James Sprow | Blue Vault |
After a great lesson in management priorities from Doug Buce of Boing Dynamics, Day 5 of the Blue Vault Bowman Alts Week 2020 began with a presentation by Inland Securities Corporation, introduced by Mike Ezzell, President and CEO. He was joined in the presentation by Keith Lampi, President and COO of Inland Private Capital Corporation, Rod Curtis, Sr. VP of Inland Real Estate Investment Corporation, and Ravi Bansal, Chief Investment Officer at Inland Venture Partners.
Inland Private Capital 1031 Exchange
Inland consider themselves a legacy sponsor. They have had experience with market cycles. This is the second iteration, beginning with the financial crisis when there was a lot of dislocation. The uncertainty and volatility are not new to Inland.
They have accumulated scale and asset diversity. Cash on hand is plentiful. They have capacity in their credit lines (less than 50% drawn on lines) and they have a considerable inventory of properties.
Lampi described each investment sector by the risks faced in the COVID-19 crisis. Over 40% of their portfolio is in multifamily. April collections were in the high 90% range. May looks to be similar, so far, so good. The same is true of self storage. They will continue to look for self storage assets. Self storage is more anchored to a life events thesis rather than economic cycles.
In the moderate risk cohort: healthcare, with uncertainty about elective procedures. Senior living assets were focused on lower acuity, like assisted living, unlike skilled nursing facilities. Senior living rent collections are in the high 90%s.
Higher risk segments make up 30% of their portfolio. Retail has been challenged. Bright spots: pharmacies and grocery stores. They may be looking to monetize retail assets. In hospitality, they have a small portfolio of hotels. Long term he thinks the hotels are well-positioned.
Inland Venture Partners
Rod Curtis introduced the Inland Venture Partners, LLC, a subsidiary business of Inland Real Estate Investment Corporation. He described the attractiveness of manufactured housing properties (trailer parks) and recreation vehicle communities. They are currently about half-way through a syndication to invest in these types of properties. They are currently investing in parks along the Gulf Coast of Florida near Bradenton and Clearwater.
According to Curtis, we are going to see a lot more in the manufactured housing category of real estate. More and more Baby Boomers are moving toward this type of housing. Now they occupy some of the best real estate in the country. They perform in recessions. No real competition. “The smartest minds in real estate are looking at unloved, unattractive properties. Now some of the smartest minds in real estate buying some of the ugliest assets.”
The attractiveness of trailer parks as investments stem from many factors. Curtis highlighted the “NIMBY” factor that has constrained supply as residential communities do not want new trailer park developments. In existing parks, the average tenancy is very long as compared to other asset types. Inland owns the park, the roads, the infrastructure. The resident owns the home and pays rent for the land. “The true competition for our parks is not from competing parks. Their competition is the two- or three-bedroom apartment building down the street.”
Curtis looked at the price performance over five years of these listed manufactured housing REITS (ELS, GSPC, SUI, VNQ). They have outperformed the S&P 500 by a factor of 8X.
A question for Rod: What keeps you up at night about manufacturing housing at this point in time? Answer: “Nothing, a lot of our tenants are retired. A lot of tenants are in industries not affected by lockdown. With each day our confidence has grown with regard to this asset class.”
Legendary Capital
Corey Maple, Chairman and CEO presented for Legendary Capital, focusing on Lodging Fund REIT III, a $100 million publicly reporting, non-traded real estate investment trust (REIT) focused on acquiring and operating a diverse portfolio of 80-to-200-room limited-, select-service and extended-stay hotels, with strong mid-market brands (Marriott, Hilton, Hyatt, IHG), primarily located in America’s heartland.
Maple emphasized communication and transparency with shareholders, including sending out shareholder information every month. They have earned trust because all the way along they have shared the bad with the good. They are the only voluntarily reporting Reg. D offering in the space. All of their filings are on Edgar. As a Reg. D, they don’t have to do that.
The sponsor took no fees in 2020. They will be presenting a due diligence webinar on May 19, 2020.
Regarding the COVID-19 impact on their properties: Their trailing 7-day occupancy has been 26%, while their peers are in the 14% occupancy range. They have trimmed down staff considerably but have kept all of their DOS’s (Directors of Sales)
Legendary will end with more cash on their balance sheet at end Q2 compared to end Q1. They see one of the best opportunities in the coming year since they began. The average hotel is losing $30,000 per month. Legendary “can weather the storm. Others cannot.”
For the due diligence webinar May 19, 2020, register at Legendary.bz/721UPREIT
CIM Group
Steve Altebrando (VP Portfolio Oversight) and Brian Rivera (Sr. VP Business Development) presented for CIM Group. With 1,000 employees, CIM is a vertically integrated RE company. The Group has completed $70 billion in CRE transactions over the last 25 years and has an AUM of $29.7 billion. The Group is committed to 120 communities around the world.
CIM Income NAV, Inc. was launched in 2011, the first to launch a perpetual life daily NAV NTR. Now most NTR capital is coming in the perpetual structure. In response to COVID-19, the REIT made changes to declaring dividends on a month-to-month basis. The REIT is monitoring collections from all tenants and wants to help tenants survive and thrive.
Prior to pandemic were valuing 1/12 of the portfolio on a monthly basis. Going forward, will value the entire portfolio over the next few months to see the overall impact of COVID-19. Their current portfolio has a $901.2 million gross purchase price and is 98.6% occupied, with an average lease term of 10.7 years. An analysis since inception shows the REIT has captured most of the S&P 500 average return but with much less risk as measured by standard deviations.
Steve Altebrando introduced CIM Real Asset and Credit Fund (CIM RACR) an Interval Fund.
The fund has declared its first distribution at 6.0%. CIM has committed $20 million to fund, $5 million to begin, then on a matching basis. The 1.5% of NAV management fee has been waived for the first 12 months. The fund will invest in real estate and corporate credit. A focus is on finding high quality loans, with low leverage, in businesses that can withstand the current environment. It is the best ideas fund. Real assets and corporate credit complement each other.
Panel Discussion: “Managing Change in the Alternative Investment and Broker-Dealer Worlds”
• Thayer Gallison, Moderator – Advisor Group
• Joe Byrne – LPL Financial
• Larry Lyons – Kalos Capital
• Mike Miller – Sigma Financial Corporation
• Dan Weiss – Advisor Group
First question, how are you responding to the current crisis?
Larry Lyons: They did a quick re-assessment of the platform. Where are the vulnerabilities: retail, hospitality, commercial office. Got on the phone to see how they were positioned to deal with the environment they are in. Suspended certain offerings.
Mike: Suspended all NTR sales at the end of March. Using FINRA rules, they really couldn’t fulfill their responsibilities. Due to material uncertainties they suspended their sales. They have already left the 1031 space as of March 31. Could not get enough information. They will be reviewing as they get public filings and updates.
Joe Byrne: Set up multiple calls with products they were offering and previously offering, to get evaluations of exposures to certain sectors. Suspended a large portion of their offerings, concerns mainly centered around valuations.
Thayer: The shock to the economy has shown that the valuation policies are best suited to a more stable economic environment. The recessions previously were more orderly. We could see what was causing them. It’s natural that we might as DD officers change our procedures. How are you changing your policies?
Joe: The policies we have now may not work in a period of severe market disruptions. We are likely to come out of this changing with regard to education. Making clients aware of what can happen when we have major disruptions like this.
Larry: This is definitely a teachable moment. We do have to address the negatives of the offerings and how do we do that? Do we change our processes? No. But are there some holes or weaknesses that we need to tighten up? Probably yes, but the lessons we took from the financial crisis probably don’t apply to the COVID-19 crisis.
Thayer: What will it take to bring these products back?
Mike: When does everyone think the virus situation will be safe to bring things back? If someone can tell me when that is going to happen, then I can tell you when we are going to bring products back on our platform.
Joe: We’ve spoken to a lot of third-party valuation firms. What we’ve been doing is as we’ve been seeing these valuations come in we’ve been comparing to what makes sense in this environment. If there aren’t buyers willing to pay these valuations then you have to question them.
Dan: We want to see price discovery, and we want to see the financial models that all of these programs are using, that now have to be changed. There are some sponsors that are farther along than others in changing their inputs to their models. We want to understand where those variables have changed, and we want to understand why they have done it and how it affects their valuations.
Thayer: More philosophical question: Why suspend alts when they could be performing better in this environment than stocks or bonds?
Larry: I can see from the risk mitigation perspective the easiest thing to do is shut it down. It may be easy to decide when to get out, but it is more difficult to decide when to get in.
Dan: The difficulty here is we don’t have the price discovery in real estate right now. It’s difficult to say that it is performing better than equity and bonds when you don’t really know. Green Street says that real estate has fallen about 10% on average (which is an unleveraged estimate). 20% or more is probably a more realistic number, [based on leverage].
Joe: The lack of price discovery is extremely important. I think there are certainly buying opportunities like in distressed properties. If the prices haven’t come down to reflect the current economic environment, then it isn’t really a good deal. A lot of these programs also have liquid assets that have been hit pretty hard and a lot of the NAVs could be driven by the liquid portions of the portfolios.
Mike: At least in the public products, a lot of them have either reduced their distributions or dropped their distributions, it is really troublesome to recommend the product.
Thayer: Have you seen issues with transparency with the private funds?
Mike: We have not approved any interval funds. You have to look at some of the other issues. The question has been raised if the interval funds are really covering their distributions. One of the sponsors has said, “It’s complicated.”
Larry: I’ve struggled with the whole concept of daily NAVs with real estate. I’ve noticed that there are sponsors that have begun to shift away from daily to monthly or quarterly. I think it is a little challenging to understand the valuation from an underlying basis.
Joe: The daily valuation of private real estate, it was never meant to be this way. They use different methods. You really are only getting the underlying fund valuations quarterly. It’s tough to say that the valuations are really capturing everything.
Dan: I agree. I think in a normal market environment it works well. They obviously don’t have time to make adjustments in this environment.
Thayer: The appraisal-based methodology makes Sharpe Ratios inappropriate.
Thayer: Reg. D programs don’t have the same problem with valuations. How are you treating Reg. D programs in this environment?
Larry: We have definitely seen a shift to the Reg. D market. They are more attractive these days because the deals tend to be smaller and there is more co-investment. And they tend to be quicker to pay back. The Reg. D space seems to be alive and well.
Joe: Reg. Ds tend to make sense in this environment. They’re not intended to have regular ongoing valuations. If you’re coming in at the tail end of a portfolio acquired at pre-COVID prices you may be at a disadvantage.
Thayer: Have you seen any changes to the E&O procedures?
Mike: There is a cyber security issue. The insurance industry has to get a better understanding of our industry and the risks.
Thayer: Any differences between real estate and credit?
Mike: Credit has to do with the wecollection of principal interest payments. So you have those risks as well.
Dan: There are differences. Credit is able to price more in real time.
Larry: Definitely there are differences. “Make sure you can manage it when you have to take it over.”
Joe: There are some products that you have to be careful because they have the same issues with valuations.
Thayer: What are the prospects for new products and when will we see them again?
Larry: We will see more NAV products, but if you’re concerned about liquidity you should go to the listed REITs.
Mike: If you’re buying into a large NAV REIT you’re really getting the equivalent of a listed REIT.
Joe: I think that perpetual product makes a lot of sense.
Dan: I think today’s structure makes a lot more sense in terms of corporate governance and valuation.
Conference Wrap-Up
The first ever Blue Vault Bowman Alts Week 2020 virtual summit ended, having a total registration of over 530 participants, including broker dealer representatives, RIAs, and the general public for the open sessions. We would like to thank all of the presenters and panel participants for their contributions that made this very unique event a great success. We wish you all safety and good health in the months ahead, and we look forward to a return to “business as usual” knowing full well that the COVID-19 crisis has changed the way our industry will do business forever.
