Briefing Document: Irwin Boris on Industrial Real Estate Investment Overview

This briefing document summarizes key insights from several interviews featuring Irwin Boris, a seasoned real estate investor and member of the investment committee for Heritage Capital Group. Boris's expertise spans various facets of real estate, with a current focus on industrial properties, particularly multi-tenant and flex spaces. The central themes revolve around a conservative, cash-flow-focused investment philosophy, emphasizing long-term value, and careful due diligence, learned from a career across management, lending, and ownership roles.

Key Themes and Concepts:

"Boring" is Better:

• Boris favors "boring" or steady-eddy investments in industrial properties over high-risk, value-add strategies. He seeks reliable cash flow and a solid basis, rather than quick flips.

  
  

• "I find that these are boring Investments...they pay their rent on time. I'm not looking for like people invest in multif Family Value add I'm not looking for a rocket trajectory in order to make it work."

  
  

• He emphasizes that industrial properties with good tenant relations, when kept full, provide predictable income.

  
  

Industrial Asset Types:

• Multi-tenant Industrial: Large warehouse-style spaces with multiple tenants, used for logistics, distribution, light manufacturing, and storage. Includes uses such as "Amazon is a big user... large scale soda bottlers, beer bottlers, bakeries…FedEx, UPS… light manufacturing."

• Flex Industrial: Smaller spaces with lower ceiling heights, suitable for a variety of uses from small businesses to light assembly, like plumbers, electricians, appliance repair services, engineers, and even "guys that grow coral for saltwater aquariums." Flex spaces may also have more office finish, in contrast to industrial's more warehouse finish.

• Boris notes that "no one is really building this anymore," which makes existing flex properties in desirable locations attractive.

Cash Flow is King:

• Boris prioritizes current cash flow over potential future gains (IRR). He states, "you can't eat the IRR," a core principle that guides his investment approach. He defines "You have to make your money on the buy," meaning that buying at the correct price ensures steady income.

• He states, "the most important thing to us is does the asset have the legs to pay continuous cash flow."

• He uses a "body weight" analogy to illustrate the power of compounding cash flow. "If you take your body weight and compound it 3% the year for the next seven or 10 years you put on a lot of weight… if the rents are compounding at 3% per year for 10 years… it's not hard to say well I got a great return.”

• He believes that if rents grow consistently, the property’s value will increase and there is less pressure to sell.

Long-Term Hold Strategy:

• Heritage Capital views investments as if they'll be held forever. Boris emphasizes, "We look at each investment as if we're going to own it forever."

• They prefer long-term holds and family office investors who have a long-term perspective, rather than syndicators seeking short-term returns and high promote fees. "I don't really think that the the interests are really fully aligned with the investor who's looking for cash flow."

• They are comfortable refinancing and pulling out equity to reinvest. This also allows them to generate current cash on cash.

Acquisition Strategy:

• Boris aims to buy at a discount to replacement cost. He looks for well-constructed buildings in strategic locations, accessible to major roadways.

• He likes to "look for deals that are in markets where the tenants need to be there". He seeks high cap rates to achieve positive leverage and first-year cash flow.

• They are not always the highest bidders. They target deals after they fall out of contract when sellers are more motivated and have “pliable” purchase prices.

Due Diligence and Risk Management:

• Boris emphasizes a "trust but verify" approach. His varied experiences allow him to “smell” issues in a deal.

• He looks closely at tenant history, lease expirations, and the condition of the property. He prefers properties with excess land for expansion or storage, which can create additional income streams.

• He believes that "transparency" is key, and lenders appreciate that. He advises, "if there's a problem, and part of your acquisition is because you have a solution for the problem, put it all down".

• He prefers conservative loan-to-value ratios (around 60%), and seeks a spread of at least 200 basis points between cap rate and interest rate. He notes that he will go lower for "value add" deals with expiring leases.

• He likes to overcapitalize with funds for capital improvements and tenant improvements.

Tenant Management and Lease Strategy:

• Boris stresses the importance of proactive tenant relations. He aims to "keep the building full and make the same money," so he will cater each lease to the specific needs of the tenant.

• He includes clauses requiring tenants to notify him of renewal intentions well in advance, allowing for minimal downtime during vacancies, and the ability to pre-lease. "If you have a renewal option, you have to let me know nine months in advance."

• He looks at lease expirations as value add opportunities by increasing rents and adjusting lease terms.

Experience and Perspective:

• Boris's background as a CPA, property manager, lender, and owner gives him a well-rounded perspective. "I've got to see how everybody looks at it."

• He has seen the process from many angles: “whether you're the lender, whether the owner, whether the underwriter.”

• His goal is to "invest with your head, not above it". He cautions against "eyes open really wide" thinking of unrealistic returns.

Financing and Banking Relationships:

• Boris uses a variety of lenders, including banks, CMBS, and life insurance companies. He prioritizes certainty of closing. "I want certainty that you're going to close."

• He favors long-term fixed-rate debt to provide stability. His preferred loan terms range from 5 to 15 years.

• He observes that lenders may be hesitant to take back properties, meaning that there may be opportunities in the future as those deals come to the market.

Value-Add Strategies:

• Beyond lease expirations, Boris looks for properties with low occupancy rates, often due to neglect by previous owners.

• He prefers to “white box” spaces and make them presentable to attract tenants.

• He prefers to purchase properties where there are “barriers to entry” meaning where there is no more land for development.

Market Insights:

• Boris is seeing attractive cap rates in the current market, some as high as 8.5% to 10%.

• He notes that some sellers are de-risking their portfolios due to uncertainty about inflation and interest rates. This creates opportunities for buyers.

• He has found many deals from "non-traditional" sources such as attorneys and accountants.

• He emphasizes the value of networking and talking to others: “Sometimes it’s about… striking up a stranger conversation with a stranger… to exchange ideas.”

Future Investment Ideas:

• In addition to industrial, Boris is considering acquisitions of delivery service companies, citing their strong cash flow. He is observing the private equity trend of "rolling up" companies and believes he can do the same with trucking and logistics.

• He believes that opportunities in multifamily may return as cap rates increase.

  
  

Quotes that encapsulate Boris’s Philosophy:

• "You can't eat the IRR."

• "We look at each investment as if we're going to own it forever."

• "You have to make your money on the buy."

• "Invest with your head, not above it."

Conclusion:

Irwin Boris's approach to real estate investment is characterized by a focus on stable cash flow, a long-term perspective, and a thorough understanding of all aspects of the business. His experience across different roles in real estate gives him a unique abili

ty to assess risk and identify opportunities. He emphasizes the importance of buying right, operating efficiently, and maintaining strong relationships with both tenants and lenders. His approach is a useful model for investors looking to navigate the real estate market with a focus on long-term value.