This is a transcript of our fourth mastermind call with a group of experienced investors to understand where each investor is and how they are dealing with the Covid-19 lockdown and its consequences.
Self Storage and Retail
We are going into month 7 of the quarantine in San Francisco, some places are being allowed to reopen at limited capacity such as nail salons and hair dressers, still there is no indoor dining allowed, although restaurants may be able to reopen at 25% capacity at the end of the month. A lot of restaurants and boutique gyms have permanently closed. There are a lot of vacant retail space for rent in all areas of the city.
As far as housing, new, high end condos that are located near the large company offices are selling for 25% less than a year ago. The building that I live in is 30-40% vacant, and according to the doorman, there’s one moving truck every day.
Apartments for rent are between 15-30% cheaper than this time last year.
There’s a small percentage of people taking advantage of the moratorium and not paying rent, they will likely live rent free for at least 6 months according to a friend who invests in homes in California. This investor is actually selling their investment homes here, and the upside is that the homes are selling very fast and there’s a lot of equity on these properties.
The office area of San Francisco is completely empty and will likely be until July 2021 which is the date that major companies said their employees can work from home. All the businesses surrounding this area are closed and I don’t see how they will survive.
However, I am still confident that offices will not go out of style, companies are already saying that productivity and innovation is down. Productivity was up at the beginning of the lockdown because people were scared of losing their jobs, but that’s not the case anymore.
As far as my deals, lending hasn’t affected me, I am in the process of purchasing a couple of properties and had no problems with the loans.
Mobile Home Park Operator
He is seeing that buyers are taking a little bit more time and there seems to be less frenzy about trying to acquire parks. A lot of people are looking, but they’re taking their time to buy. Part of it is that without that sense of a frenzy, people feel like they can take their time, it’s not as critical to get an offer out and to get a park under contract because they think it will still be there a month or two down the road. And that’s combined with some sentiment that people feel like they can wait for a little bit and hope that they might be able to find more motivated sellers over the next three to six months.
From the sellers side, a lot of clients that his consulting firm works with haven’t gotten to the point where they really feel like they need to drop their price to act as if they’re in any way desperate to get out. If the parks aren’t making really good money for them, they’re not having to pour a lot of money into it. They’re still being patient from a seller’s standpoint, and thinking that maybe they can wait 3, 6 or 9 months down the road until the dust settles a little bit. And then they’ll be able to get a price that will be more attractive for them.
On the operations side, they’re still seeing an impact from COVID. In Georgia, for example, where he has a couple of parks, the courts closed in March, and they opened back up in July. And when they did, there was a big backlog of cases. They had some tenants that were upfront and said that their job was affected by the pandemic and showed proof of that, and they were able to work on payment plans with them. Other people took advantage of it. And they’re still making their way through some of those tenants, going through the eviction process, and trying to get on the court’s schedule, which is taking a long time. The courts are giving the people who are being evicted the option of either coming out in person, or coming to the court via Zoom. When they do it via Zoom, the court dates are actually set further out. So from a tenant standpoint, there have a choice of coming in in person in October, or of doing a Zoom call in December. They’re choosing to do it online to stretch things out a little bit. So that’s something they’re still working their way through.
He is also taking it slow and being patient. He was starting to get a little bit more comfortable with everything around August and started to be a little more aggressive in the acquisition side, mainly looking in the Charlotte market. He thinks that the Charlotte market is really great long term, especially in light of everything going on. He thinks that the diversity of employment there is really good and sees that as a good long term market, but he stepped back a little bit when that CDC moratorium came down. That was a little bit jarring for them to come out with such a sweeping regulation and not provide any fiscal support that goes along with it for renters or landlords. The opportunity for people to take advantage of that is certainly there. And if you’re looking at Class C assets, or for properties that have class C tenants in it, then that’s a big risk right now. He is really curious how that’s going to pan out, because right now, there are a lot of question marks on the future of this through December, and what happens after that? Is there going to be any fiscal aid coming out? It doesn’t seem like Congress is in a big rush to pass another Cares Act or anything like that.
He’s not bullish on the future in terms of the economic climate. And there’s a real potential right now that things get worse before they get better. We have this initial uptick, they’re pushing the narrative that we’re in recovery, but he doesn’t think it’s going as strong as some people are making out to be, just looking at the jobless claims. He’s taking his time on that respect, because he thinks there’s still a lot of risk out there.
Senior Living / Assisted Living
They’ve been dealing with a lot of changes in the visitation front. As far as operationally, they are going to see a lot of interesting deal flow in the assisted living memory care, skilled nursing space. They’re at a demographic trough that’s going to exist for a little while. That’s where the baby boomers don’t need care yet. And their parents and people that are older than them are passing away faster than they’re being replaced. They’re at that point now for the next couple of years, where it’s going to be a little bit of a demographic challenge in this business, and then it will turn pretty sharply. He is starting to see more and more deals at 50% occupancy that are trading on 30 cents on the dollar. And if they’re decent assets, you can get in there, serve for a couple of years and then have some good deal flow.
Other than that, everyone is dealing with major shifts. He thinks the impact of senior housing is going to be more generational than a couple of years. There was an article from the AARP that said that smaller home assisted living, long term care facilities are doing really well in the pandemic, which would mean the corollary that big providers are doing poorly is true. He thinks that people are going to start waking up to the fact that gyms, and underwater treadmills don’t mean much if you don’t have infection control, and the food is not very good, and the communication is not very good and all things being equal, if one place has a one out of 20 shot decrease of not killing your mom or dad, that’s probably a pretty good tiebreaker.
He thinks it’s going to be a really interesting, very turbulent, three to five years in this business. COVID just accelerated that. If you were going to see receiverships, you’re going to really start to see them now.
He thinks that there was a tremendous amount of smart money that was actually dumb money and didn’t know that it was dumb money. There has been a lot of institutional players that have gotten annihilated in this space because they don’t have an operator, and they don’t have operations under control, they thought that would be easier than it actually was. He thinks that there were people making decisions without doing the proper due diligence, and they thought it was Field of Dreams, build it, and they will come.
In some of the bigger cities, there was an overbuilding problem, and there are still plenty of cities, especially smaller, secondary and tertiary markets that are massively under built. And people don’t know how to have a unique selling proposition. They just keep building the same old product over and over again, and they fight for market share. So it’s a little bit of everything. And then of course, it’s a difficult sell, Hey, move mom or dad in and maybe you can come visit them in six months. For the average family that’s actually a negative. The visitation policies really did put a huge damper on move ins. The suburban rural flight pattern that’s happening all across America right now affects this business too. Some people that have their properties in the suburban areas are seeing more rapid movements than some of their urban counterparts.
If people are leaving cities, then naturally, city based assisted living and memory care facilities will also suffer. Most of his places are in central Dallas and there’s a little bit less demand than there was before, even though their model is superior for infection control, and for pandemic. But his suburban friends seem to be busier. Other cities are way worse off like San Francisco and New York, he thinks that urban New York and San Francisco assisted living memory care, and skilled nursing facilities are just getting destroyed.
Overall there has been a lot of things happening simultaneously. They’re getting back to closer to full visitations, probably at 50% in Dallas and Texas. It’ll be interesting to see when people can actually come visit. They’re requiring people go through a caregiver training program about infection control, and then they can actually visit indoors. The prior rule was that someone had to be failing to thrive, they had to be passing away, or end of life, or losing weight, or having cognitive problems, and then you could come visit, but no physical contact allowed. Now physical contact is allowed if they have proper infection control and follow certain protocols. Once that starts to happen, they’ll start to break away from COVID being the central story, and then it’ll be more about people that have been exposed because the tide came in, and the tide went out. He thinks that’s probably what they will start experiencing in the next 6 to 18 months, and then it’ll be an ugly run for some people.
As far as distributions to their investors, they paused them. Early on the pandemic they were doing really well, their expenses were high, but they got about 25% of their clients agree to rent increases. They were actually able to expand in the pandemic a little bit. But when the visitation policies set in, it was difficult to get people in. The trend right now is that people that do private sitters at home, those businesses have exploded. For $12,000 a month, I can keep mom at home, and they’re safe, and then they have the care that they need. That’s a temporary solution for a lot of people, most people can’t afford to spend $140,000-$150,000.
They got PPP money, got caught up from the prior distribution, and they will have a pretty normal distribution this quarter. But it’s not business as usual, expenses are high with things like buying PPE, the protocols, and constantly dealing with changing policies that are pretty heavily enforced. It’s definitely different. But as far as weathering the storm they’re well positioned. And ultimately he is excited about the things that are coming online, because they’re both in secondary and tertiary markets, which will be attractive. And they were able to incorporate some COVID state of the art things into those facilities. He is bullish on the future for the right product, but for the industry as a whole, he thinks it’s going to be a little bit of a business bloodbath in the next two to five years.
The past month has been definitely unexpected. They’ve a number of projects in Lake Charles, Louisiana, that got hammered by Hurricane Laura. One of the projects suffered some delay but suffered zero damage. And they got to see how well the site would perform under heavy rain conditions and it performed well, including a tropical storm that came through recently. The last month has been dealing with that situation, and it has opened up more opportunities. So overall, it’s actually been good for them. They’re still seeing opportunity for new construction. A lot of people have been wondering if the market is going to freeze up. They’ve three projects that they’re doing. It’s never a straight line, there are always surprises, like lenders doing the bait and switch thing pretty liberally, saying that they’ll give you amazing terms, and the loan committee comes back with this concern. So the interest rate is going up. Apart from that, it’s business as usual. They’re being very careful not to make major long term commitments unless they really see very strong market fundamentals. They’re still bullish in some markets. There are a lot of markets that are dramatically underserved in the boat and RV space. If you look at a lot of the major metros across the United States, there are definitely price increases. And of course, you’ve declines in New York, San Francisco, and some of the coastal cities, but a lot of the interior markets, for example Boise, ID is up 11%. Maybe there’s artificial robustness in the market.
They were planning to build a hotel in the hottest area of town, and now they turned it into a condo building. With 24% of hotels in North America being in some form of financial default on their bonds or on their notes, no one’s going to build a new hotel. They want to pick up distressed assets for a discount and everyone’s waiting for that to work its way through the system. It’s unfortunate that they couldn’t build a hotel there.
Overall it has been very busy. They added new people to their team. He likes markets where there’s a shortage of supply and an excess of demand.
At the end of the call we had a discussion regarding if we think offices will come back to normal, and some of the thoughts were:
– Offices will come back, but it will be different, and there will be individual contributors that will continue to work from home. The pendulum has not finished swinging yet.
– Most will have a hybrid version where people can work from home once or twice a week.
– Some offices won’t come back such as law firms where lawyers can work from anywhere.
– Startups and tech companies will come back because there has been a decrease in productivity and innovation.
– For the companies that give employees the choice of working from home, they might see that the employees that are in the office may get promoted quicker because they’re picking up other tasks that may be needed to be done. The hybrid model may work.
Conclusion: maintain adequate reserves, make sure that you are solving an income statement problem with an income statement solution (not a balance sheet solution), have money readily available to take advantage of opportunities that are coming up in the next 6 to 12 months.