In this conversation, Dennis Cisterna shares his journey from a corporate career to entrepreneurship in the real estate sector. He discusses his investment strategies, focusing on commercial real estate and the importance of risk management and transparency in investor relations. Dennis emphasizes the need for thorough due diligence and the challenges of tenant management, while also addressing the evolving landscape of passive investing and the importance of aligning interests between operators and investors.

Investing in Net Lease at Double-Digit Cap Rates with Dennis Cisterna

Joe Guidi (00:00)

Dennis, thanks so much for joining me today.

Dennis Cisterna (00:02)

Hey, thanks for having me, Joe.

Joe Guidi (00:04)

Yeah, I'm really excited for our conversation. I've just been talking a little bit beforehand and excited to have you on the platform. Before we do get started, I would love for you to just set the stage for our listeners, tell them a little about yourself and your journey from institutional to where you are.

Dennis Cisterna (00:20)

Yeah, happy to. So, started my career as a housing market analyst, spent the next close to 20 years working my way up the corporate ladder. Always had that C-suite in mind. And then basically got there by the time I was in my mid-30s. And I realized once I was there, it just wasn't what it was cracked up to be. I still had a board of directors. I still had shareholders.

And even though I was the boss, I still was not the boss. And it was just frankly kind of unfulfilling from a personal standpoint. And so with the encouragement of a lot of my industry colleagues and friends, they pushed me forward and said, "Look, you should just be opening your own shop. You've done everything in the space. You've made other people a lot of money. Why don't you just go do it? Worst that can happen is, a couple years later, you just go back to the C-suite for somebody else, but you owe it to yourself to try to go do this on your own." And that's what I did, and that was seven years ago.

Joe Guidi (01:25)

That's awesome. So you stepped out and you needed to get started. Did you—you're using retail capital now, correct? Did you start that way?

Dennis Cisterna (01:37)

I started with a blend of retail capital and institutional capital. And that was the benefit of my background really coming up on the institutional side, working for large private equity funds and developers and investors, having those relationships. That's something that your average GP just can't step into. So the first couple of small deals I did were with retail investors. And that was really the friends and family and industry colleagues that knew I had a good investment thesis. And then as I stepped forward in the build-to-rent sector as one of the early entrants in there, I partnered with a former client of mine that was an existing single-family operator, although had not done anything in build-to-rent. And we went out and we did a formal roadshow. We got Carlyle Group to back us, which was great. And we exploded overnight and were able to scale that business very quickly.

And actually, I divested in most of those holdings in mid-2022 before interest rates got too crazy. So a little bit more luck than good on the exit, but it was a very great way to have a lot of momentum coming out of the gates doing things in the residential sector at that time.

Joe Guidi (02:54)

And where's the business focus right now?

Dennis Cisterna (02:57)

So, I realized that once I started one company, I could not stop creating companies. So the first one, Guardian Residential, was focused on model home sale-leasebacks and off-balance sheet financing for home builders. And then Guardian partnered to create Lafayette, which is the build-to-rent company. And then in 2020, I started Sentinel Net Lease with another industry colleague of mine. And that's focused on commercial real estate primarily: single-tenant office, industrial, and retail across the country.

Joe Guidi (03:28)

Okay, get it. So, and then are all three still going or where's your focus?

Dennis Cisterna (03:29)

So, the residential strategies are relatively dormant from at least my interest. I sold my interest in the build-to-rent. I've got some legacy passive GP positions in deals, but I'm not actively pursuing anything in that space. Same with the model home business and other off-balance sheet stuff for home builders—kind of dormant right now. I don't really like the fundamental economics in either of those spaces right now. And what I've learned about myself as an investment manager is I am highly opportunistic. So if I don't think I can outperform a market or other operators, then I'm not really interested in participating. And so that's really been our focus point now is 100% on Sentinel and focused on trying to find the needle in the haystack for good, high-quality commercial real estate assets across the country.

Joe Guidi (04:24)

Right. Okay. So your focus is on Sentinel, and Sentinel's model centers on long-term mission-critical leases, correct?

Dennis Cisterna (04:33)

Yeah, that's right. So for a lot of folks, I feel like everybody understands the multifamily investment thesis and maybe doesn't always understand some of the risks associated with it, but the macro bet is we don't have enough housing. That's pretty simple. On the commercial side, what we're doing and what is of critical importance is who's actually occupying the real estate you're acquiring and why. And so we focus on a lot of corporate headquarters, research and development facilities, lab space, manufacturing—things where we know that company can't necessarily function without that space. And we were able to acquire them at very attractive cap rates in this environment with long-term leases in place. And so it's very predictable where we don't have fluctuations in the operating expenses. We know which way rent is going for the next 10, 15, 20 years.

And so it's kind of advanced coupon clipping is the best way to put it.

Joe Guidi (05:31)

Yeah. That's a great way to put it. How—I'm curious, just because you're dealing with retail investors, right? I'm sure many of them you've gotten in your network, but theoretically there's new folks coming in. Those that started in the BTR space and then kind of shifted around—how has the shift impacted the way you communicate with investors?

Dennis Cisterna (06:00)

Well, we only had probably about 20 or 30 retail investors—really small core—on my residential strategies. And so it wasn't as if I told everyone, "Stop the presses, I'm doing something new." It was really more the vast majority of the dollars that were being invested were coming from Carlyle. And so that was a little bit easier to manage. When I made this shift, I think I did a very good job of explaining, "This is why I'm launching this new platform." I think we've got a very unique runway in the commercial real estate world right now. And this was in 2020. It was a different time. This was in the middle of COVID. And we thought we would be able to buy some interesting deals at that time in overlooked markets. And the thought process was, especially in the middle market—so in the commercial real estate world, it's dominated at two ends of the barbell. One end of the barbell is 1031 buyers who want to be tax efficient and frankly probably care way too little about what the cap rate or the basis they're buying assets is. And at the other end of the barbell is the institutions who keep getting bigger and bigger with each year. So the size of the assets they are interested in get bigger and bigger as well. And so that's kind of left us where we primarily buy assets in the 10 million to $40 million range. We just don't have as much competition.

And so we're able to extract value and find alpha a little bit easier in that particular sector of the business.

Joe Guidi (07:37)

That makes sense. So when you think about the strategy—it's a long-term strategy, you said advanced coupon clipping—so when you're communicating with investors, how are you communicating the long-term value of these deals to them?

Dennis Cisterna (07:38)

So there's a couple ways to do it. Basis-in is a fundamental part of what we're buying. And so if I can say, "Look guys, we're buying a great building in a great area and we're buying it at 25% of replacement cost," I feel like I have a great defensive barrier against 98% of the rest of the investors in that market because of the prices we're buying at today.

But where I really explain the risk profile to investors is I say, "Look, everything you buy, I don't care what part of the cycle you're in, it should make sense today." And so what I get into ridiculous arguments with people all the time about is groups that will buy stabilized assets with negative leverage. And I said, "You do not understand. You are literally—you are causing a problem by doing this because you are willing to take equity risk for sub-debt level returns." And so you are getting out of whack with the capital stack entirely when you do that. My opinion is anything you buy, you should be able to put positive leverage on it if it's a stabilized asset. And so when I look at the assets we're buying today, we buy them at—let's call it between an eight-and-a-half and an 11% cap rate. I can go borrow at six-and-a-half to seven.

And I've got long-term contractual income in place. So I say, "Look guys, let's assume my tenant doesn't default. You're going to get between 120 to 220% of your invested capital back just from contractual lease income, depending on the term of the existing lease that's in place." And so I say, "Okay, worst that happens, you don't beat inflation and you're not beating the S&P, but you're not losing any money."

And so I think that's something that people can get their arms around pretty easily because you're not taking lease-up risk, you're not taking construction or development risk. And so people like that level of stability. And then I say, "Look, if we get lucky or even if the market stays the same, our NOI is growing over time. So even if we sell at the same cap rate we bought at, which is historically elevated, we're still going to make some money on the disposition." And if we get lucky—now, I deem it luck; other people are calling this a strategy—if there's cap rate compression when we sell, there'll be additional profits, but we don't bank on that. I think that's—if we have some level of cap rate compression, it's because we know we are getting a great deal.

Joe Guidi (10:31)

Yeah. You're not building cap rate compression into your marketing strategy.

Dennis Cisterna (10:42)

I'm buying something at a double-digit cap rate with 20 years of term, right? So, even then, it's only going to take up a very small percentage of my overall return profile.

Joe Guidi (10:42)

Right. Yeah, got it. No, I think that is something that has come up on quite a few of my conversations with GPs is this exit cap rate issue in the pro forma. It's interesting, so I'm glad you brought it up. So it seems like—I think I read that you—one thing you talk about is preserving wealth through discipline, not speculation. And so it seems like your angle on the market is very much about just that, right? It's like, "Hey, we're going to make really disciplined decisions by finding good deals and only doing them when they meet this criteria."

Dennis Cisterna (11:38)

That's right. And we adhere to that very strictly. The downside of that is it totally limits my company's scalability in terms of what we do, right? Because I look at a thousand deals and I buy one. So it's a little frustrating from that standpoint to have to really find this needle in a haystack, but you feel very good about everything you buy. There's no heartburn to think that you're scaling the business for the sake of scaling or for more AUM or more fees or whatever bullshit people want to talk about on LinkedIn about why they're such a great sponsor. I think when you're thoughtful about what you buy and when you're putting your own money in there—which my partner and I, we're our largest investor in our fund that we launched last year—so damn straight, I'm going to be disciplined with my money. Of course I'm going to be disciplined with that.

And if people are coming along for the ride with me, then they know just how serious we are about underwriting and risk management and really trying to get our arms fully around what could go wrong in any scenario. Even when you do have a stabilized, fully occupied building for the next 15 years, if you don't underwrite the credit of that tenant properly and understand that risk, there's potential downside in anything. Nothing's bulletproof. That's the one thing I will attest to.

Joe Guidi (13:07)

I want to ask you more about that in a second, but before we go there—do you think that—this has come up quite a bit too—do you think that LPs should be asking about skin in the game?

Dennis Cisterna (13:09)

I think LPs should be asking about a thousand different questions that they don't ask on the regular. I would say skin in the game is one of them. And not only skin in the game, but understanding where that capital is actually coming from, because over the last decade, we have seen a rapid ascent of co-GP capital, which masquerades the actual GP's equity position in the deal.

Joe Guidi (13:27)

Okay, which is the most important.

Dennis Cisterna (13:52)

And I will tell you, that is easy money to go get if you want it as a GP. So if you need to put a million dollars into a deal, but you only have 50,000 bucks, guess what? There is a company out there that will put up the other 950. And to your investors, unless you are really being transparent, it looks like you're putting all that up and you're not. That lack of alignment—yes, exactly.

Joe Guidi (14:15)

The GP's got a million dollars in, right? Yeah. Right, right, right. Got it.

Dennis Cisterna (14:20)

So I think that is absolutely of paramount importance. The other part is to be able to test the assumptions of the operator, of the sponsor, and say, "Well, what happens if you don't sell at a 4.25 cap rate in two years, or four years, or six years? What happens if you have to go get permanent debt that's 100 basis points higher than what you are anticipating right now?" And it's moving all those levers around to see how jerry-rigged and how much financial gymnastics are being done by that sponsor to make the deal look attractive on the surface. And unfortunately, there's not a ton of resources for the average LP to go—which is why I'm such a big fan of Invest Clearly—to get this higher level of education out there for folks, or at least know to ask the questions.

And I will tell you, the biggest red flag is if you ask those questions and they become defensive, just go the other way, right? Because the number one rule of any investment manager should be that there's no reason to hide anything, that there's true conviction in the numbers, and that there's a financial ability and wherewithal to actually go and augment their numbers and show you what that looks like—if they're not already doing it on their own, which they should.

Joe Guidi (15:20)

Yeah. So let's talk about the type of data that's available for a second. You and I were talking in advance about something you're going through right now where you're getting listed in a couple of different bigger firms and you've had to go through some processes specifically designed to underwrite you or look at you operationally and the way you do things. Can you talk a little bit about that?

Dennis Cisterna (15:40)

Yeah, sure. So, as we move towards working with registered investment advisors, broker-dealers, our investment products are put on larger platforms. And so, in order to do that, usually you need some type of sponsor, a wealth management firm, an RIA, or a BD themselves. And they're going to want to see some level of diligence before they're going to back you, let alone invest with you. And so we went through this exercise over the last three months where a large wealth management firm out of San Diego that we have a previous relationship with said, "Hey, look, we want to potentially help you get on these platforms, and we want to put some capital in ourselves. We're going to go through this exercise." They hired this third-party research firm, which spent a month interviewing our firm—everyone in it—went over all of our historical financial modeling, all of our PPMs, all of our OMs, everything. And it was quite a real interesting process to go through as an operator. You think you have everything dialed in, but you bring a third party in, a new set of eyes. And the finished result is they create these two different diligence reports. And luckily, they shared that with me when they were done. The review was generally positive; obviously, nobody's perfect, right? And it identified some weaknesses and some blind spots I didn't know we had. And that really allowed me to go work internally on fixing some of those weaknesses. And we actually hired the due diligence firm itself and said, "Hey guys, I want to shore this up, not just working with my people, but I want to make sure that as we're doing this, we're fixing it the way you would think it would be fixed, right?" So that that would not even have come up in your report before. And so it's been really valuable for us as operators to go through that exercise. I think any investment manager that wants to be good, that wants to be successful, is constantly looking for that next level of improvement and innovation. And for us, although research and due diligence is time-tested, turning it inward on ourselves has been a really, really interesting process.

Joe Guidi (18:35)

Yeah, I can only imagine. In those diligence reports, anything that came to mind that will impact the way you communicate with your investors?

Dennis Cisterna (18:47)

Yes, I will tell you—now we are probably—I would say we're in the upper echelon of reporting and transparency. We've always been on an investment management platform from the beginning. And that's one of the cool things for syndicators and LPs of any size right now is you have AppFolio, Agora, Juniper Square, and a host of others that really help provide that login transparency 24/7. But the information you report, the frequency with which you report—I think that's an important thing that we've always done. But I think opening the kimono further and explaining to our investors our methodology to a greater degree is key. So that's one thing I'll just open the kimono with you too, Joe—our underwriting before—we had an underwriting process.

We did it the same way over and over again, but we didn't share that with anybody other than "this is our finished model, these are assumptions, if you want to see us change any assumptions, we will." But what this due diligence firm has helped us with is we've created an internal scorecard methodology across every part. So we have seven pillars of investing that we focus on that are the core tenets of our underwriting. And so now each one of these pillars has its own sub-metrics. And it looks like a lot more of a science document than a real estate document, but it is awesome. And it's what we've always done, but it wasn't formalized and memorialized in the way it is now. And now we're making it accessible to our investors where they're going, "Wow, this is not something I would expect from a company of your size."

Joe Guidi (20:43)

That's really interesting. You basically—of your size, that's really the key. Because you expect that as you get up to an institutional level or inside a corporate organization, the things that you might be competent at based on instinct or experience won't get systematized until later because they have to be rolled out. You're saying—do you feel like that will help?

Dennis Cisterna (21:13)

Well, let's just think about the LPs that you're talking to. A new LP is coming to you, you're sharing a deal with them—walk me through how you think that's going to impact the conversation, being able to put a score in.

Dennis Cisterna (21:24)

Well, we're focused on retail investors and going through these more sophisticated channels now, but we're also starting to approach—because we launched our first fund about a year ago—we're now also approaching non-P.E. investors as well that are OK being passive LPs in a fund: endowments, foundations. So we knew we would have to check off some of those boxes. And so for the big guys, it's a no-brainer. They're expecting that. For the little investors, the conversation is really explaining, "Hey, we built this methodology and these systems the same way a $10 billion fund would. You get the benefit of that exercise." Now, you may not understand everything in here—we've got a glossary, we're going to do our best to explain it—some of it's going to be over the head of some investors, depending on the level of their sophistication. But what we want to do is translate as much of that institutional knowledge to the average retail investor so they can at least understand what we're going through. We're not just throwing shit against a wall. There are safeguards in place all across the entire acquisition and due diligence process so that you know by the time we have closed on a property or are in active asset management, we've thought about just about everything you could think about that could go good or bad with that property.

Joe Guidi (22:58)

Right. It's interesting because what you're talking about—I usually talk to people about it when we're talking about communicating negative things, right? Like what's too much and what's too little. I think data storytelling is such a big part of being a GP. You're taking people's money. They're giving it to you because they're not going to go out and find these deals themselves. There's this balance between oversharing and undersharing. How do you strike that?

Dennis Cisterna (23:31)

Yeah, a hundred percent, you're right. I mean, shoot, you can talk to most LPs and they'll say that they never read their full PPM agreement when they signed the money. So are they going to read my 35-page underwriting scorecard methodology? Probably not. But I want to at least make it available to them. And I think that's what we've realized—let's not overwhelm our LPs with too much information, but let's let them know the information is there. And so we've created this repository library of different documents that they have at their availability to download or read. And sometimes we'll do video explainers of stuff if they want to see it. I think it's better to have it, and if they don't need it, great, but at least they know it's there than to not have it at all or for them to just operate blindly without knowing how you're really doing things. But we try to be very to-the-point when it comes to investor communication. I think that early on, we tried to cram an entire OM into an email and you would see the open rate not be very good. And these would be our investors. We're like, "We're doing something wrong here." And so what we did was it ended up being just more: "Here's a paragraph, here's a few bullet points. If you want to learn more, go here, here, or here. Done." And I will tell you, with bad news, I think it's better to be a little bit more detailed. And no one should be afraid of sharing bad news with their investors. I think it's ridiculous what I'm seeing right now, where a lot of syndicators are ghosting their LPs, they cease communications, they stop distributions without any notice. It is just phenomenally operating in bad faith. Just like any other group, not everything we've done is perfect. There are some things outside of our control, and when something bad happens, we want to bring it to the forefront to our investors. We want to explain what the impact is. We want to explain what we're trying to do to resolve it, both in the short term and the long term. If it can be resolved—sometimes there's things you can't resolve, and that needs to be communicated as well.

Joe Guidi (25:48)

Those need to be addressed also, right? Sooner or later. I mean, correct me if I'm wrong here, but one of the biggest risks in your business would be a tenant. You underwrote them well, it was going, but something happens in their business, right? Have you ever had something like that happen? And then how do you communicate that, if so?

Dennis Cisterna (25:50)

We haven't had something where the tenant has straight-up left with no notice, like in a default situation. Fingers crossed for that, because anything can happen at any time. We have had deals, though, where the tenant decided not to renew. And if it was a single-tenant building, that could be problematic. And so that's where it comes back to: did you account for that happening the right way? Did you have enough money in reserves to handle a new tenant coming into place or to weather the debt service payments if you don't get a tenant in place long enough? And so that has definitely been an issue at times, but it's been one that luckily has worked out in our favor because we've either had enough capital or we bought the building at the right basis and we were able to sell it to somebody else.

I will tell you the one thing that's been a pain in our butt—that I think maybe multifamily guys don't understand quite the same way—is that when it comes to capital expenditures, even in a net lease, you might be responsible for the roof or the parking lot or HVAC or some system within the building. And so when you go hire a third-party consultant to go do the property condition assessment, you're assuming they're doing a great job. You're paying them tens of thousands of dollars. We learned that at one of our properties. Our consultant was supposed to do a roof review and they didn't go on the roof. They instead used Google Maps, and the image was from three years prior. Wouldn't you know it, that roof was close to failing six months later. And so, in that situation, what we had to do was we had to—we had reserves, but we didn't have reserves for a whole new roof because our condition report said that the roof had 10 years of life remaining. So we had to reduce distributions for a period of time to save up enough capital to go make that roof repair. And that's not a fun conversation when you're buying a stabilized asset and saying, "Sorry guys, I've got to reduce your distributions for the next nine months until we cover this." Now, the good news is we have a new roof. And unfortunately, you don't really, as an operator, have a lot of recourse with these consultants. The report's only worth about as much as the paper it's written on. There are limitations of liability all across the board. And so what we've done is we now have a spot checker, a quality control agent that works for another firm that will review the report done by the other third party. So yes, we spend a little bit more money, but we have such greater certainty that whatever the final result of our diligence is, is what it is.

Joe Guidi (29:25)

Right. Yeah. Not easy conversations to have, naturally. But at the end of the day, it certainly could be worse. So, how does that work going forward? I'm just wondering—you have retail investors—you have such a good mix of investors that it probably impacts you differently than a pure retail shop. But with your retail investors, are they generally invested in more than one deal, or was that deal in the fund?

Dennis Cisterna (30:04)

That deal was not in the fund. So I think we probably had 70 different investors in that deal. We have 420 retail investors total, so it's well beyond the friends and family. And it's a total mixed bag. I could have a doctor or a dentist who knows absolutely nothing about commercial real estate absorb the information I give them totally logically, or they could lose their minds. Same thing if I have a guy that works for a large PE shop in their real estate group—they just want to know what's going on. They're going to react more rationally, even if they have 10 times as much money in the deal as the doctor or the dentist.

Yeah, we have found time and time again the key is provide as much information as possible, make yourself and your team accessible. And that really covers a lot of it. Nobody wants to have something bad happen at the property. But I think as long as you can show you're being responsive and as good of a steward of that property as you can, what else are you going to do? There are sometimes things in real estate, and in life in general, that are just out of your control. So, you deal with the bad news as well as you can and you hope everyone understands. If it's too severe of a mistake for them where they think we no longer earn their trust, I understand that. I don't force anyone to try to invest with me. If Sentinel's a good fit for you, great. If Sentinel's not a good fit for you, I'll recommend you to some other sponsors that I like their strategy as well.

Joe Guidi (31:53)

Yeah, I think that level of transparency in and of itself gives a lot of LPs comfort. No one wants a sponsor that's desperate for their money—that's not a good sign. So, we're a little long on time, but I have a couple more questions to ask you. One of them is a question we ask every single guest: what part of passive investing needs to die? What elements of passive investing are no longer useful and need to go away?

Dennis Cisterna (32:51)

Influencer bullshit needs to die. I could list 40 guys that couldn't underwrite real estate out of a paper bag—they really do not have any fundamental knowledge, but they are great used-car salesmen. And they have raised tens, if not hundreds of millions of dollars from investors that don't know any better. What I hate about society right now is that this cult of personality is starting to dominate every walk of life where the loudest person, not the smartest person, is the one that's actually gaining favor, attention, and power. And it just kind of makes me sick that we're in the information age—it should be so easy to figure out if someone's full of shit, yet nobody takes the time to figure out if they are or not.

Joe Guidi (33:44)

Right. Well, as you know, that's part of the reason we built the platform.

Dennis Cisterna (33:46)

Why I am such an ardent supporter of it as well. And I think there needs to be more out there for the average LP so that they can sift through the noise to really have a good opportunity. It is hard enough for real estate in general to outperform the stock market. So if you're going to go put your hard-earned cash with an operator that's not diligent, not thoughtful, and not aligned, your chances of beating the market are next to nothing at that point. You know, there's operators out there that dilute their investors from the day they close on the property, which is just mind-numbingly frustrating to me that that exists.

Joe Guidi (34:30)

Well, I think that's a good one to end on, actually. But before we do wrap it up, where can listeners go if they want to learn more about you or Sentinel?

Dennis Cisterna (34:32)

Sure, so they can go to SentinelNetLease.com. Very simple. It has everything about our current fund, our existing portfolio, our strategy, our team—best way to do it. If anyone wants to reach out to me directly, I am, again, full kimono. My email is Dennis at SentinelNetLease.com. Feel free to email me. You're an LP, you have a question; you're a GP, you have a question. I don't care. I spend probably way too much time talking to people about how I think they can be better prepared as either an LP or a GP or just as a participant in the market in general.

Joe Guidi (35:22)

Thank you so much for your time. It was great talking with you today.

Dennis Cisterna (35:25)

Yeah, really appreciate it. Thanks, Joe.

Joe Guidi (35:27)

All right.