​INTERVIEWS WITH REAL ESTATE TITANS : The Location mantra is dumb!

Interviewee: Dave Sislen: $650 million in real estate acquisitions

Real Estate investors stray for many reasons: they fall in love with design and aesthetics, get overwhelmed by property management, obsess over financial models and Excel formulas. Well, my interviewee and mentor, Dave Silsen is none of the above. He has his mind set on one thing: how to maximize returns to his investors and create value while minimizing risk. His mantra is to minimize and control the downside and leave the upside to eventually take care of itself. Easier said than done!

Before sharing Sislen’s investment philosophy, let me give you a bit of background. Dave grew up in the Washington DC area. His grandparents were Eastern European immigrants who operated a grocery store in Petworth. They worked hard to put food on the table and harder to save cash for investing in DC real estate some of which is still in Dave’s family. Dave’s father was a Physician by practice. Yet, he continued the real estate gig that his father started by investing in real estate.

Unlike the older Sislens, Dave stepped into the real estate world early on. In 1978, he was exposed to the tangible nature of real estate by working for an investment firm focused on tax shelter oriented real estate investments. While with that firm, he was involved with acquiring or developing north of $650 million of real estate including more than 4,100 hotel rooms and 1,350,000 square feet of office space.

Since 1986 he has been the President and Managing Director of Bristol Capital Corporation. For more than 30 years, his shop has developed a successful acquisition track record through disciplined and opportunistic investing in a variety of real estate asset classes including industrial, flex, self-storage, office, senior housing, and developable land.

Now, that you know Dave a little bit better, let’s jump straight into the interview

Q: What are your investment principles?

A: Well, I will tell you what is not my principle: “location, location, location” is a dumb mantra. I can show you any number of well-located real estate properties in which the investors lost significant amounts of money.

Q: What do you mean?

A: Once an investor accepts that bad things will happen and they actually do, you will realize that buying in the greatest location in town will not save you if your cost basis is bad.

Q: So if the location mantra does not apply, what does?

A: Don’t get me wrong, location is important but not the number one criteria in buying an asset. The first and foremost measure is “COST BASIS”. We believe that almost any asset is a good buy if the price is right. When evaluating an opportunity, I ask myself, will this purchase price allow the investment to survive bad times? Will the cash flows cover expenses and debt service? If the economy sinks, will I go bankrupt? if the answer is “yes”, then that deal is not for me.

Q: How do you find such deals?

A: Well, I like deals that everyone else hates. We look for the black sheep of real estate. If investors are chasing multifamily and office in CBD, we stay away from them. If the market dislikes suburban office, we buy them. At times, what we are intrinsically interested in is the land not the building. In other words, a covered land play. A warehouse or an office building that sits on a large plot of land, which is situated on the path of development, will grab our attention not because we know when the land will have greater value than the building, but because we don’t have to know when the land will have greater value than the building. The cash flow of the property grants us the luxury of time and optionality for the asset.

Q: Can you give me an example of a deal that showcases your acquisition strategy?

British Petroleum owned a solar panel manufacturing plant that sat on 23 acres in Fredrick, Maryland. The property is situated close to major highways and has water rights which are a scarce commodity in Frederick. BP wanted the asset off of their books after announcing their corporate exit from the solar panel manufacturing business. Disposing of the asset was a priority above price! Yet nobody wanted to buy this peculiar asset – and this was the opportunity!

The property had several assets beyond the water rights and 23 acres of land including a perfectly good 60,000 square foot high bay warehouse. We did our valuation based solely on the warehouse’s value, not the solar plant, not the land, but the warehouse surmising that if we bought the warehouse for a good price and got everything else (land/water rights/manufacturing plant) effectively for free that we’d be ok. If we can create acceptable cash flows by renting the warehouse, then we are good. Yet, we knew that the true value was in the 23 acres of land. When would we resell the property was unknown and,at the time of acquisition did not matter - As long as we generated reasonable returns from the warehouse, we were good. The warehouse was worth $50/SF and that is how we based our valuation. Remember, we are buying the asset for the land but doing our valuation based on the warehouse.

We acquired the property in 2013 for $3 million and after two years a neighbor (a pharmaceutical multinational) purchased the property for $13.8 million - They wanted to erect a large campus on the I 270 biotech corridor!

Q: Did you foresee that coming?

Certainly not!. As real estate investors, we focus on risk management. We followed the implied economic principles of supply and demand. There is a limited supply of land with water rights in this area.

We did the valuation based on the warehouse, not the land to assume a worst-case scenario. On the other hand, best case scenarios are left to serendipity.

How many deals do you transact every year?

Maybe one or two. We are very patient to find the right deals. Numerous deals cross our radar but rarely do they pass the test.

Q: What advice would you give to real estate noobies?

Don’t sweat over financial models and formulas. You need to know the basics, just the basics. Use your common sense, mingle and network as much as you can, and lastly work hard to find deals but don’t rush into any just because you want a to get a deal done. Lastly, be risk averse and avoid overly optimistic projections.