Understanding Industrial Real Estate Investing Through Triple Net Leases (NNN) with Neil and Drew Wahlgren

Tim Lyons  00:07
All right. I’m going to count down, and we’ll get started. This is going to be right where you say 109, episode 109 with Neil and Drew Walgren from Mag Capital. Ready, 321. Welcome to another episode of the Passive Income Brothers podcast. I’m Tim Lyons. Today, I’m thrilled to be joined by two brothers from Mag Capital. It’s not every day we get brothers versus brothers, Greg, but today, I’m pretty excited.

Greg Lyons  00:37
You know, I hate making history on this podcast, but we seem to do it over and over again. This is getting mild, so…

Tim Lyons  00:46
We’ve been at this just over two years, and it’s the first time we’ve had more than one guest appear at the same time. But I’m really excited to bring these two brothers on. They’re from a company called MAG Capital Partners. It’s an operator we’ve been working with through our broker dealer. They have a really cool business model, something not an everyday thing you might hear about. It’s a way to participate in the industrial real estate space without, sorry, Greg. Oh, my God. I don’t know, you were raising your hand for some reason. It threw me off. I’m sorry, guys. I don’t know, you were raising your hand about something.

Greg Lyons  01:33
When was the last time you stopped talking? Anytime? Okay.

Tim Lyons  01:40
I’m just gonna take it from the top. I don’t know where I was. Okay. All right. 321. Welcome to another episode of the Passive Income Brothers podcast. I’m Tim Lyons. Today, I’m joined by two other brothers. We’re making history today, Greg, because we’ve never had two brothers versus two brothers on the Passive Income Brothers podcast.

Greg Lyons  01:59
Again, history in the making. It just gets better and better on this podcast. But the interesting thing about today is that this is going to be something new for our audience. If you remember, everyone remembers Don Homer a couple of weeks back with the oil and gas; that was very new to our listeners. And today we have another special treat.

Tim Lyons  02:20
Yeah, Neil and his brother Drew are from a company called Mag Capital Partners. What I love about their story is that this company is a bit different. It’s a unique way to participate in a private placement in the industrial real estate space. Today, I just want to introduce you to Neil and Drew Wahlgren. Hey, how you doing today, Drew?

Drew Wahlgren  02:44
Guys appreciate you having us on here. It’s fun. Next time we’ll play tennis, you know, two brothers, brothers, have some friendly competition.

Greg Lyons  02:53
Pickleball, maybe.

Neil Wahlgren  02:58
Mario Kart, but, you know.

Tim Lyons  03:01
Well, whatever it takes. Greg and I are certainly down for the competition. So, Neal, why don’t we start with you? Could you bring us into a high level of your background, how you got to where you are today before we dive into Drew and the background on Mag?

Neil Wahlgren  03:17
Absolutely. First off, thanks so much for having us. Super stoked to be on here. We saw the brothers’ connection, and we knew we couldn’t say no here. But yeah, my background, Neil Wahlgren, a partner at Mag, really focused on the capital market side, lining up largely equity, a bit of debt for the industrial real estate investments we put together. My background, Drew and I, born and raised in the East Bay, East San Francisco Bay Area in California. I had a prior career, military pilot for the Air Force, flew C-130s all over the world, lived in Japan last time, then in the Middle East and the Pacific Rim, got to see a lot of things, a great way to spend the 20s. Ultimately went to business school afterwards, ended up falling into several firms focused on money raising and capital alignment in commercial real estate. That’s how I got to where I am now.

Greg Lyons  04:19
And, you know, Drew, you probably get this a lot, but you’re going to be compared to your brother. This is going to be an A and B test right here. Drew, a bit about yourself.

Drew Wahlgren  04:27
Sure, there’s one of you, the older, of course, but also type A, and Neil definitely has some of that. He has an impressive resume, hard to stand up to, you know, a pilot in the military. Yeah, so Neil and I always been close, going way back. I fixed up a couple of houses, sold them, had that fork in the road personally, whether I want to become a landlord, an active real estate manager. At the time, he was working at a firm raising capital and syndicating commercial real estate investments. We would talk about this over beers or dinner, really interesting to me. So I chose that route. Fast forward years later, Neil and I joined Mag Capital Partners, been a great ride. I’m on the capital market side, working on equity and debt right alongside Neil. It’s been fun to be shoulder to shoulder with him, work that side, bringing all the debt and equity into each acquisition and fund as we continue to acquire more properties. It’s been a great ride, and nothing better than working with family and somehow still getting along.

Tim Lyons  05:44
Oh, I love that. I mean, Greg and I talk multiple times a day, right? I can’t tell if he likes it or hates it, but we do it anyway. But it’s really fun to work with your brother. People always ask me, you know, how do you guys get along? Do you guys fight? If you guys knew, the only fight we’ve ever had was whether or not we needed a website for the business. I kid you not.

Greg Lyons  06:10
Mind you, we didn’t start the business in 1982. I mean, yeah, I was a little off on where you guys stand on it. Keep going.

Drew Wahlgren  06:18
I gotta say, just to jump in. I mean, who else will give you as honest feedback as a brother, right? So I think Neil and I both lean on each other for that. Hey, here’s something I’m a little less sure about. I really want someone who will give it to me straight, and so, you know, just gut punch me if this is a terrible idea, because someone else would. 

Tim Lyons  06:40
Well, I’m glad we’re not the only brothers who have that brutally honest relationship because it works, right? It works in business. And what I love about hearing, you know, Drew, you did a couple of fix and flips, have a finance background by way of education, a couple of fix and flips, deciding that fork in the road. Do I want to be an active landlord, go down that route, or maybe do something a little different, a little bigger? Neil was doing some syndication stuff. What’s striking to me about that is that a lot of us start the same way, right? I started with a three-unit, Greg has single-family rentals. We all kind of maybe start out with that because we can understand it. We’ve bought and sold our own home, maybe have a vacation home. We know how the financing works, know how a single-family house should operate. But when you get sick of that or it becomes another job, but you still want that passive income, it’s a perfect foray into what we do here at Cityside Capital and what you guys do at Mag. So, you know, I think this would be a good time, you know, Neil or Drew, feel free to hop in. What is it that you guys do with Mag Capital and industrial properties?

Drew Wahlgren  08:00
At a high level, we invest in industrial real estate with long-term triple net leases backed by American manufacturing companies. We typically buy and hold, enjoy that cash flow, and really see predictable increases in rents. Being that there are no expenses with those leases, increasing NOI, paying down debt, and really having this predictable cash flow and appreciation model. We’ve been at this for about nine years now with that same strategy, so really continuing to see more opportunities in that space.

Greg Lyons  08:36
You know, it’s interesting. I think a lot of people think industrial real estate, and they think maybe an Amazon distribution warehouse or maybe an electrical supply. When you kind of uncover the veil on industrial, there are so many different assets out there, and that can be confusing sometimes. When you talk about American manufacturing, triple net leases, it’s outside the norm of the single-family or the multifamily that we talk a lot about. So just breaking it down a little bit more here. What exactly are you investing in when you say American manufacturing companies? Because that’s not the Amazon warehouse; that’s something a little bit different.

Neil Wahlgren  09:23
Yeah, it absolutely is. Industrial is interesting because not a lot of people have actually been in an operational warehouse, right? You’ll see it on the side of the road, but you could live your whole life without ever stepping foot in an active warehouse like that. When you compare that to retail, multifamily, or office, almost everyone has been inside, utilized, or even rented a space like that at some capacity. So, you know, really, I’ll paint a high-level picture on what industrial really looks like. It’s typically used for a number of different purposes, primarily warehousing, shipping and receiving, and manufacturing. Those are the core single-use space types. Inside, it can take a thousand different versions, shapes, and forms with the tenant. But ultimately, the real estate tends to be a flat surface, poured concrete foundation, four walls, open-format space, and a relatively flat roof. There may be some cranes on top, but everything else in there is the property and the unique configuration of that tenant. There is some specialty use industrial, like heavy refinery, biotech, or even a bit of cold storage, specialized properties for specific-use tenants. But the space we plan is much more versatile. Many of our tenants focus on manufacturing but also have some warehousing, shipping, receiving, etc., in the space they occupy.

Drew Wahlgren  11:20
A little mysterious, I was gonna say, to a lot of civilians, right? If you don’t work in manufacturing or in a warehouse, I mean, why is it so mysterious? Typically, it’s zoned in another area where most people don’t drive through, right? It’s on the other side of the train tracks. Even if you go by those buildings, what do you see? It’s not like there are giant windows, you can see what’s happening inside. Usually, there’s some small signage, might say ABC Holdings Enterprises or something along that line, and you go, I don’t even know what that means. Inside, they might be building school buses, right? You really don’t know. So it’s a little mysterious unless you get some exposure in there. I think for a lot of investors, it’s kind of misunderstood, not understood at all.

Tim Lyons  12:06
Yeah, it’s unknown, right? Even with retail, the investment behind retail, where the thesis behind retail is like Dick’s Sporting Goods or Best Buy, I understand inherently what that is. I understand people go there, supermarkets, and grocery-anchored retail strips, those all make sense. I can get behind that thesis. But what I’m hearing from you guys and felt in the beginning too, when I first heard about Mag, is you could drive past the industrial park of these never-ending properties. They look enormous, some of them. You don’t know what their balance sheet looks like, don’t know what they’re selling, don’t know what their revenue is. There’s a little sign that says ABC Code or whatever it says. But once you dive into it, you guys have done a really masterful job. Just following you guys and following your fund has been really educational for Greg and me because there’s a whole other asset class that we’ve been opened up to. So I’d love for one of you guys to kind of go through the investing thesis behind industrial triple net lease, and maybe you can even define what triple net lease is for folks and why that’s so advantageous to be on your side of the investment.

Neil Wahlgren  13:23
Yeah, maybe I’ll start with the lease, and then you can jump into the thesis. The lease is a critical piece of the thesis. In two broad categories, you have a gross lease and a net lease. A gross lease means the owner of the real estate will pay for most expenses associated with owning, operating, managing, and maintaining that real estate. Largely in multifamily, the building owner will pay for capital improvements like roof replacements, modifications, and even down to the unit level, they often pay for toilet repairs, renovations, etc. Utilities might be split with the tenant, and property tax is paid by the owner. In a net lease or our scenario, an absolute net lease, all line items are paid directly by the tenant. Tenants pay their utilities (electric, gas, water), property insurance directly. They absorb unknowns, increases from the county tax assessor, maintenance costs, and even large capital expenditure items like a ten-year industrial roof. They’re willing to take on that risk and responsibility because the lease structure is long enough to make it worthwhile. In our space, we often see 15 to 20-year leases. Tenants know they’ll occupy the space for a long time, so they’re willing to make that agreement to maintain and take on the responsibility of upkeep.

Drew Wahlgren  15:36
The thesis really takes that triple net lease, that absolute triple net lease, as a huge part of it. We’re investing in an industrial property, or many in the case of our funds, executing a long-term lease. If you look at a single tenant with 100% occupancy and combine that with an absolute triple net lease, where is the risk of expenses? We box that out. Where’s the risk of vacancy? We box that out. We have 100% occupancy. Most of these leases are 20 years, occasionally 15, but 15 to 20-year term leases. We’re not taking this lease-up risk in three or five years. With small multitenant industrial real estate, you might see a three or five-year lease, which has its own risks. We box out the operational risks and focus on the single tenant default risk. Our thesis is finding private credit manufacturing companies across the country, well-established businesses with a track record and history. We analyze the credit, financials, management team, and often a private equity sponsor that owns the manufacturing company. We look at their track record and portfolio to understand the credit risk because that’s the concentrated risk. We box out the day-to-day operational risks and focus on the long-term lease. We want to understand and get comfortable with the single tenant’s credit risk. If there’s weakness, what’s the yield? What return are we getting? We don’t want to run into a vacant property and see the occupancy go from 100% to zero. It would take some time to work through and return the property, depending on the market, maybe a couple of months, six months, or nine months. We focus on the strength of the tenant. Neil can talk about a typical credit profile we see across other types of investments and what a typical company looks like.

Greg Lyons 17:55
Yeah, you know, that’s, you do a great job at MAG Capital of kind of taking some risk off the table. That’s really important to investors. So when an investor comes to Mag Capital, they’re investing in the leases that you all are putting together. There’s a lot of skill that goes into that, and a lot of deal-making that has to happen. But when you talk about investing in those absolute net leases, I think one of the key components is the importance of the creditworthiness of the tenant. Who are you investing in? Drew, you touched on it a little bit. But when you’re looking at risk, it’s really important, and I think a lot of things hinge on this. So, Mag Capital, how do you account for that risk? Do you have a team? Do you have a bunch of underwriters? What happens when an investor says, “Yep, I want to put some money with you”? What does Mag Capital do to make sure that this is a very strong tenant?

Neil Wahlgren  18:56
Great questions. I’ll take this one. When we’re looking at a potential acquisition, we look at the real estate first, the basis of that acquisition. Are we buying it well below replacement value? Is this something that’s intrinsically protected from the real estate side? In the unlikely scenario of a default on our lease, are we positioned well below what it would cost to rebuild another building here? The second piece is the strength of that lease. So what are the teeth behind it? What’s the lease rate, the terms, the structure, etc.? And then the third piece is who’s behind that lease? And that’s where credit risk comes in. Most of our, you know, if I was to paint a very broad swath, you know, picture of what our typical credit tenant looks like, they’re usually a manufacturing firm, as Drew mentioned, privately owned or recently sold to a private equity backer. These firms have typically been around for 30 to 80 years, a long time, with a long operational history. They usually have several hundred employees, if not more. Quite often, they will be part of a small portfolio of similar industries, where they have a parent company that owns several portfolio manufacturing firms and uses synergies between them. When there is a parent company, we usually get that parent company to sign a guarantee on that lease alongside the tenant that’s in place. From a financial standpoint, we look for our guarantors to have $50 million or more in annual sales, and many of them have $300, $400, or $500 million a year in sales. We look for strong EBIT margins, indicating profitability. Our credit team delves deep into corporate debt, evaluating leverage and operational efficiency. These are the main metrics for predicting how likely these tenants are to stay in business and keep paying their rent. With larger credit tenants, like Amazon, Walmart, or Home Depot, who have publicly traded stock and transparent financials, it’s easier to assess credit risk. However, in the private credit space where we operate, many tenants are privately held, requiring a more in-depth analysis. We’ve built a four or five-person in-house team for advanced due diligence and credit analysis. Once they feel comfortable, and we go forward, in the lease, we’ll put provisions where those tenants have to continue reporting their financial picture to us on a quarterly basis. So once a quarter, we’re seeing how that financial picture is ebbing and flowing, allowing us to be proactive as real estate owners and managers.

Tim Lyons  23:05
What I love about what I just heard, and I really hope that if you’re driving in the car, you pull your car over, you get your notebook out, or your notes on your phone, and you start taking some notes. Because there’s real participation from passive investors when they see the light or they understand the product. They’re like, “Wow, this is really powerful stuff.” That’s how I felt with Mag Capital. I’ve got to be honest, I didn’t understand any of this. And then I went through your offering materials, your webinars, and your videos, and it made total sense. Because a lot of times when we talk to brand new passive investors, they’ll say something like, “Well, you know what, they might have even a million dollars to invest. And they’ll say, ‘I just want to do it myself.’ Go ahead, you know, that makes total sense. If you know how to do credit underwriting, God bless you. If you know how to do tenant improvements, even I can’t even hang a picture on my wall. My wife won’t let me. If you can do all that by yourself while still doing your W-2 or your small business or owner, that’s great. But if you don’t, I hope you can hear the transference in Neil and Drew’s talking points here, because they’ve built out a team. They have, I forget what the number of years is between the five principles, but it’s like, I don’t know, 60 or 70 years. Neil, am I hovering around the right timeframe here?

Neil Wahlgren  24:19
Yeah, myself and the two partners have, I think, 65 years now between the three of us. Not bad. I mean, more like 55 years of experience. The other two guys are strictly on the buy-sell side and just have mountains of experience between the two co-founders there.

Tim Lyons  24:36
And what we talk about all the time on this podcast is building out a team, right? It doesn’t matter if you’re buying your first single-family rental or getting into a syndication with everything in between, right? You want to have a team behind you that can do the underwriting, the acquisitions, taxes, right? A good CPA, a good attorney, we always talk about that. And here with Mag Capital, what we found working at Cityside is that they have a team in place, right? They actually produce a lot of this credit analysis for each of their tenants. And it was impressive. What I love about it too is that there are quarterly financials, right? There’s no “set it and forget it” in this industry. Because if you lose track, you know, if you don’t know the numbers, right? If you don’t run the numbers, the numbers are going to run you. And you don’t want to be on the other side of that bet. So what I love about this is that you guys are also vertically integrated, right? So if there’s a big capital expenditure (capex) project, meaning they have to do a roof or they want to expand 10,000 square feet to do some sort of manufacturing build-out. Can you talk a little bit about maybe the little value-add pieces that Mag Capital provides to some of their tenants?

Drew Wahlgren  25:40
Yeah, I’ll jump in. Yeah, we’ve seen this opportunity pretty often with tenants that, you know, after they’ve been bought by private equity, they come to us for sale-leaseback. It’s a financing transaction for them. They’re using capital to grow the company. And oftentimes, they frankly outgrow their space. Typically, you know, they have this in mind. And we keep this in mind too. And we’re, you know, outlining or doing our due diligence on the property. It’s pretty easy to see how much acreage should we have around this building? You know, is there space to expand there? So, it’s a great opportunity when a tenant comes to you and says, “Hey, we’d like to expand 50, 100,000 square feet. We need more space.” And, you know, reason number one is, “Hey, my tenant’s doing great.” They’re not expanding because they’re doing poorly. They’re busting at the seams, which is a great sign, in general. But second of all, because we can do a very low-risk development build-to-suit expansion on this property where we have a tenant, you know, essentially ready to sign a brand new lease once we’re finished with that construction. So, you know, there’s, there’s no risk in lease-up at that point. As soon as we have a certificate of occupancy, you’re signing a new lease with a fresh set of terms, your new square footage built-in, usually at a pre-negotiated cap rate that’s a lot higher than the market, frankly. So you see some delta there, right? Hey, you know, the market might be trading this kind of asset tenant at an 8% cap, or we might have a 9, 9.5% cap rate or higher built in based on construction costs for that expansion. So you could see how nice of an opportunity it is and how valuable that is to our tenants. We’re a capital partner for them. And, you know, speaking of in-house or being vertically integrated, we have in-house construction and facilities management. We’ve done this several times before. So it’s, you know, and that’s a sell as we’re making offers on these properties, right? Talking to that tenant, that seller and saying, “Hey, you know, we’re not buying this property from you and going separate ways, right? We’re going to be partners for the long term. We’re going to be the landlord, and you’ll be the tenant. But we can be a source of capital for you for an expansion like this and really help you with that.” And obviously, you take on the additional burden of rents, but for them, that’s a huge win. So there’s a number of other ways we can, you know, capitalize on any kind of CapEx repairs into a lease and really build some additional value when those opportunities come along. So contrary to popular belief, it’s not just set it and forget it with no upside at all. We frequently see those opportunities over the course of a five-year hold on a lot of these.

Greg Lyons  28:22
Yeah, I think it’s important. You’ve talked a lot about just set it and forget it, you know, what kind of value does Mag Capital bring? I think there’s so much that you do to add value. And I think our listeners are really kind of thinking to themselves, “Okay, this is new to me. I kind of see what’s happening here.” But I think if you could just bring it home to our maybe listeners or future investors and say, “How does Mag Capital and how does the investor make money?” Right? And I think speaking about market conditions, market conditions right now would be kind of helpful in describing how you will and how the investor makes money.

Neil Wahlgren  29:05
Yeah, and I’ll take this one. So really, I mean, it’s a two-prong approach. On prong A is going to be upfront cash flow. And that’s really driven from setting an acquisition cap rate at a level with corresponding rent that makes sense, such that even with interest rates where they are today, when I put debt on the property, I still have a nice spread between rent coming in, my debt service, and then having a really a decent amount of upfront cash flow to distribute to LPs. Our internal target is roughly 8% to LPs from day one. And we’re able to do that because the properties are fully occupied when we buy them. And there’s long term leases, no expense exposure. So really, we know at a high degree of certainty, I’m going to deliver around 8% in the first year. There’s going to be annual rent escalators built into that long lease. So I know every year my rent’s going up. If I know my expenses are off the table and boxed out, as Drew said, and really, I know my corresponding cash flow to LPs is going to go up every single year. That said, as we hold, we’re building value and how are we doing that? We’re increasing NOI, as that rent goes up, it directly correlates to NOI. Also, we’re paying down debt, all of our debt is long term, fixed-rate debt, is amortized. So every month that we’re making that mortgage payment, we’re paying down what’s owed on that loan. Over five, six years, those two pieces are a pretty good spread. And then when Drew was talking about, probably about one and three properties over a five-year hold, will have some level of expansion or value-add or amortized, you know, capex improvement to the real estate, or a lease renegotiation, or I mean, one of just a probably a dozen or more tools in our toolkit that we can use to do a hands-on value improvement. And then when it goes time to sell, range of different buyers, we still have a lot of lease term after, and usually 12 to 15 years left on that lease when we go to sell. A huge amount of buyers are looking for a stabilized, performing net-leased industrial asset at that point. So we can either bundle them together, we can sell them individually, to REITs, to institutional buyers, to single investments, or investment groups there. And so on that sales side, really similar to the multifamily structure, we’re going to sell, we’re going to return capital, and then all profits generated, we’ll do a waterfall split.

Tim Lyons  31:35
So I really hope the listener’s getting that right, because you know, multifamily, I wish it was triple net lease, that’d be amazing. But it’s not, right? Because if we’re talking about a 15 or 20-year lease here, guys, and you can feel free to jump in and correct me anytime. But, you know, if you’re starting out at X amount of rent, and there might be an escalator saying every year is gonna go up 2%, or 3%. I’ve even heard of some of these kind of long-term leases having some kind of attachment to the CPI. You know, so, you know, but at the same time, you don’t have to worry as an operator about exploding insurance costs in Florida, like for some of our properties. You don’t have to worry about capex or a leaky roof or, you know, blowing the leaves off the property or mowing the lawn, because that’s all part of that triple net lease right there. They’re responsible for the insurance, the taxes, and the maintenance and upkeep. So that’s how this can work. And, you know, forgive me if I didn’t totally understand, but, you know, from the research that I’ve done at MAG Capital, there’s a positive leverage ratio, right? So you might be buying something at a seven or an eight cap. And you might be putting, say, fixed-rate debt at, I don’t know, six, six and a half. So there’s a there’s a spread there. When you’re buying something with leverage with a rate that’s below the incoming cap rate, that’s what you’re looking for. That’s positive cash flow. That’s a healthy debt service coverage ratio. And from what I’m hearing from you is that going in? Those are kind of the metrics that you’re looking for to have positive cash flow day one rent escalators, triple net lease. I mean, did I do a good job, number one, of retelling that story? And if I did, could you then just pivot real quick? And tell me what are some of the risks? What are some of the risks in some of these properties or this asset class?

Drew Wahlgren  33:32
Yeah, I’ll jump in. You nailed it. I mean, really, it’s stabilized real estate, fundamental kind of real estate investing, which you don’t see as much of in development and value-add, right? Those are higher-risk strategies that typically don’t have debt paydown. I mean, when someone goes, typically the entry point for real estate investors is a single-family home, right? And what’s the sell to him? Hey, I can buy this house, and my tenant will pay down the loan. Right? And it’s true, it’s a great strategy. And if it cash flows on top of it, that’s that kind of fundamentals of real estate. So there’s some nuance and complexity to what we’re doing as far as evaluating and mitigating that risk from a tendency, which I’ll get into in a second. But really, from just a high-up view here, you’re absolutely right. A lot of that positive leverage with cash flow and debt paydown and really consistent rent increases that are baked into that cake. It’s really attractive, right? You can see a lot of that without wondering, you know, how is my sponsor capable of executing this may be a very complex value-add plan right here. In this case, we’ve done a lot of work on the front end to lock in a lot of these inputs and very few variables. Now to get to the question about risks, kind of talked about this, right? That is that there’s the variable really is only two variables. One is that what’s our exit cap rate, right? And we have a lot of flexibility and timing to capture a great time and anywhere Real Estate Investment, you’re gonna have to make that assumption, right? We don’t have that crystal ball. But the other assumption is that the tenant doesn’t default on the lease. Right? So we’re really, and I’ll just kind of add one thing. You know, I think Neil didn’t touch on this. But he talked about monitoring the credit of the tenant, doing a ton of due diligence on the front end and understanding the management team and the company, the industry that they’re in, and their financials, debt, etc. But another is really holding a critical piece of real estate. So sometimes it’s a single property for this company, right? Hey, we have an office in the front 100,000 square foot manufacturing behind it, this is critical to their company. Now, if they get into trouble if they take on some leverage, and are having an issue servicing that. What’s more common than anything, is if a company really gets into it and goes downhill, they could file Chapter 11 bankruptcy, and so they can write off some of those debts. Now, you can only get out of a lease in chapter 11. If you exit the property rights, they’ll they’ll have a company without this property, this is where all their operations are so really critical to the company. And so you’re holding this really top tier position in the in their sort of debt, sort of I shouldn’t say debt, but it’s our obligation stack, you’re high up on the totem pole when it comes to chapter 11 Bankruptcy Court. So you’re certainly in a much safer position holding that critical real estate. Now it gets more complex when they have 10 locations. Right now we’re really understanding how profitable is this location in comparison to the others? Is that the headquarters? Is it a facility that has special capabilities, like a really high capacity crane system inside that none of the others do? And they needed to do some critical work there? Right? These are some of the questions we’re asking ourselves, as we look into this and say, if they ever get into trouble and need to shed some, some operations, this is not going to be the one this is a crown jewel in their assets and operations here. So it’s, you know, we look at this from a lot of different views. But it’s important to kind of understand that we’re sitting, you know, very high up again, in that in that stack, when it comes to a company that could potentially get into trouble. This is really unlikely, really uncommon. We’ve never really seen a company kind of go downhill over time, and just erode into a bankrupt company. So, you know, in one case, we had a company defaults, and we gracefully kind of navigated through that and ended up selling the property for a profit. And that’s kind of what Neal touched on earlier. Is that basis, what are we holding? Right? Is it A, is it a note? Is it a corporate bond? Now, it’s actual tangible real estate here. So when bought correctly, you’re holding, you know, a very defensible asset that, you know, from a national point of view, has, you know, four and three-quarter percent vacancy. So really strong asset class across the board.

Greg Lyons  37:49
You know, it’s interesting. I wanted to maybe jump into a real-world example. At the end of 2023, Walgreens had their credit downgraded, and they are a single-tenant building. We work with a lot of 1031 investors, and they sometimes flock to a Walgreens or Dollar General or something like that, single-tenant buildings were, I think, more simple buildings. Whereas the kind of buildings that you’re operating are maybe a headquarters, they are the best of the best of the real estate of this particular company. Can you compare and contrast like a single-tenant Walgreens in your local neighborhood versus the properties that you’re investing in so our listeners can get a real-world example?

Drew Wahlgren  38:43
Yeah, I’ll take that. I love this question because I see that a lot, right? You see brokers marketing, “Hey, we have a Dollar General store,” right? It’s a 10-year triple-net lease. The biggest difference really between what we’re investing in and those is that these tenants have a huge capital commitment to this location. That’s because they’ve invested in huge equipment, typically tens of millions of dollars at it, right? There’s a massive investment in the space. They’re under a long-term lease, partly to protect that predictable overhead for a long period because they don’t want to have a five-year lease where their rent gets jacked up. It’s a really expensive move. In fact, some of these buildings and equipment almost look like they built the building around their equipment. It’s heavy-duty, it’s large, it has to be assembled there typically. So you have a very sticky tenant, essentially. They don’t want to go anywhere because it’s very costly. Not Dollar General. Not so much the case, right? How hard is it to move retail shelving and cashier stations? There’s quite a bit of supply out there. They can go somewhere else, and who doesn’t want a Dollar General store? So, you know, you look forward, and you go to these guys, “Is this tenant going to stay there?” and the answer is typically for us, yes. And we haven’t mentioned this too much, but a lot of acquisitions we make are through a sale-leaseback transaction. We’re buying this property from the owner-occupier, and they’re leasing it back. They’ve already been in the space for 30 or 40 years or more typically, so they’re really well entrenched. And that’s a huge difference, I think, between the two.

Tim Lyons  40:25
I love that, and maybe you can just expand upon, you know, a minute or two on the sale-leaseback strategy because when I talk to investors about, you know, sale-leasebacks, a lot of the times they go, “Well, why do they want to sell their real estate? You know, it doesn’t make a lot of sense. I mean, if they don’t sell, well, why wouldn’t they just want to keep it?” And it’s, you know, it’s a whole strategy, right? And I mean, especially when there’s a private equity firm involved, and, you know, the everyday investor sometimes doesn’t understand the strategy of private equity or the strategy of recapitalizing their balance sheet with the proceeds from the sale of their property so that they can reinvest in the business. And then they don’t have to have the headache anymore of owning that real estate. So, yeah, can you take a minute or two and just kind of explain what that sale-leaseback strategy looks like?

Neil Wahlgren  41:15
Yeah, I’ll take this one. You know, really, there are a lot of reasons why an owner-occupant might sell. In our scenario, in our little niche in terms of how we find our acquisition opportunity, largely, we work either hand in hand or directly following private equity acquisition. So imagine you’ve got a capitalized private equity firm, usually not a BlackRock, usually much more boutique. They’re focused on manufacturing, they’re building a portfolio of several manufacturing firms, maybe, you know, we’ll say all in the automotive space. ABC, Inc, makes ball-bearing components, and XYZ over here makes fluid, liquid fluid assembly mechanisms or whatever it might be. So, as they buy these up, they will acquire the company and then typically look to, you know, kind of, okay, how do we grow this company the most efficiently? Usually, that’s going to require capital. So they can either inject more capital into the building, same way we have capex into, you know, say a real estate acquisition, they’re going to have, you know, effectively capital on the sources and uses for that, or when that acquisition came with real estate, they can go, Hey, we want to be asset-light. We want to take some of these, what they call low-performing assets. You know, they’re not making a ton of money on by owning that real estate. They’re looking to really grow the operational side. So, they will prefer to fully sell off that asset on their balance sheet to a group like us. So, we are the buyer. They are able to extract 100% of the capital that was tied up in that asset. And now they have that cash really without covenants, without lending restrictions that they might have if they’re pulling outside debt or lines of credit. And now they can use that capital really however they want to grow that business. And oftentimes, it’s a function of paying down some long-term debt facilities that are coming due. It’s a matter of reinvesting into areas of the business they want to grow, maybe hiring new headcount, maybe adding a new equipment line, really any range of things that now they have all this capital that they are able to acquire off the balance sheet. So, we call ourselves an off-balance-sheet, alternative kind of specialty finance partner. I know that was a long, long title there, but ultimately, we inject capital into the business. They sell us a piece of real estate, and they securitize that real estate with a long-term lease, and it’s really a win-win on both sides.

Greg Lyons  43:58
I think that’s the perfect way to describe it, right? And you really win when the business is doing well. And if they have more capital to grow their business, to buy more equipment, more headcount, you know, that’s where the win comes in for everyone, not only the company but for you, the leaseholder. So, you know, Tim, I think this was a fantastic kind of dive into industrial, just like we did oil and gas a couple of weeks ago, in very, very interesting ways to make money in real estate. But right now, in the interest of time, we’re going to transition to our three or four final thoughts here. And I’ll just pick, Drew, right now. And Drew, when we talk to investors, sometimes they say, “You know what, investing in real estate is too risky.” If someone says something like that to you, what is your response?

Drew Wahlgren  44:53
I’m here in Dallas, Texas, and the famous said Trammell Crow of Crow Holdings here, private equity real estate group. I think they have about 15, 16 billion in assets. And he said, if you want to make a lot of money in real estate, all you have to do is hold on to your assets and live a long time. And I feel like he couldn’t agree more with that. Really, any pain you see out there, stories you hear are usually kind of short-term pain. Right? And I think we all know here as real estate investors, holding real estate in the long term, you know, we’ve seen a lot of people make a lot of money over time.

Tim Lyons 45:31
Love that answer. Alright, Neil, how about you now? I’m gonna ask you, you know? Sweetie, can you go shoot upstairs? Hold on.

Drew Wahlgren 45:51
Just fire off that question.

Drew Wahlgren 45:58
Alright, Greg, here’s brother. You know what he was about to ask? You have a telepathic connection. You can just…

Tim Lyons 46:04
Every once in a while. Sorry, there’s a four-year-old in the house. You never know what they’re gonna come down and just happen to the thing. So Neil, this question is for you. Robert Kiyosaki is somebody everybody’s read Rich Dad, Poor Dad. They understand assets and liabilities from that perspective, but he says something that can turn people off sometimes. He says savers are losers and debtors are winners. What does that statement mean to you?

Neil Wahlgren 46:36
Alright, so savers are losers, and debtors are winners. Is that right? I mean, you’re gonna put me on the spot here. I’ve met Robert Kiyosaki, and I would say he is not the conventional thought leader out there. He’s a kind of counterculture, pushing against the popular narrative quite often. Savers, what are savers making? I had a guy I know works kind of high up at JP Morgan, and he was getting me set up with a new account there. He’d say, “Have you moved over to this higher interest version?” I was like, “No, not yet.” He goes, “You know, I like to tell my clients, why move your capital over to this higher interest-bearing account? It’s still liquid, etc. You’re just cutting down on JP Morgan’s margin.” It was interesting to think about. He said, “Yeah, you can keep your capital in the baseline checking account, but you’re just giving away margin to the bank.” Effectively, people who save are willing to leave their money in an ultra-low-risk space. The way I interpret that is you’re probably really risk-averse and willing to take well below-market return as a result. Debtors are people loaning or investing, basically taking more risk in the transactional side, if it’s intelligent risk, if it’s securitized well. In a way, we’re almost the alternative financing partner for the sale leaseback transaction we spoke about. We’re effectively providing capital, it’s securitized, there are long-term leases, great credit tenants behind it. You can almost view us as debtors, and we’re going to make substantially more capital or a higher return. So I think that’s the mindset that Robert Kiyosaki looks at. That’s this quadrant. That’s how he’s made a lot of money over the years, and he’s been successful.
Greg Lyons 48:50
Yeah, you know, it’s kind of what’s your risk tolerance, right? Keep your money in a savings account, it’s going to be there. But what are you really gaining from something like that? So Tim, I’m glad we’re able to trip them up a little bit on that one. I like that. Good. That’s good. So Drew, this one’s back to you. This was from another one of our de facto mentors, Jim Rohn. And he said something about formal education will make you a living, self-education will make you a fortune. What does that mean to you?

Drew Wahlgren 49:25
Well, in current days, I mean, more and more see people self-educating, right? We have podcasts like this, you can learn from all your guys’ great guests, and just YouTube, right? The other day, something broke in my house, and I YouTubed it just as everyone here has done a hundred times. And, you know, that formal education? Yeah, it’s oftentimes kind of a credential to get you a new W-2 job, right? As entrepreneurs, you really want to educate yourself and sometimes, as listening to the forementioned Robert Kiyosaki, right? Okay, here’s a contrarian thought, right? I’m gonna weigh that against something else. And really understanding whatever subject you’re diving into. So, I mean, what it means to me is that I feel like it just makes me immediately think of all the resources we have today and how if you really have a passion and dedication to any subject, you can really access it, right? I don’t need to have a Harvard degree in real estate to get into it, amongst many other fields where you can really start a business. And, you know, if you’re the boss, no one’s going to ask for your Harvard credentials. So really, it’s a land of opportunity, obviously, here. And I know that sounds cheesy, but with the advent of the technology we have, and really, it’s just drive and dedication at this point that’s holding you between you and that goal.

Tim Lyons 50:55
Love that answer. We always talk about here on the Passive Income Brothers Podcast, really leaning into that education and then applying the action right behind it. Because, I mean, look, we all went to college here, right? We all went down the trajectory of maybe a W-2 job. And now, you know, we kind of said, look, self-education brought us Cityside Capital, brought us to the podcast, brought us to operators like yourselves. So there’s a lot of opportunity out there beyond formal education. I love that. Just wanted to drop this disclosure at the end of the podcast. The deals we talked about, we’re not giving any financial advice. We’re not CPAs, not financial advisors, not making an offer to sell any kind of securities. We’re really doing this for education and entertainment purposes so that you guys can understand what’s out there, what’s available to you, how you can participate in stuff outside of Wall Street and back onto Main Street. So Neil, Drew, this has been a masterclass on industrial triple net lease real estate investing. I have about 4,000 more questions to ask you, but we’ve run out of time. If people want to connect with you, if they want to know more about MAG Capital Partners, how they can work with you, if they want to talk about certain deals or offerings you might have, what’s the best way for them to get in touch with you?

Neil Wahlgren 52:18
Yeah, no, really appreciate it. We welcome that directly. Easiest way, just to give a little higher overview on the firm and easily connect with me, Drew, or someone on our capital team, just go to our website. MAG Capital Partners’ website is www.magcp.com.

Tim Lyons 52:39
That’s gonna do it for this week’s edition of The Passive Income Brothers Podcast, and we look forward to serving you again next week. Alright, guys. Thanks so much. 501. Man, we just made it to the hour. But I had about 4,000 more questions. I think it’s gonna be awesome to open up the conversation for people about something they don’t hear about all the time. Before I was on the broker-dealer with Dave and Dez, I didn’t hear about triple net lease and industrial properties. Meanwhile, I drive past them all the time. Same reason, Greg and I are in a huge retail center in Murfreesboro, Tennessee, drive past me all the time, never knew that it was available to us to invest in it. Anyway, this is gonna come out in about a month, Greg, we’re just saying. So, we’ll be sending you an email with some social media stuff. If you guys are into posting, if you’re not, don’t worry about it. But if you guys could do us a favor, just leave us a rating and review on Apple Podcasts. It’d be much appreciated. And I look forward to now that we’re on to finance. This has been a sprint. I thought it was gonna take a couple of days. It’s taken a couple of weeks for us. But we will come forward to marketing fun too and closing you guys out. I’m just happy that we had a chance to do the podcast. Awesome.

Neil Wahlgren 54:11
Really appreciate you guys been partners with us through their and true F analysis, the new broker-dealer that we were kind of going through that transition. So I know you guys are jumping through hoops just like us here. Appreciate it.

Greg Lyons 54:24
We’re actually going to contribute to fun too. We can’t wait. Can’t wait.

Tim Lyons 54:31
Alright, guys, make it a great day. It was a pleasure to see you guys. Okay, bye.