The Private Credit Strategy That Creates Predictable Cash Flow with Andrea Propp – EP 289

Justin Donald: Andrea, great to have you on the show.

Andrea Propp: Justin, it's so good to be here. Thank you so much for having me. It's an honor.

Justin Donald: Well, this is fun. Well, I cannot believe in all the success that you have had that this is your first podcast appearance ever.

Andrea Propp: Yes, I know. I am very much a stealth wealth kind of person. And so, this is new for me, and certainly it was incredibly important to me to do this in a way that was very much in alignment with who I am. And you and the Lifestyle Investor group are exactly that. So, this is the perfect first podcast to do.

Justin Donald: Well, it's an honor to have you, and off air, we are talking about how you yourself are a Lifestyle Investor before you even learned what lifestyle investor was.

Andrea Propp: Yes, exactly. Yes.

Justin Donald: So, we're going to dig into it all. We're going to talk about what you do professionally, your story, how you got to where you are because you have just an incredible progression into different markets. So, I want to dissect all these. I want to see why you made the pivots that you made. And for me, it's a huge honor whenever I get a chance to interview our own Lifestyle Investor members. So, you're a member of our mastermind, you're a sponsor inside of our community, and we just love having you, not only as a member, as an advocate. You just bring a great energy.

Andrea Propp: Thank you for saying all that. Yeah. It's been such an amazing journey, honestly, from getting to know you guys very organically in the Austin community to figuring out, wow, there's really some business to do here. It is so important to me, and you've heard me say it before, that I do business with good people, and I have a few different barometers for monitoring and checking that. And you guys check those boxes for sure. So, definitely, it's exciting for me too.

Justin Donald: Well, I love it. We got a chance to hang out last night. We've got our Lifestyle Investor foundations, our young adults program. And so, Ryan Casey, our COO, and the guy who runs that program, he's in town with his family, and we got our big retreat here the next few days here in Austin. And so, you and Aaron came and hung out with us last night, which was a blast just getting to know him, getting to know you better. Man, we geeked out on all kinds of stuff that we're going to have to talk about. So, I'm so looking forward to this. I also want to give just a shout-out to you because the first event that you ever did with us was our Napa trip, and what a spectacular event that was. But you really helped make possible some of the extras that we did, where we got to go and rent out Opus One, the whole facility, just our community.

Andrea Propp: So good. It was so much fun.

Justin Donald: Michelin-rated chef doing dinner for us, our own private dinner, our own private tasting, a private tour with no one else in the facility, let alone hitting up Cathiard Vineyards and doing their private tour. It was really fun having you there.

Andrea Propp: Yeah, that was one of those moments for me where it was like you know you've made it when you get to do stuff like this. So, it was spectacular. Thank you, guys, for putting it on. And just like very incredible members. Everybody was so in tune and asked excellent questions, and we really got into it. So, yeah, it was a fantastic trip. Can't wait to do more.

Justin Donald: It was a good time. And something I want to highlight about you is you are all about empowering women in this world of finance and investing, and I love that. I think more women need to be in this space. I think, I mean, I know it is a highly male-dominated industry. You're really kind of bucking that trend, which I think is incredible. We need that. I love that you kind of have your crew of women that you invest together, you learn together, you travel, and vet deals together. And I think it's great. We need more women like you in the space. And one of the things I'm proud of in the Lifestyle Investor Mastermind is that we do have a makeup of a strong female contingent. And we just want to keep kind of bolstering and supporting that and growing that.

Andrea Propp: Yeah. And I want to be a part of that too. And listen, it starts here, right? I mean, it is a very male-dominated industry that we both live and work in, as evidenced. You can even look at many of the guests you've had on your podcast, right? It's very male-dominated.

Justin Donald: It is.

Andrea Propp: So, I was sort of looking through, I'm like, "Who's Justin talked to before? And who is a female voice?” And there haven't been a lot of them. And it's not by design. It's not by any effort of yours to make it that way. I think it's just very much that tends to be the makeup of folks in these kind of finance and investing roles. And I certainly want to help evolve that and lead by example.

Justin Donald: Well, you've got an incredible background. We're going to dive into it. But before we get into the granular detail, there are a few different kind of like niches or spaces or kind of areas that I want to explore today with you. And I've been thinking hard on what does that look like. With our limited time here today, how do we uncover as much gold as we can? And so, one of the areas I want to talk about was really just the pivot that you made from Wall Street to predictable cash flow. And I want to explore this because there's a durable investment model out there that a lot of people don't know about.

Something that you really, I mean, we're talking about super niche industries here, super niche investment genres, if you will. So, we'll talk about that. So, you started on the commodities trading floor at Goldman.

Andrea Propp: I did. Yep.

Justin Donald: But something made you realize you wanted to pivot from there, that you really wanted to get away from that world, and get into something more predictable.

Andrea Propp: Yeah, 100%. I started my career in finance now 15 years ago. And yes, I started on the commodities trading floor in Calgary, where I'm originally from, Canada. Go Canada. And I was covering oil and gas producers, storage operators, helping them with their hedging programs, really helping them manage their risk around whatever they had kind of coming down the pike. And I was able to take that career to New York in 2012 and started to cover hedge funds and asset managers, still with kind of that commodity hat on. And didn't take me too long to sort of realize that working for a hedge fund would be more lucrative than just covering hedge funds.

And so, I went down that path. I worked at a commodity fund called Jameson Capital, run by Steve Jameson, who was a storied commodities trader from Morgan Stanley, helped grow his business to the tune of 2.2 billion at its peak. And I kind of got to the eight-year mark in my career, and I said, "Am I really going to do this my whole life?” Really, what it came down to is living and dying by markets that are marked to market literally every second was incredibly intense.

Justin Donald: Which we see real time right now with oil and gas and the prices that they're trading at, and what they're on war is that the price, the delta that is happening in real time is just crazy.

Andrea Propp: Yeah. It is crazy. And it's even crazier. If it's crazy for those of us kind of looking at the Wall Street Journal every morning, imagine how crazy it is for the guys and gals on the trading floor. It's intense, and it was the perfect way to start my career and cut my teeth, but I did get to a point where I recognized it was time to trade one hard asset for another and trade it for one that was more about really assets that are worth only as much as somebody is willing to pay for them, right? So, I turned to real estate and private credit and structured credit. I really ultimately got just this incredible opportunity to pivot. Got an opportunity to work at LibreMax Capital, which is an $8 billion structured credit hedge fund in New York, and run by a number of star traders, Greg Lippmann being one of them. And if you're familiar with the book or the movie, The Big Short, he is that main character in real life.

Justin Donald: And by the way, great movie. If you haven't seen it, watch that movie. And by the way, watch it again. It's amazing how relevant it still is today. I've watched it several times, and every time I have new takeaways just because of what I've learned over the years.

Andrea Propp: Oh, for sure. With many lessons to be learned.

Justin Donald: And just a great movie. It's enjoyable, and you learn a ton.

Andrea Propp: I couldn't agree more. I couldn't agree more. And so, I ultimately got to learn from the real cast of characters, and it really put me in a position to learn about all the structured credit products, all the acronyms of which there are many. You've got CLOs, you've got RMBS, you've got CMBS, and then you've got RTLs, which stands for Residential Transition Lending. And so, these are short-term loans that are used to rehab residential real estate properties. And when I was at LibreMax, I recognized that this was sort of a small part of our large portfolio that we had dedicated to the space, and yet it was this bright shining star. This was 2018 now, and we were living in a zero-rate environment, and so this part of the portfolio producing 8.5% returns was like knocking it out of the park.

And so, I double-clicked and started to spend more time there. And really went down this rabbit hole of really kind of figuring out, okay, what is this space all about? What is residential transition lending? Who are the players in this space? Why do they exist? Why don't banks play in this arena? And what I came to find was that it was this really fragmented, very kind of up and coming part of the industry, run by a lot of sort of small players, family offices, putting their money to work, small private lenders just starting to like get a foothold. And as I was going through this process, I was also seeing, okay, you've got the ability to originate these short-term loans, 12 to 18-month loans, and generate this incredible return safely and solve parts of the housing crisis.

I mean, I say this a lot to people. I love to make money, but I really only love doing it if I can do it in a way that solves real problems in the world and also with good people. And so, this was a clear, like, "Wow, win, win, win. How do I do more of this?”

Justin Donald: Yeah. We talked about this last night, where we both identified different industries where you could make a lot of money, but it was not aligned with our values, and we just refused to play in that space. And I love that about you. I think that's awesome. It's very honorable. I want to go back real quick to oil and gas here. When we talk about commodities, typically oil and gas being the number one traded commodity, being one of the single, if you look at like anything based on consumption, it's water, oil, and gas, right? So, when you think about that, I think a lot of people, so your wealthy play in that arena. But what I want to make really clear for those of you tuning in is you've got a lot of people overallocated in that space. There are a lot of crooks in that space. A lot of fraud happens.

Andrea Propp: Still the wild west.

Justin Donald: Yes, it is. You've got to be careful. But I think some people have the wrong idea of what weight of the portfolio should be in that asset class. And if you look at the single-family office data, which would be the billionaires, it's typically only 1% to 2%. And it's an important 1% to 2% because it is a hedge, it is part of diversifying for any and all seasons, any economic season. But a lot of people are way heavier than that. And I think it's good just to kind of share the facts, what the wealthy are doing. Now, there's a larger allocation, which we're going to talk about the private credit, which we'll see generally more than double. Usually, you're seeing this most families, 5% to 10%, you can see it up to 15%, but I mean, at a minimum, you're seeing at least 3% to 5%.

And so, I really want to tackle this, but when you compare trading volatility versus lending against real assets today, what do you feel investors misunderstand the most, where the true risk really lies?

Andrea Propp: Yeah. I think there are a lot of ways you can put commodities in a portfolio, right? And I would caution those who want to trade commodity futures because that gets really volatile, and you can get in over your skis pretty quickly.

Justin Donald: I would say futures of any kind, but yeah, I mean, certainly in that space.

Andrea Propp: And then the next layer is, okay, well then you can trade options, right? You can trade puts and calls, and you can structure them in a way where it's a little less volatile for sure, but still fraught with risk. And so, I think when I'm talking to people about investing in commodities today, I'm not playing in that world anymore. I am thinking about, okay, well, how can I get diversified exposure to really like oil and gas producers, in a way, importantly as well, that acts as a tax benefit also.

Justin Donald: A lot of great tax benefits in that space.

Andrea Propp: Right. And so, that's how I'm playing it today is I'm not going out there and picking one individual producer. I don't think that's a good idea either.

Justin Donald: It's high risk.

Andrea Propp: Super high risk. I think the play is to find a manager or a portfolio with a bunch of these producers and likely with exposure across the US, right? You don't want to just be in the Permian Basin. And so, for me, I can give a little shout-out to Cas. I know they're also involved in Lifestyle.

Justin Donald: Yeah. We love Cas.

Andrea Propp: And I am a huge fan of Cas and have that in my portfolio. I have their energy evolution fund in my portfolio. And that's one of the ways that I keep commodities in the portfolio in a lower risk, lower volatility way that also presents tax benefits as well.

Justin Donald: Yeah. And to use your language, we're going to double-click on this for a second because I see a lot of people that invest in oil and gas because it's a good tax strategy, not because it's a good investment. So, they get caught up in these great tax savings without vetting the deal.

Andrea Propp: That should be number one on the list.

Justin Donald: It has to be a good deal first, then you get the benefit of having great tax strategy.

Andrea Propp: Yeah, for sure. And because it was a lot of these things, too. It's like to continue to get the tax strategy, you actually have to keep investing in these things as well, right? Because your tax benefits only last so long. In the case of investing in these oil and gas producers, you're getting the oil and gas producers get to push through the expenses of drilling to the underlying investor. And so, you're getting these write-offs depending on how you invest and who you invest with. But you're getting these write-offs every year up until a point, right? You can only write off that asset to zero. There's no negative.

Justin Donald: And beware of the ones that write it off past zero. Beware wherever you see many multiples on it, right?

Andrea Propp: Yeah. Totally right.

Justin Donald: So, let's talk about residential transition lending. Okay. So, this is a specific niche that we want to dig into, and this is a cashflow strategy hiding in plain sight, but most people don't know about it. So, I really want to dive in. For someone hearing about residential transition loans really for the first time, how would you explain the strategy in a simple way where they can understand how this produces consistent, predictable returns?

Andrea Propp: Sure. So, residential transition loans are short-term loans used to rehab residential real estate, typically 12 to 18 months.

Justin Donald: Yep.

Andrea Propp: These are loans that are originated by private lenders, typically. These are, in our case, specifically, and also typically these are smaller loan sizes, so think $2 million, $3 million, $4 million loans. And it's basically financing that we provide to incredibly talented, incredibly experienced borrowers, typically who are developers who are buying properties in a distressed situation, a competitive sale of some kind, they're moving quickly, closing in a couple of weeks usually. And that's why we can come in and provide that financing in a way that banks can't. I just closed on my home in Austin last year, and that process to get a traditional mortgage took three months.

Justin Donald: Oh, it's crazy.

Andrea Propp: So, banks can't move like they need to move in this space. So, that's where we…

Justin Donald: Well, that's the reason that private credit became what it is today, right? Over $3 trillion, all created out of nothing in the last decade, based on banking regulations tightening. So, I mean, this is a relatively new asset class, and we're going to get into kind of the niches or subcategories of risk versus less risky. And I want to get into some of the headlines here in a little bit. But before we do, what creates the edge here? Why isn't institutional capital flooding into this space like they typically do on the equity side?

Andrea Propp: Yeah. Well, so it's also still quite niche, right? I think it's maybe helpful to give you sort of a little bit more of that flow of how I came to be within it and really create IceCap. And then you can sort of see that lens through which, "Oh, this makes sense for smaller players to be the winners here.” And so, I found it, like I mentioned when I was at LibreMax, and I really got to know the Oved family, who is a player in the space. One of these small, well, I shouldn't call them small. They are a big family. But at the time, their outfit, IceCap Group, in 2016, was they were doing a few million a month in originations. They were just kind of like testing the waters, and we found each other. They were trying to get me to buy their loans for the LibreMax portfolio.

I was trying to get the family to invest in LibreMax. We did that for a year. And then finally they were like, we're never investing in LibreMax. And they said, "But we want to invest in you, and we want to figure out how to build something bigger than this together.”

Justin Donald: What a big honor.

Andrea Propp: Totally huge honor. And I was on my journey of going, "Oh my gosh, this RTL space is so unique.” I'm seeing it produce this consistent cash flow, but yet there was no way for me to invest my capital directly in it. And 2018, I was sort of looking, I'm like, "Is there any way I can get exposure to this?” The only way at the time would've been if I had underwritten my own loans and created my own private lending business, which that was not the path I wanted to take. And so, I became really sort of dedicated to creating this opportunity as an investible opportunity for folks. And so, we decided to join forces in 2019 and build a fund platform for investors to get allocated to this space.

And started really launched the business ultimately from my home office in Brooklyn in the middle of COVID, because we were no longer working in the office, so that was a crazy experience. In the middle of COVID, you had construction moratoriums in New York. We’re like, "Really? Is this really a good idea, guys?” But it didn't take long for everything to kind of come back, and it turned out to prove a very lucrative business model. And so, fast forward to today, I've raised $170 million in the fund platform structure. We've got various leverage lines that we're able to pull on to make that 170, which is really 120 in fund 3, which is our only open fund, act more like 400 million in the market.

And that 400 million is about a third of our total business at IceCap Group, because we do some term lending as well, but that doesn't land in the portfolio. And so, even just watching our consistent steady growth has been a barometer for me of what's happening in the industry and our space. It is still fighting to be sort of this institutional product. But because there's all kinds of different players, some are doing a really good job of it, like we are, and some are doing a not-so-good job of it. And so, you really have to be able to sift through who's good at what they're doing and who's not still. And so, it's created just a need for like incredible diligence like you guys do, and a keen eye for kind of, yeah, who's good at this.

And so, yeah, in terms of like the institutionalization of this space, it's kind of been my crusade. That's exactly what I'm trying to do with IceCap. But of course, in a way, that is very carefully calculated. I'll give you one example. Like, I specifically put in our docs that we will not raise more than $25 million a quarter.

Justin Donald: Yes. Slow growth.

Andrea Propp: So important.

Justin Donald: Make sure you can handle it.

Andrea Propp: Yes.

Justin Donald: And that you're not forced to invest in things, right? That because you have the money and you're going to have to pay out a return, and you're sitting on it, it's like, “Ooh, it's burning a hole in our pocket. Let's buy this asset. Let's lend to this group.” And that can get you in trouble.

Andrea Propp: A hundred percent. And I mean, like, touching on some of the headlines, I mean, earlier headlines in the private credit space were certainly around some of the cracks in the foundation. Some of these big blue-chip names that have raised billions of dollars really fast have done it without necessarily having the pipeline, right? And when that happens, well then, you might look at a deal and miss some details or not properly underwrite, and that creates issues later.

Justin Donald: That's right. Or you're hungry for the fees, right? You're raising billions of dollars off of fees alone. You're making an incredible living. The business is booming. I mean, at that level, your fees are well beyond the cost to have a team and maintain the business.

Andrea Propp: Totally.

Justin Donald: So, it's a consideration everyone needs to have in this space is like, what's too big?

Andrea Propp: For sure. And I mean that's exactly why I love the model that we've built with IceCap is because we're still fundamentally family office backed. Like, those are my business partners, right? Joseph Oved, Ezra Dweck, the full Oved family. I mean, we're all in this together, skin in the game, but also they're making money in other parts of the business. They're in the apparel manufacturing business in a really big way. That is a real money engine for them. So, this is not for them. Like, how do we raise as much money as possible? In fact, I've tried to, and I've had moments where I've had $100 million at our doorstep, and they're like, "Nah. We're good.” And I actually love that and respect that about them. So, I think it's really important to pay attention to that.

Justin Donald: And even last night off air, when we were just hanging out, you had so many nice things to say about them because for you, it's important who you partner with, that their value aligned with you, the way that they’re family men, and the way that they show up. So, I think that's really important. I want to give them a shout-out. I also think it's interesting seeing the pivot. I'm talking a lot about this in my newsletter, so I started this brand new newsletter called Lifestyle Investor Lens, and I'm talking about this big shift that's happening basically from the wealth industry to the family office paradigm. And you're seeing more and more of this.

So, that transition from institutional capital, or the big banks or the big private equity firms, over to these family offices and what they're able to create, the opportunities that they're getting, obviously, this being one of them, this being one arm for your family office partner.

Andrea Propp: Yeah, totally. No, and it's definitely a trend, right? You're seeing new family offices are created every day. And certainly, as you see more wealth creation and exits happen, yeah, there's just the family office world continues to expand. And not all family offices are the same, of course. It's very hard to know which one is what kind, but I got super lucky, of course, getting to work with the Oved family. I said to you, I think I've spent a lot of years working for some pretty unsavory characters. And like we were talking about before, a lot of male domination, of course, in this industry. And so, it became clear to me, as I was thinking about who I wanted to build this business with.

I'm like, “I want to work with people who are probably going to be predominantly men for the first little bit, who love their wives and love their kids.” And that is actually an incredible checklist item for me when I think about allocating my money, as well as an investor when I wear my investor hat.

Justin Donald: That's awesome. Well, and shout out to Front Row Dads, which is a group that I'm part of, where the mantra is family men first, businessmen second. So, huge, huge fan there. I want to talk a little bit before we get into the headlines that we're seeing here in private credit. I want to talk about leverage because leverage is tricky. Sometimes you hear it, and you're like, “Ooh, that's a bad word. Taboo. We don't want to do that. That means risk.” But there are ways that you can structure leverage in a less risky environment or a less risky way based on how you collateralize. But I also think that for those that are not heavily in the investment world, they may not recognize the relationship between leverage and returns. So, there's this balance of how do we get the best returns but keep it lower risk.

And so, I'd love to hear how you talk about that because I know IceCap uses leverage. But you use it intelligently, versus like there are a ton. I mean, I was actually looking through my emails yesterday, just I was trying to find something. I was like, wow, I've got 6,000 emails just in my investments folder, just from the last couple of years, right? So, if you think about the deals, I've looked at the number of deals that we vetted, and I see so many red flags on the leverage side. It’s crazy. And I think your average retail investor, when I say retail, like people that aren't professional investors, someone that is trying to invest money, they got work that they're doing and a business that takes the majority of their time, maybe they're not getting access to the best deal, so they're just taking a retail deal.

Something that's out there. Generally, higher fees. Generally, way more favorable to the sponsor than to the investor. Less of a win-win. More of a potential lose-win. So, talk about leverage in the way that you guys look at it.

Andrea Propp: Sure. And I love this question because I know this is also one of your 10 Commandments, right?

Justin Donald: That's right. That's right.

Andrea Propp: And using leverage, I think, is a really powerful tool, but one that needs to be used with a considerable amount of caution, of course. So, it's also really important to look at what's being levered, right? You don't want to lever bad assets or bad deals either. So, for us at IceCap, we're originating loans at typically 12% with another 2 points of closing fees. And so, I often get investors who are like, "How are you originating loans at 12% and then delivering to me this like 15%, 16%, 17% return?” And the answer is, I mean, there's a lot that goes into it, but there's sort of two key components that I would say are part of our edge. One is the way we use leverage, and then, two, is also our loan sales program, which I can get into separately.

But definitely the way we're using leverage is a key component. And so, we do have warehouse line partners that we can pull from. We've got a couple of them that we use for the fund, and that allows us to dial up leverage within a month or within a quarter. And also, really importantly, we're taking in capital every quarter, and so that gives us the flexibility to, when investors come in, they're getting invested immediately. And so, there's no drag on performance. So, we're using these facilities as a way of calibrating around inflows and making sure that we're continuing to consistently deliver returns every time we bring in a dollar.

Justin Donald: Now, before you move to the next point, explain real quick what a warehouse line is for people who don't understand what that is.

Andrea Propp: So, it's a credit facility. It's got strict covenants built around it, in terms of what we're allowed to use it for, what we're allowed to put on that line. And within that construct, we can originate loans. There's a lot of work that goes done to get to know each other and make sure that it's a right fit. They analyze our business and the types of lending and loans that we're doing, make sure it's a fit for what they want exposure to. And then we've got sort of this credit box that we know that we can work within to use that credit facility

Justin Donald: With preestablished terms, interest rates, something more favorable than what you'd see in the general market based on volume and relationship, and all that.

Andrea Propp: Yep, exactly right. And so, with our warehouse lines, those lines are floating rate lines. And so, they're moving as markets are moving, as interest rates are moving. And our loans are fixed-rate, typically. And so, that's something to pay attention to when looking at any private lender, looking at anybody using leverage, “Hey, what are your assets doing in relation to the debt that you're using?” And so, that's something we're always paying attention to as well is that spread between our cost of capital and the note rates that we're putting out, which happens to be quite a large spread right now. So, we're originating at 12. Our cost of capital, really for the business right now, is kind of around 6.5%, 6.6% for the fund. And so, we're always making sure we're managing that spread between that 6.6 and that 12%. So, that's ultimately how we're able to turn these 12% returns into 16% returns.

Justin Donald: Well, and the origination fees, you're just getting that straight up, no matter how quickly they pay it off, right? 2% or 2 points is pretty big in the whole scheme of things. So, for people that don't understand this space or private credit, that kind of helps juice the returns.

Andrea Propp: Yep, for sure. Yep, that 2% is collected day one on the full loan amount. And our loans, by the way, so these are construction, these are rehab loans that are released over time, which is another really interesting dynamic of what we’re doing here. We’re giving the borrower a part of the loan to go and buy the asset, and then the other part of the loan we’re giving to them over time as they’re doing the work. Once they…

Justin Donald: To make sure they perform based on what they said they were going to do, right?

Andrea Propp: Exactly. And so, we are de-risking and this product, this loan is de-risking as they’re getting work done.

Justin Donald: But it’s brilliant because you make your 2% no matter what.

Andrea Propp: Exactly.

Justin Donald: And even if they never get to the point that they earn the extra tranches, you guys are in the money there.

Andrea Propp: Yep. That’s exactly right. And we’re getting that 2% on the full amount regardless.

Justin Donald: Yeah. And then from a collateral standpoint, talk about that. And then we got to get into your second point.

Andrea Propp: Yeah, perfect. Okay. So, we are first lien on all of our loans. Very important to pay attention to that as well when you’re looking at credit funds, like where are you in the capital stack? We’re first lien, which means we can take that asset over at any time. Now, the type of lending that we do, we are incredibly hands on. We are right in there with our borrowers. We know them very well. We know all the projects really well. We do intense diligence on both the project and the borrower.

And then once we get to actually closing that loan, we are servicing the loan as well. And so, we know what’s happening month by month. We are collecting interests from those borrowers in real time. And so, we can tell if things look like, they’re going a little bit sideways or they might need help. And so, that’s a really good position to be in for us to kind of maintain just safety around that asset. And so, if it looks like things are in trouble, our first line of defense is our relationship with our borrower. We go, we talk to them, what’s going on? How can we help? What do you need?

And oftentimes, it’s just like they need a little bit more time. You need a time extension? Okay, we’ll do that. We’ll give you a couple extra months and in turn, we’ll take some restructuring fees.

Justin Donald: That’s right.

Andrea Propp: We love doing that and we love getting our borrowers back on track. We would rather not take over the assets.

Justin Donald: That’s right, that’s right.

Andrea Propp: But we can if we need to. And that’s super important.

Justin Donald: That’s the key.

Andrea Propp: Yeah.

Justin Donald: All right, so the second key to your returns is what?

Andrea Propp: So, also, our loan sales program, really importantly. So, we have a head of capital markets, Stephen Schwartz, who is just a badass, my whole executive team, they’re all badasses, as Stephen is responsible for all of our loan sales, all of our warehouse line management, as well as our securitization, which we didn’t even get into. But the securitization is the other way that we’re using now to lever our portfolio and that is super high level. It’s $185 million securitization that we closed last year, posted $18.5 million from the fund to access that capital, and it acts like a bond with very seasoned, well-known hedge funds asset managers that are invested in it. We pay them a coupon and we use that now to lever the fund.

We could spend a whole other podcast on this so I won’t get too detailed on it, but it really has allowed us to silo the risks and silo the $18.5 million that we have at nine to one leverage on a portfolio of $120 million. And so, we really like that kind of leverage. It keeps it really carefully managed.

Justin Donald: And a lot of these private credit funds do not have that type of leverage.

Andrea Propp: That’s right, yeah. And we’ve been able to access that leverage, one, because we are bigger than our funds. We are. We did $1.1 billion in originations last year. We’re going to do more than that this year. We are definitely one of the largest private lenders in the space. And we’ve got, we’ve built that institutional rapport and relationships, and so that’s what allowed us to go to the street last year and make this happen. And we will do another one this year as well. And so, that’s part of the edge for sure and how we’re carefully levering the portfolio.

And then this loan sales program. So, what’s great about our business is these loans, once they’re closed, it’s a very liquid market actually. There’s a lot of players who want to buy these loans from us once we’ve done the hard work. And so, what we like to do, I would say is probably like 20% to 35% of our portfolio, we’ll let that loan season on the portfolio for a couple of months. Stephen’s really attuned to what note buyers want, which loans. And so, he can look at our whole portfolio and go, okay, these three should go here. I know that this guy is going to want to buy these two. And so, he will opportunistically look at the portfolio and sell loans when it makes sense.

And when we do that, that loan that we originated for 12%, we’re now going to sell to that note buyer for 10%. They’re going to take that note and that risks off our book onto their book, and we’re going to continue to receive that 2%. It’s called interest-only strip or IO strip while the risk is removed. So, we love doing that all day long. That adds for us probably another like point and a half of performance at the end of the day. So that’s, yeah.

Justin Donald: Yeah. And you see this in the residential mortgage space, right? You see this with CMBS, right? Packaging loans, taking them to Wall Street.

Andrea Propp: Totally.

Justin Donald: So, this is a variant of that. So, it’s not odd, but it’s becoming, this is now on the private side. It is becoming, as private credit continues to mature as an asset class, we’re seeing more and more of that, right?

Andrea Propp: That’s right. Yeah, and I’m super proud of my team for making this a reality because it is for the RTL space to now have securitizations. This is relatively new and exciting. And so we were only one of three securitizations in our space last year, so yeah.

Justin Donald: I love it. Well, I want to get more granular, but before we do, I want to talk about really what chaos does, the opportunity that chaos really brings for investors when you’re trying to find alpha in a regulated, some sort of like regulatory environment. And so, we’ll get into some of these headlines here in just a second. Before we do, you’ve spent time investing in markets like New York, you mentioned that already.

Andrea Propp: Yeah.

Justin Donald: How do regulatory environments actually create opportunity for disciplined investors that can– I talk a lot about invisible deals in my book and in the way that I invest. I feel like that’s a huge invisible deal because a lot of people see the regulatory environment as like, oh, I can’t do these things. It limits me over here, when in reality, it’s kind of opening up another lane if you’re willing to look at it that way.

Andrea Propp: Totally. I mean, we are heavily invested in New York. That is where our headquarters are. That is where our business started and where we really grew from. It also happens to be an incredibly complicated, highly regulated part of the market that a lot of people are like, I don’t want to touch it, and for good reason.

Justin Donald: Yeah, that’s right. Well, and I’ve always said no to real estate in New York because that regulatory environment is really challenging, especially on a rental standpoint. So, this is different because you’re lending, but I mean, I am running from New York from an investment standpoint on the equity side, on the rental side.

Andrea Propp: I don’t blame you, by the way, on the equity side. There are still loads of opportunities where we play. And in fact, this is where folks who are retreating from the space being like, you know what? I’m going to a pause on New York for now. Or we even had a capital provider that we were working with that we were close to setting up another relationship with, and they had some changes internally, new CEO, and then the new CEO was like, I don’t get New York, so actually, we’re going to stop this right now. And definitely creates some challenges at times, but man, it’s like, it’s creating a lot of opportunities for players like us who are really good at New York to really take a bigger stake of the business. And so, what we’re seeing right now is there’s obviously a ton of like headlines and conversations around Mamdani and okay, so now, New York is…

Justin Donald: I want to talk about Mamdani because what was supposed to be issued just to the ultra-wealthy seems like what has happened every time before, it trickles down to the middle class. It trickles down to the lower income folks. I mean, it doesn’t end up, resulting in what people think that it will across just the ultra-wealthy.

Andrea Propp: Totally right.

Justin Donald: Or they’ll move or I mean, so you’re seeing a mass exodus from New York, from California, but…

Andrea Propp: Even to Texas.

Justin Donald: Yeah, that’s right, right here. You did too. I did as well.

Andrea Propp: I did. I’m part of that. Yeah, for sure.

Justin Donald: From Chicago originally for me, but some of these blue states are creating very combative environments for investors. And I’m curious, I mean, we talked last night a little bit about this, as I am seeing things that I would want to run from, and I don’t know the lending side. I’m pretty good in private credit, but I don’t know the nuances even close to the degree that you do in this specific niche and probably other niches that you’re well versed in. Even if you’re not participating, you know it so well to stay away from it, right? But this has opened a lot of doors for you, which I find interesting.

Andrea Propp: Yeah, totally. So, there’s sort of three key things that Mamdani is talking about doing that I think makes sense for this podcast. The first one being, talking about rent freezing, rent freezes across all rent-stabilized units in New York, which there are a million of them in New York, and that represents close to about a quarter of like the total livable units in New York City, and…

Justin Donald: It’s a big number, 25%.

Andrea Propp: It is a big number. Yep, it is a big number. And the thing to pay attention to, there’s a few things to pay attention to, so this isn’t the first time we’ve talked about rent freezes in New York, right, de Blasio did this three times actually from 2015 onwards. And then, this isn’t something that he can just blanket, be like, I’m going to freeze rents for the next four years. This is something that’s decided on a year-by-year basis.

There is like a housing guidelines board in New York that makes these decisions, of course, appointed by Mamdani. So, there’s, of course, like from our perspective at IceCap, we do think he will be successful in these rent freezes, but it’s going to be on a year-by-year basis. We are going to find out. I think the next meeting is in October of this year, and that’s when we’ll find out if it’s going to happen or not. Probably it will.

And yes, it’s going to create some pain for those who are owners of legacy rent-stabilized assets, no question, right? It’s going to make it very hard. What this means is they cannot increase rents for that period of time. So, they cannot increase their NOI on their properties. And so, values stagnate, right? And also, these are older properties that probably have a lot of maintenance and like falling apart and like, it’s a disastrous plan. But what I will say is from IceCap’s perspective, we don’t touch legacy rent-stabilized assets. We have no exposure to that.

Justin Donald: It’s not your bread and butter.

Andrea Propp: No. Our exposure is, remember 12 to 18-month short-term loans. And we are supporting borrowers who are actually out in the world creating more of these rent-stabilized assets. So, our typical loan, and important also to mention, our typical loan is like our LTVs are quite low. We’re lending on average around a 60% LTV. So, our borrowers make up that other 40% equity buffer. So, we’ve got a ton of protection in our loans if anything goes badly.

And I always like to say too, it’s like you’d have to have the worst environment that we had in the worst market that we had, which was 2008. And I think, Nevada was one of those states that was one of the worst, where you had house price appreciation negative. It was like negative 30 or so. You would have to have worse than we saw in the worst market during the great financial crisis to see principal prices or principal impacted on our loans.

Justin Donald: Okay. Michigan got hit pretty hard there for a while too.

Andrea Propp: Yeah, yeah. And so, I think that helps kind of put things in perspective when people are thinking about how they’re investing with on the debt side versus equity. That equity piece wiped out, right? And so, that’s why, like you’re saying, I would not choose to invest in New York on the equity side right now, but from the debt perspective, our borrowers are, in a lot of cases, they’re building new properties where they’re actually setting aside a certain percentage of that property for new rent-stabilized assets.

There’s a whole ecosystem that exists in New York that supports the new construction of these, right? And so, it’s 421-a, the new program, I think it’s like 285 or something, but same idea. Essentially what it does is it incentivizes builders to set aside a certain percentage, usually, like 20%, 25% of the units for rent stabilization and in return what they get is a 35-year deal usually on tax abatements. And so, typically how they’re structured is like first 10 years, no taxes, no property taxes.

And then those years after, it slowly ticks up over time until you get to the end of this term. And once that tax benefit has gone, so too is the rent stabilization. And so, this is how these deals pencil for our guys, right? And so, our exposure on the debt side is to the creation of new ones, not to existing ones.

Justin Donald: Right.

Andrea Propp: And so, for us, this isn’t impacting us directly.

Justin Donald: Which is awesome. And it’s interesting because– so, for those of you that are unfamiliar, a tax abatement in itself can make a bad deal a great deal because of that margin, because of the delta of what you can get into return. But you also have to be careful because a lot of these groups pitch in these things. They’ll say, oh, yeah, we can get a tax abatement. And then they don’t.

Andrea Propp: Oh, yeah, you need to make sure.

Justin Donald: And then their deal doesn’t pencil.

Andrea Propp: For sure. You need to make sure they know what they’re doing, yeah.

Justin Donald: Again, that’s a specific equity side example, right? This is different than what you’re talking about.

Andrea Propp: Well, and I will say too, when we’re underwriting deals, we will look at the deal from both lenses. It’s like, if this gets a tax abatement or if it doesn’t. And we’re using that, like, if it doesn’t, do we still want to do the deal? So, that’s important to look at, for sure. So, the other thing Mamdani is talking about doing is he wants to support the creation of another 200,000 units of rent-stabilized homes in New York City over the next 10 years. That’s actually great for us. That’s going to create more borrowers who want to do this work that we will want to fund. And so, this is a net benefit for us.

Okay, number three is he is talking about increasing property taxes. Really, actually planning for him was to increase taxes on the wealthy. He basically wanted to tax anybody making a million dollars or more, realizing…

Justin Donald: This is where we’re seeing it slip.

Andrea Propp: But realizing he doesn’t actually have the power to do that, right? So, we’ve got a nice balance, at least with Hochul, and so…

Justin Donald: And didn’t I see something where it was now going to be 750,000?

Andrea Propp: You know, so what I have seen is when it comes to his plan on taxes, it’s probably not going to happen.

Justin Donald: Okay.

Andrea Propp: It’s basically, he realizes he’s not going to get this done, right? And so, his plan B is to increase property taxes instead, because he does have a little bit more power to influence that. However, the…

Justin Donald: That’s not just going to be on the ultra-wealthy. This is going to trickle down to, you know…

Andrea Propp: For sure.

Justin Donald: I mean, housing prices in New York, like $750,000 doesn’t get you a whole lot.

Andrea Propp: Right. Well, so the things to pay attention to there, again, like this isn’t something he can just like blanket do. This is something that City Council has said is a non-starter. It’s going to get a ton of pushback. I think we are starting to see his rhetoric change a little bit around this, recognizing that this isn’t going to impact just the wealthy. And so, okay, so let’s take a step back and really look at this proposal.

Again, with our business, I mentioned to you that a lot of our deals that we’re doing, our borrowers are taking advantage of these tax abatements. Well, they’re not paying taxes for the next 10 years anyway. So, we’re good.

Justin Donald: That’s right.

Andrea Propp: And again, like, we’re definitely good because we’re only in the deal for that 12 to 18-month period. Our borrowers are good because they’re covered for that next 10 years. But ultimately, our borrower, at the end of our project, they are refinancing out of our loan and at that point, they’re getting a traditional bank loan. And they’re turning that asset into an operating asset that is in their portfolio, generating income for them over time. And so, we want our borrowers to succeed. We want them to win, because they win, we win.

Justin Donald: Yeah. And then they’ll come back for the next one.

Andrea Propp: And they will, for sure, yep.

Justin Donald: So, it is fun seeing how these regulatory environments can create lanes for people that are creative and looking for ways that it can be a win. So, it’s cool seeing that you guys and IceCap are doing that. I do want to talk about these crazy headlines. Okay? Private credit is dead. All this private credit that went into these software companies that aren’t AI is disrupting them all and their software is not worth anything anymore. It’s like, it’s so click maybe, but…

Andrea Propp: Yeah, totally.

Justin Donald: And the reality is plenty of software is great. AI is great. A lot of it will collaborate together. In some cases, it will take over some of the software, right? There’s no doubt about it. But the hysteria that the media has created around private credit being bad and run, you’re going to lose all your money, like, I want to talk about this because yeah, there are some risky private credit operators out there and risky subclasses in that asset class. But there are a lot that are super safe that are very risk adjusted on the return side of things. So, help us understand what’s going on here because the average Joe is like, oh, I shouldn’t invest in private credit. This is risky. I’m going to lose all my money. And it’s just not true.

Andrea Propp: It’s not true. I think anybody who’s saying private credit is dead is just painting with too wide a brush because not all private credit is created equal. I think, you certainly are right to be concerned about some of these. You’ve got Ares, Apollo, Blackstone, Blue Owl, right, with a considerable amount in specific funds, a considerable amount of exposure to SaaS companies, and they’re underwriting loans that are backed by perceived future cash flows and underwriting loans, typically, they are like…

Justin Donald: Perceived.

Andrea Propp: Yeah, exactly, and like five to seven-year type loans. And they’re doing it in a vehicle that offers quarterly, sometimes even monthly liquidity. That is like asset liability mismatch alarms, right? That was something I paid a lot of attention in structuring our fund. I think it’s incredibly important because now what we’re seeing is you’ve got sort of this mass exodus of sorts. You’ve got, like, there’s definitely numbers out there that are– it’s interesting to see the way that different reporters are reporting on this because something I’ve noticed is even in a Wall Street Journal article earlier this week, they talked about Blue Owl and hitting their gates, right? Mass redemptions.

Justin Donald: And explain gating, so people understand what’s happening here, because this is the big thing. And by the way, of course, in a higher risk asset class, if you have people running to redeem, you’re going to have to gate, right?

Andrea Propp: You’re going to have to gate. And like, any private credit fund is going to have a gate. And what a gate is, is essentially a point at which, so you can have an investor level gate and a fund level gate. And so, an investor level gate, typically, it’s something that structure around, okay, if you want to fully redeem from us, this is the truth for IceCap and it’s structured differently, fund by fund, but if you want to redeem in full, we’re going to put you on the list for 25% increments over four quarters. So, that’s a 25% investor level gate. That allows us to manage around our natural liquidity because we’ve got loans paying off every day, the new loans we’re getting into every day. And so, our existing investors don’t ever want us to be in a position where we are forced to sell assets to meet a redemption request. So, we say give us…

Justin Donald: You could lose money selling an asset early. It doesn’t make any sense.

Andrea Propp: Correct. I mean, you even look at what happened in ’08. Those that did the best were the ones that like held on, in 2009, 2010, 2011. So, really important not to sort of freak out and run for the exits, right? And so, this investor level gate is one way to sort of protect the portfolio and give the manager the ability to manage the liquidity around their assets. And then there’s typically a fund level gate, and that’s looking at the full portfolio and saying, we will allow X percentage of the fund to flow out each year within a year. So, a lot of these funds that we’re hearing about have a 5% investor level gate. So, if they’re a billion-dollar fund and they have $50 million in redemptions, they’re going to say, hey, we’re going to cut it off here and we’re going to now– everyone is a little bit different, but probably like puts you in a queue where we’re going to give you pro rata redemptions as the liquidity becomes available. Or some of these guys are going to start pulling from warehouse lines and leverage to meet these demands too.

Justin Donald: Well, and it shouldn’t be a surprise. This is all in the fund docs, right? So, for people that do the right due diligence, you should know this ahead of time. You should know what happens in a regular environment and what happens if you have a lot of investors rushing into something. And by the way, the hysteria around this is quite comical because some of the numbers that I’ve seen in these big legacy media articles are not even accurate. Like, we have higher ups in a lot of these Blue Chip, Blue Owl, Blackstone. A number of these groups were like, these numbers aren’t even accurate.

Andrea Propp: I know. Exactly right. And it’s good to go direct to your source because, I forget exactly what the numbers are, but the Blue Owl example was like mass redemptions, hit gates. But at the same time, one of the last lines in the article was like, they also had pretty much the same amount of money in new investments coming in. So, I was like, oh, okay. So, they’re fine actually. Now, I’m not going to say that like people shouldn’t be cautious about what’s happening out there. They should be. There’s definitely major concerns, but…

Justin Donald: Well, and a lot of private credit’s garbage. Anytime you have a new industry that’s created, you’ve got great players and you have a majority, they’re not great. This is a new industry. Things haven’t been perfected. You have people that are starting these that never went through a financial crisis before. So, that’s important. And even to the point on the headlines, like I think it’s important to mention, you had talked about the perceived future earnings as collateral, but what about these funds that actually collateralize with real assets, right? So, let’s talk about this.

Andrea Propp: Yeah. So, this is where I come out on is that the same decision that I made when I was thinking about what to build, right? And what I want to build my career around and really, like building the fun platform at IceCap. I love hard assets. Hard assets are king. Turns out people need homes to live in, right?

Justin Donald: Yes, they do. People will do a lot to not be homeless or to not lose their home. They will do, I mean, they will jump through fire, right?

Andrea Propp: Exactly, exactly. And so, yes, to me, when it comes to investing in private credit, I think I will invest in asset-backed private credit all day long. Obviously, understand what those assets are that are the collateral, understand how the deal is structured, how the loans are structured.

Justin Donald: Understand the leverage.

Andrea Propp: Understand how the leverage is used, of course. But for us, our loans are backed by the hard asset. It’s backed by a real thing and not just a spreadsheet.

Justin Donald: Yeah. And you don’t want to be in second or third position. You want to be in first position.

Andrea Propp: Yep, exactly. And not only that, you want to know too, like how the book is marked, right? With a lot of these private credit, especially the corporate, these corporate credit middle market lenders, they’re kind of marking their book however they see fit, right? And for us, it’s like we’ve got many lines of defense that say this asset’s worth this. We do our own internal process of assessing valuation. We get, of course, third party valuations. And then there’s…

Justin Donald: You say, of course, but I hope you guys tuning in here, if you’re watching this, you’re listening to this, it’s of course for IceCap. It is not of course for most private credit out there.

Andrea Propp: That’s fair. And pay attention to that if you’re looking at other deals, for sure. And then, of course, you can look at the environment. If we’re investing in a property in a certain neighborhood, you can see the comps in the neighborhood. So, you’ve got many degrees to point to what that asset value is. So, I like that all day long.

Justin Donald: Well, I feel like we did a good job of really kind of talking high level and then getting granular on a lot of things. This has been awesome. I can tell, like, you know your stuff, you are very well educated in this space. It certainly helps to have the time that you have spent in the different industries and being on the institutional side, being on the family office side, getting to see this stuff firsthand, different types of loans, different types of structures, different types of asset classes, right?

Andrea Propp: Totally.

Justin Donald: So, it’s cool hearing your level of sophistication here. And I hope that this inspires a ton of women that are tuning in here to do the same thing, that they have the ability to dive in. It’s one of the things I love about Lifestyle Investor. I’m in all these different masterminds and almost all of them, it’s like, oh, no, you’re the member. You can come. Spouses aren’t welcome. And I hate that.

Andrea Propp: That makes no sense.

Justin Donald: It drives me crazy. So, we always have spouses. You can come to anything. Now, maybe the spouse doesn’t want to come. Maybe they have no interest in it and it’s not their thing. but we want them to know they’re invited. But the funny thing is, once they come, they think it’s going to be all about investing and they find out it’s all about just living and relationships and doing stuff together. The spouses that come, they just keep coming back. They love it.

Andrea Propp: I love hearing that. And what’s so cool about what I see you doing now too, is it’s not just about the spouses, it’s about the family. I mean, we had a really awesome, was so fun meeting up with you and Ryan and getting to meet your kids and seeing the Lifestyle kids on Savannah’s sweatshirt and seeing the way that you interact with your own family around what you’re doing with Lifestyle and what you’re doing with investors and managers. And I just think you are setting her up for such success by talking to her about the world of investing this way, like, they, bringing up young women in the world of finance.

I was so lucky to grow up with a dad who did the same thing with me. We would talk shop, we would talk about deals, and he allowed me to have that sense of confidence around investing my own capital and building my own business. So, you are really setting her on the right path. And I got to see that firsthand. And that was a beautiful thing.

Justin Donald: Thank you. Well, if she can follow in your footsteps, I’d be just ecstatic. I’ll be proud of whatever she decides to do, but just my love of investing and this whole world, it’d be cool to see her do that. And for those that haven’t talked about this a lot, but our kids’ book is coming out and it’s called The Money Club. And the four kids of the Money Club are the four kids you hung out with last night.

Andrea Propp: No way.

Justin Donald: So, we got our Money Club picture. So, each of the four characters are my daughter and then Ryan’s three kids.

Andrea Propp: I’m one in the money club.

Justin Donald: So, it’s so cool.

Andrea Propp: It sounds really like where the cool kids are.

Justin Donald: Oh. And for them to get started at this age, I just, it’s amazing to think of where we could have been had we known these things or had people that could mentor us on these things. So, it’s cool seeing them put it to work, I mean, real application at that age. Savannah just did a lemonade stand with her friend.

Andrea Propp: Yes, that’s where it starts.

Justin Donald: Just this weekend, and it’s cool. They’re fired up to make their $36. And they whipped this thing up pretty fast and…

Andrea Propp: Oh, my gosh, 36. They made 36?

Justin Donald: 36 bucks just in the neighborhood, a few hours.

Andrea Propp: In my day, I set up a candy store on my front porch and I did it with two friends. They were, of course, my employees. We made $5 that day, $5. And you know what we did with it? We took it and we went to 7/11 and bought more candy.

Justin Donald: I love it. Well, and what it does, it builds that confidence that you can do it again. So, we’re actually using– it’s really fun. So, I’m an investor in a lot of these AI companies that are out there, and so we’re using some of them, we’re using Replit to build our website.

Andrea Propp: Awesome.

Justin Donald: Savannah has her own business domain name. We’re building her website. She’s got a jewelry business.

Andrea Propp: So cool.

Justin Donald: Which I’ll probably do an episode on at some point in time, but it’s cool. It’s cool.

Andrea Propp: That’s incredible. Well, I don’t have kids yet, but I’m very excited to join the club soon enough.

Justin Donald: Heck yeah. Soon enough. Well, you get married here in T-minus a month or so.

Andrea Propp: That’s right. Yes.

Justin Donald: So, very cool. Very exciting. Andrea, this has been awesome. Where can we learn more about you and more about IceCap?

Andrea Propp: Sure, yeah. You can reach out to me, aspropp, as my last name is P-R-O-P-P. That’s S as in Susan in the middle at IceCapGroup.com. You can find us online at IceCapGroup.com or come to the Lifestyle Investor group events and I will likely be there.

Justin Donald: Love it. So fun. Well, I like ending every episode with a question for our audience. The question is the same each week, but what is one step that you can take today to move towards passive income, move towards financial freedom, and really just living a life on your turn? So, not a life by default like most people, but a life by design. And what’s one thing that you can take from Andrea today to put into practice in your own life? Thanks so much, and we’ll catch you next week.

Andrea Propp: Thank you.