Episode 118 - The Flywheel Effect of Spiritual Integration

 

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Ben Erskine and Matt Miglarese join us on the Faith Driven Investor Podcast to discuss a concept that is gaining momentum: The Flywheel Effect of Spiritual Integration. But more than just a philosophy to discuss, Faith Driven Investors are deploying capital into real estate assets with operating partners that have a model for spiritual integration. Ben, a managing partner at Callis, and Matt, an advisor and consultant for faith driven investors, business leaders, and impact organizations, will explain how owners and operators of real estate have an opportunity to faithfully steward the properties and businesses that they have been entrusted with well. And they can do so while also achieving superior results in the marketplace. Sit back and enjoy the conversation.

All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies and securities discussed. This podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization.


Episode Transcript

Transcription is done by an AI software. While technology is an incredible tool to automate this process, there will be misspellings and typos that might accompany it. Please keep that in mind as you work through it.

John Coleman: Welcome back to another episode of Faith Driven Investor. I am here today with my partner Luke Roush and we are soon to be joined by two incredible investors and folks who think about faith driven investing. Ben Erskine and Matt Miglarese. But before we do that, Luke, how are you doing today?

Luke Roush: Great day. It's summer season, which means time with family, time outdoors and time cranking. And we've got two guys on the call today that are cranking in the realm that God has laid out for them. So I'm excited for this interview.

John Coleman: Yeah, me too. Me too. And you're in Bear Lake today? Is that in Utah? Is that right, Luke?

Luke Roush: We are. It's from the beautiful Bear Lake, 6000 feet elevation. And it is a great place to do remote work from, so I am greatful for my partners that let me to do remote work.

John Coleman: When was the last time you would say you worked, Luke?

Luke Roush: Well, I feel exposed. I feel exposed.

John Coleman: Well, indeed. We are privileged to welcome Matt and Ben today. Matt and Ben. Thanks so much and welcome to the program.

Matt Miglarese: Thanks for having us.

Ben Erskine: Great to be here.

John Coleman: So one thing we wanted to start with today, we're going to circle back to Callis Capital with which you're both affiliated. Ben, obviously, you were a founder of Callis Capital and a real estate investor. And Matt, you've come alongside Ben working with CallIs in an advisory capacity. But we wanted to start with this idea of the spiritual integration flywheel effect of the flywheel effect more broadly. You two recently wrote a white paper on this idea of the flywheel effect and how that applies to FDI. I was wondering if you could just take a moment to tell us what is this flywheel effect and why does it apply to faith driven investing?

Ben Erskine: Yeah, yeah. I mean, really what it is and there are probably a bunch of investors out there that are familiar with the term from Jim Collins book, Good to Great. And you know, before I forget, I always wanted to say this first time caller, longtime listener. I think that, so really it's just an application of that idea that Jim Collins kind of gets into in his book, that lasting success is not the result of a silver bullet, but rather the result of consistent input over time. And sometimes that input might even seem insignificant. And so as we have been wading through the ecosystem out there of different operators that are doing great things with real estate business plans across the country and across different asset classes, we've noticed time and time again that it's very much a process and sometimes things that feel insignificant are really the meat and potatoes that get you there on the spiritual integration side. And we really bucketed those things into three different categories that kind of fit into this flywheel.

John Coleman: It's great. And Matt would you say more about what those three different buckets are and how those might apply practically to some of the ways in which people invest?

Matt Miglarese: Yeah, yeah, for sure. So we kind of assign the term like practice of the first category. Translation is what we're calling the second category in purpose, really. I mean, Ben touched on a little bit where we want to be in a position where we get to look back and kind of say across this landscape, what's the pattern that's leading to all the things we really hope we want to see? Right. And so those are kind of it's just our terms of trying to test that, but really describe it. And so the idea about two of this very simple, faithful but consistent and intentional practices that folks are doing that in the moment, you know whether it's weekly or monthly prayer for their tending to their vendors or whatever it might be, or whether it's, you know, just welcoming with a very like hospitable strategy like that. It might seem fairly repetitive and insignificant, but it's done consistently, faithfully over time. And that practice then kind of jumps in to be able to share the why behind it and then jumping into if folks into internalize the purpose behind the integration you're going for.

Luke Roush: So Ben and Matt, I want to jump into some specific examples of how you guys are thinking about incorporating your faith in the work that you do as a real estate investor. But first, I want to go back in time to the origin story and maybe take us back to the beginning. In 2020, Callis Capital is being formed. Help us understand from where you came in terms of form in the firm.

Ben Erskine: Yeah, yeah, sure. So like you said, we were founded in 2020, but it was really years of conversation and idea generating and prayer that led up to that moment. And so I've spent my career on the transactional side, the brokerage side of commercial real estate, usually working for the users occupiers of real estate and sometimes the investors into real estate as they manage portfolios around the country in different commercial asset classes, office, industrial and the others. And so as I was in that phase of my career, I always had an eye towards getting closer to the principle seed in transactions. And it really coincided with as that was starting to come into more focus. It coincided with observation of everything else that was happening in the faith driven investing sphere. So I had some exposure into that sovereigns with a part of that Sovereign's Capital seeing what was happening in venture and private equity. I couldn't help but ask questions about, Hey, what could this look like? What should this look like in the real estate asset class? And I'm biased. I love real estate. I have an affinity for real estate. But, you know, one of the distinctiveness of the asset class is just this power of place. When you control real estate, you control space in places where people live, where they gather, where commerce is conducted. And so there is a power to place the design of that place and the operations that drive the functions within that space. And so I was very much inclined to think, hey, if there's ever been a phenomenal asset class for spiritual integration, it feels like real estate could be at the top of that list. And so, like I said, those conversations really evolved over the course of five or six years. And in 2020, we formed the fund that we had a few closings and took on some outside capital. And today, you know, we've been invested with nine different operators across 17 vehicles and had exposure to thousands at this point of multifamily units and a few hundred thousand square feet of other commercial real estate space. So it's been a journey, and I'm grateful for all the support and encouragement today.

Luke Roush: So when you guys think of actually the problem that you're trying to solve is the problem more around managers that just need to kind of be pushed to lean into their faith in how they do their work. Or is the challenge more of how do you actually help managers understand the tools that are at their disposal to be able to more clearly reflect their Christian faith in the way they manage real estate?

Matt Miglarese: I would say to some extent it is understanding tools. What are some opportunities? We have a lot of conversations with managers trying to sort of discerns and best practices and say, Hey, I've got this opportunity, I've got, you know, these types of properties or whatever it might be, you know, how could we best [...], you know, somebody who has seen some success in this kind of a property of this kind of an opportunity? So there's definitely a need for that as well. I think there's also kind of the need for a vehicle that can help marshal some investors who actually care to come alongside those folks and are aligned in faith and values and want to pray and support and partner with those folks and give them a pathway to do that or vehicle to do that. It's kind of two things at the same time. It's almost that intersection of those two groups is the maybe the problem with I would say it that way. Ben, you're jumping as well.

Ben Erskine: Yeah, that's great. And just to elaborate on that, on both sides of the fence, both the operator side, so the folks that are out there driving real estate plans in the market and the investor side, we've seen an incredible amount of activity and progress and even mature plans. You know, we've talked to hundreds of operators out there at various places on the spectrum of spiritual integration, but all intentional about how they are already or how they want to incorporate their faith into the stewardship of their properties and their real estate companies. And, you know, in terms of room for growth, less than 1% of apartment buildings have any form of intentional faith integration at the ownership and asset management level. And that number drops off dramatically when you get into other asset classes. So there's huge opportunity. There's there's opportunity for existing operators to scale and grow with the right encouragement and capital and for new operators to innovate and apply spiritual integration plans with the right encouragement and leadership and example. And on the investor side, you know, there's room for existing investors to expand their allocations in a faith driven operators and for new investors to get better exposure and education. As to the excellent business that is being done without compromising on values and in fact being very intentional about the application and integration of those values. So if you think about values aligned investing as a chain, we see ourselves as a link in that chain. And if we can cultivate really strong deal flow and we can work through and apply professional diligence to all of that access to construct a diversified portfolio with preferred terms in many cases, then we can deliver to the investor side of the fence a really attractive offering that is distinctly aligned with our values as Christ followers and also positioned for excellent performance. And that should in turn allow us to expand the financial capital that we can make available to those operators out in the market, those existing in those that are ready to stand up. And that is really the role that we see ourselves filling in the problem that we are aiming to solve.

John Coleman: Love those concepts and I can see how there's a great need for that, I think. Ben You touch on this idea of a sense of place which we've talked about with others before in this space, and how important that is to people's lived experience out in the world. Maybe to make it more concrete, I'd love to hear you guys talk about a couple of specific examples. Either of things that Callis has done or of things that you've seen that you've just been really inspired by, that begin to incorporate some of those concepts. You've talked about how those play out, real world developments.

Matt Miglarese: Yeah. So maybe I'll take one on the Callis side and then one from our partners and we're going to start there. Right. On our side, we want to model as well. Both be good partners on the capital side, but also model a spiritually integrated company as well. And so one of the things we try to do to keep ourselves accountable and intentional about you're kind of going back to that concept of there's practices that you implement faithfully over time. Ben and I, we've got a cadence where we will make sure we're praying by name for partners, manager partners and things to do, and we'll check in with them. We also have a tool. We've dealt with a couple of different tools that we kind of are trying out that might help us partner with them better. So we utilize something we call a statement of intentions that we will use just to help outline, kind of like, hey, you know, the intent behind this partnership is that we could come alongside you and pray and support you as well. And so, you know, tell us what God's called you to do. Tell us how your how you're looking at that, what your opportunities are, and then tell us how we can potentially partner or resource you, you know, certainly capital. But maybe even beyond that, maybe it's an introduction or something like that or just prayer. So that one thing on our end, we've had some great conversations. The point of that has been a tool to generate conversations and a fruitful conversations where some of our partners are just call Ben or call me out of the blue and just say, Hey, you know, we got this going on. We'd love for you to pray with us. We're dealing with this issue. Do you have an idea? And even sometimes if they want an idea, they just want us to pray with them. That's been pretty powerful, I'd say. You know, I think of a couple of different stories. You know, one of the groups we have that they kind of own operate immigrant refugee housing. I think they've probably been on here previously and they've got just a really unique way that they manage their properties and that they engage their tenants and they take what is a normal business operations and workflow, and they just tweak it a bit to make it redemptive where they will train their staff members to show up and welcome folks in and just spend a little bit of extra time asking a few extra questions and establish a stronger relationship for the purpose of helping their tenants understand that this is their place, this is their home, right? The way that they've set up their operational system is designed to kind of accelerate that sense of place. [...]. It's kind of so strategic.

Ben Erskine: Yeah. And I could build on even that example, maybe with a little bit of an illustration of kind of what does that look like and feel like in the apartment complex in the apartment. And so using that same example of a group that really is aimed towards refugee and immigrant housing, you know, they have families that are coming in from overseas that have never navigated an American grocery store before. Right. And so is there an opportunity in that to pair up a refugee family with a local family that's tied in to the local church to navigate the grocery store, probably share a meal together, perhaps operate a stove for the first time. I mean, there are there are stories around, you know, large fish on an open flame in the kitchen, in the stove, because, you know, that was the path of least resistance. They're cooking the fish, right, and setting the fire alarm off day after day after day. And so practical little things like that. But then how does that tie into the business model? So, you know, part of what we believe is that this kind of integration, this kind of intentionality and accountability in terms of values and faith alignment can be should be synergistic with excellent business practice. And so you look at that same example and what does that kind of love and care ultimately translate to in terms of a real estate business plan or a PNL or, you know, what we call earnings net operating income. And the reality is that you can achieve incredible improvement in terms of retention, which drives down costs. You know, one of the biggest costs in most real estate models is turnover. So taking care of the capital improvements that are required when potentially even new tenants come in and all of that work comes at a cost. And if you can avoid that, if you can crank up your retention from 55% to 58%, that's meaningful savings. And so as a result of that, you've created real value at the asset level. And so these two things, this intentionality and the impact side and. The business plan can very much be accretive. And we've seen that time and time again.

Luke Roush: So when you think about engagement with residents in a multifamily context, is it more about actually just engagement broader or going deeper with families that are really in need? Like have you seen one or the other actually be more impactful or more in focus for for Callas as an investor?

Ben Erskine: Yeah. You know, I mean I think that there's an array is the easy answer right is not one size fits all for certain. And there are several spectrums that we see spiritual integration kind of play out on internal external word and deed, whether or not it's pointed at the organization itself or kind of the outside community and tenant base. And so and there are lots of things that influence that, right? So depending on the nature of the organization and even how it's capitalized, there's sensitivity around how things are manifested at the property level. And so some groups are very, very much focused on community care and they will absolutely seek opportunity to share the word, pray over people, enter into spiritual conversations, make invitations to church when they present themselves. But, you know, kind of the starting point for all that is just love thy neighbor, you know, care for your neighbor very, very well. That relational platform will afford opportunities to more evangelical activities versus other groups are very, very focused on, hey, you know, we feel called to share the gospel and that's really at the top of our minds all the time. And how do we, you know, get there faster? And so the short answer is it looks all different kinds of ways and we see beauty in that diversity.

John Coleman: That's awesome. You know, we are living through a very interesting moment right now, let's say, and particularly real estate has come under a microscope just because it's typically viewed as an inflation hedge. There's a lot of market volatility, though, right now where housing prices are viewed to be inflated. There's a ton of uncertainty around commercial real estate given return to office. And then retail has also been a consistent theme for years, but has taken some twists and turns given. COVID would love to pivot and just get you all's reflections briefly on the current market for real estate, how our investors should be thinking about real estate in this environment, and where you're seeing the greatest opportunities and risks.

Ben Erskine: Yes, the affordability crisis in the housing space is real. Certainly when looking at lower renter income levels and is more pronounced in certain cities and markets than in others. But it is something that we should all be focused on and we should be putting time and energy and resources into solving. It's also worth taking a step back to look at affordability more broadly across market rate apartments. And that conversation has often started recently with a look at the steep rent growth that has been reported, driven by a shortfall in supply and continued demand that is outstripping even historically high levels of new construction delivery. But on the renter income side, there's also been pretty incredible growth. So since March of 2020, new renters signing new leases. Those renters have reported more than 25% growth in renter income. So again, without discounting at all the affordability problem that is very, very real in certain segments of the market that we need to work to solve. We do believe that there is actually still a very healthy and robust demand supply profile that supports investment opportunity in the multifamily space. And it's been true for years that you need to be thoughtful and buy smart it's been very easy to buy bad as more and more capital has flowed into the multifamily category in recent years. And that is a big part of why we are focused on the operational component of value add business plan. So our strategy is not to buy assets at a cap rate in today's environment and hope for compression in the capital markets to sell at a reduced cap rate in the future. We rely heavily on the operational expertize of our sponsor and operating partners and whether that is physical improvement of the asset, operational improvement of the asset or some combination of the two. We're relying on that expertize and that excellence in the marketplace to deliver the returns that we're seeking. And spiritual integration can be a huge component of that operational component. So I've been focused on multifamily because that's where we spend a lot of our time. But back to your question, to quickly touch on other asset classes, industrial has been another darling in the market alongside multifamily. So not only on the demand side, as there's continued to be significant demand growth for industrial space supporting e-commerce, there's also been a lot more attention from the investor community, again, putting downward pressure on cap rates and pushing up pricing. And on the other side, again, broadly on the other side have been office and retail with less investor attention, less capital flow into those asset classes and questions about demand going forward. Although the retail category is very nuanced, depending on whether you're talking about neighborhood retail, big box mall, etc., and all of these shifts present major opportunities for adaptive reuse, you know, whether that's of big box retail into industrial space or of traditional office to more flexible workspace mixed use or even residential.

Matt Miglarese: The only thing I'll jump in real quick for tacked onto that is Ben kind of alluded to it. It unlocks this whole new category almost of spiritual integration with the concept of redemptive imagination. A lot of the beauty of real estate is it's just very personal, relational. There's a lot of on the ground stuff you're doing with ministry activity, but then you go into imagining what a space should be or could be if it was the way God designed the world to be. And that's just a whole new category, a whole new opportunity you can open up. So it's kind of cool in that way.

John Coleman: Guys as, we're going to switch now to a segment of the podcast we like to call Lightning Round Sometimes, where we pose a simple question to you and you give us your gut response to that in kind of 60 seconds or less. Okay. Now, what we'll probably do is slide a few fun questions in there alongside some of the more serious questions. So beware because you never know what's coming first. Luke Roush, do you want to start us off in The Lightning Round?

Luke Roush: I'm happy to do it. So I'll give you two scenarios and you get to pick one and we'll go. Ben, then Matt. Office occupancy is going to stay stable or go down by 30% in the next 12 months. Pick one. Ben.

Ben Erskine: Occupancy as measured by leased space, is going to go down. Occupancy as measured by butts in seats. People actually returning to work is going to go up .

Matt Miglarese: And I think it's going to down. I think it's a new era.

Luke Roush: Yeah. I mean, arguably, there's kind of a hangover effect, right? Because you got multi-year leases, you can't really get out of it. And yet actually people realize they need less. So that's a hangover that comes due over the next two, three years. John, over to you.

John Coleman: Yeah. Ben So you're a Chicago man, as I understand it. And so very serious question for you. Top three locations for Chicago, deep dish style pizza.

Ben Erskine: Giordano's, Illuminati

Luke Roush: That was conviction. That was conviction on the first one. I want to go there.

John Coleman: Yeah.

Ben Erskine: Yeah. That will never change for me. And I'm I have to think about the third one [...]. Might be on there.

John Coleman: Okay. Excellent. You were waffling on the third, so I think we'll stick with those top two probably. Matt, any favorite pizza places on your end? Any style. Any city style, if you prefer.

Matt Miglarese: So my kids have a favorite just down the street. There's a local spot, but we don't have the best pizza in Raleigh, North Carolina. I'll admit that.

John Coleman: Any letters and complaints can be directed towards Matt Miglarese for that response. Luke, back over to you though.

Luke Roush: I'm curious on New Single-Family housing starts, are multi-family housing starts, which is going to grow or shrink in the next three years, is one going to outpace the other?

Ben Erskine: Good question. I mean, it both starts and deliveries are at elevated levels right now as measured against history. It seems like they could both probably ember in the years to come based on construction costs being one thing and maybe just perception as we kind of get into the front end of a recession.

Luke Roush: Do you think it's a tale of two cities where, you know, places like California, the Northeast struggle and other geographies thrive? Or is it sort of a kind of a across the board move?

Ben Erskine: Yeah, I was reading an article yesterday that kind of pointed to, to your point, Northern California, some of the expensive gateway coastal cities in terms of single family homes that the movement in interest rates has already translated at reduced velocity in the housing market out there in a way that it hasn't, at least yet in some of the other markets. But I think it's you know, it's too early to tell. I think that prices on the single family home might be buoyed for a while, as so many people are locked in with attractive financing, but they're just not going to put their houses on the market because it's just hard to go replicate the cost of occupancy that they have through like 3% debt. So I think that could be a real artificial bouy potentially for pricing for the next little while.

Luke Roush: Yeah, it's good Ben, thank you, Matt.

Matt Miglarese: Yeah. I don't have a data to back me up that Ben is whipped out here. But I would say, I'll tell you from my area, I think we're going to see a lot more single family homes in the southeast. I think that's where our pace is better. Yeah, that's good.

John Coleman: So quick question for both of you kind of pivoting on what you just mentioned there about the southeast map. If you had to pick two cities to invest in right now for multifamily, where you all spend a lot of time, what two cities do you think you're most interested in?

Matt Miglarese: Two cities. Just two. I'd say I'm a little biased here. The triangle area is pretty hot, right? So that's one Raleigh-Durham area. That area, pretty good interest. And Charlotte though. Charlotte's grown pretty strong too, obviously. Raleigh and Charlotte. And that's not totally location bias.

John Coleman: Ben what do you think?

Ben Erskine: I think I maybe be a little contrarian, and I'd say some of the Southern Midwestern cities that have not gotten the attention, you know have not gotten the same attention that the Sunbelt has. And historically, the Midwestern cities typically don't offer the same explosive growth in boom times, but they also don't drop out when things get really slow. They're just a little bit more steady, Eddie. But if you look at a Columbus or a Cincinnati or a Memphis, like some of these cities, they're a little bit off the beaten path. I think there's a lot of merit there for families and people that want affordability and can work from anywhere. You know, I think that that could be a wave of the future.

Luke Roush: Okay. I've got one. How many years? I just need a number. That's all I need. How many years? Until the market realizes broadly the benefits of things like chaplaincy for multifamily complexes. Our apartment life.

Matt Miglarese: Six.

Ben Erskine: Six. Okay.

John Coleman: I love the conviction. He actually listened to the instructions there.

Luke Roush: I'm so grateful.

John Coleman: Matt and Luke

Ben Erskine: Ten.

John Coleman: Luke, you answer that one.

Luke Roush: I think four or five. And the reason is that I think that tough times reinforce the need to really care for people and care for people. Well, I think the data that apartment life has put out, among others, I mean, there's a bunch of other programs as well, but clearly demonstrates less turnover, better satisfaction, things that are actually even more important in a down market, which I think we're going to enter. I think it's going to be more quick, but I'm an optimist.

John Coleman: Awesome. Well, we always close these discussions, guys, by asking the same question, which is what is something that you're hearing from God in his word right now? So kind of something for inspiration for the audience that you're hearing in your own life in your study of his word right now, Matt, if you don't mind, we might start with you.

Matt Miglarese: Sure. Yeah. I think what comes to mind, I'm almost I feel like I'm relearning it right. Like so much we relearned over and over again. Maybe it's just me. I'm hardheaded, but at my church, we're going through a study right now to the book of Galatians. And so we've just been reading that book and fot the last couple of weeks, Galatians 525 has just been stuck with me. If we live by the Spirit, we should also walk by the spirit. You know, I feel like God has impressed on me that the phrase If we live by the Spirit, it means our life, our eternal life, is completely dependent on the power of the spirit and therefore our walking day by day, week by week, the stuff we do in Callis, whatever you know our work activity, our daily activity, that also ought to be by the same power. And it's just been a conviction for me to turn around, say, God, you know, this is yours. I might have a lot of plans right now I might make. This day is yours. So I've just tried to implement a few, you know, kind of habits and practices to remind myself of that. But that's really been the thing. God has re impressed on me in the last week or so just how important it is to rely on the spirit and walk by his spirit, led by it.

Ben Erskine: That's great. So I was thinking about this and my pastor had incorporated Micah six eight into a sermon a couple of months ago. And it was timely because Matt and I were in the thick of working through this flywheel concept and kind of fleshing out this idea in a paper. And so Micah six eight is he has told you, Oh man, what is good and what does the Lord require of you but to do justice and to love kindness and to walk humbly with God. And I think that I like the word require in there just because it is clear instruction is required of you. I take that well. And just the notion that, you know, through our actions loving is doing and if you act and do loving things that your heart will produce loving feelings. And it just really resonated with me that there is this interconnectivity between actions and words and translation, and then ultimately posture, our posture and what you might call culture or purpose or identity for an organization, and both things feed each other. And so that was really what we were observing over the past year or two, and it resonated with me when I heard it from my pastor a couple months ago.

Luke Roush: It's a good word, Ben and Matt, we're grateful for the work that you guys are doing. Keep going. Keep getting after it. I think this is a sector that absolutely is ripe for transformation in terms of how investors think about deploying their capital in ways that are both responsible and also faithful and intentional. So grateful for the work that you guys are doing and grateful for your taking time to be on the podcast today. Blessings to you

Matt Miglarese: thanks for having us.

Ben Erskine: Thank you so much.