Baker Program Miami Trek Visit: 13th Floor Investments

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Joshua Lau

Joshua Lau is a masters student of the Baker Program in Real Estate at Cornell University. Originally from Singapore, Joshua grew up in a family of architects, and completed an undergraduate degree in Civil Engineering from the University of Toronto. Recently, his passion for the future of cities has challenged him to think about the impacts and opportunities in the built environment through real estate leadership. Drawing on his quantitative background, Joshua is pursuing a career in opportunistic investing in real estate.

Rooftop Pool Deck at 1010 Brickell Ave Condo

 

As a result of superstitious beliefs, most buildings intentionally skip the 13th floor.  In fact, this superstition seems to stem from the word “triskaidekaphobia,” which the English dictionary describes as the fear of the number 13.  But just like a charm, Arnaud Karsenti has credited luck, as much as capitalizing on good opportunities, for his success in managing and growing 13th Floor Investments.  

 

13th Floor Investments is a real estate investment firm that focuses on value-add and opportunistic deals primarily in the Florida market.  Arnaud recounts the early days of starting the company in 2008 when the market was very different from where it is today.  Access to capital was very limited, but assets were also selling at a true bargain.  He gives an example of a deal involving a portfolio of properties purchased in Homestead, Florida, for about a fifth of the price it is valued at today.  But the day before this deal was about to close, the stock market fell by about 800 points, which imperiled the deal as his primary investor, spooked by the almost ten percent one-day drop, decided it could no longer participate.  With just 24 hours to replace this investor’s capital, Arnaud was left to source it from an investor that was originally excluded from this deal.  This was an investor not based in Miami, but who just happened to be in the city at the time, and so they held an impromptu meeting that stretched into the early hours of the morning at the 13th Floor office to work out details of this joint venture.  The next day, with the new investor aboard, 13th Floor closed on the deal, and ultimately this partnership worked on multiple other profitable deals together.  This just goes to show that sometimes Lady Luck can come through just in the nick of time.  

 

When addressing how the company has performed since these early days, Arnaud was frank in admitting that, while 13th Floor has never lost money on a deal, it began in a down market that has been going up ever since.  He advised the audience to remember that no investor is ever invincible.  There will be a time when the market will correct, and it would be disastrous not to be mindful of that.  To counter this overconfidence, 13th Floor Investments de-risks by not over-leveraging.  Their internal target is to keep debt under 50% on all their deals.  Leverage is powerful, and has the ability to increase the IRR by reducing the amount of equity invested in each deal.  Therefore, equity returns multiply if the property cash flows meet or exceed the target.  But if the actual cash flows fall below the anticipated target, and debt service cannot be met, leverage can have a devastating negative effect, and investors can lose their properties to foreclosure.  

 

Additionally, the company has a strict policy of acquiring land unlevered.  Arnaud cautions against levering land because the debt starts a countdown timer, as interest is accruing on an asset that is not generating income.  And over a long enough period, that pressure might force an investor to make a rash decision on the idle land.   

Arnaud Karsenti (left) giving a tour of 1010 Brickell Avenue Property with the Cornell Baker Students

 

The visit with Arnaud at 13th Floor Investments concluded with a tour of their recent condo development at 1010 Brickell Ave.  At the time, they were able to acquire the underlying land for relatively good value, which meant they were also able to sell their luxury condo units at a very competitive price, hence why the condos are fully sold today.   The Baker Program in Real Estate left with renewed insights on real estate investing, a breathtaking view of Miami, and some bespoke 13th Floor Investment Monopoly Boards.

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