed is focused more specifically on credit, and so I I was fortunate to meet somebody and be introduced by our mutual friend Dan Smith at Trident Fund Services to you because I thought this would be a great opportunity to offer content to both audiences because asset backed is focused clearly on on the the deeper, more technical discussion of credit and private credit and and how asset based and asset backed strategies can fit into a portfolio. So let's talk first alternatives and the importance of alternatives and then maybe dive into private credit specifically.

Yeah, no, absolutely. So I think when we think about an allocation to alternatives, it's always important to put it in context to the broader market, right? And since the vast majority of risk taking is done in the equity market, I thought we might just take and start there first. And so when you think about it, you know, prior to this recent equity drawdown, right, PE multiples and valuation levels were trading in the top decile and well above historical norms. Okay, so why is that important?

Well, generally speaking, when they've traded at this level, ten year forward looking returns have been in the low single digits. Now markets may not repeat, but they often do rot. So you have to bear credence to some of the technical trends. But I think what's even more important is something that you just accented and highlighted is that there is a tremendous amount of uncertainty embedded in financial markets today. We've got geopolitical risk.

We've got uncertainty regarding the path and the trajectory of inflation of Fed policy stance. We have no idea the impact of the tariffs on global growth and the implications of that on a go forward basis. Any one of these things in isolation or in combination can contribute to an accelerated risk off environment. And so we have to bear mind to certainly a lot of the headline risks that are being introduced. And I do believe that there's, and most people I think would probably be inclined to agree with this, is there's a reasonable expectation that we're going to continue to see elevated levels of volatility embedded in the equity market, just given all the vast uncertainty that we're seeing.

But I think alongside that, one of the other discernible trends that we've observed is you've started to see an uptick in cross asset class correlations between equity and fixed income, right? And this is exactly and precisely what we saw during 2022 when the S and P drew down and the Bloomberg Bond Aggregate Index drew down in excess of 10%, right? There was no benefit to diversification, right? So we saw a pretty pronounced drawdown in a seventythirty, sixtyforty equity fixed income portfolio construct. Now if we pivot just for a second and we talk about the fixed income market, because we just did some analysis for a fairly significant sizable endowment.

They have a very substantial amount of treasury exposure. And so what the analysis revealed was very simple. Showed that the ten year treasury had moved plus or minus 10 basis points, 114 times since 2022 between 02/11/2025. So what that tells you is you are getting equity like volatility in the treasury market right now. And while treasuries generally serve as a flight to safety during an equity risk off environment, given the path and the trajectory of potential tariffs, inflation, you know, we may be entering a changing market regime.

So I answer and introduce all those facets because I think, and we can certainly debate the merits of this, if you believe, and a lot of groups that we talk to do, that we may be entering a changing market regime marked by lower returns across traditional asset classes, then having an incremental and strategic allocation to alternatives, specifically private credit, can be extremely accretive in contributing to the performance of a portfolio. Now let's talk and unpack that a second and discuss a little bit about why private credit and alternatives, right? So private credit as an asset class has been a core allocation for institutional investors for over a decade. And there was a recent survey that was completed by PREQIN that showed that many of these institutional groups are incrementally seeking to add to that allocation because of the relative and absolute attractiveness of the asset class itself. Because if you think about it, exposure to alternatives and specifically private credit can be instrumental in really one of three ways.

It can contribute to enhance the diversification of a portfolio, it can improve the risk efficiency, and it can help drive the optimization within the construct of, you know, a total portfolio allocation. In many groups, look at exposure to private credit as a more optimal alternative to traditional fixed income because you don't have the duration, the interest rate sensitivity, and really the mark to market volatility that you get in the fixed income public debt sector. Right? But I think increasingly more important is if you look at the historical performance of private credit over time, an investor can generate and realize 300 to 500 basis points of incremental yield and total return. But I think also alongside that is if you look at capital market assumptions, and most of your financial institutions, JPMorgan, BlackRock, Goldman Sachs, they all publish capital market assumptions and expectations by asset class.

Private credit is widely forecasted to be one of the most attractive producing asset classes over the next ten years, and that's very consistent with what we are seeing and experiencing in the market. And there's a couple of reasons for this, okay? And let's because I think it's important to understand what the key drivers are, okay? Number one, banking regulations, legislative changes, capital reserve requirements have all created and contributed to a very restrictive lending environment for banks. And absent there being really broad sweeping banking relief or significant legislative changes, which would be unprecedented, by the way, We expect the attractiveness of private credit to continue to persist.

Now I think the other dimension in play here is the fact there is a lack of liquidity and a scarcity of capital, particularly in the lower lending sector of the market. Okay? And so if you have the cash and liquidity on your balance sheet and you can be a liquidity provider, then you can generate very attractive returns with low levels of risk. And there's a very pronounced need from these experienced sponsors or borrowers to do one of three things: either rehabilitate, renovate, or convert an asset for its highest and best use. There's generally a value add component to the underlying initiative, right?

But at the end of the day, they're willing to pay a premium in order to access the capital on your balance sheet. So it's very simple. It pays to be a liquidity provider in a market like this. And that's where we effectively step in and fill the void. Now kind of leading that into and transitioning into your question about what we do and where we specialize, and maybe I'll pause right there in case you have any follow on questions, and then I can talk about more specifically where we operate.

Yeah. I mean, did a great job, Brook, of outlining and making a case for alternatives in the portfolio to optimize, diversify, to pick up incremental yield. You know, summarizing, I think, what you said, we we if you look at data historically, you know, the the the premise of a flight to safety to go to the you know, to treasuries, if you look at the ten year data, it's just been extremely volatile. And and and there's a lot of folks I'm a believer. Right?

I created this content and these platforms to provide education because I think that, by and large, institutions have been in the alternatives game. They've been in the alternative space, as you know, firsthand from from your prior stops for decades. Those that are arguably, in my case, under allocated and as an adviser working with individuals and and and business owners and families with substantial means, but also those just starting out, they the data shows are historically and today tremendously under allocated to alternatives, much less exposure to a portion of their portfolio that's not in publicly traded debt like bonds. So so that's why I seek out folks like yourself. So I thought I thought you did a really good job.

I guess a follow-up question would be, know, when when you think about the high net worth family office, you know, wealth adviser channel, right, there's a there's an education gap relative to the institutional community, and there's a lot of different reasons. But when you think about your experience relative to that gap, can you talk for a minute about just the benefits and opportunities before we dive into maybe specifically of real estate and what you guys do at Oak Real Estate Partners, but talk about some of the opportunities that make private credit attractive. You talked about banking and regulation and some of the needs of being a liquidity provider in certain segments of the market. What are some of the things that our listeners need to understand about why private credit, more specifically, within the vast sea of options and alternatives today?

Yes. No, that's a very thoughtful question, Andres. And I guess I would first start out, given that we want this to be in kind of an educational format, is that I think it's important that the audience understand that not all private credit is created the same, right? There's different iterations. There's subordinated debt, mezzanine debt, there's VC debt, you know, whereas you're collateralized by the anticipated and future or expected profitability and cash flows of the company.

All of these things carry a different risk return profile. Whereas, you know, and we'll talk a little bit more about where we specialize, but, you know, we're fully collateralized by an income producing hard asset that carries a significant amount of intrinsic value. There's tangible value there with the underlying asset. So it's important to understand where you're playing in the capital stack because, you know, the higher you are in the capital stack, the less risk. Know, a lot of firms tend to use a lot of leverage.

Leverage carries a form of risk and a higher form of risk. So how is leverage being used? Is it used at the fund level? Is it being used at the transactional level? These are all fundamental questions that investors need to explore and understand in terms of the portfolio implications of that from a total return and risk standpoint.

So we have found, you know, obviously there are a lot of RIAs and, you know, other various groups that are significantly under allocated to alternatives and private credit, and this has been a very learning experience for them. But what I have found too is those that have invested in this space, and this is supported by a study conducted by Preakin, have generally been very satisfied with the performance that they've received. And we do think and believe that the attractiveness of private credit is going to persist for a variety and a host of reasons, all of which we just formally discussed, you know, banking regulations, the lack of liquidity, because, again, you can be compensated to be a liquidity provider in a market like this. And that's what we're structurally trying to take advantage of. And so there are a lot of inherent opportunities.

What we really enjoy and embrace are educational opportunities like this where, I mean, we had an advisor that was the first time investing with us and he had never done private credit. And he called me up. This was after about a year of being invested. He goes, Hey, I just want to thank you. And I'm like, Okay, what are you thanking me for?

And he goes, Well, this is the first time we've ever invested. And my clients receive their capital account statements and they don't see the volatility they see in my equity growth portfolio. One of the areas that we operate and just kind of transitioning along that front is that we operate in a very kind of niche or specialized sector of the market. And as a firm, what we're able to take advantage of are the structural inefficiencies that exist in the lower lending sector of the private credit market. These are very simply transitional bridge lending opportunities that are senior secured in the first lien position of this lack of liquidity and the scarcity of capital that exists in the market.

We can continue to take advantage of that in several different ways. Now one of the things that I think we're highly focused on as we think about the execution of the strategy is risk mitigation. Because risk mitigation and capital preservation can have a fairly significant impact on the optimization of a portfolio. And so when you look at us, there's really several different layers of risk mitigation that's built in to the execution of the strategy. The first, as you would naturally imagine, is the deal flow.

Last year, we saw $8,400,000,000 in top of the funnel deal flow. Now why does that even matter? Well, that just allows us to be very, very selective in the types of lending opportunities that we pursue and really the quality of the assets that we bring into our portfolio. I think the second is the low loan to stabilized value. Our loan to stabilized value is right around 61%.

Now why is that important? Well, that provides a high margin of safety against the permanent impairment of capital. Our goal and objective is not to take acquisition of these underlying assets, but in the event that you need to in order to protect the interest of the investors, the likelihood you're going to recover your principal is exceptionally high because even under a scenario like the great financial crisis, if you discount the value of these assets by 15-20%, twenty five %, you know, your likelihood you will recover your principal is exceptionally high. I think the third part, and this is what kind of inherently makes us different relative to other private credit lenders, is the structuring. So let's take a hypothetical $10,000,000 lending opportunity.

Again, we're senior secured in the first lien position transitional bridge lenders. That $10,000,000 we take the first five million dollars That simply puts us in the first lien position, top of the capital stack. Nobody in front of us, nobody behind us. The other $5,000,000 we hold, maintain and control on our balance sheet for interest reserves, cash reserves and renovation reserves. What do we do with that $5,000,000 It's very simple.

We merely park it in an overnight money market fund yielding four and three quarters in order to generate some incremental yield of return. The borrower day one is paying as if we had fully deployed the $10,000,000 although they only hold and control 5,000,000 of it until the balance of it is drawn down. And on average, we only deploy about 88¢ on the dollar. So there's always reserves that we're holding back, which serves as a very significant risk mitigation tool for us. And I think the other two parts, which will probably resonate, as you know, we're going to be diversified across industries and sectors and geographical regions.

So we'll do multifamily housing, light industrial, self storage. What we don't do, and I think most people would naturally agree with this, is we do not do downtown central business district office. You're not being adequately compensated for that risk right now. I think quite honestly, office is going through a fairly radical transformation. And we don't do ground up construction.

There has to be an income component to the asset in order to mitigate some of the risk. But I think the last thing, which is something I'm going to expand upon this here in a second is that we're very short in duration. Our weighted average life is fourteen to eighteen months. So these are winding down very quickly. And quite honestly, one of the most frequent questions we get is how interest rate sensitive is the strategy relates to private credit.

And quite honestly, I know the Fed just went on pause in the prior two meetings and there's a Fed meeting today. The prior two meetings, you know, they cut interest rates, and that's actually a favorable development for us. And I'll tell you why that is. Our cost of capital was so expensive that interest rates, as they were being cut, it creates a greater incentive for these borrowers or sponsors to get us taken out as quick as commercially reasonably possible. They don't want to hold the heavy debt burning cost any longer than they need to.

So we've actually seen our weighted average life turn down from about twenty one months down to sixteen months. Now, maybe for the benefit of the audience, Andre, and then I'm going to pause and give you an opportunity to ask any follow on questions. I'll give just a couple indicative case studies, because I think, you know, an example is, you know, worth, you know, probably a thousand words at the end of the day. Does that sound like a good way to proceed?

Yeah, yeah. Let's jump in. I'd love to hear some examples or case studies things that have happened at Oak Real Estate, because I think it helps illuminate for an investor whose background has historically been in the context of maybe a non institutional investor. When they think about debt and they think about lending, they're thinking about in the context of a thirty year bond or they're thinking about a municipal allocation. They're not thinking about lending to businesses or in your case, to real estate sponsors who are borrowing from you for that shorter duration bridge debt,

a lot of people would think, well, why aren't they going to a bank or why can't they go to a bank? Because they're inferior, because they're not able to get lending from a bank or from the main street financial institution. I'm throwing a lot at you, but I do think the real life case studies to your point are really worth more than anything because they illuminate what's going on really out there in the marketplace and how investors and people that want to learn about this area of private credit, how they can sort of put what's going on in their community, their economy, their local market in context.

Yeah, no, I think that's a good way to stage it, Andres, and I think this will give some context and perspective as to kind of how irrational the market currently is. So there was a transaction that rolled off our balance sheet and matured out of our fund late last year. And it was an industrial complex. And it's down in Melbourne, Florida. The sponsor has twenty plus years of experience and what he does is very simple.

He acquires these industrial complexes, he repositions them and then he monetizes the asset over a three to five year time horizon. He's got a whole business plan of doing this. And at the time there was no tenant in the facility. So I'm sure you could imagine there's no bank credit union financial institution that is going to lend on a non cash flowing asset. However, he had a ten year fully executed, fully enforceable lease agreement with Jeff Bezos' Blue Origin.

And he needed the $10,200,000 Part of it was for the acquisition of the facility and the balance of it was for some specification required by Blue Origin before they took occupancy of the facility. So when we look at a transaction like that, number one, you got a ten year cash flowing asset and we're short duration money. You know, we got taken out of that in I think nine months, may have been eight point two months. Number two, you've a high quality tenant in Jeff Bezos in Georgia. I mean, those are two good fact patterns that, you know, you're happy to underwrite those transactions and to bring those into the fund for the benefit of the investors.

I think another good classic example is this one actually just rolled off our balance sheet the first quarter of this year. It was the California Highway Patrol. And so this particular asset was bought out of bankruptcy. And as I'm sure you can imagine, there's very few financial institutions that are going to lend on an asset that's coming out of bankruptcy. But in this particular instance, the sponsor had a fourteen year lease agreement with the California Highway Patrol and the asset was being converted to house the SWAT unit, which is literally located two or three blocks away from the State Capitol Building.

So they were converting it into an armory. And so we held that exposure on our balance sheet for maybe a little bit less than nine months. So, you know, it just speaks to how irrational the market is. And we've had several, several transactions that we've done in the DC area. And these are kind of unique because, you know, you feel like you're having a little bit of a positive societal impact.

That's, you know, we're not ESG, you know, related investors. But in this particular instance, the sponsors are converting one and two bedroom into two to three bedroom in order to make it more accommodative and spacious for families. Now it's not Section eight housing, but it is zoned as an opportunity zone. So what they're eligible to participate in is what is referred to as the DC Housing Voucher Program. It's a program that's completely backstopped by HUD.

And these sponsors, what they get is like a 30% premium for every unit they turn over. There are some 20,000 families on the waiting list for these units. So the demand and supply is completely out of balance, right? So we look at this, they're happy to pay us a mid teen interest rate because there's a value arbitrage opportunity because of what they're making and converting each of these respective units. They just need accessibility to the capital in order to go through kind of that transformational rehabilitation process.

And so again, I think that just speaks and really highlights just how irrational the market is right now. Because again, it's all predicated on the fact that Jamie Dimon was on Bloomberg right before the holidays. And he gave a very simple illustration, Andres. He said, for every $100 we have on deposit, only $60 goes out in lending activity. He goes, That ratio used to be one to one, where we had $100 on deposit and $100 going out in lending.

And he goes, But a lot of that is a byproduct of the regulatory environment that has been created by virtue of Dodd Frank, Sarbanes Oxley, Basel III. The names are long and distinguished.

Yeah. Yeah. So it's created an opportunity in the market for non bank lenders, also known as private credit managers or sponsors to look for alternative sources of financing. Having worked in the private credit space myself, in this specific area, I can speak to firsthand the experience is real. There is substantial amount of deal flow.

You spoke about the $8 plus billion in top of the funnel deal flow opportunity that your firm saw last year. Let's speak to that for a minute because you gave three very distinct examples. You talked about Sacramento, California, you talked about Melbourne, Florida, you talked about DC. You're coast to coast, very idiosyncratic, unique, opportunistic type of things that are coming in. One of the things that I always ask private credit sponsors or managers is to talk about origination and talk about what is a deal that fits your criteria at Oak Real Estate Partners?

Because you said this earlier in the conversation, Brook, that a lot of maybe less experienced investors may just paint private credit with a broad brush. Everybody is senior secured, top of the capital stack, trying to generate a risk adjusted return in the 9% to 11% yield. How you generate that, obviously, when you get into the nuances is why we do these conversations. So talk about origination because I think it really does distinguish one firm from the next. Like a deal you all would do that fits that is a good Oak real estate deal may not be a really great deal down the street at another firm that does short term, short duration bridge lending.

So what are some of the characteristics that your investment team and committee and origination professionals get real excited about when thinking about that top of the funnel sort of approach?

Yeah, no, that's a there's a lot packed into that question, obviously. I want to try to decompose it in a couple of different ways. But first of all, you know, we are a vertically integrated firm. So our origination team is all in house. And we think that's important from an execution perspective and a quality control perspective.

So most of our originators, all of our originators have 25 in the business. They've worked at ex insurance companies, MetLife, Nationwide, whatever the case may be. They've got a significant amount of experience and they developed a very strong industry reputation. Having been in the industry for this long, our CEO has been around for thirty seven years. He's got a very significant amount of experience having run-in syndicated portfolios, again, for large sophisticated insurance companies.

So we've got we've cultivated a fairly significant network of relationships with your Tier one, some select tier two commercial real estate brokers. So your CBREs in the world, JLL, Cushman, Wakefield, etcetera, etcetera, we tend to be a first call simply because of the industry reputation and the certainty of closure. Because again, people come to you because they need the speed of the execution because a bank is going to take 90 to 01/1928 to underwrite any loan. They're certainly not going to underwrite a $6,500,000 loan because it's not sizable enough to go through an institutional underwriting. That's one of the points that exist in the market.

So I would say, and these are just directional numbers, you know, maybe 15% of our sponsors or repeat sponsors, you know, that come back because, you know, of our ability to we want to be perceived as a lender of choice, you know, and a partner of choice, and really providing them that speed of execution. One of the things that we do is, you know, we go through a completely institutionalized underwriting so we can securitize our loan docs. We don't. And despite the fact that these are small lending opportunities, I mean, sometimes we underwrite a $2,500,000 loan, but you could effectively securitize it. I mean, these are industry standards that are being employed by large and sophisticated insurance companies.

So, you know, I know we talk about the $8,400,000,000 on top of the funnel deal flow. That's great, but realistically, there's probably 60%, if not 70% of that, that would never satisfy our investment underwriting criteria. You know, we track it, we monitor that deal flow because we want to get a pulse of the industry and what's kind of currently out in the market. But a lot of these, either the sponsor doesn't have sufficient, you know, track record or business experience, or there can be a variety and a host of reasons. I mean, we have a very substantial comprehensive checklist as we go through kind of an institutional underwriting.

So it's great to see that level and volume and velocity of deal flow, but in many instances, you know, some of these opportunities that come across, you know, aren't things that we would ever contemplate funding because it's just not of institutional quality. But we do want to continue to see and track and monitor the volume and the velocity of the deal flow because it gives, again, it's important to get a pulse of the market. I think one of the advantages go, please.

No, was going to say, I mean you mentioned securitizing your documents, and I think that's important to highlight for folks that are listening and what that really means, because ultimately when you're a borrower, you're trying to drive down your cost of capital, right? So if I'm a real estate sponsor or I'm a company and I need to go borrow money, right, I want to get the cheapest money. It's just like buying a house, right? You're going to shop for the best mortgage, lowest terms, you know, best rate, you know, lowest amount of points to originate that loan, etcetera, right? So it's no different.

But I think what you're saying is is important to highlight, that's that the institutional approach to underwriting, whether it's a 5,000,000 or $10,000,000 loan or it's a $50,000,000 loan, that is going through the same underwriting process, and you employ extremely experienced originations folks and executive folks like yourself who can bring decades of experience to bear, albeit in a end of the market that is arguably more inefficient because banks just simply won't get excited and won't do the work on a 10,000,000 or a sub $5,000,000 loan that you guys might be willing to do because it's a repeat borrower that just has a smaller deal. I'd love for you to talk about that. I assume that that didn't develop overnight and not every borrower has the wherewithal to build the team you have, but the ability to securitize your docs and really take that institutional approach think bears a comment, and I'd also love for you to talk about what you said earlier is vertical integration because the game of lending is about getting repaid, right? And not having those losses like you see in the growth portion of the portfolio and the volatility, Right? The most you're going to get back is your principal plus maybe some interest and, you know, maybe some points and fees.

But talk about those two dynamics, if you will, the vertical integration and then, you know, the the securitis the securitization of the of the underwriting.

Yeah. So the vertical integration has been key to us because, you know, none of the employees are, you know, outsource employees. You know, we maintain control, have quality control and really very seasoned and experienced, you know, leadership executives that have, you know, a great pedigree at the end of the day. We think that's important to execute on the investment thesis. And I think, you know, one of the things that we just touched on lightly is the fact that, you know, playing in this lower lending sector of the market has several structural advantages to it, because we're not competing with the likes of Blackstone, KKR, Apollo, etcetera, etcetera, etcetera.

And you can harvest two to 300 basis points of incremental yield because there's a lack of national competition in this space. Now, as you move up and you take down larger capital tranches, 50,000,000, 1 hundred million, 2 50 million, increasingly you see more competition. So what does that mean? It just means there's pricing compression. There's more people operating in that space.

We don't see and experience that same level of pricing compression. So it actually pays to be down in this lower lending sector of the market. And I like to use a very simple analogy, Andres, because it's like an equity strategy. You've got large cap, mid cap, small cap, right? Like we're down here in the small cap space in the private credit sector of the market, but there's an extreme and high level of inefficiency.

And that's where we're going to continue to play. I mean, one of the things, and we actually did an empirical study on this when I was back at UNC and we kind of looked at some academic studies around this and as a lot of these mega managers continue to grow in AUM and aggregate assets, there's actually a point where they start to experience an erosion of return, right? Because what happens is they now have so much in committed capital that they have to effectively deploy that sometimes you run the risk of certain circumstances where you're deploying capital into a sub investment opportunity. Whereas, you know, we may be seeing the volume and the velocity of the deal flow that we're seeing, but we've created a hard cap limit of $600,000,000 for our fund simply because we want to remain very disciplined in that high selectivity position. You never want to run the risk where you could be deploying capital into a sole lending opportunity because we could probably very easily be running 2,000,000,000 to $3,000,000,000 out of the strategy.

So it's philosophically one of the things that I really embrace is the fact that we're never going to be perceived as an assay aggregator. You know, it's really about doing things and structuring things that are truly and inherently in the best interest of our investors and being very judicious in the risk taking that we do at the end of the day. But I think, you know, to your point, you know, it is going to continue to be our abstracted market environment. I mean, we're very conservative with our target expectations. You know, we think low to mid teens is, you know, a very reasonable expectation and very consistent with what we've been able to deliver thus far.

And, you know, we think, you know, given the current market environment, now is a very optimal time. If you haven't thought about strategically exposure to alternatives, then introducing a small sleeve of that, you know, as a part of your asset allocation mix, because again, I can think, I think it's going to be very instrumental in dampening the volatility and really improving the risk efficiency, you know, for all the various reasons that we discussed.

Yeah.

And so let me just pause right there because I recognize we're

we've got, you know, we've got say 15 and I want to talk about, you know, what your firm's expectations are of the environment. You sort of teased it out in terms of these larger global asset managers, which get the vast majority of the coverage and have, if you will, the largest pools of capital, for better or for worse, it's the dynamic that we see play out across all asset classes and it has for sort of forever, right? What's ironic is I started in the emerging manager space and have spent my whole career working in what I guess folks would call the emerging manager, niche manager, specialist manager area. I find it endlessly fascinating and for all the reasons that you have illuminated today to listeners, know, are just pockets of inefficiency where large pools of capital just simply cannot play, you know, whether those banks or those are now publicly traded asset managers. And so if you as an advisor, as a specialist can find those managers that can unlock that alpha, do it on an institutional level with institutional controls, etcetera, you've created value for your clients.

Now let's talk about the expectations for returns. With more and more private capital and more and more private credit managers looking for increasingly, whether it's bigger and bigger numbers of opportunities or just more folks looking to be the lender of choice as you used that term earlier. What are your expectations at Oak Real Estate for yields and for private credit returns, let's say over the next, you know, one to five years as we see these dynamics in the industry play out?

No, it's good question. I kind of point to a couple of things. You know, again, I think it goes back to the capital market assumptions and expectations, you know, highlighted by BlackRock, JPMorgan and others that, you know, private credit is widely anticipated to be one of the best performing asset classes over the next ten years. And that's very consistent with what we're seeing and experiencing. Mean, we're targeting kind of low to mid teen returns and we think that's a very conservative estimate.

And I think one of the things that we strategically adopted, I'm going to say it was last year, maybe closer to the end of twenty twenty three is that we are SOFR based lenders. And one of the things that we've incorporated is effectively a SOFR based floor. So if rates go down and the Fed gets into a rate cutting regime, right, we lock in and we're hedging the interest rate risk. However, if SOFR rates move higher, then we've got the ability to dynamically adjust our rate on a 30 basis capturing that incremental return. So while it's not a perfect inflationary hedge, it does help to mitigate the interest rate risk that other firms would otherwise experience.

And so that's been very advantageous for us. We continue to execute on that investment thesis. And, you know, as rates have come down, and we've seen that, you know, particularly over the last several months. Now, SOFR tends to exhibit a lot less volatility than the treasury market, if you were to look at thirty day SOFR. But, you know, we do have that layer and level of protection in place so that, you know, if rates become increasingly more volatile, you know, we've kind of immunized that interest rate risk, you know, for the benefit of our investors.

But, know, where we're currently pricing, the market is holding up. You know, there was a point in 2023 where I can tell you definitively, there was probably a 203 basis point spread. And what I mean by the spread is, you know, kind of the bid ask what we were willing to lend at versus what borrowers are willing to accept. And I think as the year increasingly moved on, borrowers came to the realization, the actualization that if they wanted to get access to the capital, they were going have to pay the premium. So that bid ask spread then began to compress.

And now it's virtually nonexistent. Mean, you know, we're out there in the market and, you we're pricing things and, you know, we're pretty competitive. But again, I think that the lack of national competition and the fact that you're not competing against some of these larger mega institutions is inherently a structural advantage for us. Not to mention, when we talk about the total return, there's really several components of that. You know, the first is, you know, there's generally a couple points of origination.

There's interest rates. There's back end exit fees, but also is the time value of money. Remember, if we're only holding this exposure on our balance sheet for eight or nine months, it's very short duration money. Remember, we're only deploying on average about 88¢ on the dollar, and yet, you know, you're being paid interest as if, you know, the full dollar had been deployed. So, you know, it's extremely, extremely accretive in the total yields and the types of returns we're able to generate for the benefit of the investors.

The structuring, I think, is one of the things that inherently and uniquely makes us different from a lot of other private credit lenders. So, you know, we're going to continue to capitalize. You know, our goal and aim is just to continue to educate firms that are interested in just learning more about the space and understanding where the opportunity set resides and just being a resource. I mean, many of the RIAs we work with, we work alongside them because they're not comfortable necessarily trying to articulate where we specialize in this space. So we come in and we just merely present to their clients and say, hey, we try to do it in a very simplistic way.

Know, think about it like a first mortgage on a house. This is just the first mortgage on a piece of income producing commercial real estate assets. And, you know, we do it in partnership with a lot of RIAs just as an educational resource, and, you know, we did an education on, and I'll leave the name anonymous, you know, with a county public pension plan here in Atlanta not too long ago, who was interested in learning a little more about this space. So we came in and presented a whole case study on private credit and how it can be accretive and contributing to a portfolio. So we love the educational piece more than anything else, because if you're effective at educating people into the opportunity set and how to think about risk mitigation and downside protection, increasingly they become more comfortable with the investment thesis.

And that's what I enjoy. Everybody again is trying to solve for something a little bit different from an optimization standpoint because regardless of the group that we talk to, I've talked to some groups and they look at this as, again, a substitution, a more optimal substitution for fixed income. Other groups say, well, we'd put you guys in our diversified strategies portfolio because your return streams are broadly uncorrelated to broader markets. Now whereas some groups are like, well, we put you guys in our opportunistic or value add credit portfolio. So everybody's got a different lens that they typically look through.

It just depends on how their investment policy is kind of constructed in their asset allocation framework is built out.

Yeah. It's a really valuable point. And I think one of the things that I've learned now having moved from the asset manager side of the business to, you know, the the wealth management side is I'm being able is is I'm able to really draw upon that network. And I wanna spend the last five minutes really talking about, you know, the importance of of two things. The first one I wanna talk about is is identifying niche and specialty managers and how the allocation to alternatives and specifically maybe private credit doesn't necessarily only have to be with those giant large publicly traded asset managers and the importance of identifying and utilizing advisors to identify managers out there that are specialists or that are niche.

You talked about the strategy of being a 600,000,000 sort of targeted fund size for a variety of different reasons, and that's different than what you often see making headlines. That somebody just raised a $10,000,000,000 fund or a $20,000,000,000 fund, or they've got permanent capital and all the benefits that that brings. So that's a setup for a question of what do you think from your experience, institutional, couple of big endowments, pension plan, you've got that background. All these small managers and emerging managers are trying to raise money from those firms, right? Because they can write a big check.

But from your experience and now working at a specialist firm that's focused on the lower end or the smaller end of real estate debt market, what are your experiences and what do you think are some of the benefits of niche and specialist managers?

Yeah, and Andres, I think, you know, philosophically, that was kind of at the core of our approach at UNC. You know, we tended to shy away or tilt away from some of the larger mega managers and really focus more on bespoke or esoteric managers that had the ability to generate outsized and very attractive returns. Proven track records, experience, pedigree experience, leadership teams, playing in unique specialized sectors of the market. Because again, you know, when we were in the endowment space, you know, absolute returns are important, but also relative to your peers and how you're generating performance is also an important component of how you're evaluated. Now, you know, I think for us, that's one of the inherent advantages.

As a smaller manager, you can be nimble and flexible in taking advantage of sectors of the market that these larger players can't take advantage of because of the mere size of their balance sheet and how much capital they have to effectively deploy. And, you know, we're fine with going through an institutional underwriting for a 6,570,000.00 loan because, again, there's a tremendous amount of value to be harvested for the benefit of the investors, you know, as opposed to, you know, Blackstone who just recently announced that, you know, they're acquiring Jersey Mines. You know, I mean, they've got to put capital somewhere to work, right? So I think for us, you know, we're pretty excited about the space that we operate in, you know, and kind of having a national footprint and a reputation within the industry that, you know, tends to be a first call due to the certainty of closure. The speed of the execution, we think, is vitally important and kind of further differentiating the firm relative to some others.

I mean, we just, one of the exciting things that just at a firm level that just transpired is we just completed a majority acquisition of an FHA lender. Okay, so why does that matter? How's that important? Well, that actually now provides certainty of exit. Like we can be our own takeout.

And so that provides a tremendous amount of positive value and traction for us because while we close on it, an FHA loan typically takes nine months to underwrite. That lines up perfectly with our weighted average life and duration. We can work with our FHA lender and kind of going through that underwriting from that more permanent take uncertainty of exit. So there's a lot of things that, you know, from a structuring standpoint that, you know, we're constantly looking at, and, know, I'm not saying anything that's revolutionary here, but it's a very dynamic business environment. You've got to continue to adapt with the times.

I think if we look at the market environment and what's naturally transpiring and the opportunity set, again, I think part of the investment thesis is just anchored on the fact that if you have the cash and the liquidity and you can be a provider, you can capture some very attractive returns. We think that type of opportunity is going to continue to persist for all the apparent reasons that we previously discussed.

Well, we're about out of time, but I have one question and one bonus question. So much of finding your way through challenging market environments, whether you're an investor or you're allocating capital or lending capital like you guys, is a network. What are your peers hearing and how you referencing sponsors and deal flow? My question is, and then my bonus is an easy one. When you're talking to your investor peers, when you're talking to the folks in your network, what are they saying about what's going on in the market?

Are they concerned? Are they fearful? Are they optimistic still, etcetera? So I'd love to hear, you know, perspective. And number two, who's your pick for the NCAA tournament since March Madness is is underway?

And and who's the what's the consensus from the from the smart money out there?

All right. Good questions. Good questions. Well, I'll start with the first one. And I can share with you a couple of anecdotes that I think is very consistent.

Obviously, we speak with dozens and dozens of whether it's foundations, downments, corporate, public pension plans and the like family offices. And I think there's been one consistent theme that's kind of emerged to the forefront. And it's that, I can't say this universally, but the vast majority of groups are concerned about a lower return environment, given the market environment that we've come out of. And so I think everybody's thinking about portfolio positioning and kind of their strategic and tactical asset allocation and where can they take advantages of opportunities that may offset underperforming parts of their portfolio. And so that's what we enjoy in talking because this can really be a ballast within the construct of a portfolio and you can generate an equity like return with very low levels of risk because you're in the senior debt position.

Mean, fact that we're generating mid teen returns in the book, I think the reality is this, we're coming off two consecutive years where the S and P has returned in excess of 20%. That's not sustainable. That's not a market environment that we customarily see. And so I think at some point, given PE multiples, valuations, uncertainty, you can point to a host and a variety of reasons. I think people are coping with the reality that this could be a changing market regime and how do they need to think about kind of portfolio positioning.

So you know, we enjoy just being the resource and just educating people into the space. You know, it's not about walking in and pitching a strategy. It's about understanding the implications of private credit, how it can be accretive, you know, within a portfolio construct. That's what we enjoy is the consultative aspect of it. Now I'm going to transition to your latter question.

I did go to graduate school at Auburn, so I've got to say War Eagle. Okay.

War Eagle. Well, they came in as the number one overall seed and I'm a Kansas native. You can see, I'm wearing my Jayhawks. We have had an up and down year, but yeah, there's a lot of folks that think Bruce Pearl will get the Tigers back rolling. They lost three or four going into the dance, and sometimes that's a way for a team to look inward and get the ship right, so it all kicks off tomorrow.

Know there will be a lot of people in our industry playing hooky or having the TV on. I can't thank you enough. Again, you said this multiple times, Brooke, education, being a consultative resource, helping bring just clarity and helping people think through a lot of the questions. I think that's what boards and investment committees and individuals and advisors out there are looking for, is they're looking for a calm or a calming presence and voice to sort of help think through a lot of noise and a lot of headline risk and a lot of just uncertainty that's pervasive in the markets today. So that's what we were trying to do today with a conversation, and I hope we were able to do that.

I will definitely put your contact information out there in the show notes, but I want to give you the final word. How can people learn more about Oak Real Estate Partners if they're interested?

Yeah, no, just happy to reach out. And again, it's more about being a resource to people internally. We like to share our case studies and just kind of talk more strategically about the asset class and how it may fit in within the construct of a portfolio, how to think about risk mitigation and downside protection, how we generally look at that and view that and how we manage through that. Again, I'm happy to field any calls. We've got a whole sales team that obviously is on the road.

I don't travel typically with the sales team, but at the end of the day, I'm here in Atlanta. For those of you that are here in Atlanta, I'd like to get together more in person. I tend to be more of a personable person, kind of spending time one on one, happy to allocate the time. I'm always looked at it from the standpoint, there's never downside to a conversation. You tend to learn something new from the people that you interact with all the time.

And I've always kind of embraced that philosophy. So if you have any questions, again, I'm happy to be a resource. I really appreciated the opportunity to share the time with you Andres today. And hopefully, the market color context was insightful for the benefit of the participants.

I think it was, most definitely. So I want to thank you, Brooks Scardina, Managing Partner from Oak Real Estate Partners. I'll put your information to contact the firm and get in touch with you in the show notes of today's conversation. I want to thank our listeners. I will post this show and this conversation to both ATL Alts and Asset Backs.

I think it offered a tremendous amount of insight and wisdom and perspective on opportunities and alternatives, private credit, and also in this area of real estate lending and real estate of debt that I think people would be wise to learn more about. So with that, we'll wrap it up and look forward to you joining us next time on ATL Alts and Asset Back. Thank you.

Thank you.