Acquiring Senior Loans Collateralized by Real Estate

Adam Torres and Paul Brenneke discuss investing.

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Show Notes:

Sortis sponsors and manages the Sortis Income Fund (“SIF”), an unleveraged, evergreen investment fund focused on the acquisition of senior loans collateralized by real estate in the US with a focus on Western US markets. In this episode, Adam Torres interviews Paul Brenneke, Founding Partner at Sortis Capital. Explore SIF’s disciplined approach and rigorous risk management.

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About Sortis Capital

Sortis is a leader in diversified alternative investment strategies focused on real estate, lending, distress situations and rescue opportunities. Top priorities include capital preservation and long-term economic growth.

Full Unedited Transcript

Hey, I’d like to welcome you to another episode of Mission Matters. My name is Adam Torres. And if you’d like to apply to be a guest in the show, just head on over to missionmatters. com and click on be our guest to apply. All right. So today’s guest is Paul Brenneke and he is a founder and founding partner over at Sordis Capital.

Paul, welcome to the show. Thank you. Good to be here. All right, Paul. So a lot to talk about today. So a lot, a lot of business owners, entrepreneurs, executives, investors, accredited investors that watch this show. And we’re going to be talking about acquiring senior loans, collateralized, collateralized by real estate.

So, so big topic. And just to get us started, Paul, we’ll start this episode the way that we start them all with what we like to call our mission matters minute. So Paul, at Mission Matters, our aim and our goal is to amplify stories for entrepreneurs, executives, and experts. That’s what we do. Paul, what mission matters to you?

Well, at Sordis Capital, our mission is to safeguard our investor capital and generate above market returns for our investors. We prioritize the financial goals of our primarily individual investors. We don’t have many institutional investors, and that’s really by design. We tailor our funds and investment to support the financial goals of these individuals.

and their future retirement. Our investments are driven by our commitment to strong partnerships with our clients, whether they’re borrowers or equity partners. And, you know, we’re known for our hard work and energy and what we put into these investments to achieve high performance. We also actively contribute to the wellbeing of our communities.

And we’re really behind sustainability, both financial sustainability as well as, as well as environmental sustainability. So those are core to everything we do. Well, Paul great having you on the show and I want, I want to take it maybe a step back or two, and we’re going to get it, further into Sordis Capital as well.

And I also specifically want to get into more about, you know, your, your decision and your, and your role in like, in creating these relationships, because I always find it interesting when someone is saying, you know, most of our investors aren’t necessarily institutional, so we’ll get into that as well.

But that being said, like, how’d you get in the business? Like, take us back. Like, when’d you get into either real estate or in this side of the business? How’d that, how’d that start for you? Well, I come from a three generation real estate family. So we’ve been, we’ve been doing a real estate at the dinner table since I was a kid.

So it’s really all I’ve ever known. Well And what was that like in the holidays? I want what I can’t, I can’t leave that one there on the table, pun intended. What was Thanksgiving like, like, that’s pretty cool to me. Well, you know Family businesses are always entertaining in a lot of ways. So my grandfather started it.

My father took it to the next step and I only lasted a short time. I’m, you know, I’m entrepreneurial and I, I actually was only there less than two years after college and decided I need to go out on my own. And But you experience then because you, so then you experience cycles and even hearing them talk about it even prior, like when you were younger, right?

Like that’s, that’s, that’s also interesting because your context isn’t just like, Oh, what happened in 2008 or 2002 or even the eighties or like, like you’re going way back on that one. That’s interesting. Well, eighties are way back for me. So don’t make no, no, I mean, like, no, I mean, when you were a kid, no, no, no, no, no, I, I, I know.

So I was a kid. I was a kid in the eighties, right? Yeah. And I remember dinner table talk was in the eighties recession of which one of the Builders and other people that my father was working with that were struggling and having challenges. And, and, and somewhat, even a little bit in the seventies, I remember some of that.

That’s when my dad was kind of headlong in the business taking over from my grandfather. So it it has been table talk forever and learned a lot during that kind of got it ingrained in you, but yeah, I, I live cycles even as a kid hearing about things being tough for, for people we did business with.

Yeah. When you was there a point in time, I know you grew up in the industry, so to speak, but was there a point in time when you were, or was it just a buildup or was it just natural? Like to where you were? Cause sometimes people kind of go the opposite. Like they don’t want, like, ah, I don’t want to be part of any of this or any, no real estate if my family was in or whatever else.

Like, was there a point in time when you’re like, no, this is what I do. Like, I need to find my niche, but like, this is me. Oh, you know, it was, it was definitely trying to find a niche. So I was actually I started, I started doing computer programming when I was in high school and college and did a lot of freelance programming and always thought I would do tech things.

Oh, so that was your rebellion and then real estate. Yeah, I got it. Okay. I was just curious. I, I, I worked at EDS Ross Perot’s company for a whole year out of college. That’s, that’s all I could last. It was a little too big company and a little bit too rigid for somebody who’s entrepreneurial. Yeah.

Learned a lot during that short period of time, primarily that I didn’t know that I wanted to be in. Tech, it was different than I envisioned as a freelance programmer. So when I decided to leave that I was in San Francisco, went back to Portland where the family business was, my dad said, come work here for a while till you figure out what your next stop is.

So I did that for a year or two and really helped them a lot with their tech. So I was on the finance and tech and kind of accounting side of the business. And I just decided after a year or two of doing that, that I really wanted to go out and be an entrepreneur. I just remember my conversation with my father when I told him, I said, what are you going to do?

I said, I don’t know, but I’m going to figure something else out. Cause it’s not this. So were they, were they happy? Do you remember? Like, was that, was that like a good moment? They’re like, ah, finally coming back to entrepreneurship. Were they like, are you, are they like, you’re, you’re kind of signing up for some pain buddy, but you already know what you’re in for.

Yeah. And my, my mom was happy. She felt that was in my best interest. My dad, not so sure. I mean, I think a lot of parents want their kids to. Come in the business. So I’m not really sure whether he was or not, but it was really about what I wanted to go do. And, and, and really my first thing outside of that was going out and doing land development.

So it was early nineties and I didn’t know it, but it was a great time to enter development. I, I kind of knew, but really didn’t give it that much thought. It was the end of the late eighties recession and things were just starting to come back and. And then you know, the Gulf War hit and things were a little messy, but everything after that for seven or eight years went great in the land development world and, and really launched me into development and real estate and kind of grew from there.

Yeah. So when did the, when did the the the loan side of things come up in Sordis? Like, like how did that all come about? Well, it was primarily development through the nineties. And, and I think the early two thousands, we did some loans really because opportunities came our way, people we knew that needed capital.

We had investors, primarily investors on the equity side of the business, but those investors always like cashflow and in development, you don’t typically get cashflow. So we started doing some small syndicated loans, just putting our investors into them. And then started doing some.

Distress note acquisition and in getting into more complex issues post nine 11 on some hotel deals, got involved in some bankruptcy deals that involve notes. And then did a little more lending in the, in the mid 2000s, but really the great recession hit and was mainly focused on distressed investing during the great recession.

But at 11 or 12, we, we really decided as things, the world was getting a little better to dive more into lending doing more syndicated loans, looking for financing partners to do that. And then up about 15 or so, we decided to start our first fund. So that’s when we really kind of crystallized the idea and got into the fun side of the business.

Yeah. What are your, and I, I always try to work in I always try to work in like a pay it forward question in these interviews, Paul, like, like for those that are just getting started or those that are at different points in their career. And one of the things, or one of the. Themes in your career that I find interesting among others.

But one of them is just that, that concept of I’m, I’m using this word, but you weren’t rigid, like the market changed, the opportunities changed, even in developing, like you didn’t, when, when with Sordis, you didn’t just. Like, say right off the top, we’re going to start even a fund. Like you started by, you know, looking at what the market was, was giving you and, and, and solving a need that somebody in the market had and providing value through the lending, even in the beginning, which then, you know, ended up towards taking you to that route.

So the question is like, what are your thoughts on those that are out there right now that are kind of that are kind of haven’t quite found their footing yet? thematic question that haven’t quite found their, their footing yet in real estate or even in other portions of their career that are really looking to hit that next level and to kind of like to excel, like what, what are the, some of the things that helped you get there?

You know, I mean, that, that, that’s a good summary actually. I always look to be opportunistic. If you get really programmatic and really rigid, things can pass you by. It goes to something my dad told me back, back at the dinner table talk, which he was talking about home builders going broke. And he said, you know, the way cycles work, if you’re a home builder and you just keep building homes and you don’t look at other opportunities at some point, you’re going to hit a cycle and go broke, which was very true back then.

And that just got me thinking about, you know, how I approach development. And even though I started out as a lot developer and we still do loans for a lot development have done, you know, a little bit here and there working on a large development deal now I never got programmatic. And, you know, when it seemed like it was time to shift and the trends were shifting a different direction, we would shift.

And when opportunities came up, you try to use that same skill set and the same group of investors to pivot those opportunities. Now, for a lot of years, I heard from investors and others, why are you doing all these different things? And I said, you have to focus on one or you have to, and I get it. Yes. I heard that a lot.

I would, my advice to people would to not do that. I mean, I really think that a lot of opportunities have come my way. They haven’t all been, you know, home runs, but, but you learn a lot along the way by doing that and you learn things maybe that you’re going to like better. I’m, I’m glad I’m not just a lot developer today.

I’m glad I’ve learned a lot more. I’ve developed almost every product type. There is out there and I’ve learned which ones I enjoy, which ones I’m good at. You know, it’s like with lending, I, you know, lending was not something I went to school for, got trained for. It’s just something, if you understand real estate, you can be anywhere in the capital stack.

You can own it. You can lend on it. You know, you, you can be anywhere there and be successful at it. So we just try to use the skills that I have learned in our, our company and our team has learned over the years to be effective and investing anywhere in the capital stack and lending just happens to one area where we’ve grown some real expertise.

Hmm. Yeah. And I like, I like that word that you use better. I’m going to take that one away. Programmatic. You’re right. That is, that is what it is. Sometimes people, and just this concept, sometimes even not, not intentionally. And I mean, in entrepreneurship in general, I don’t mean necessarily just in real estate, but just that, you know, the death of many, many businesses when cycles change is, you know, that that’s the way we’ve always done it.

Right. Yeah. Well, I mean, Being focused and programmatic isn’t necessarily a bad thing at all. I don’t mean that. I just mean that if you get too rigid about it, opportunities will pass you by. You have to keep your head up. And, and I felt even at times I have my head down and. And don’t see the opportunities around me.

So I always got to think, take a step back, view where the trends are going, review where you want to be, and try to figure out these opportunities coming at you fit within that. Thank you for that. And I want to circle back to Sordis here. So what, what are some of the things that you feel makes Sordis unique in this vision you have for the company unique?

You know, I, I think it’s some of the things we’re talking about here. The we’re nimble. You know, we’re, we’re certainly not a Blackstone or a Starwood Capital that we’re not programmatic that we try to I always equate our, our business style to surfing a little bit, whatever that wave’s giving us, we have to take.

And if there’s no waves, then we have to be patient. Ride the wave. Yeah. And, and I think you have to. But the thing you have to remember is you can’t chase waves. You have to be in front of them and you never catch a wave chasing it ever. And I have learned that the hard way. Sometimes there, there’s something interesting that seems like it’s trending.

And a few times you try to chase and you don’t catch it and you learn your lesson, right? You get in the game too late. So it’s really about trying to position ourselves and use our experience to get out ahead of the trends and be. An early mover and to capitalize on them. And and you gotta be right in that sweet spot to be able to do that.

We’ve talked, we’ve been, we’ve been too far ahead of the wave a few times too, and paid the price for that when you think too far ahead. So it can cut both ways. Talk to me a little bit about, about the about the products, whether it’s the Sordis income fund or the lending that you’re doing, the private side, like, like talk, talk a little bit more about the products.

Well, as I said, we’re, we’re in all parts of the capital stack. So lending just happened to be our first fund, but you know, I’ve, I’ve been a developer, which means you’re raising equity, you know, my whole life for 30 years. So, you know, now we offer products in all categories. We have some opportunities zone funds, which are primarily equity and development related just by their nature, because you have to build or develop in those funds.

We have the Sordis income fund, which is our largest fund which is a lending fund and primarily real estate, but we do other types of lending. Also And then we have a small REIT, which we hope is a big REIT someday. We started that right about the time interest rates started going up.

So we took kind of a step back to, to let things kind of play out and decide where that was going to fit in. Now we’re getting ready this year to really do a hard push on that. And we’ve got a whole theme on, on retail actually, which we think is a good category right now, especially neighborhood retail especially in the markets we’re in.

So we’re going to doing a big push to grow that REIT this year. We’ve got a lot of product in the pipeline for that. And we’re we’re working on an opportunistic fund to try to take advantage of some of the dislocation in the markets now and some of the distress. And that’ll be primarily hospitality based, you know, hotel, but we’ll look at other products also you know, with interest rates and other challenges in the market, there’s going to be a lot of opportunity.

The end. And that fund will again, kind of play anywhere in the capital stack. It could acquire debt. It could provide preferred equity. It could be, you know, pure GP equity. It’s, it’s really wherever the opportunity presents itself. I like, I like to say we’re, we’re deal focused. We try to identify great opportunities, great collateral or assets, and then figure out what the financial solution is, work with the borrower owner.

No seller, whoever it may be to try to come up with the best solution for the asset. Talk to me about, about real estate in general, the what excites you in the market right now? And it could be, it could be on the lending side, could be on the physical property side. It could be in development. Like, like just what, what gets you excited?

I’m interested in your vantage point cause you’ve been doing this a while. Well, the one thing I always say is a common theme between what we do is placemaking. I believe successful, I mean, real estate’s just bricks and mortar, right? It’s not successful on its own. It needs tenants, it needs foot traffic, it needs all kinds of things that make real estate really successful.

And starting with location, right? Picking a great location, the old adage, location, location, location. But to me, it’s experience and activity in today’s market. And it’s something that I’ve been talking about. I talked about experiential real estate 10 years ago because I love mixed use. I loved hospitality.

I built my first hotel in the late nineties. And I, and I’ve always liked the energy that those uses bring together and that the mix of uses can do where you get one plus one is three. So think if you have a great restaurant or a great coffee shop on the ground floor of your apartment building, it becomes more attractive.

That’s a real simple example. I throw the opposite example is a lot of developers are out there. I’m going to take 75 bucks a foot from CVS because they pay the most rent. I don’t know. It’s not, it’s not really exciting to live upstairs from the CVS. I mean, maybe for a few people, but not most of the population, right?

I’m laughing at this part because there’s one right by me in downtown LA and I, and there is upstairs. And whenever you park, you’re kind of going there. And I’m laughing because I always wonder. Who wants to live on top of the CVS? Well, Hey, but you know, you got a 20 story building in the ground floor defined your building, right?

And the use is there to find your building and can make you iconic with the right tenant in a neighborhood, right? You become the whatever building where this coffee shop or restaurants located. So You know, and that to me becomes placemaking. It really drives long term value in real estate. That’s what got us into investing in operating companies.

We used to just dabble in it. We set up a fund in COVID and did a lot of investment in operating companies. And really the type of companies that we valued as tenant, most of the initial investments were. Investments in companies that we, we would have loved to have as a tenant. And by investing with them, they became friends and we were able to attract them and work with them on, on projects.

So I think that that’s the part that I’m most excited about in creating that really interesting place that people want to be around. And it makes real estate a lot more than bricks and mortar. Amazing. So Paul, you mentioned as we kind of opened the interview that, you know, you’re, you’re like the majority of your investors are not institutional and they’re, you know, they’re going to be a credit investor is going to be other individuals.

Can you maybe just elaborate on that a little bit more? Cause I always do. I always do like to kind of highlight that for for people that are listening. Well, you know, the, my career’s kind of gone almost full circle. So I started out with an individual investors, friends, and family, like most people do get in development business.

And then we had so many investors that I felt like all I did was spend my time dealing with investors between raising capital and answering questions and doing reporting. And then I started getting into larger deals and the numbers got large enough that trying to get that many investors in was, was a lot of work and try to try to manage all those investors.

So I started working with institutional investors and you know, that, that was fine. They were, they were more about just the return though. What I missed about those days was really, there was a good connection with investors and getting to know them. And some of them became good friends. And and you just felt really good.

There’s nothing better than hitting a home run and everybody gets to share in the rewards and it makes you feel good. It makes the investor feel good. You know, I have probably my longest term investor is one of my best friends from high school. And, you know, he always tells me my retirement depends on you.

Don’t put any pressure on you. Anything, right. So but I’ll tell you, I take it that way too. I mean, as you should. And that’s why I asked the question. Cause I understand. Dan, what that means when you said that, like, it’s not just, there’s a heart, there’s a pulse, there’s a culture to the company that chooses to do that because it’s not just, you know, and not saying that the return doesn’t matter.

Of course that does all that matters, but who you take on as investors is important as well. Please continue. But I love that. So your high school buddy is in, yeah, well, it, it, so it, it, it creates a mindset, right. Of. You know, I refuse to lose. I think it’s, I’m a Capricorn, not a big star sign guy, but that’s, that’s kind of the way we’re built, right.

Where I do not like to lose. And, you know, I can’t say you win big on every investment, but I’ll, I’ll fight to the death, not to lose money. And it’s just kind of core to what we do. And, you know, in our income fund, we, we’ve never lost money. We actually have a $2 million gain over the last five years on what we call, you know, a bad asset or a challenged asset.

So when we have to, when we have a bad loan or when we have to take an REO, we’ve actually made several million dollars to the positive Mm-Hmm. . And that’s just because you don’t give up, you’re, you’re more creative. And you know how to deal with them. And we’ve done a lot of distressed investing. We actually go in and buy challenge notes.

So I think it’s, it’s really a strong attribute for what we do. But going back to the, to the investors, I, I, you know, I enjoy winning and I enjoy winning for investors and having them be happy about it. And, you know, and you go through, I went through the great recession and I know there’s a couple of deals I fought to the death on and we got out and we got our money back and we didn’t make much, but that was a win.

That’s a win. Nine and 10. Yeah. We got our money back as a win. Yeah. Well, and I can tell you it was not easy, but you know, so that that’s kind of the philosophy you have to take though. It’s easy to give up and it’s hard to persevere and be resilient and try to win and, and That’s, that’s, I think a culture you’ve got to build.

And we try to build that around here and find people that are the same way. And as I said, it’s, it’s easy to give up and it’s, it’s hard to persevere to the finish line. Even if, especially when you’re not making money, when you’re just recovering and but that’s, that’s what you’ve got to do to win.

It’s great. Paul first off, it’s been great having you on the show and and learning more about your background and learning about more about Sordis Capital, the products, the journey and you know, what you look for in an investor and also in, in the market. So thank, thank you for that. If somebody’s listening to this and watching this, Paul, and they want to learn more.

I know we just scratched the surface and then we can only go so deep on a podcast interview when it comes to, you know, investment, investment returns, things like that, because obviously you want to provide documentation, all that good stuff, but that being said, if somebody wants to continue the conversation with your team, like, like how do they do that?

Just reach out to us at sorescapital. com. We’ve got an 800 number on there and email, and you can also pull information off the website. And we’ve always got somebody standing ready to talk to you and share more. And I try to make myself as available as possible to investors also. So that you learn a lot about what the investor wants by doing that.

So. And for everybody listening, just so you know, we’re watching this. We’ll put all that information in the show notes, so you can just click on the links and head right on over and check out Sordis Capital’s website. And speaking of the audience, if this is your first time with Mission Matters or engaging in an episode, this is a daily show each and every day.

We’re bringing on new entrepreneurs, new executives, new founders, new ideas. If that sounds interesting or fun or exciting to you, hit that subscribe button because we have many more individuals coming up and we don’t want you to miss a thing. And Paul, again, thank you so much for coming on and sharing your story.

Really appreciate it. Yeah. Thank you for having me. It’s great.