Cove Capital’s Webinar on Debt-Free 1031 DSTs

Marketing image for the Difference Cove Capital Investments makes

Watch Cove Capital Investments along with Dwight Kay, Managing Member and Corey Nolen, Vice President, Wholesaling for a webinar on Delaware Statutory Trusts (DST) and real estate investment fund opportunities.

We will be discussing:

  • Debt-Free Investment Options: The benefits of Cove’s strategy in mitigating risk in today’s volatile market
  • Cove Capital Portfolio Overview: 1,500,000 square feet of real estate sponsored, $380M in sponsored transactions, 70 properties in the cove portfolio
  • Full Cycle DSTs: Preview Cove’s previous full cycle offerings*
  • Current Cove 1031 & Cash Investment Opportunities

The History of Cove Capital Featuring Dwight Kay


Recently, Dwight Kay, Managing Member and Co-Founder of Cove Capital Investments participated in a webinar where he discussed a wide variety of topics relating to Delaware Statutory Trust investments and Cove Capital’s specific investments. Below is a transcript of the entire webinar.

Corey Nolan:

Thank everyone for joining. Again, this is the Cove Capital Investments webinar. My name is Corey Nolan. I lead our wholesale team here at Cove Capital. So you can think of me as your day to day contact if you have any questions about Cove or our offerings. I know many of you I’ve worked with already. And the rest them, I’m looking forward to working with. We’d like to start this out by going through some of our risks and disclosures. So I’d like to introduce Edgar. Edgar is one of our in-house counsel. He’s going to quickly go through our risks and disclosures before jumping into the rest of the presentation.

Edgar Cruz:

Hi everyone. So as we get started, please keep in mind that our offerings are made to only accredited investors per Regulation D of Rule 506C. Any material that we present today is intended for accredited investors, generally. These are people defined as having an individual net worth of over a million dollars, exclusive of any primary residences and certain entities with gross assets greater than $5 million or made up of entirely accredited individuals. If you are unsure if you or if your entity is considered accredited, please verify with your CPA and attorney prior to considering any investment. There are significant limitations on the ability to sell and transfer interests in our offerings. Securities offered. The securities that we are offering are offered through FNEX Capital, a member of FINRA. SIPC, Cove Capital Investments LLC and FNEX Capital are unaffiliated entities.

The Internal Revenue Code section 1031 contains complex tax concepts. You should consult your legal or tax professional regarding the specifics of your particular situation prior to considering an investment. This material is not to be interpreted as tax or legal advice. Again, everyone, past performance is not indicative of future results. The sponsor and their affiliates will receive substantial fees and compensations relating to the syndication sale of interest as well as relating to the ongoing management and disposition of the property owned by the DST. Investors should read the entire PPM carefully, including the risk factor section of the PPM before investing. The material obtained in the PPMS obtained from sources believed to be reliable. However, Cove Capital and its principles and affiliates cannot guarantee that it is accurate or complete. The potential cash flows, distributions, appreciations are not guaranteed and could be lower than anticipated.

There are material risks associated with investing in real estate, Delaware statutory trust property and real estate securities. These include illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, the risk of new supply coming to market in the softening rental rates, general risks of owning/operating commercial properties, potential adverse tax consequences, loss of an entire investment principle, declining market values and general economic risks. The principles and associates of Cove Capital investment, which are registered representatives of FNEX Capital, may represent investors considering an investment in the beneficial interest and may make offers in sales of beneficial interests, thereby receiving an economic benefit from the sale of beneficial interests. All real estate and DST investments carry the risk of complete loss of invested capital and that returns, cash flow, appreciation, distribution after appreciation are not guaranteed and could be lower than anticipated. Please read the entire private placement memorandums associated with our offerings for full discussion of the business plans and risks factors prior to investing.

By accepting any material PPM, you agree to keep all terms and provisions of our offerings and the leases confidential. You will not share or disseminate any of the information in the offering memorandums or the lease. The sponsor may potentially utilize equity or financing in the form of bridge loans, first mortgage, preferred equity, mezzanine financing regarding the acquisition of property. This possesses a level of risk to investors if the sponsor was unable to raise the entire offering amount and retire the equity or financing including foreclosure and a cassociatedomplete loss of investor capital. Back to you, Corey.

Corey Nolan:

Thanks, Edgar. So just a few quick guidelines before we jump into this. We are recording this for future use. For that reason, we have disabled the questions. If you have questions, we are happy to answer them. Shoot me an email, give me a call after this wraps up. I would love to talk with you about those questions just so we can distribute this after the fact, we’re not doing it right here. On with this call is Dwight K, one of the co-founders of Cove Capital. I’d love to turn it over to Dwight so he can talk about Cove, why he created the company, and some more about what we have available right now.

Dwight Kay:

All right, thanks so much, Corey. Thank you, Edgar. Thank you attendees for joining us today. Really appreciate everybody getting on this webinar, learning more about Cove Capital, who we are, what we’re doing over here, and how we work with our investors. Today, we’re going to keep this brief, I’d say 20, 25 minutes tops. We know that everybody is very busy and has schedules to keep, so we’ll make sure to get through this. If there are questions on any aspect of Cove’s background, history, current portfolio, current offerings, full cycle offerings, et cetera. Again, like Cory said, reach out to him. Happy to get on a call with anybody on the line and dig in. But let’s just go ahead and start.

6:05 – Why Cove Capital Emphasizes Debt-Free Assets

So Cove Capital we are different. The Cove capital difference is that we are debt free. This is a majorly contrarian approach to most real estate investments. Typically, when investment real estate is thought about or discussed or transacted upon, I would say a large percentage, if not the vast majority of those transactions are leveraged. I mean, just look at the DST space, if you’re familiar with the DST space, 95% plus of the offerings in the market roughly, as an estimate, are leveraged. Very few that buy investment grade real estate, whatever the asset class may be, debt free.

And we did that for a number of reasons. We’re kind of going to jump into some of those, but again, it’s a contrarian approach. We believe that this strategy is highly prudent considering the recent pandemic, the condition of the U.S. economy and current state of geopolitical, global affairs, all of that. We’ve all been living and been conducting business over the past 2, 3, 4 years. And everybody understands that those are real things that we’re talking about. The pandemic, the economy, interest rates, things happening overseas. This is not the time to push for potentially increased returns with leverage for certain clients. Other clients leverage makes a lot of sense and obviously with the 1031, you’ve got to purchase equal or greater value. So a lot of times that means replacing debt for investors, but for many of your clients, they just don’t have loans on the properties that they’re selling or they’re at or near retirement or in retirement and they don’t want take on the extra layer of risk that financing provides.

7:58 – A Quick Background on Cove Capital’s Origins

So quick background on Cove Capital. Since August of 2018 was when we bought our first property. We had done millions of square feet of joint venture offerings prior to that, but under the Cove brand, it was August 2018 that we bought our first acquisition. It was industrial distribution facility leased to FedEx in North Carolina. We bought that August of 2018. Since then, we’ve bought over 70 assets. Right now we’re under contract on a number of other assets. Just closed on a handful of assets. It’s about 1.5 million square feet of real estate sponsored. I think we’re getting closer to the half a billion mark in sponsored transactions.

So we’ve had a lot of growth. We’re really thankful for the growth that we’ve had. We have hundreds of loyal investors at Cove, Broker dealers, RAs, family offices and registered reps that have supported us with placing clients into our offerings. We’re super thankful for that. I’m going to get into kind of a little bit more about Cove here. So essentially we have a commitment to providing investors with debt free investment options. A lot of times in the DST space as well as the real estate fund space, there are no debt free options or if there, there might be one and it might be every 3, 4, 5 months that comes out. And Cove is seeking to make a difference for advisors, broker dealers, RAs, and investors by providing a lower risk potential offering.

And at the end of the day, from our experience, I’ve participated personally with clients in I guess over 30 billion of DST offerings since 2007. Prior to that I was in commercial real estate and out of all the offerings that I’ve been involved in historically, the ones that had the financing are the ones that had problems. And debt can be great if everything goes well, but we all know we live in reality and everything doesn’t always go well. And so for certain clients, putting them into a leveraged offering just is not a suitable situation for them. And for you as an advisor, for an investor, not wanting to take on that extra layer of risk. Because real estate, any real estate, whether it be debt free, whether buying a house, you’re buying a commercial property, industrial, net lease, apartment, whatever the asset class, wherever it’s located, there’s no guarantees that there will be appreciation, there’s no guarantees that there will be income and distributions. And when we do, excuse me, when do non-leveraged offerings, we’re really removing a large amount of that risk from the equation for our investors.

10:54 – A Little Bit About the Cove Capital Team

So debt-free investments, contrarian approach. Our team since 2018, we’ve added a highly talented, and we’re going to get into those individuals, but a highly talented group of real estate professionals to our team. We’re very proud of the team we’ve built and the portfolio that we’ve built. We have acquisitions, asset management, accounting, due diligence, in-house council, investor relations, marketing, capital markets. We’ve been involved over a million and a half square feet of properties. Primarily DSTs that we’ve done at Cove, but we also have some debt free funds, income funds that we’ll kind of go over in a second here for those investors that are not in a 1031 exchange, but looking to have some exposure to real estate as a non-correlated asset to the stock market with income potential, appreciation potential, but without the risk of debt. And so we’ve done multifamily net lease, industrial and office.

11:48 – Assets Cove Capital Avoids

We stay away from the higher-risk asset classes that trade at higher cap rates in the marketplace because of that increased risk. And those are hospitality, senior care, senior living, Alzheimer’s care, student housing even. We’re really focusing on reducing as much of the risk as we possibly can with what we buy and how we put together the offerings.

12:27 – Tenants Cove Capital Likes

Here’s some of our tenants. These tenants for us did, we believe, very well during Coronavirus. Obviously past performance doesn’t guarantee future results. There’s no guarantee that any of these tenants are going to do well in the future, but we were quite pleased with our portfolio and how it stood up throughout the entire pandemic. And now that we’re looking at some serious economic headwinds with interest rates rising, the economy cooling off, we’re very pleased with the portfolio we’ve built. So these are all the brands that we all know, a lot of us love, some of us hate some of these, and my wife hates Starbucks, I love Starbucks.

12:55 – Reducing Risk for Investors

But these are tenants that are very, very large companies that have stood the test of time and that have continued to honor their obligations to us as tenants, and we’re the landlord, month after month after month since acquiring these assets. And then we go back even prior to when we started, these are the tenants that have done well in the past. Again, it doesn’t guarantee future results, but it’s definitely something to consider. Okay, so when you combine the strength of an Amazon, a FedEx, CVS, Walgreens, DaVita, Dollar General, Starbucks, Tractor Supply Company, Fresenius, et cetera, you combine that with being debt free, that is a recipe for reducing potential risk for investors.

Again, markets can go up and down, tenants can blow up, tenants can blow out a leases, public companies have gone bankrupt before, investment grade credit ratings have been reduced to non-investment grade ratings. That can happen. Tenants can take locations dark, that can happen, but at the end of the day, the loans are really the pain point when something like that happens. And that’s when if that stuff doesn’t happen, then the financing’s great. It’s accretive to the transaction. If one of those items does happen, having debt really can hurt your investors and you as an advisor. So this is our tenant raster. We have a number of more tenants.

This is an offering. All the offerings that we do at Cove are 506C Reg D offerings. This one is actually fully subscribed. It’s closed out. It’s a recent one that we did. It’s in Rochester, New York. FedEx Express 111,000 square feet, debt free offering. FedEx has a 37.5 billion market cap. They’ve done incredibly well for us as a tenant of ours all through the Coronavirus. And at the end of the day, any of these tenants, somebody can look at their stock ticker and go, their stock is down by 5% or ooh, they didn’t hit the earnings. These are multinational corporations with hundreds and hundreds of millions of dollars of revenue and giant balance sheets, okay?

15:10 – Difference Between Being a Stockholder and a Landlord

We’re not buying the stock, okay? We’re buying the real estate that they lease from us and it’s debt free. So we’re not buying stocks here, we’re buying real estate leased to some of the largest companies in the world without leverage. That’s what we do at Cove Capital. So this asset, again, fully sold out. Right across the street, is a 2.6 million square foot Amazon facility. I think it was like half a billion dollars that was being invested into that facility. So we feel we have a solid location, a nice long term lease with great tenant.

15:43 – Arguably the Best Located Asset in the DST Space

This is another one that has, I think a little bit left in terms of equity, but Cove, we’re contrarian, other sponsors will buy CVSs in the middle of Timbuktu, based on the credit of CVS and the lease term. Way out in the boondocks. And that’s fine and that’s a strategy. And we’ve bought stuff that is off the beaten path for various reasons before. The credit is good. But we’re contrarian in that we do look at location. At the end of the day, real estate. What do people talk about when they talk about real estate? They say location, location, location. This is arguably the best located asset in the DST space right now. This is on Collins Ave, South Beach Miami, irreplaceable location. his is a 24 hour CVS right next door to a brand new hotel. It’s got a shared entrance. And every time that our DD team or acquisition staff have been out at this asset, the beer and wine, they don’t sell liquor. CVS is, I think, they do ABC or the government’s involved in the liquor sales, unlike other states. But the beer and wine is constantly being sold out and empty shelves there. And that’s because this is a giant tourist spot, very dense infill location, an iconic location. So we have combined the strength and credit quality of CVS Pharmacy, brand new construction with a 25 and a half year lease just built in 2021, investment grade tenant. It’s an essential business open during Coronavirus and during the pandemic. Fully occupied and it’s debt free.

At the end of the day, there’s no perfect deal. No perfect deal. So people might say, “Well what about inflation?” You have a flat lease. Well, yeah, there’s a flat lease on this, but right now what we’re seeing across the board in the multifamily portfolio is expenses are going through the roof. Insurance, insurance costs, all different types of costs across the board at the property level are going through the roof. And when you’re multifamily or self storage or any of these other operating businesses, you get to raise rents on your tenants but a lot of times the expenses at the property level are eating into that in a big, big way.

18:09- Why Investments Like CVS Can Potentially Act as an Anchor Against Inflation

And so for us, we like to think of this asset as an asset that protects us from inflation on the expense side. And that’s really getting hit across the board. You talk to any commercial property landlord insurance is just out of control right now. We’re seeing doubling and tripling of insurance premiums that landlords are having to bear the burden of, unless you have a net lease where the tenant is responsible oftentimes for the insurance. And so this asset here, we understand that for investors, they want to have some upside potential. They want to have the potential to grow rent and absolutely, but also they want to have some stability. And we call this the anchor.

This is an anchor of a portfolio. It’s not for the entire client’s exchange or the entire client’s investments by any mean. It’s for that 5, 10, 15, 20% of that investor’s portfolio that the advisor is putting together or the investors putting together for themselves to have that anchor and build that diversified approach. Diversification doesn’t guarantee protection against loss of principle or declining market values, but it is something that we all use and should use to position ourselves for what the future may hold. So Collins Avenue, debt free CVS, 25 and a half year lease. Offerings pretty much almost sold out though.

But these are just some of the capabilities that we’re doing. We bought an Amazon distribution facility in Akron, Ohio, performed very well for us. This is a last mile distribution facility, smaller building, but done very, very well for us. And again, debt free.

This right here is one of our current opportunities. This is not a DST, this is our Cove net least 18 fund. This is a Reg D 506C fund.

20:06 – Cove Capital Principals Personally Invest in Each Cove Offering

Personally, my partner and I, we pretty much invest in every single Cove offering. We’ve got a lot of our own personal family capital tied up in each one of these own offerings in this fund and each of the DSTs. So we’re really vested in creating an outcome for our investors that is different than what we’re seeing out there in the marketplace. Like I said, I’ve personally been involved in over 30 billion of DST offerings from sponsors all over the country and certain offerings do great, others not so much. And we’re trying to create an outcome for our investors and for the advisors, RAs, family offices, broker dealers that work with us. That makes a lot of sense in today’s environment.

If you’ve participated in DSTs, you’ve probably seen the same thing. A lot of them do fairly well and then a handful of them just don’t really stack up. And so we’re trying to… What we’ve really done so far is we’ve put together offerings that really go toe to toe with the offerings in the marketplace, but on a debt free unleveraged basis. So we really don’t have that… It’s not apples to apples, it’s toe to toe in terms of our performance and what we’ve done for our investors. But it’s not apples to apples because it’s way lower on the risk spectrum because they’re debt free because of what we’re doing. But basically net lease 18, right now we have 10 assets in it. We’re in nine states, it’s about a hundred thousand square feet. We just close on this brand new construction Starbucks. Out parceled to a Walmart in Maryville, Missouri.

21:45 – Assets Included in Cove’s Net Lease 18 Investment Fund

Couple Dollar Generals, DaVita, that was a sale lease back with DaVita, Fresenius, FedEx. We have another FedEx that’s not on this map. We just bought it from a large REITs. It’s in Iowa. CVS, Advanced Auto Parts. We’re under contract right now to buy a brand new 15 year leased Chipotle. So we’re building a very high quality large Fortune 500. Oftentimes many of them are investment grade, it’s not a requirement, but large corporate back net leases. That’s what we’re doing here and building this for investors that aren’t in a 1031 exchange, but that are looking to have some exposure to real estate without exposure to debt and foreclosure.

So this offering right now, 10 assets, it’ll probably by the time, we’ve raised about 20 million here, we’ll probably end up having 30, 40 assets by the time we raise the 50 million or so. Or maybe we go over that into our expansion from 50 to a hundred million. But the offering, again, it’s designed to potentially perform for our investors. We say potentially because all of these companies could go bankrupt, they could be gone off the face of the earth and we’re stuck with empty buildings. At least it’s not the bank stuck with empty buildings because this is a debt free fund. That’s what we’re doing there for our investors.

Monthly distributions, ACH direct deposit, 8% preferred return, long term leases, corporate backed leases. And we’re adding to this portfolio. So we’re excited about this portfolio here. Next we have our Multifamily 28 fund. It’s very similar Cove net lease 18, started a little bit later. Multifamily fund, same thing. Debt free apartments. We’re under contract on an asset right now for that property or for that fund.

23:47 – Details About Our Cove Dallas Multifamily 59 DST

We have next our Cove Dallas Multifamily 59 DST. That’s one that we just closed on I guess like a month and a half ago or so. 159 units in Dallas Fort Worth MSA. It’s in Lancaster. If anybody knows Lancaster, you’ve got a huge industrial presence there. A lot of distribution facilities and not a lot of affordable workforce housing. And so the strategy here is take advantage of all those new completions on the industrial side. Those warehouse workers have to have a place to live. And we’re going in doing a full value add package on the asset. We’re hitting some really nice rent growth on our renewals and our first four units are about to be completed. So yeah, it’s going very well. Again, it’s debt free, it’s multifamily, a $100,00 minimum investments. It is winding down though. We’ve got a lot of interest on that one.

Let’s see, Gunnison, this one is a FedEx. We probably are one of, I don’t know the exact stat, but when there’s a FedEx that is thinking about being sold, whether it be a ground or a freight or FedEx ship center that a developer is selling or an owner is selling, we’re getting the call. We own probably 15 or 20 different FedEx’s nationwide. They’ve been a great tenant for us. They’ve continued to perform. This one is a build to suit that we’re buying directly from the developer. We’ve worked with this developer multiple times.

The Colby, Kansas one below it, we’ve already closed on. They’re basically both brand new FedEx ground distribution facilities. 55 is in Gunnison, Colorado, 56 is in Colby, Kansas. They’re both debt free. And the Gunnison property we’ll be closing on, I believe this month is when we’re closing. Colby, we’ve already closed on. So very indicative of the types of assets that we’ll buy in terms of distribution facilities, the rising e-commerce trend, a very large corporate tenant and no debt.

26:04 – Cove Capital Has Had Several DSTs Go Full Cycle

This next slide is something that we’re super proud of. We’re definitely thankful to be given this opportunity to deliver these returns for our investors. At the end of the day, like we said earlier, past performance doesn’t guarantee or indicate the likelihood of future results. And we’re not making any representations that any DST investment will or is likely to achieve profits or losses similar to those achieved in the past or that losses will not be incurred on future offerings. Make sure to read the PPMs, have your clients read the PPMs, understand the business plan and the risk factors on all Cove offerings before investing. And we encourage investors to talk with their CPAs and attorneys prior to making any decisions on investing.

But since August, 2018, we have had seven full cycle offerings. And when you look at the total returns, again, toe to toe with other sponsors that have done similar offerings but that have been leveraged. So we’re really taking out the equation and risk of the debt out of the equation, but still average annualized returns that our clients have been very, very satisfied with these average annual returns.

27:18 – All of Cove Capital’s Full-Cycle Offerings Are Debt-Free

So if we put debt on these offerings, could we have had much higher returns? Absolutely, because debt leverages your appreciation potential and your return potential, your cash on cash return will be higher, typically not in today’s environments with where interest rates are, but your appreciation potential will be higher, but your downside potential is magnified as well. And so could we have done more than these? Absolutely. But at the end of the day, we’re investing our own capital into these offerings and we really want to be in a situation where we’re poised to weather the storm. We’re not beholden to any bank lender, CMBS lender, whoever it may be, we’re not in that situation.

28:03 – Cove Capital’s Full Cycle in Greenville, SC

So the first one was in Greenville, South Carolina, DST, 12.6% average annualized return for our investors. Each one of these, there was a full principle back, some of them modest appreciation, others even better appreciation and distributions along the way. So this first one in Greenville is a long term net lease corporate tenant, 12.6% average annualized return.

28:30 – Cove Capital’s Full Cycle in Missoula, MT

This Cove, Missoula, multifamily debt free DST that was closed on, we sold it, I think it was 10 days ago now. And this one we’re especially proud of Missoula, Montana. We bought it before the pandemic. We just anticipated the market and that is a growing market. We were able to sell it to a 1031 exchange buyer that had sold some sort of piece of farm or ranch in Montana and they knew this asset. And so we got a really solid return for our investors and it was a 18.29% average annualized return there on a debt free multifamily DST.

Cove Capital is believed to be the first sponsor to fully subscribe a debt-free DST. We did one outside of Nashville, we still have it in our portfolio. It’s performing very well for us. There was another debt free multifamily DST, I think it was six, seven years ago by another sponsor, but they didn’t raise the money. And so the offering didn’t actually happen, but we believe that we’re the first ones to do a debt free multifamily DST. And we think probably with this one, the first to take one of them full cycle. So pleased about that.

29:45 – Cove Capital’s Full Cycle in Tacoma, WA

Let’s see. Our acquisition fund one, it’s essentially a venture offering, not available for 1031 exchange. We took that full cycle, 7% average annualized return. That’s for cash investments. Our Tacoma debt free data center as long term net lease with DaVita. It housed their corporate data center or one of their major corporate data centers. Average annualized return at 5.57%. Full return of investor principle there. Our Cove Winston-Salem industrial distribution facility DST, that was our first asset that we bought in August, 2018.

30:22 – What Are Items Cove Capital Looks for with Net Lease Tenants

With net leases, you’re looking at a handful of items. You’re looking at where the market is, where cap rates are, how much term you have left on your primary lease term? What is the likelihood of that tenant to renew? Are they developing newer facilities nearby? You’re kind of weighing all that and looking for that opportune time to take that asset to market and provide that full cycle liquidity event for your investors. And that was a situation here, 7.19% average annualized return. Clipped the coupon all the way through from August, 2018 to when we sold it a couple months ago. Which you compare that to sponsors across the board that were dropping distributions during the pandemic, during the Coronavirus pandemic, these clients were very, very pleased to have that predictable, durable income stream from one of the largest companies in the world as the tenant paying rent being FedEx.

29:45 – Cove Capital’s Full Cycle in Elk Grove Village, ILL

So next below it another industrial distribution facility. We bought it kind of right during Coronavirus in Elk Grove Village, Illinois, right next to Chicago O’Hare, another FedEx distribution facility. That one went full cycle at a 12.37% average annualized return. And then this next one here, Cove Dallas distribution, debt free DST, that was a Frito Lay distribution facility in the Washington DC metro area. 8.73% average annualized return for our investors. Again, full return of investor principle. We close on that a couple months or probably about a month ago now. So eight full cycle offer, or I’m sorry, seven full cycle offerings in since 2018. And we design these properties to, or we design these offerings to mitigate risk and to provide a solid outcome for our investors.

There’s no guarantees and that’s why we talk about that. The risk is there in all real estate, you can lose all your money. Cash flows could go to zero, but that’s the major risk with a debt free offering, the cash flow could drop to zero while we have to re-tenant that asset and put somebody back into that space and back fill it. We haven’t had that happen yet, but it’s a reality. But that’s the beauty of debt free. You live to fight another day. You don’t have to have a lender knocking on your door doing all sorts of mechanisms that are already agreed to in the loan docs. If you read the loan docs on these leveraged DST offerings in the marketplace, it’s a little scary when you really dig into those. And that’s something that investors and advisors, broker dealers oftentimes aren’t really doing. Or the sponsor may have done well in the past, but these loan docs, they change from deal to deal. So you really have to be careful there.

Not saying that leverage offerings are bad and they do have a place for certain investors that have to replace debt or maybe they’re wanting greater upside potential, but it has to be considered. Does that make the most sense for that investor? And oftentimes the debt free option can deliver potentially similar outcomes without that added risk. Again, we don’t guarantee cash flows or returns and past performance does not guarantee future results.

So this is my partner and I, Chay Lapin on the left, myself on the right here. We founded Cove Capital in 2018, bought our first asset, I think it was founded in January 2018 or February 2018. Bought the first asset in Winston-Salem, North Carolina in August of 2018. And since then we bought over a million and a half square feet of assets. Very strong pipeline and million and a half square feet is great and almost 500 million of asset center management. And that’s with a relatively small selling group.

34:27 – Cove Capital Has Created a Best-in-Class Real Estate Investment Team

So we’re excited to have Corey. We’ve never had a wholesaler. To have Corey on board to talk with others in the industry and share what we’re doing at Cove because we believe it is a compelling story. Not right for every client, not right for every advisor, but for the right client and the advisor that understands the risk of leverage and the risk of real estate and is looking to mitigate that risk, we think Cove is a very, very compelling potential solution.

So on top of the million and a half square feet that we’ve purchased and the portfolio we’ve built, we’re really proud of our team. First and foremost, Doug Kay, that’s my older brother actually. He just retired from the Navy. I haven’t spent this much time with him since he started working at Cove about eight months ago as the day that he left the house to go to the Naval Academy when he was 18 years old. So really, really a huge blessing to have my older brother working with us and on our team at Cove Capital.

He oversees as a SVP of operations, all of Cove’s asset management, acquisition teams, accounting ins and outs. Doug is overseeing that and it’s the leadership skills that he’s built while being in the Navy as a commander in the Navy are really, really valuable for the entire Cove family, all our investors, et cetera. So Doug, Naval Academy grad went to flight school, then started flying the Navy Seahawk helicopter, which is the MS60R, multiple deployments around the world. And from there, sorry, he was a flight instructor. Hundreds of students that he taught on the initial training in the fleet for helicopters. As well as did the, he was the first deployment with the Fire Scout MQ8 unmanned helicopter. So that was really a unique part of his career. And then went to the Pentagon working in acquisitions on the Navy staff for those fire scout and fire scout helicopters. And this past year retired from the military and now we are lucky to have him at Cove Capital. So that’s Doug K.

We have Alisha Kosareff, she was employee number one at Cove Capital. Our first handful of acquisitions we used outside council in some of the larger law firms out there, working with them on our acquisitions and offering documents, et cetera. And it became clear that we really needed somebody in house that was able to help us with our goals for Cove and for our investor base. So Alisha Kosareff came to us. UCLA School of Law grad. She was in-house attorney for a real estate development and management firm that had properties across the United States, including shopping centers, net lease, retail, multifamily. Very, very bright legal mind in real estate acquisitions, leasing, business contracts. And she’s helped us close on over 70 properties at Cove Capital since joining us. So really fortunate to have Alisha Kosareff as our general counsel.

Ted Vidmar is our CFO. He was a CPA and former partner at Raimondo Pettit Group with 30 plus years in public accounting firm experience. Let’s see, partner of audit and attestation services with specialties in real estate constructions, M&A, and serving companies generally with revenues of 50 to 150 million. Graduate of Golden Colorado. So Ted has been my personal CPA, my family CPA for all of our affiliated companies as well as Chay Lapin for years now. And he’s seen the growth of Cove, of our other companies and we were fortunate enough to be able to bring him on board at Cove as our CFO. So really excited to have Ted on the team.

Dennis Younes. Dennis is our Vice President of real estate acquisitions and development. He is previously with Whitestone REIT, a publicly traded Texas based REIT, where he negotiated nearly 2000 lease and purchase agreements for retail, medical, office and industrial users. He’s got a very deep understanding of multi-tenant development, having developed over 1.6 million square feet of shopping centers. He has an MBA from the University of Phoenix and a BS in construction engineering from Arizona State University.

As Cove is growing and in looking to expand our investment product suite for our investors and capital providers, we really realize that in order to venture into these other asset classes that have a little bit of a higher potential for risk adjusted returns, whether that be multi-tenant industrial facilities, multi-tenant retail centers, we wanted a higher expertise boots on the ground. So Dennis is based out of Houston, lots of experience and we’re lucky to have him on the team.

We’ve also got Carlos Valdivia. Carlos is our VP of multifamily acquisitions. He’s the one that ran our Pleasant Creek acquisition, 159 units that we discussed earlier. And Carlos, he’s focused on multifamily and value add multifamily nationwide. He’s got over two decades of experience in all aspects of commercial real estate investing, including asset management, redevelopment, leasing, finance, and valuations. He was previously at a company called Tokyu Land US Corporation, which was a publicly traded Japanese real estate investment firm where he was deployed here in the U.S. handling value add multifamily acquisitions for this publicly traded Japanese real estate firm. So we were lucky enough to have him join us from that firm and he’s done a really great job. He’s got a MBA from Stanford in economics and real estate finance.

Corey Nolan, Corey, many of Corey, he’s our first wholesaler. We’ve worked with Corey for a number of years at his other firm and it was just really a great fit and match for us as Cove has evolved and looking to work with more broker dealers, RAs, family offices, et cetera. And so Corey is our wholesaler VP of wholesaling here at Cove. Lot of breadth of experience in the DST and private fund space and he’s a great resource for you, the advisors out there, whether you’re looking for getting questions answered on Cove as a company or Cove’s current investment products. Walking through the business plan and the risk factors. Getting on phone calls with your credit clients to go through Cove and the offerings available and the business plan and risk factors of the offering. Talking with your clients, client events. Whatever it may be, we’re here to support you at Cove and that’s why we hired Corey Nolan. He’s been a great asset to our team and already for a number of BDS and RAs that he is working with at Cove.

These are other members of our team here, Edgar Cruz, who helped us with our risk and disclosure this morning in-house council. Sam Simino, acquisitions, Karen Brown, VP investor relations, you’ll be working closely with her for investors that go into Cove offerings or advisors, broker dealers, RAAs, great resource for you there in Karen, VP of investor relations. Sam Schwartz, Senior asset manager. Sam Timchai, our an accountant. Daniel Schubert, another accountant, Joy Isoke in asset management.

Taylor Lapin, asset management. We have a number of assets down in Texas, both net lease, commercial and multifamily. Taylor as well as Dennis Younes, who I mentioned earlier, they’re both in Texas, deployed there to help us with our portfolio down there. And boots on the ground is really important, especially with these operating assets. And so I think that’s something that sets us apart at Cove a little bit.

We also have Valerie Guzman, who is our legal assistant. Kyle Brownell, senior accounting manager, came from a large REIT that many of you would know that previously did non-tradeds in kind of the BDRA community and he was accounting manager there. So we’re lucky to have him.

43:10 – Eight Reasons Cove Capital Uses Debt-Free Offerings for Its Clients

Quickly, I’m going to go into why debt free. A lot of people don’t understand the risk that come with leverage because a lot of times it goes well, but when it doesn’t go well, there’s some real issues. So no refinancing risk, as rates rise, if your loan’s coming due, you’ve got major refinancing risk, right? Maybe you can refi, but maybe you have to add cash for the bank to give you that refi. Or maybe the interest rate is so high that there’s no cash flow anymore on that offering because of the refi. So no refi risk with the debt free DST real estate investment. Two, flexibility, you can hold through any potential market downturns, credit crunches, recessions, depressions, pandemics. You’ve got flexibility. You’ve got holding power. You can live to fight another day.

Number three, no cross collateralized loan risk found in certain leveraged real estate investments. A lot of DSTs that are portfolio DSTs, whether they be multifamily or single tenant net lease or industrial, it’s all cross collateralized. Read the loan docs. Look at the provisions in there. If one of the tenants or a certain percentage of the tenants in the portfolio, something happens bad within, but everybody else is performing, well, that could hurt the entire offering.

Four, no cash flow sweep risk is found in certain properties with debt. Read the loan docs on these leveraged DSCs out there. There’s cash flow sweeps built into the loan docs that I promise you lenders will exercise if there’s an issue. Again, I’ve participated in over $30 billion of DSTs since 2007 and I’ve seen it happen. I’ve seen sponsors cash flow swept when there’s an investment grade tenant who gets a downgrade in their rating by the agencies. The lender sweeps the cash flow. I’ve seen tenants go dark, take a building dark, the tenants still paying their rents as promised per the lease. It’s a nice long term lease. Well, the lender sweeps that cash flow and an investor that goes into that could be sitting there for a year, two years, five years with no cash flow from their investment. When you’re debt free, even if a tenant goes dark, there’s no sweep of the cash flow. So no cash flow sweep, that’s really, really important.

Number five, especially with interest rates rising, and even without, oftentimes all cash debt free real estate investments can have a higher projected cash flow than leverage real estate investments due there being no monthly debt service that needs to be paid to a lender.

Number six, allowing an investor to protect themselves from the financial catastrophe of a complete loss to the principle due to a lender foreclosure. I’ve seen leveraged offerings get hit. Look at the track records in the various sponsors offerings. There are properties that were sold for less than the investors put in. So if you don’t want to have a situation where there’s a loss of principle due to a lender foreclosure, being debt free makes a lot of sense. Yes, the market could go down if the building was sold at the wrong time. You could sell at a loss in a debt free deal. But typically sponsors are selling a deal because the loans coming due, that’s what forces them to play their hand. They sell that deal. And if it’s out of the money, you’re looking at a potential loss. So debt free, yes, you could lose principle with declining market values, but you’re not forced to sell. And that’s the difference here.

Number seven kind of ties in with number six, no balloon mortgage maturity typically found in most leveraged DSTs. They’re all 10 year debt. All DSTs are 10 year debt. We’re seeing more and more that are seven year and five year debt. And at that five or seven year timeline, you’re sitting there with a maturity. It’s not like a 30 year loan like you see on a home mortgage. It’s a five, seven or 10 year loan, typically, on these offerings. And so that balloon mortgage maturity, that’s coming and if it’s not the right time, if the economy is soft or there’s a recession or something’s going on, you might be forced to sell into that market if you have leverage on your offering. Where with debt free, you can live the fight another day.

Yeah, if you just decided, Sure, I’m selling today in the middle of recession, you could sell at a discount and give back investors less than their full principle. But being debt free, you can live the fight another day and continue to hold the asset. Again, no guarantees. Read the PPM, understand the risk factors. There’s risk in all real estate investments, whether debt free or leveraged, but with debt free, there’s no balloon mortgage maturity.

And then number eight, no lender prepayment penalties, defeasance costs and or yield maintenance. We’ve seen a lot of sponsors take offerings full cycle, DST offerings full cycle and you look at the returns and it’s pretty minimal. It’s the cash flow and principle back and that’s it. Where’s the upside potential? Well, they did sell it for more, but of you remember, you have to burn through the load as well as you have to burn through those prepayment penalties defeasance costs and/or yield maintenance. And so when you’re debt free, you just don’t have that. And so that really helped us on a lot of our offerings is that we didn’t have those extra fees and costs. We were in the money. We were in the money, and we were able to provide that full cycle liquidity event for those investors. And as opposed to a lot of sponsors with these prepayment penalties and defeasance, it really eats into return. So you just don’t have that when you’re debt free.

43:10 – Common Exit Strategy Cove Capital Can Offer Its Clients

What’s our exit strategy? So we have multiple options. Individual asset sales to 1031 exchange investors, which we’ve done. Individual asset sales to REITs, family offices, investment funds, and other professional investors, which we’ve done. Portfolio sale of assets. We’ve never done a portfolio sale. Probably won’t happen for quite a while until we get scale Again, we’ve got about close to half a billion, I think God willing, that we’ll exponentially grow. We’ve seen exponential growth previously, even when the market wasn’t as robust as it has been in ’21 and ’22 up until a couple months ago. But a portfolio sale is definitely something that we’ve thought about and we’ve actually talked to a few folks about it. UPREIT roll up, right? The 721 UPREIT roll up. We’re right now drafting our REIT program. That’s essentially going to be one of the exit strategies for investors in these DST offerings to roll into the REIT, so that’s being done now. It’s a 506C offering.

And/or hold for long term income and appreciation potential. The beautiful thing about debt free is we are not beholden to any one exit strategy. We have optionality. We can look at these exit strategies and decide which one makes the most sense for our investor? Which one is going to maximize potential returns and provide the best investor outcome possible. Again, no guarantees for positive returns, profitable sales on any DST, debt free or not. But when you are debt free, you have optionality. And we’re executing on these exit strategies. We’ve done two out of the five here already. We’re working on the third one there.

50:44 – The 721 UPREIT Exit Strategy

So very exciting for our investors to have that option. With the 721 UPREIT, you exchange your DST interests in maybe a FedEx debt free DST or a multifamily DST, or could be a Fresenius or a Walgreens DST. You exchange it for shares in the REIT on a tax deferred basis, and now you’re not in just one asset, you’re in a number of assets because the REIT’s a portfolio, so having a half a billion dollar portfolio of these assets, that’s a really nice place to be, in our opinion as investors in each one of these offerings as well, as an exit strategy to roll into a much more diversified portfolio.

So that’s it for today. We really appreciate each one of you on the line joining us, and if you have questions, reach out to us. We’d love to have you visit us. Our headquarters is here in Torrance, California, so Los Angeles, the South Bay of Los Angeles. Love to have you come out and meet the team, and Corey’s a great resource for you. So work with Corey. Talk with Corey, and we’ll get you all the help that we can. So thanks everybody for joining. I’ll turn it back over to Corey.

Corey Nolan:

Thanks, Dwight. No, that was great. Just to close up, I’ll let everybody know this has been recorded so I can send you a copy of it if you’d like it. Thank you for joining. For those that have emailed me questions, I will get back to you this afternoon as quick as I can. So until next time, talk to you later.


*Past performance does not guarantee future results.