First to Market: A Conversation with John Beacham

Kevin Kim: You are listening to Lender Lounge with Kevin Kim, a podcast dedicated to helping those in the private lending industry grow, improve, and streamline their business. I’m Kevin Kim, partner at Geraci LLP, the nation’s largest private lending law firm. Join me as we chat with the best and brightest in private lending who are eager to share their years of wisdom and best practices with lenders, borrowers, brokers, investors, and more. Subscribe to Lender Lounge on your favorite podcast platform and learn more about Geraci and how we can work with you at geracilawfirm.com. Check out the episode summary for other valuable resources.

Kevin Kim: Hey, guys. Welcome to another episode. A very special episode in between seasons of Lender Lounge with yours truly, Kevin Kim. This episode, we’re doing it in conjunction with our friends at the American Association of Private Lenders, because it’s that important of an episode.

I’d like you all to welcome our guest for the show today, John Beacham. CEO of Toorak Capital Partners. John, please introduce yourselves to those who don’t know who you are to our audience. And let’s get started.

John Beacham: Hey, Kevin. Well, first of all, thanks for having me on your podcast. It’s super exciting. And I’ve listened to many seasons of your podcast in the past. And lots of impressive people have come on here. Appreciate you’re having me here for this special episode.

I am John Beacham. I’m the CEO of Toorak Capital Partners. We’re a company that was founded in 2016 that is focused on funding the residential bridge loan market both across the US and UK. We partner with lenders who originate loans. Typically, they’re small or short-term bridge loans on one to four-family properties or multifamily properties that we then acquire after they’re funded and then hold them on our balance sheet. We have a pretty significant balance sheet of loans that we purchased over time.

Kevin Kim: John, you’ve been in, I would call it, real estate finance I believe your entire career, right? Before we get into Toorak and we get into – the primary reason why we’re doing the show today is the rate deal you guys did. The very first one in our sector. I really want to spend some time on that. But before we do that, you’ve been in the industry now since ’16. Toorak’s a household name in this space. Everyone knows what Toorak is. But I feel like a lot of folks don’t know who John is, right?

You’ve done a lot of media spots. But you guys have a lot of things to talk about, because Toorak’s doing some cool – always been doing some cool stuff. But I feel like John, John Beacham. I want to get to know you first. Give us a little bit about you. Your background. Where did you come up? How did you get into our space and all that? Because I feel folks who know you in the industry don’t know like beyond Toorak Rack or maybe beyond B2R. Go give us some more background about you, John.

John Beacham: Sure. Well, thanks, Kevin. And so, I was born in Georgia. Grew up in suburban Chicago and then went to high school in Manhattan. It’s a little bit of a culture shift as you can imagine. Then stayed in the New York City area. Either in New York City or New Jersey.

Since then, since I went to high school, except for a couple years in Australia. I actually moved over to Australia a couple years. It’s great to be the exotic foreigner with an accent when I was over there and lived in a city called Toorak, which is us, the name.

Kevin Kim: A city called Toorak in Australia.

John Beacham: A city called Toorak. Yeah, it’s actually outside – it’s a suburb of Melbin over your American Melbourne. But if you’re Australian, Melbin, Australia. And I moved there. I didn’t know anyone in Australia. And lived there for a couple years. And just love Australia. Love the city. And always had that name in the back of my head as something. If I’ve ever had a company, I could use it to go name the company.

Kevin Kim: That explains a lot. That’s cool. I like that. Well, how did you end up in Australia though? Was it during high school, like an exchange program?

John Beacham: No. I went to college. I went to Princeton. Then graduated. And after college, I worked in investment banking, because I didn’t really know what else to do. And there seemed to be a lot of good jobs there. And so, I got assigned to the – I was at First Boston then. Now Credit Suisse. I was assigned as an analyst in investment banking to work in a financial institutions group. Doing insurance company M&A, and asset management M&A, and also debt and equity. We do deals with Credential, and MetLife, and companies like that.

Then after a couple years, traditionally, back then, it was a two-year program. And then they’re like, “John, you’re doing a pretty good job here. What do you want to do?” And I’m like, “Well, I really want to go somewhere overseas and do something different.” And back then, they had offices in New York, obviously. London, Paris, Hong Kong, and also Australia. And so they’re like, “Where do you want to go?” Well, back in college – and, also, France, actually, was another option.

London seemed too similar. Back in college, you got B minus every time I took French. And that was it, I think. As far as I could tell, the lowest grade they gave out. My foreign language skills aren’t the best. France is definitely not a good fit for me. If I can’t speak French, I’m definitely not going to learn Chinese. Hong Kong was a little intimidating. Then you’re like, “Okay, how about Australia?”

I moved down there and didn’t know a single person down there and just spent a couple years there making deals. And we demutualized a company called the NRMA, which is the biggest insurance company. Did listings for companies like that. And so, it was a really great time there.

Kevin Kim: And so, from there, you stayed in investment banking. And then was that your first – after that, was that your first exposure into kind of the real estate finance world?

John Beacham: I came back from Australia after a couple years, which is a hard decision, because it was a great place to live and I could have – one of a few times in my life as a real pivot where I could have gone this way or this way. And I would have been very happy living in Australia.

But came back and – outstanding timing, I came back right in 2000 – end of 2000. Beginning of 2001. And it was right when the dot-com bubble was happening. And so, and at the same time, my firm, First Boston, bought another firm called DLJ. You had two firms merging. Double the number of staff. At the same time, that deal volume was going down precipitously. Io it wasn’t a great time to be in investment banking.

I got an offer to go over to Deutsche Bank in their investment banking area. And so, moved over there and worked in their investment banking area for a couple years. And then during – none of this has anything to do with real estate. While I was at Deutsche Bank, DB actually bought a – was looking to buy a mortgage lender. Actually, multi-family lender. A company called Berkshire Mortgage then. Now it’s been renamed.

But in commercial real estate group knew nothing about buying companies. They’re good at making real estate loans. But they weren’t like corporate finance or M&A people. And so, I came in as the internal adviser basically to structure this acquisition of Berkshire Mortgage on behalf of the commercial real estate group.

And so, did the deal. We bought the company. Then worked on the integration for a little while. And then at the end of that process, I’d gotten to know pretty intimately all the people in the commercial real estate group. And so, I walked into my boss’s office, a guy named John Vaccaro, and said, “John, I really love working here. I’d actually like – I know I’ve never done a mortgage in my life.” By the way, at that time, Deutsche Bank was the number one commercial real estate lender in America. They definitely knew what they’re doing and had a a lot of volume. And so, I would like to get a job here. He’s like, “That sounds great. Let me come back to you. Talk to the rest of the team.” Came back to me in a couple days and said, “John, would love to have you here.”

And so, I asked him, “What’s my job?” “We’re going to make you a large loan originator.” And I didn’t even really know what that meant. Sounded pretty good, because large loans sound better than small loans. But it really meant I was one of four people in the group doing all the biggest deals for the biggest commercial real estate lender.

Kevin Kim: That’s not intimidating at all though.

John Beacham: I’m like, “I should figure this out.” First thing I did is I read the documents, which by the way, everyone listening to this, if you’re in the mortgage world – and, Kevin, you’ll definitely agree with this, the best thing you can do is actually read front-to-back a loan document. Understand everything that’s in there. I think a lot of people don’t do that. But that was the first thing that I actually did.

And then I started doing deals at Deutsche Bank. And I wasn’t the real estate guy. I was kind of the corporate finance guy. I’m like, “I got to find a niche for myself.” Because I don’t really – I’m not going to finance malls or offices. But I could. But other people are doing that. I had to figure out something.

And right around then, it was a big – this is probably like 2003, 2004 era. And then there’s a ton of M&A going on with just leverage finance, and leverage buyouts, and everything. And one of the big ones was a company called Toys R Us. And so, Toys R Us had a bunch of toy stores. And now it’s bankrupt and whatever. It’s getting crushed by Amazon. But that was a different era back.

And they had tons of toy stores that are getting bought by private equity. And, normally, when you buy companies this historically, you would just finance that in the corporate finance market. You’d go to the bank. You’d issue high-yield bonds. Get bank debt. You wouldn’t go to the real estate market.

And so, I came up with this idea that was really unique of taking all the real – because the company had a ton of real estate. And I said, “Why don’t we take that real estate take it out of the company? Create a new entity. Lease it back into the main parent company and then finance that real estate in the commercial – as a real estate loan?” Which is, by the way, much cheaper. You get more proceeds and lower cost that you do in the corporate finance market.

And all the private equity funds thought that was awesome. They’re like, “This is the best thing I’ve ever seen.” We get more debt and it’s cheaper. Which, of course, makes the returns better. And so, did that deal. And then did many other deals like that. What’s called Opco/Propco. You’re taking corporate real estate out of LBOs and financing it in the CNBS market. And so, I did a ton of those deals. I did like – I think it was $30 billion worth of deals over like four or five years.

Kevin Kim: And that’s nonstandard practice, by the way, for our listeners. It’s most owner-operator, big corp commercial real estate transactions happen with that kind of situation.

John Beacham: It was a crazy time. And we built this whole new market. And then the financial crisis happened. And the last loan I did, which is an Opco/Propco loan right before the crisis was a $2.5 billion dollar loan to a casino company. And then back then, the conventional wisdom was that casino companies are recession-proof. We learned that when you go through the great recession, people lose their jobs. Obviously, they don’t gamble as much. And so, that deal was kind of committed in 2006 and then closed in 2007. And a couple years later, the company went bankrupt.

I ended up spending years of my life actually in Las Vegas, in Reno, in bankruptcy court sort of learning all about bankruptcy, and litigation, and cash cloud orders, and all this very complicated bankruptcy stuff. Because we ended up being the threshold creditor in this entire bankruptcy.

And so, our borrowing entity ended up trapping cash throughout the bankruptcy. And we use that cash actually to buy our parent company, which is kind of crazy. And then at the end of this process, got to actually went on the board of the parent company of the casino, because we ended up taking over the equity of it and partnering with the management team. And learned a lot about casinos. A lot about Vegas. And got a deep exposure.

The second pivot point in my life, I could have stayed in Vegas and become a casino executive, because I got – after spending years kind of working out this casino company, get to know the executives really well and become friends with them. And so, that was sort of a choice, but decided not to do that. So, I came back.

And then this is kind of where the relevant story here begins. And then right when I got back, it’s 2012 after a few years of kind of working this stuff out in Vegas. And February 2012 was a month that kind of changed my life. I got calls within the same month from Blackstone. And I had the reputation of being the guy to figure out kind of esoteric stuff, because I was doing all these Opco/Propco deals and things like that. A lot of the other stuff kind of came to me.

And so, they’re like, “John, we want to go buy some houses because we think they’re cheap.” This is 2012, right? How you going to get them? We want to buy them at a foreclosure auction. What do you want to do? We want to buy 10,000, okay? And we want to go renovate them and then rent them out and operate them as a rental portfolio.

And that concept literally in the abyss of kind of the deepest time in the housing crisis. Private equity started coming in. That was really the first call that really was kind of, “Okay, we need money to go do this.”

Kevin Kim: That was when the eye buyers really started to make a move in the space in 2012. Yeah.

John Beacham: First moment. But then they had no idea how to finance this. Because you imagine we get a new asset class – and no one’s ever financed a portfolio of single-family houses in the country before. Is it residential? Is it commercial? Is it a commercial real estate business purpose? Because you’re buying a portfolio you’re renting them out. But you’re also renting out houses, right? And so there are single-family houses.

And so, where does it even fit within the organization? I was a guy in the commercial real estate group doing casino loans. I’m like, “Yeah, it sounds great.” I dropped everything else. I partnered with the resi group internally within DB to avoid that fight. A guy named Ryan Stark, who’s really an amazing person. A great partner. And then built up a practice internally to start doing this.

From like October of 2012 through October of 2013, we did $5 billion do worth of loans, because we were the only bank in town that was sort of financing this. And this was overnight. The sexy kind of trade. All the big private equity firms were doing.

And that was a little bit of a scary time, because that was a lot of money even for Deutsche Bank. And after we got the two billion, the guys in Germany said, “Hey, John, that’s kind of a lot. You kind of slow this thing down.”

Kevin Kim: A lot of headline risk on Deutsche at the time, I’m sure, because of the mortgage meltdown and everything. That makes sense. Yeah.

John Beacham: And then I did promise that this is a scary moment. I’d read a letter to the CEO of Deutsche Bank saying I was highly confident that we’re going to figure out how to securitize this stuff even though it’s never been securitized before. And so, after two billion, we need to sell the rest of it, the next three billion over to all the other banks on Wall Street, because they capped me out at two billion.

Kevin Kim: And these were bridge loans?

John Beacham: We wouldn’t even call – we didn’t even know that term. I didn’t know what private lending was or this whole industry actually. Yes, it basically was. But we didn’t call it that. We called it a revolving line of credit over to Blackstone. And they could buy the houses and then renovate them. We wouldn’t do draws. We just do like two fundings. One at the beginning, one at the end. And then they rent them out. And then the idea was like once they rented out, we have to find a real financing that had never been done before. Now it’s a big market, right? But like at that time I could not afford to take it out.

Kevin Kim: Right. Perm rental was not a product. It was not a product back then. No. No. And was mostly on the Eastern Seaboard? Or was this all over the country?

John Beacham: No. It’s all over. They’re very little on the Eastern Seaboard actually, because in Northeast, the taxes insurance and prices are too high. I mean, the best places were like Atlanta, and Riverside, California, and Texas. Kind of I say South and Southwest markets. Florida was a big market where things were really inexpensive and yields were high.

Kevin Kim: Right. Right. Right. Right. Right. It’s funny because like 12 was when – our purview on the West Coast and us working with some of the more legacy “hard money” guys, it was when they started realizing, “Hey, there’s some real juice to this business.” Because they were just doing it – it was all kind of a second part of their business. They were all doing non-QM. We call it non-QM today. And this was all kind of a side piece of their business.

And then eventually – and 12 was the year we all had to deal with licensing. And they all jumped into it because they were exempt. And that was the year. That’s the year Dodd-Frank came out and we were all like, “Wait a minute. We can do this without a license?” And so, that was the year everything just kind of shifted at the local market.

And I remember hearing about the eye buyers – at this time I was at a bank. And I remember hearing about – actually, I wasn’t at a bank. I working at a law firm. I remember hearing about big institutional investors buying homes. It was the most head-scratching thing, because banks don’t buy houses. It wasn’t a thing.

John Beacham: No one thought it was even possible. It wasn’t even a concept. And by the way, the practice was insanity, because they started from zero and went up to buying like 10,000 lot of houses, right? And you’re buying them one by one in foreclosure auctions. They would actually show up in Georgia. You had to show up in cash to buy these houses in a lot of places.

Soon you have guys in like armored trucks and literally like $25 million in cash in these – all this stuff like walking these foreclosure auctions just bidding on houses. Tons of cash. It was absolute insanity.

Kevin Kim: And structuring the transactions must have been foreign. Because like I said, the you had to do it as a revolver because no one understood the idea how do we do these loans. There’s no formula at the time. And they weren’t going to look at the local markets to figure it out because it’s too far disconnect. This is still at Deutsche, right?

John Beacham: It’s still Deutsche. And then the hardest part actually was like once these things were done, okay, and we had them renovated, how do you finance the renovated houses and with tenants in place? And what’s wacky about this is the American system for financing investor properties is kind of really bizarre. If you go to Fanny or Freddie Mac in this country or indirectly to them and you get a loan, they basically treat it like you’re a homeowner.

I mean, they underwrite you the same way they underwrite a homeowner. There’s no different rules for investor properties. And so, they’re looking at your income, and verifying your employment, and all these your FICO score, and all these concepts that are – it’s almost like they had this like monster – someone that created Freddie and Fanny and they created a monstrous-sized entity that would just do it’s doing owner-occupied kind of loans. And they’re like, “Oh, we have this investor stuff. Let’s just do that and let’s do it the same way.

Kevin Kim: It was an over-correction to the reaction to the market, because they were like, “Well, it’s all subprime. It’s all regulated the same way.” That was my perspective on it. Yeah. What happened after that? How’d you find the perma rental? Was it Fanny and Freddie or was it –

John Beacham: No. Well, they wouldn’t do it, because they were underwriting it. It wouldn’t work. You can’t go to Blackstone and get like 10,000 houses. And so, we had to basically look internationally. And so, I spent a lot of time looking at the English market actually. And they have this thing called buy-to-let over there, which I thought was sort of an interesting concept.

And by the way, that was like everyone in the – it seemed like. I don’t know. Like a lot of people in the country, even individuals would buy houses and rent them out and they would get loans based upon the rental income. Not based upon their personal income. And so, I’m like, “Well, that makes sense.” Come a commercial real estate guy, if you finance a hotel – I mean, you look at the cash flow of the property. Why would it be if you finance a multi-family property, you look at the cash flow of the property. Why would a portfolio of single-family properties be different? But it just wasn’t done.

And so, we had to create all these rules and how we’re going to underwrite this cash flow and figure out like, “Okay, you know what the rents are. But what’s the vacancy rate? No one really knows.” Crazy. We spent like months and months and months, Kevin, trying to figure out how much it cost to actually maintain a house.

And you would think that would be a simple question because we have so many houses in this country. But, actually, there’s basically no data on that on how much it cost an average over time to maintain a house. We had to kind of make it up. And so, we created this way of underwriting it. And then I went over to the agencies and had to get them to rate it, right? And that’s hard, because the big short just came out.

And so, imagine me walking into Moody’s and saying, “Hey, I know you just read this book.” And I’m not a resi guy. So that’s good. I’m a commercial real estate guy. But we have this great new idea. We want to go finance a bunch of single-family properties in a totally different structure you never heard of. And we need a lot of AAA. It’s going to be great. And you can imagine like the a tough sell.

Kevin Kim: Yeah.

John Beacham: But all these people saw, they’re like predecessor to get fired, right? It’s like okay. And then we spent – it took from March 2013 until uh October 2013 to get the agencies on board with this. And we got Moody’s and Craw and Morning Star to sort of rate the first ever deal. And, ultimately, securitized that in the end of I think it’s like October-November of 2013 .

Kevin Kim: That was a perm rental product, right?

John Beacham: Yeah. It’s a permanent product. We had like a term Loan on the – once it’s renovated, all the renovated properties went to a new financing vehicle. And then we went and got that rated and securitized.

And I’ve done securitization for a lot of my life. I mean, securitization are not that sexy. You go and try and sell bonds, you may get – I think the biggest ever number of people I ever saw in a room on a marketing show or marketing effort trying to sell bonds is like 10 or 15. We’re going there in that first imitation home steel in late 2013 and it was overwhelming. The demand is just off the charts.

We had to rent off the Waldorf Astoria in New York City. And if you walk in the front door on the left, there’s a massive long room. We rented the entire room and had standing room only. We had 380 people show up in that room. And we had to have guards. And we’re turning away the press and people were unauthorized to came in there. And we had people up in the dais up in front with like massive screens and everything. Sort of almost like it’s like this is not the Google IPO guys. It’s like a bond offering.

But the excitement from the investor universe was so high on this deal. It was just overwhelming. And the deal went really well. We sold it more better terms than we expected to. And we’re super excited about the reception we had.

So then I’m like, “Okay. That’s great.” And then during this whole process, I’m like, “Well, okay, I’ve figured out how to go lend to the big institutions who are buying thousands of homes. But 98% of the market is everybody else. And those other people really have no options. You can’t go to Fanny and Freddie if you own an LLC and get a loan. They underwrite you based upon your income. That concept of like cash flow-based underwriting for single-family properties really needed to be applied to everyone else.

I went to Blackstone and I came up with a pitch. I’m like, “Hey, guys. We know how to securitize this now. I can do it again. What if we set up a company to go do this for everybody else? For smaller investors who looking to buy five homes, 10 homes? Not the Blackstone size. But much, much smaller. But, frankly, much bigger market.”

And so, I got hired to startup a company called B2R Finance, which, by the way, in homage to buy-to-let, which is how I discovered this whole thing. We called it B2R, which is buy-to-rent, right? It was being respectful to kind of the UK heritage I think of this. The concepts around the asset class. And then started that. That’s how it got started at B2R.

Kevin Kim: That’s fascinating how it comes from the UK market. We joke about how Canadian and the UK regular mortgage market is so different than ours. And so, fascinating that the DSDR product came from there. That’s actually pretty cool.

Now with B2R, was B2R primarily a rental lender, a perma rental lender? Because I remember it being – at least after I joined the industry, being a full-fledged private lender. They did everything.

John Beacham: It morphed overtime. Like a lot of things. At the very beginning, it was just going to be single-family rental portfolios. Small, I mean, five houses, 10 houses. Really small portfolios for smaller investors. And we did that. And then we built that up. We did about a billion and a half dollars of lending over the first couple years. It was like the investor demand was out of control, because we’re, once again, the only game in town kind of doing this kind of concept.

And then we added – over time, we bought a company called Dwell, which is a bridge lender. And then we started doing bridge loans and added that and sort of added on to the core over time.

Kevin Kim: Added on to it. And you added commercial and all that other stuff. The interesting part is the industry is full of B2R alumni. And I’m always fascinated to meet people. They all know you and they all work with you over there. You worked there for – you formed the group. You founded the group. You built it what happened after during the life cycle? Because there’s not a lot of time between that and the founding of Toorak.

John Beacham: Yeah. It’s about two years, right? By the way, it was crazy. I don’t know. This is probably inter-story for people. But when you start off a new company, you think like Blackstone, they have like a whole massive team that sets up companies and everything. And actually, they don’t. Because Blackstone doesn’t really set up new companies. I mean, they tend to buy big companies and they’re good at that. But they’re not a venture capital firm.

And so, it’s kind of funny story. Right at the end of October where I was leaving Deutsche Bank, I emailed the guys at Blackstone. I’m like, “I’m coming over. I haven’t gotten like a drug test. I haven’t gotten like a background check to my knowledge. Where do I go up to show up for my new employee orientation?” And I still have this email somewhere. The answer is, “You’re in charge of figuring all that out.” And so, that was kind of like oh my God moment where it’s sort of real.

Kevin Kim: Yeah. You had convinced them to back this company. But it was more of like, “All right, you’re on your own now. Here’s some money. Go figure it out.”

John Beacham: And, by the way, you’re used to working at Deutsche Bank where like you call up the IT department or the health –

Kevin Kim: Yeah. You have this giant infrastructure you’re part of this massive global company. And then you go to being a startup. That must have been really scary.

John Beacham: It was totally scary. There’s only one guy over there, Jeff Tennyson actually, who was hired right before me and became my Chief Operating Officer. I was now the CEO of Lima One. And a great friend of mine. But we sat there and like – the first day, I got like literally the LLC agreement for the NT just formed the day before. And I had to go across street to the Wells Fargo branch and go there and open up a bank account. And so, that was my first like morning.

And then the next day, I got $5 million wired into the account. And I’m like, “Okay.” Then they’re like, “Okay.” They put me in an empty office in the HR floor and they said I had two weeks to get out and find my own place. It was a trial by fire.

But then we went off and just worked 24 hours a day for months and months and months hiring a lot of people who are amazing people in this industry. Anthony Cazazian. Obviously, Eli Novey works for me. Devon Patel who now runs the lender. I mean, a lot of people who have gone on to have really successful careers in our industry that we end up hiring over that first six months. I was just interviewing seven people a day at some points.

Kevin Kim: This is the time when now private lending is really starting to get some horsepower. I joined the industry in ’14. And in ’15, we noticed like – the firm doubled down in 15, because we realized there’s a lot of horsepower in this space. We were actually doing more commercial work than residential work. And we saw just massive horsepower being pushed behind this fix and flip. We call it now RTL.

And we were noticing – this is within the emergence of these national, global-backed, institutionally-backed organizations start to pop up. You guys were there, B2$. Genesis here in LA was really growing. Colony was growing. We joke around, that’s when the spiciness began, because it just started getting really, really interesting. Because we didn’t really believe that there was that much volume in the space to be done with.

How did that evolve into you going into Toorak though? Because b2r, it took off. I remember taking off. I mean, being institutionally-back, there must have been a lot of trials and tribulations with the fact that you’ve got Blackstone behind you. Because not stress from that. And they’re on both sides of the deal. They’re buying houses as well. Hike how does that transition over to Toorak?

John Beacham: Well, it was great. When I was there, we did the first-ever securitization. A multi-borrower securitization. We figured out how to do a different – not one loan to Blackstone, but 70 loans to different people.

Kevin Kim: Multi-asset actual – that was the first RTL securitization.

John Beacham: No. That wasn’t RTL. That was still term loans. But that was the first multi-borrower term Loan securitization. And that was a different type of underwriting. And we had, which was they weren’t involved in the other deals. It was kind of a new big agency that got involved in our space.

And then what I realized after a couple years is that two things. Number one is that building a lender takes a lot of time. And we did a billion and a half over two years. But still, there’s a finite growth pattern to building a lender. And number two, I kind of learned about this RTL space. Fix and flip, I don’t love the term. But back then, people were calling it hard money. But I learned about this industry. And it fascinated me, because you had – you think about the mortgage universe. And I’ve worked in commercial real estate, and resi, and sort of big institutions. And you look at the mortgage universe and you realize that most of it kind of operates pursuant to a pretty consistent pattern, even internationally.

You have a pretty clear set of guidelines for what’s a residential mortgage loan. There’s 1,500-page Fannie Mae seller guidelines to define everything that’s a home-owned. Same thing for commercial real estate. There’s agency guidelines and clear criteria around what makes that. And so, you have a pattern where like lenders make loans according to rules. They ultimately go to Wall Street. Wall Street takes those. They package them up. They securitize them. And then that’s how the whole rest of the mortgage universe is financed, except for this industry.

And this industry was really the anomalous one. And it’s kind of bizarre, because you’re like – just like when I started off at Deutsche Bank in that first imitation homes loan, is it commercial or is it resi? This thing kind of fits in that middle somewhere and that they’re business purpose loans, but they’re usually on one to four-family properties. And so, they’re kind of – and the people, the world in the mortgage world tends to be divided into two groups. You’re either a resi lender, in which case you tend think about statistics and about large pools and about data. Or you’re a commercial real estate person in which you underwrite every single loan individually.

And there’s very little overlap between those two universes. And this the overlap. And so, people in the commercial – I remember going to my boss at Deutsche Bank and saying, “Hey, I want to do this.” He’s like, “That’s too much work. I mean, it’s too many loans. They can’t possibly understand that.” And then you go to the resi guys, they’re like, “Oh, you can’t put numbers around this. You have to actually analyze these loans individually because there’s stories around them.”

Kevin Kim: Can’t price – I remember hearing that all the time. Can’t price these deals. Like, “Well –”

John Beacham: It ends up being in the middle of the two worlds. And so – but then I realized, okay, at B2R, that there are 400 at least I knew of, there probably are many more, private lenders across the country. And they’re making – call them bridge loans. And these are one four – in 2016 where I left B2R, the Eureka moment was I looked at my town. I live in Short Hills, New Jersey. And if you wanted – at that point, if you want to go buy a house and live in it, you get an 80% loan to value loan from thousands of lenders around the country at about 3.5% interest rate.

Now this is the moment. If you were an investor – and by the way, you can go to lending tree and like the brokers would call you until your phone battery would die trying to get you to take their loan. If you wanted so much demand for those, if you were an investor want to buy the exact same house and renovate it, you get, “Doo-doo-doo. This number has been disconnected.” No one will call you back. Okay? No one has any bid.

And so, you end up going to like local lenders who have their own capital. And the interest rate for the same house was 14%. And the loan-to-value was 65 %. And so, I’m like, “Even I can’t screw this up.” I mean, this is so juicy, and so attractive, and so much economics in this. Because no one from kind of the mentality of the rest of mortgage world has sort of found this little industry and applied kind of the concepts that work in the other parts of the mortgage world to this industry. And so that was the idea behind getting at B2R.

Kevin Kim: That’s funny you said that. Because from a contrasting standpoint, I remember how – I remember in ’16 how it was here in California. And by that point time, it had already become kind of a standardized in LA, in Orange County, in the major metros in California. It had already become widely accepted. My banking friends were calling me to place loans with my clients because it was kind of widely accepted here in California.

And I think it comes from like the large volume of commercial real estate brokers you have here. Because, I mean, if you ask Uncle Chuck – Uncle Chuck is the best example. Chuck Hershson. He’s probably been doing private lending for about 40 years. And I asked him about like what was the first resi deal that you ever did? And it was a bridge loan. And he said, “We underwrote it like a multi-family deal. And we didn’t know how to deal with it. We knew multi-family. We underwrote like multi-family. We charged him 12%.” And he said, actually, back then, it was 18%. And this is like in 1970 probably. Uncle Chuck’s been in this space forever. And he said that’s how we did it.

And if you look at the demographic of the Legacy lenders who’ve been around more than 10 years in our space, especially on the West Coast, they’re all commercial guys. They’ve all come from the commercial sector. Or they’re all real estate brokers that became private lenders. Very few came from conventional mortgage. Except for a handful of guys. And shout out to Mark Wazila and his family. They jumped into resi space. But most of the people came from commercial.

And I think that it was a lot harder to – we were starting to hear about this on the East Coast probably in the beginning of ’17 where the volumes were picking up out there. And like guys from Texas were doing deals in New Jersey. And we were hearing about this, like, “Oh.” Because they’re chasing the yield.

And so, it was a fascinating time, because there was a lot of horsepower at the time. And you guys opened shop in ’16, right?

John Beacham: Yeah, 16.

Kevin Kim: Open shop in ’16. Give us the story now. Now we’re at the Toorak segment of the podcast. Give us the story there a little bit.

John Beacham: It’s definitely just on the industry though before I do that. California has always been – it’s a birthplace, this industry. I mean, the big anchor is the granddaddy, in my opinion, of this whole industry. That’s been around forever. Have a huge amount of respect –

Kevin Kim: Steve started doing this 20 years ago, he said. Yeah.

John Beacham: And so, in that company when I started off was the only company had a data on what happened during the financial crisis to bridge loans. And it definitely started in California and then moved East.

Kevin Kim: Right. The concept of this I’m going to buy a house, renovate it and sell it was foreign. There were guys were living there and selling them within a year or two. But there weren’t guys that were buying them particularly in six months and get it off the market. It wasn’t happening. Also, product of volume coming off the auction.

John Beacham: And the big lenders, the original lenders were all from California.

Kevin Kim: Yeah. Yeah. I mean, they were. Also, I mean, I give a lot of credit to the East Coast. There’s a lot of folks out of Florida and out of New York that came out doing stuff too. Just that they were doing a lot of like what you guys were doing. A lot of rental stuff and a lot of multi-family stuff. And they started doing the flip work later down the line.

John Beacham: Then I left B2R. And I really wanted to start my own fund. And, originally, actually I had – I was a little scared about raising money because I didn’t know how to do it. I had a pitchbook book with 10 different ideas in it. And because I thought if I went to the investors – and like I didn’t like idea number three. I flip to page seven and have another idea. And I had three meetings. And they’re like, “John, they seem interesting. But there’s too much here. And we don’t know what to do with you. But very nice.”

Kevin Kim: well, who are you pitching, by the way? Were you pitching your friends at investment banks?

John Beacham: No. Yeah. Every everyone I knew. I talked to hedge funds. I talked to private equity funds. I mean, I networked. I worked in Wall Street for a while, so I know people who know people. But I had three. Then went back to my library and sat by myself for a month and deleted nine of the ideas. And then leaned in on one. That one idea was we’re going to go partner with lenders around the country. We’re going to buy residential bridge loans and we’re going to finance them.

And before I went back out and talked to another investor, I went over to Deutsche Bank and my old friend Ryan Stark. I’m like, “Okay, here’s what I want to do. You can you give me a term sheet.” And he gave me a term sheet for financing. And then I went to a bunch of the lenders I knew in this industry, RCN capital and some other ones, including my prior firm, B2R. And I got term sheets from them and where they would sell me loans. I knew where I could buy the loans. I knew where I could finance the loans.

And if you know that math, you pretty much know what the economics of the business are. And then I went around and I ended up talking to – I think it was 23 different investors and got three different offers including one from KKR. A guy named Dan Pietrzak, who’s still the main guy at KKR we work with. And then started, got funding Toorak and then started Toorak. And we got going in like February 2016 our first loan. We funded in August 2016.

Kevin Kim: Was that another startup situation? That was another like, “Okay, we’re starting from scratch. I got to go open the bank account.” Kind of fact pattern? Or was it a little bit more kind of like, “All right. We’re going to help you out here?”

John Beacham: Well, first of all, I knew what I was doing. We kind of figured it out before. I knew I had to set up payroll and insurance.

Kevin Kim: Right. Right. You had set up a business before. You had that part – you had the skill set internally. But now you’re investors, was it more of like a passive role? Were they’re going to – like a fund investor?

John Beacham: Yeah. I mean, they give us equity. They control the board and they give us equity. But they’re not operationally sort of doing the business, right? And I had a lot of great people from B2R like Eli Novey and Coco came over as my CFO. Coco came over. She’s now the treasurer. Devon Patel came over and ultimately headed loan acquisitions. And Darren Weaver came over and end up doing – and all these people are still either working for me still or leaders in other companies in the industry. So we had a lot of great people from B2R who kind of were with the start or came from a startup background who understood it.

Kevin Kim: Let’s talk about kind of like evolution of Toorak. At its initial thesis, was it originally to buy loans?

John Beacham: Yeah. That’s it. We’re going to go to lenders around the country and we’re gonna say, “Here’s our credit guidelines. If you make it look like this, we’ll buy everything you have.” And that mentality, no one – they never heard that really. Which, literally, I’m a million miles in United Airlines. Mostly flying around the country talking to people about this.

And when we started off, people were, A, kind of worried. Are you going to comp with me? Are you going to take my customers? Who are you guys? You’re the guy who just ran B2R. Now you’re coming over here trying to partner with me. It’s kind of weird. And so, we had to convince them, “Hey, we’re real. We’re reliable. We’re consistent. We’re going to be here for you. And we’re going to buy loans as long as you make it look like this.”

And what happened is you need to fundamentally homogenize the industry, right? Having done this in 2016, the amount of different ways people underwrite loans, it’s like everything’s totally different. It was like region by region. The people in Phoenix do it one way. The people in Miami do it a different way. And you’ve kind of created this balkanized kind of world of how people operated based upon their local competitors. It’s a very localized market, which is different than the rest of the mortgage market.

And so, we had to go off and say, “Okay. Well, if you make it look like this, we’ll buy everything you have and we’ll buy it at a much lower rate.” And a lot of lenders jumped on it and said, “This is great. And we’re going to change what we do to sort of do it the Toorak way.” And then those lenders, a lot of them are top-tier lenders in this industry right now.

Kevin Kim: That box you guys put out to the market early stage, was it – back then, was it also – because the big fundamental change I remember was our clients complaining like, “Man, they require FICO and appraisal.” Right? And that was not a commonly done thing in private lending back in ’16. And it’s still not done by some of our clients.

Was that part of it? Because I remember there was another buyer who will not be named that was on the West Coast that did not require those things. And so, a question to you whether you guys required it.

John Beacham: Yeah. We did require FICO. We did require appraisals. And we still do. We have different kinds of valuations now. There’s a little bit more creativity on the valuation side. But at the beginning, that was it. Because what I was doing is I was thinking, “Okay –” well, by the way, these loans were so expensive. I mean, you’re talking about 12%, 14% loans.

And so, I knew rates were come down so much because they were so juicy, and so wide, and inefficient. And I wasn’t thinking about what the industry was then. I was thinking about like what is going to happen once it gets kind of institutionalized. And I knew in order to go get bank support, in order to get good financing terms for me, in order to ultimately securitize the product, that I needed to have the basic things that institutional investors expected in mortgage loans. And so, the pitch was, “Hey, if you get an appraisal, here’s the rate. If you want to keep it yourself, you can keep your own rate.”

Kevin Kim: That was the key difference then. You knew you were going to securitize from day one.

John Beacham: No. Originally, the plan was just borrow bank debt and finance. Not till two years after we got going that we did our first securitization in 2018.

Kevin Kim: What clicked that, “Okay, now I can securitize this?” What clicked in your head that was possible? Because at the time, there’s only been – if I remember correctly, it’s ’18, right? 18 was the year.

John Beacham: Yeah, 2018 was the first deal.

Kevin Kim: In ’18, there were – I mean, I know Beth’s company was trying to push it. And maybe they’ve done one. You guys had done one. It wasn’t a thing. Nobody had figured it out. It wasn’t really on the bridge, on the RTO.

John Beacham: Not bridge loan securitizations.

Kevin Kim: No one had figured it out. No one was able to do it. Everyone conventionally thought this was a balance sheet play. What clicked that allowed you? Was it an invest are telling you? And for the audience who doesn’t – when John’s been talking about Lou this entire time – you want to give him the idea of who Lew is? Because I know who he is. But you want to tell the audience Lew Ranieri is?

John Beacham: Lew Ranieri is the godfather of mortgage-backed securitizations. He, yeah, invented it. He’s most famous for Liar’s Poker. He’s the star of Liar’s Poker. That book by Michael Lewis, which is amazing book. And he was at Salomon Brothers. And at that point, he left to go to work at a company called Ranieri & Company. That’s obviously his company. But really, just the godfather of the mortgage-backed securitization world.

Kevin Kim: Right. Was it Lew that told you like, “Hey, this can be done.” Or was it like something that you figured out for yourself? What was going on?

John Beacham: I worked in commercial real estate. And we did CNBS securitization. And then I went over and did the first ever single-family rental securitization. And I knew how to go to the agencies and sell bond investors on this and what they expected. They did the first multi-borrower single-family rental securitization.

I have a lot of background and sort of selling bonds, and structuring deals, and understanding what the market wants. And so, I was pretty confident that we put this together. And if we did it in the right way with the right collateral, the right disclosure, that we’d be able to get investors that are attracted to the industry and create a real market around it. It’s using the background that it had from all these other experiences and really applying them to this new concept.

Kevin Kim: The question though on that, how did you convince them to kind – because you said it earlier, this is kind of a weird – I always J this is the bastard child between residential and commercial, right? This is the bastard child. RTL is smacked out in the middle. It’s hard to understand. And ’18, it started to become understood. But Wall Street wasn’t really jumping into this sector. How did you – that fundamental disconnect, was it hard to unravel that for them?

John Beacham: Yeah. Originally, I went to – first line was with Deutsche Bank, right? It was my partner at Deutsche Bank. And Dan Pietrzak who actually ran KKR, senior president at KKR. He came from Deutsche Bank. I mean, the relationship depth at DB was really, really high. You have some relationships and that starts it off.

But then, once we got the securitization going, I spent weeks on the road talking going to Minneapolis, going to Ohio, going to LA, going to Boston. I mean, sitting in conference room after conference room with investors explaining what this is and how it worked. And how we underwrote the loans. And what our philosophy was. And getting them interested in it.

And so, it was just work. I mean, you fly around. You spend a lot of time and you tell investors what you are. And we explained that we’re doing it in the right way. We’re getting FICOs. We’re getting appraisals. We’re reviewing these loans the way that you expect us to review them because we think like securitization people. And so, we’re taking this market that was not organized that way and applying kind of a capital markets mentality to it that allowed us to homogenize these loans. Create the same loan that’s underwritten the same way. Whether it came from lender A in California or lender B in Boston. And pull those into a deal and give investors kind of what they want, which is something that’s understandable and homogeneous. And that was the key to kind of getting going.

Now that being said, before we did the first deal, I went to the agencies and said, “Hey, guys. Remember me? I’m the guy who did the other deals before. And I got KKR here and we want to get some ratings. And DB came out with us and Morgan Stanley,” who at that point was funding us as well.” And then we tried to get them to rate us. And they just said, “No.”

Kevin Kim: What was the reason?

John Beacham: The stated reason was either it’s not a prior – we don’t think it’s a big enough industry. Or it’s not a priority for us. Or the generic answers was there not enough data, which is just kind of –

Kevin Kim: That’s a legitimate one I feel like. It was very hard to get data back then.

John Beacham: When did the first imitation homes deal, there was zero data. I mean, that’s literally a whole new loan structure that’s never been created before. It’s a little bit of a like – it’s not really a priority for us right now. We don’t want to do it. I think they wanted to see some traction in the industry. Some momentum.

Because the problem is, after the financial crisis – well, I think it’s probably good. But a lot of things have both good and bad. After a financial crisis, we passed a whole – the country passed a whole series of laws that changed the way the agencies worked. And a lot of those laws did things like they separate the revenue side from the analytical side of the business. They also put a lot of more regulation on the agencies and a lot of hurdles in what they have to do to demonstrate a new asset class and like a new ratings criteria, which means that in order to do something new, the amount of work you have to do in order to get something going is just a lot, lot, lot higher than it was before, which in practice means they just don’t do it. I mean, they’d rather do the 20th non-QM or 200th non-QM deal and stamp it out. Or another CNBS deal where they already have criteria, it’s approved. And so, create something new. And so –

Kevin Kim: I remember that happening, but I also remember when the non-QM deals were getting rated. It’s a different loan product than what you were doing back then. But you have no problem rating this. But you’re saying no to this stuff. And it’s still a new thing. But they were already used to it because it was an owner-occupied deal.

John Beacham: Yeah. , that’s right. They have criteria and history around it. So, they can rate it. And so, they said no. And so, we had to do unrated. And that the market was unrated until this year. And we’ll talk about that, I’m sure. But in the unrated market, the problem is if you’re a fixed-income investor, if you work at Fidelity, or a big insurance company, or a lot of these institutions, they have very little money for unrated bonds. I mean, the whole market for fixed income is based upon ratings.

And so, if you’re trying to sell an unrated securitization, you’re dealing with like 10% of the market. That’s very small, which means there’s not that many investors who do that. And you end up having wider spreads. Or the interest rates, you have to go sell the bonds that are higher because you’re dealing with a smaller market. And so, the whole utopia was getting to a rated deal where you can open up the full range of the capital markets to be able to at least look at your deal and say, “Yes, I like it.” Or, “No. I don’t like it.”

Kevin Kim: Yeah. And I want to ask about that little bit when we get into securitization. I want to ask kind of some questions about Toorak. Because, I mean, today, in private lending, Toorak is a household name. Everybody knows Toorak. Everyone knows who you are. And Kate on your team. And it’s widely respected. Widely used.

In 2016 when you guys came on the scene, it was controversial. And there were some, I guess, mudslingers out there on the loan buyer side. And the lenders, the originators and the lenders, one of the accusations that was made was you guys are pushing down rates. And I always wanted to ask you this specifically, because I think I’ve heard you talk about this. What was your response to that? Because I remember back, this was a big accusation back then. You guys are pushing down rates. Yeah, California, was at – at one point, a fix-and-flip deal in California was in the eights. And so, how did you respond to that back then at least? Because I don’t personally believe it. But I believe it’s a part of the competition. But that was the accusation being made.

John Beacham: It’s not me personally. But I think it’s interesting. You have two different perspectives. You have perspective of an individual lender looking at their individual loans. Or you can step back and look at the market as a whole, which I try to do. For the market as a whole, if you look at – and there’s data on this from Adam and other sources. The vast majority of flips in this country aren’t financed. Okay?

If you’re a first-time home buyer buying a home in this country, 80-plus percent of first-time home buyers are going to get a mortgage. The vast, vast, vast majority. The vast majority of flippers in the industry don’t access our space. And so, my answer to that was your biggest competition is not the lender down the street. The biggest competition is the product kind of sucks.

I mean, first of all, the lenders don’t fund. I mean, back then, they didn’t necessarily have capital. The reputation of some of the lenders wasn’t necessarily the greatest. And the interest rates were extremely high versus other lending products. And the points were extremely high. And so, the product was not a particularly attractive product, honestly.

And so, what we needed to do as an industry is change the product over time to a product that actually is appealing to the customer so that the vast majority of our customers don’t say, “I don’t want to access your industry because you’re just too high.” And then you actually change it from something that’s a small industry, which is what’s happened if you really think about it, to something that’s much bigger private lending industry. Because we’re actually solving the customers’ needs.

And so, sure, you can do one loan at 14%. Or you can do 100 loans at 9%. And you may make less money per loan, okay, if you’re thinking about yourself. But you’re creating a much bigger market and providing a better product to the customers. I think, ultimately, that’s what we want to do as industry.

Kevin Kim: Yeah. That’s what my response was when I talked about it with people. This is a product of free market capitalism. And what do you expect? But the product’s getting better. And the customers are happier. And you guys are making more money. What’s the concern? That was my thing.

John Beacham: I’m still waiting for one of the borrowers to call me up and thank me. But I don’t think they know where I am.

Kevin Kim: Let me ask you this. Toorak has evolved over the years. And so, you guys initially started out buying loans. But now, today, looking backwards, you guys have now added a bunch of components to your business.

John Beacham: We started off just one to four family loans. We bought. They’re closed. And then we added – I went over to the UK, which I still love, because of buy-to-let. And I feel loyal to the UK for inspiring this whole idea. And then we started a business there, which is run by a guy named Tim Marsh, who’s very successful over there. We’re the biggest capital provider to the – they call it the bridging industry. Not private lending. The same idea over there.

And then we started out. We had a multi-family pretty early on. We added DSCR, which was the same concept we did for Blackstone and at B2R. It’s just one house one loan. But still underwritten based on cash flow. That’s a lingo for DSCR. It’s a loan on a rented single-family home. We added that product, which I knew well, obviously, from my history.

We added – through our holding company, through our affiliate, we end up buying a company called Merchants Mortgage, which is a direct lender, based in Colorado. That’s a very successful lender. We have access to Merchants as well over at Toorak. And so, we added a lot of different sort of ancillary ground construction and other sort of ancillary products so we can be more of a full-service provider of capital to the industry.

Kevin Kim: And as they’re doing all this, there’s more product to the balance sheet. And then since inception now, how many – before you did your first rated deal, how many unrated securitizations did you guys accomplish?

John Beacham: I don’t even know. I would guess 10.

Kevin Kim: 10?

John Beacham: Maybe eight. Something like that.

Kevin Kim: A couple year then?

John Beacham: Yeah. It’s about two a year. From 2008 to 2000 –

Kevin Kim: A lot of traveling. A lot of road shows.

John Beacham: Actually, after COVID, you can’t get investors to do road shows anymore. Because they like working remote. And so, it turned over to Zoom. And so, you don’t travel as much. But it sort of changed how you sell bonds. But when we did the rated deal, a lot of investors wanted to meet us because it was new and they’re learning the asset class. We did do a real road show for that one.

Kevin Kim: And when it comes to the – you mentioned COVID. You guys were founded in ’16. Things were real great. Real great. Real great. 2020 happens. Big first kind of punch in the stomach for our space. And then we had the rate hikes.

John Beacham: Yeah, we love COVID though. That was awesome. And then great hikes. I mean, I joke that – that was a horrible year for everybody. I mean –

Kevin Kim: Yeah. And there was a lot of ups and downs. And one of the challenges that we we noticed at the local markets, the complaints that we were getting is like, “Man, there’s this giant smoke screen.” They all become either dependent upon companies like yours or partnered with you guys to sell paper. And the market had become this really bumpy animal in general. This very dynamic industry become very bumpy and very volatile.

And there was this massive smoke screen. Not just with you guys. But everybody, right? We don’t know who’s buying loans anymore. That was the number one question I got for a solid two years. Yeah, in 2020, all the way into the beginning of 2022. And what was going on your guys’ end? Because I always explain to them, “Guys, you have to understand. The capital behind them is suffering just like you guys are.” It’s not just that. It’s not just that they – if they could buy, they would buy. That was my explanation to them. But I will try to get more information for you.

John Beacham: Two things happen. First of all, you had – I mean, everything was hitting all at the same time after COVID. But for everybody on all levels. Personally, professionally, business-wise. It was a tough time. Number one, you had a massive increase in delinquencies.

And by the way, the governor of New York State gets on TV and says, “Hey, you don’t have to pay your mortgage.” The borrowers don’t understand that means a residential consumer loan. Not necessarily your loan. But it all gets blobbed into this big thing. And so, delinquencies went up dramatically over that period of time. And we were trying to figure out like how to be fair to people. Try to figure out, if people really needed help, how to help them? But, also, weed out to people who are trying to be opportunistic. And were just trying to take advantage of the situation.

Kevin Kim: You had to go into asset management mode because of all the delinquencies. Yeah.

John Beacham: Yeah. Oh, yeah. We moved a lot of our staff over to asset management. We had daily asset management calls. And the idea was let’s try and be fair to people. But, also, be disciplined around what we do. And so, we had to create all that in real time as that’s all happening.

Simultaneously, we’re trying to figure out what’s happening to the housing market. And I think right at the very beginning of COVID, if you asked 100 housing economist, they’ll deny this now. What was getting – because they’re all like we’re experts and we’re god. We know exactly what’s going to happen. They had no idea. I mean, no one really knew what was going to happen.

I remember you know going back to the influenza pandemic and reading a lot about that. And what happened to the housing market as a result of the influenza pandemic back after World War I and trying to draw parallels for what could happen here. And I was kind of a little bit more bullish than most people. But I didn’t think it was going go down – housing price are going to go down a lot. But I think there are people who thought were going to have another great recession. You know, housing crash.

And so, you had a lot of concern around that. You’re trying to figure out like what’s happening to the housing market. And which market’s going to hold up better and what types of deal is going to hold up better? Trying to figure that out and trying to manage your own inventory. That being said, we bought loans every single week. I mean, we never shut down our loan purchasing. And since August 16, 2016, we bought loans every single week.

Kevin Kim: But I would guess – and you had to be more selective at the time.

John Beacham: Yeah. Of course, you focus on your best long-term partnerships and times like that. And you lean in on them. And you give them the liquidity you have. But we are always – we bought loans every single week.

Kevin Kim: One thing that I’m hoping for in the long term is we can figure out a way where we can get more transparency out of everyone. Because everyone’s just like, “Just tell me. Just tell me whether –” I felt like a lot of folks, they didn’t want to be let down. And they would rather just know. And that was the pain I was having. Like, “Man, it sucks. Because I can’t get you an answer. And I can’t get an answer.” Because they’re busy. They’re doing their own thing. It was a challenging time.

John Beacham: We had webinars with our customers. We had conference calls. We were talking to them every day. I mean, we tried to be as transparent as we could about here’s our box and here’s what we’re looking to buy. And then give people transparency. And at some point, we’re like actually pre-approving loans. You have a certain bucket of capital that you guys can do.

Because what happens when people shut down, water flows the lowest point. The amount of demand we had – our pipeline in the end of March 2020 went up by triple. Because everyone – Toorak is still going. And so, we had unlimited amounts of loans coming into us. And so, then you have to sort of triage and tell people, “Okay, this is your allocation. This is what you can do.” Because there’s just too much demand. Because everyone comes to you all at once.

Kevin Kim: Right. And the nice part about – I mean, the result of that though was there was – it was a nice weeding out of some of the ones that shouldn’t have been in the market or didn’t do right and kind of the cream roast of the top. And now, after that – kind of get into the rated deal you guys accomplished. At our conference, you guys gave you a recognition. You guys did the first deal. It’s a big deal. Everyone was really excited the fact it happened. We actually did not expect it to happen until much later in the year. Give us the kind of runway to that. Because there must have been a ton of prep time.

John Beacham: I’ve been rejected by every agency at least four times.

Kevin Kim: Wo were you going back to them every year?

John Beacham: Every year. I would go to New York City and I’d go around. And we talk S&P, Moody’s, and Crawl, and Fitch, and –

Kevin Kim: The consistent motivation, I have to get this rated. I have to get this rated.

John Beacham: Yeah. Because that’s where – because you really think about the industry. We’re really proud of like having a partnership instead of helping to institutionalize the space, elevate standards, create a better borrower experience. All these things that are happening. And the ultimate endgame of that from a finance person’s perspective is getting a rating. Because then you’re accessing the broadest portion of the capital markets. And you’re fully turning your industry from an industry that’s very parochial and very local and to an industry that’s totally accepted as a core asset class.

And that’s a moment. That’s a coming-of-age moment I think for our entire industry. And so, that was always the goal. And that recognition for not just Toorak. But, I mean, it’s us as an industry and the entire space that we’re fully accepted as a major asset class is a fundamental change.

Kevin Kim: Give us some more color about that. Getting ready internally. Because it must have been a big paradigm shift for you guys to get ready for that.

John Beacham: We gave data. I mean, you’re talking to agencies constantly. We have my team who led the deal. And Alexandra Seminowsky who came and tirelessly would talk to the agencies like all the time. Give them information. Give them all of our track records.

And as we got more data and more time, and now we’re up to $13 billion-plus of loans, our data set became pretty meaningful. And then that helped. And so, we’re constantly giving – there’s going to be inflection point at some point where we had enough data to sort of let them do their models.

Kevin Kim: Was that before the guidelines came out or after the guidelines came out? Because the guidelines came out what was it last year, I think?

John Beacham: Yeah. The guidelines were the end of the process. I mean, that’s like after we already gave them all the data. They did all their internal analysis. You didn’t even see that. I mean, that like years before that. And we almost actually – a little bit of backstory. DBRS and Morning Star were used to be two separate rate agencies and they merged. And we were very, very, very close to having Morning Star rate us before the merger. That was years before actually.

And then they merged. And you can imagine, when they merge, you have both turf wars of who’s in charge. But, also, you have two agencies that become one. So you have to figure out like their methodology and reconcile the two different – they get different ratings from DBRS and Morning Star and reconcile them. Bring them together. That’s such a massive amount of work. They basically said all new projects are off.

We probably could have gotten it done a few years earlier if that merger had not happened. But it did happen. And then we kind of got put on hold a while. But they always said, “Okay, we’ll get back to you once we deal with all this internal stuff.”

Kevin Kim: Was there any kind of unexpected data points that would be kind of – I guess you can say surprising to our listeners that they wanted to really get in on?

John Beacham: Yeah. Well, they asked us like what our data was. And like how we thought about loans? And some things that are counterintuitive. But, for example, when we started off, we assume that like Days on Market, which means how long it takes to sell a house in a particular area would be a really good statistic. And areas where houses sell quickly probably are going to have lower defaults than areas where houses take a long time to sell.

Our data shows very little correlation with that actually, which was totally surprising. There’s other things that are highly correlated, like how homogeneous is that house? A million-dollar house could be fine if it’s in a million-dollar neighborhood. A million-dollar house in a $250,000 neighborhood is going to be really tough to sell. We learned that like the nature of that house, and how homogeneous it was, and how conforming it was to that neighborhood was extremely important in underwriting.

Kevin Kim: That supports the old adage. Like my mom always used to tell me, don’t build the eyesore in the neighborhood.

John Beacham: Yeah, that’s right. And we see that all the time. Developers want to build the biggest house and nicest house.

Kevin Kim: Yeah. You got to fit in.

John Beacham: Yeah. Having a lot more problem. And so, it’s not about the house value. It’s about the neighborhood and consistency. And so, we shared with DBRS Morning Star sort of a lot of our lessons and our data. And then they validated with our information. So they were able to create their own criteria around what’s important.

Kevin Kim: There wasn’t any like practice change, or underwriting change, or box change to the sellers, to the originators. It was more like you have been building out the foundation to get there already. And you had convinced them that your foundation – how you had been operating until now was efficient.

Kevin Kim: Yeah. Because by definition, they were starting with our data. And so, the beauty of that is that the way we do things ends up being – it’s embedded in our data. And so, that’s kind of what they’re building around. By starting with Toorak and by spending all time, it was helpful to have them think about us first. And then they also went off to a lot of other companies in the space and got their information. And after we got them going.

And so, they had I think five or six different big lenders in our space. Shared their data with Morning Star. And I appreciate that, because that enabled them to get there. But it sort of helped because they started out with us. It wasn’t like they’re coming up with their own ideas. They start with a data set and build off of that, which is helpful.

Kevin Kim: I see. Now the execution of this deal beyond just getting ready for it. I mean, what was the difference between your previous experience with your average unrated deal? Was it a meaningful difference in executing on this deal?

John Beacham: The biggest thing was there’s a give and take on the criteria. How can I explain this? If you have a pool of loans that has a 75% loan of value and 725 FICO. Just take two numbers, right? Or whatever. It’s like something. But then these are all revolving facilities. Because these loans are one-year loans. And the economics are not good to securitize one-year loans because they pay off so quickly that, by the time you do the deal, they’re almost all gone already. It’s too short.

All these securitizations, including the unrated securitizations are designed with revolving features that allow us to not just have the initial pool, but also have subsequent pools over time that we can put in. And so, in order to do that, you have to have criteria around that. Like rules. You can’t put in loans on Mars, right? You got to put in US bridge loans that have this LTP, and this review process, and everything. And so, we had to go do that.

And so, when the agencies start out, the big issue when DBRS starts out, they’re like, “Okay, the initial poll is like this.” But you have a box. And the box is a little bit bigger. And if you’re gonna be really cynical, okay – even though this doesn’t happen in practice. Or it certainly hasn’t happened in practice with our portfolios. But if you’re going to be really cynical, you can assume that every loan that goes in there is the bottom left-hand corner of the worst LTP, and the lowest FICO, and the least experience and everything. And then you have pool drift over time.

And so, they have to go think about, “Okay. Well, I can assume that the portfolio looks like what it does day one. I can assume that every worst loan possible gets in the portfolio.” And the ratings are different depending on which of those two is the right answer. And so, we ended up going back and forth with them for a long time on, “Okay. Well, this this is our unrated box, which is bigger. If we tighten it up like this, what’s the ratings levels? If do we do this?” And sort of iterating a little bit to sort of basically tighten up the box to reduce the amount of drift that could happen from the initial portfolio to the worst ever portfolio. So that we’d get the best ratings or be able to sort of create a deal that sort of rate well. It ends up being a little bit of an iterative process to get to something that’s kind of a sweet spot where it’s kind of like the three bears. It’s not too much flexibility. It’s not enough flexibility.It’s kind of in the middle there somewhere.

Kevin Kim: They’re trying to force your hand to be very rigid. But that would kill the opportunity. I see that. Now from an opportunity standpoint for you guys, is this now kind of this is it. This is how you’re going to do it from now on. Or is it going to be a mixed bag? What’s your vision on this and going forward?

John Beacham: The deal executed extremely well. We did an unrated deal earlier in the year. And then we did a rated deal. And the rated deal had literally tripled the amount of interest in investors. And the pricing was much better.

Kevin Kim: Larger pool of investors, right? And more candidates.

John Beacham: New investors who never touched our asset class for. It’s really exciting to introduce so many new investors to what the RTL market is and tell them the story of our industry and our company. And get them excited about this. And see them participate in the deal. And the deal executed really, really strongly. We’re really pleased with how it performed. The economics are pretty compelling that we’re looking to do more rated deals over time.

Kevin Kim: What’s the difference would you say on the pricing to the lender?

John Beacham: Our pricing went down by over 1%. The spread was like a lot. A big difference.

Kevin Kim: And that translates to the transaction. I mean, that’s great.

John Beacham: Ultimately, yeah, that passed along to the ultimate lenders. And, ultimately, the investor. The borrowers themselves. It’s all virtuous cycle that once you have that capital.

Kevin Kim: And the criteria on the purchase, the box is not going to change. That was one of my concerns. As more ratings come out, is the originators are going to have to conform to the new expectations of what the rating agencies want to see.

John Beacham: Yeah. That’s true. If you want to do. You either make it look like something that’s going to fit into a securitization box. Or there’s other ways to finance that, but it’s going to be more expensive. And so, what you’re going to see is you’re going to see a bifurcation of our market that’s going to happen over time, where just like the rest of the mortgage world. Where the stuff that’s kind of down the middle and conforming is going to get better.

Kevin Kim: Oh, no. We’re heading toward a prime and sub-prime type private lending market.

John Beacham: Yeah. I mean, some version of that’s going to happen. Because you’re going to find the stuff that water flows to the lowest point. You’re gonna find the stuff that’s the best cost of financing. And that’s where those loans are going to go over time. It’s just the natural economics of it. And there’ll be other stuff that ends up being held in people’s balance sheet or going to low private funds or other sorts of vehicles that over time will be naturally the stuff that doesn’t fit into the rated –

Kevin Kim: Which makes sense. I mean, the market is so fragmented that it can support both. I mean, conventional support. I mean, owner-occupied supports both. I mean, I see why not. Now one thing that we had sat down with one of our clients in San Francisco, and he comes from the institutional world, and bond trading, and all that kind of stuff originally. And his comment was kind of interesting is his view was, “Well, ratings mean a larger swath of investor. Now every fixed income investor can look at this. Right? Every pension can look at this. Every insurance company can look at this. Not just the guys that are open to doing an unrated deal. Does that lead to a glut of capital? Over-supply of capital into the sector? And I was worried about it at first until I had spoken with Sean, told me actually the market is – the lower end of the market is bigger than you think it is. I guess he said top 50 lenders have about 20% of market. And the rest of the market has 80% of the market. And so, he was – from a volume standpoint.

John Beacham: That’s it? I’m surprised for that.

Kevin Kim: That can obviously shift. Any thoughts on that? I mean, any comments on that? Because that was like a very controversial thought process in my head, because I was like, “This is concerning.”

John Beacham: Well, okay. By the way, our industry is strange in that we have lots of private funds. I mean, no other part of the mortgage space has the depth and diversity of private funds that we do in the space. And that’s because these loans are short. They’re relatively high yield. And they work for just – you don’t have to leverage them. You can just own them. And they’re a good retirement asset. And that’s why you have all these funds that have been operating. That’s a big part of Geraci, by the way.

Kevin Kim: My primary business. That’s all I do all day.

John Beacham: You guys have really created a great presence in this space. Have a great product. Fund a lot of our partner with a lot of lenders around the space. I don’t know how many funds you’ve created. Hundreds. And really created great expertise in this industry.

But I think what’s likely to happen if you think about the reality of it, you have kind of this capital that’s really frankly much more efficient than fund capital. And so, I think, over time, the market’s going to both consolidate. You’re going to see that top – what ex-lender share get bigger over time and become more harder for smaller lenders to exist over time. Because the rate pressure is going to be high, because it’s going to be hard to compete with this lower cost capital. And you’re going to see a bifurcation of kind of conforming and non-conforming loans that you’ll end up – if you want to have a high-yielding kind of fund, you end up getting with loans that don’t work in the securitization market. It’s going to be a little bit of an average selection thing over time.

Kevin Kim: But that’s the nice part about that, is that that’s always been kind of the case for a long time even after buyers came to the markets. I’ll hold the deals that I can’t sell. They’re still good loans to me. And they’re higher yielding. And my investors like them. And we’ll sell the ones that we don’t. That we can fit into the box and we’ll sell them.

That’s always been kind of the philosophy. It’ll get exacerbated. I agree with you, it’ll get much more like that. But at the same time, you have a lot of the local retail lenders that are growing in volume that are now thinking about doing this themselves. Because this is quite lucrative for their investors, too? They can add this to their capital. They’re happy to entertain it. A lot of my larger clients who are balance sheet lenders are thinking about doing this themselves.

The second deal that happened after you guys was the Genesis deal. And they saw that as kind of like, “Oh, well, if they can pull it off, so can we.” And now they’re talking to bankers and stuff like that. I think we’re headed in that direction though.

John Beacham: We know of many – between one hand and two hands worth people who are probably will be issuing rated deals. They were at three. New York Mortage Trust came out with one. Genesis. I know there’s at least five more that are working on it to my knowledge. And so – which is, by the way, great. We want to have – it’s healthy to have a big market to have multiple issuers to have depth of liquidity. That actually in the finance world like more issuers means there’s more investor interest in our space. Means more buyers. It’s just kind of liquidity because of liquidity, which is good.

Kevin Kim: Agree. It’s a good thing. I mean, we want this market to grow. This is the right way to for it to grow. It’s a limit at the local level. Now going into kind of your vision for the future for Toorak, for the industry at large – I mean, I’d like to get thoughts. You mentioned you think about 10 maybe more rated deals that might come out this year. Going into 2025, what’s your prognosis or perspective on going into next year? Because we’ve heard all types of opinions and all types of thoughts. You’re influential when it comes to understanding both the local markets and the institutional markets. And you’ve actually played an influence on what they’re thinking. Give us some thoughts on your end what your perspective is going into 2025. Because a lot of folks would like to know.

John Beacham: Well, I think you have two sides. You have the Lending side and the financing side. I’m talking about them slightly differently. I mean, they’re related. But on the lending side, you see across country, and we have for a while now, a very massive lack of supply. It’s very hard for borrowers or investors to find properties to buy. There’s a lot of lock in effect with rates. And so, inventory in many market is low. It’s getting a little bit better now. We’re seeing sort of improving. But it’s still really hard to find deals. There’s very little foreclosure activity. There’s limited distress right now.

And so, investors, there just not as much deal volume. And so, it’s harder for them to find deals. And so, we’ve seen margins for investors that we track have decreased over time. Not in a huge amount. But some. And they’re changing the nature of the deals a little bit right now. And this is happening for probably last couple years away from like what we call paint and carpet or very light rehab deals towards more value-added transactions where you’re adding more space or you’re converting it from a single-family to a two-family or four-family.

Kevin Kim: And more construction too.

John Beacham: More construction. Structure tear-downs, ground construction. And so, you’re seeing investors move more towards a heavier rehab side of the spectrum because there’s more opportunity there. And so, it’s not just you’re buying something and flipping, make a profit. You’re buying it – that’s why I hate the term fix and flip. You’re buying it, you’re transforming something else. And then you’re selling it after it’s transformed.

I think that’s going to continue. I think rates have been higher for longer for a while. I personally think rates going to be a lot stickier and continue to be stickier through this year than people expect certainly than the market expects. At some point, you see – and, by the way, 5% rates are not like – they were that way for most of my career early on.

Kevin Kim: I have no objection to a 5% mortgage rate. That’s the ideal scenario, I feel like, for a lot of us. Yeah.

John Beacham: Rates are going to be high I think for a while. And, you have to be creative as a borrower to go find deals. That sort of make sense. And you have to reject a lot more deals than you probably had two or three years ago. And that’s going to continue to be the case.

On the financing side, I think you’re going to see what’s already happened. Continuation of this institutionalization space, which I think is really exciting. I mean, organizations like Apple and the MPLA, other organizations here, have all been – I’m on the Ethics Committee at Apple. Really focused on sort of increasing the accountability and the ethics and sort of the Integrity of our industry as a whole by setting standards for ourselves and elevating ourselves. I think that’s a trend that’s going to continue and is really important.

I think professionalizing our industry and sort of increasing our standards in the industry is something I think is very important I’ve been a big fan of – we just call ourselves hard money and getting rid of that term and moving away from that towards less kind of – whatever. Less offensive terms. Less negative connotations.

Kevin Kim: I’ve always taken the opposite position. I’ve never had an issue with it. And I think it’s because primarily – when I was a banker, nobody cared about it. It was like, “Yeah, we can’t do it.That was kind of the perspective on it. But now that banking is kind of gone and kind of dead. We can’t call ourselves private credit, can we? I mean, I don’t know if we can.

John Beacham: Private lending.

Kevin Kim: Private lending. And I have no objection to that either.

John Beacham: American Association and Private Lender Call. I think that’s –

Kevin Kim: My big thing was always like, well, what I care is what your customer call – to my client, “Client, what does your customer call you? What does your customer label you as? And if he labels you as hard money, then you’re are hard money.” It’s kind of you can’t force that conversation. You don’t want to make him think like what you’re not. You don’t want to act like something you’re not. You know what I mean?

John Beacham: Yeah. Listen, if you’re an originator and you have someone calling you up and calling you hard money, I get it where you use that term. I also think that we don’t – in the mind of many people, the term hard money is associated with predatory lending. Pay lenders.

Kevin Kim: You want to get away from that conation.

John Beacham: Lenders of last resort. And what’s – if anyone in our industry knows, I mean, what’s happened is that this industry is the opposite. I mean, this industry is very competitive. Borrowers have many, many options with lots of liquidity with big institutionally-funded lenders in all markets across the country. This is not a market where lenders are forced to take these loans or don’t have many options. Or, frankly, don’t have a lot of negotiating power themselves.

And so, I think we’ve evolved away from even how you described it. You can’t get my loan and go to hard money guy. I think this industry is really providing amazing service. And I always found it strange that if you want to go buy like a $50 million multi-family property and get a loan on that to rehab that property, that was called a bridge loan or a transitional loan. If you want to go buy a two-family property and get a loan to renovate it, that was called a hard money loan. Now what’s fundamentally different between those two loans?

Kevin Kim: And there is no difference. And that’s the funny part to me has always been locally – like in LA, a lot of the bridge lenders in multi-family and commercial call themselves hard money lenders. And they don’t price any differently. I have a client in Sacramento, they proudly wear the label hard money. But they also lend a 7% on a multi-family deal on bridge loan. And they underwrite it like every any commercial lender would.

John Beacham: That doesn’t sounds so hard to me.

Kevin Kim: Yeah. It’s not hard at all, right? It’s very much not hard money lending. But I feel like it’s a weird – on my end, I’m looking at it from what the borrower – how the borrower labels it. And that’s kind of what I care about. But I get it. There’s a negative connotation to like we’re viewed as loan sharks. And my dad always just make fun of me when I joined this firm. He’s like, “You work with loan sharks, aren’t you?” He made fun of me for that.

I hear you on that part, right? It’s definitely an issue. And what’s interesting is I went to a real estate show and I was actually very pleasantly surprised. I reflected back on our clients and how sophisticated they are, and how competitive they are, and how smart they have to be compared to the residential investors. And it’s even the local guys. And, really, I’m really, really happy about that. It makes me very like happy to be part of that kind of industry.

How about for Toorak? What are some things that you’re working on kind of for our listeners to learn more about in the coming year, in the rest of the year, in the coming years? Anything new and exciting for them to know about?

John Beacham: Yeah. Sure. I mean, we’re looking at expanding our volume and expanding our presence across all of our markets. And so, we’re looking to find quality lenders that we continue to partner with. Really looking – right now we’re focused on the ground-up product. And we like to expand our volume of ground-up lending. And so, we have a team dedicated to that. And a lot of focus on that over next year. We think that’s a both a good product for us and, frankly, a real need for the country. Because we have big shortage of housing around the country. And so, it makes me happy to be part of using our capital to actually create housing and also renovate housing, so that families can move back into that. I think that’s a big focus for us next year.

We expect to do more securitizations. I’m sure we’ll be out in the securitization market accessing that as we go forward. Continue to grow our balance sheet and grow a presence. I think it’s nothing radically different over the next year, but definitely a focus mix a little bit. And looking to grow.

Kevin Kim: For our listeners, if you guys are looking to work with Toorak, if you aren’t or are already working with them, I know for a fact they’re going to be out in forest at our show in Las Vegas at the Captivate Conference. Look for them there. And, hopefully, you can join them and take advantage of this. They’ll be pushing around ground construction.

I think that’s all the time we have for today. I want to give a big thank you to John for doing the show today. Really appreciate it. Also, thank you to our friends at the American Association of Private Lenders for co-sponsoring this special episode. And this is Kevin Kim. We’ll see you in the next season for Lender Lounge. Thank you for listening to this very special episode featuring John Beacham with Toorak Capital Partners. This is Kevin Kim signing off.

Kevin Kim: You’ve been listening to Lender Lounge with Kevin Kim. Brought to you by Geraci LLP, the nation’s largest private lending law firm. Geraci is the leading legal resource for specialty lenders, asset-based lenders, private lenders and non-bank institutions. Learn more about the firm at geracilawfirm.com. That’s geracilawfirm.com.

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