2018 Annual Letter

December 4, 2018

Dear Friend,

This is the first of what I hope will be many more annual letters to investors. The obvious inspiration for this is Warren Buffet’s annual shareholder letters. And while I would be a fool to promise the same level of insight and financial results as the Oracle of Omaha, I would be a bigger fool not to give investors the same level of honesty and transparency that he has modeled for the last 50 years. I hope you find this letter useful.

Let’s get to it. If I had to assign a grade to BlueSpruce’s2018 operations, I would give us a C. We performed above average in some respects, and below average in others. I’ll recap the wins first.

We were the primary promoter on two multifamily acquisitions totaling 99 units (Bridgeport, Conn. and Branson, Mo.) and the junior partner on a third for 68 units in Big Spring, Texas. This was below our goal of 500 doors, but it was not for lack of trying! We looked at well over 40,000 doors, made offers on perhaps 10,000 of them and ultimately put just three of them under contract. However, in the end we cancelled two of those contracts after due diligence found serious issues. (The third is the Branson acquisition.) Special thanks go to Brad Lowery, our lead underwriter who reviewed every single opportunity.

We ramped up our events ambitions beyond weekly meetups to include three power-packed events that each attracted more than 200 attendees. In particular our first annual Raising Money Summit received great praise from attendees, and we built dozens of relationships that will pay off in the future. Here are a few of the 68 comments we received:

“Speakers were wonderful. Lots of great info. Good mix of attendees with different areas and levels of experience. I had a really good time networking and spending time in a positive growth environment.”

“I learned so many different ways to raise money and will effectively start reaching out to my connections tomorrow.”

“The caliber of speakers was amazing. It was extremely well thought out and well organized.”

“The event was filled with top notch talent, not only from the speakers, but from the attendees as well.”

The overwhelming share of credit for our events success goes to BlueSpruce co-founder Adam Adams, who has a great talent for attracting speakers and organizing content to benefit the audience. BlueSpruce associates Robin Deibel and Chad Wittfeldt were critical to organizing our events and keeping things on schedule. We also had dozens of volunteers who seized the opportunity to learn master-class level content while building relationships to further their careers.

Another area of improvement in 2018 was our use of technology to nurture long term relationships. At the start of 2018 our list of investors could be counted on two hands. We realized quickly that while a pond is good for finding your sea legs, an ocean is better.

To remedy this, we made significant investments in customer relationship management (CRM) technology to manage our communications, and we doubled down on our content marketing. We released over 120 podcast episodes and 64 YouTube videos. We also started an email education list for people who want to learn the business of real estate syndication. As a result of these and similar activities, we now have over 450 potential investors on our list, and nearly as many on our education list. Once again Adam did yeoman’s work to crank out videos and podcasts, and Chad was instrumental in editing all that content and distributing it through social media channels.

“It’s a good idea to review past mistakes before committing new ones.”

Warren Buffett

After straining my shoulder to pat ourselves on the back, let me come back to earth and talk about our mistakes.

We failed to focus on just one or two geographic markets. Instead we made the rookie mistake of looking at properties all over the country. While this shotgun approach brought us our first two deals, it hurts us in two ways: 1) it’s more difficult to really understand local market economics and 2) it distracts us from developing the kind of strong broker relationships that make BlueSpruce the “no-brainer first call” when a new opportunity comes available. It also makes outbound marketing more expensive. It’s more effective to send five direct mail pieces to 500 owners in one submarket than one direct mail piece to 50,000 owners spread across the country.

This has to change. BlueSpruce partner Manny Perez is leading our market research efforts, and we will nail down our strategy by yearend. Stay tuned for a webinar on December 19 about where we chose and why.

In November we backed out of a multifamily deal in Atlanta that we had already announced to our investor list. This was embarrassing because we seek always to move forward with conviction. Furthermore, that was actually the second time we jumped into a partnership opportunity that better due diligence would have stopped cold. (The previous one was an investor referral we facilitated in August.) I speak for all of us when I say:

🤦‍♂️

That said, it turned into a great learning opportunity. After the Atlanta experience we put together a detailed partnership flow chart with multiple go/no-go decision points. I’ve enclosed a copy of that chart, and we welcome any questions or feedback you have about it.

While our events were a success overall, the planning process looked like a sausage factory: not something you would want to witness. This led to scheduling conflicts with other major events, difficulty finding venues and either too-expensive or not-enough marketing, not to mention unforced errors such as typos in programs and confusion about speaker order.The net result was high stress and low profits. We can and will reverse that into low stress and high profits in 2019.

Another area of improvement for us is asset management. And by “us” I really mean me because I handle all asset management.

After closing our first two deals in quick succession, we were the proverbial dog that caught the car. Up to that point the vast majority of our skills development had focused on finding, underwriting and closing deals. No one said it aloud, but I believe I unconsciously thought that our property managers would do most of the work with little need for oversight. But even though our properties performed reasonably well, it turns out that there are several areas where strong leadership is crucial.

Efficient communications in particular is a must-have, and if you’re not both doing it yourself and demanding it of your property managers, you are playing with fire. This was not a problem with our Branson community, where our manager Teresa does a terrific job keeping me in the loop.But it led to serious issues with our Bridgeport community, and after many miscommunications, lack of response and ongoing poor operational visibility, I made the decision to replace her. The new property manager has already taken the reins and has a clear understanding of our expectations.

“The power for creating a better future is contained in the present moment: You create a good future by creating a good present.”

 Eckhart Tolle

Reviewing the year for you has been a pleasure, and looking forward to 2019 has us all chomping at the bit. But before I close, I want to take a moment to express gratitude:

• To my partners Adam Adams and Manny Perez for trusting me with the role of CEO
• To our associates Robin Deibel, Brad Lowery and Chad Wittfeldt who have devoted countless hours to help build this company brick by brick
• To our Advisory Board, who lends us their decades of expertise in helping us make important strategic decisions
• To the dozens of partners and service providers who have helped us push deals over the finish line
• To the hundreds of investors and partners we’ve met at events around the country
• And most importantly, to the many investors like yourself who trust us with your hard-earned money.
  

For every opportunity we look at and every decision we make, we come back to two questions:

• Is this the best decision for our investors?
• How can we add so much value that they say not just “yes” but “Hell Yes!”

We look forward to helping you say Hell Yes! to 2019

With warm regards,