Top Investors Mastermind: Steps to Take During a Crisis (All Asset Classes)
We hosted a mastermind call with several highly experienced investors in multiple asset classes, we had over 200 years of combined real estate investing experience in the call. These were investors in retail, office, industrial, mobile home park, multi-family. Below are the takeaways.
Lots of people have a wait and see attitude. Others are taking a hands on approach and reaching out to tenants in advance.
It's in times like this, that fortunes get made. That's exactly what Warren Buffett does. He has a ton of cash available for situations like this. And he buys companies for pennies on the dollar.
George Ross, who has been working with Trump for several years said that now it's a great time to buy, all you need is courage.
Robert Kiyosaki said in his book The Cashflow Quadrant: "It is in times of great economic change, that there are always great transfers of wealth. A big secret is that true investors make more money in bad markets."
Note that when we say that now is the right time, in real estate it always takes a few months for pricing to adjust and investors are expecting Q3/Q4 to be a great time to buy.
Mobile Home Parks
We are waiting to see what happens starting in April when rents are due as many people are losing their jobs. Some people that having a wait and see attitude to see how things go over the first three, four days of the month, and see if there are any issues with tenants paying, if there are any delays, if they have lost their job, or potentially saying that COVID-19 has had an effect on them. There are other operators that are actively reaching out to people to find out who was planning on moving out at the end of the month, in April in May, and to find out what was causing that, and see if there was a way that they could find a way to let them stay.
Other operators are doing things like reaching out to residents to find out if they can't pay, do they want to defer payment for one month and then possibly spread those payments over the next 10 to 12 months to give them some leeway. I'm going to take the wait and see attitude and see what's happening with residents. A few residents have approached us and said they lost their job and they won't be able to pay their rent in April. For some of these people, we're reminding them that they can file for unemployment, and share where some other local employers might be hiring, and also realizing that they're most likely going to receive stimulus checks and unemployment checks faster than they would otherwise. It'll be a balance to see how we have those conversations with with our tenants. To understand the people who are really struggling versus people who are just using this as an excuse to not pay rent and not have to deal with the eviction process during the time that the courts are closed.
Reality is starting to sink in as tenants don't pay rent, some tenants are saying they won't pay rent for at least 4 months. Some investors are saying that the most realistic datapoint will actually be on May 1st.
We are working through lots of loan reworks as well as lease amendments are being negotiated. We're interpreting the CARES Act that was recently passed, updating all of our tenants on what they can apply for through the SBA and really trying to dial in on the loan forgiveness for April and May. So that has been a huge initiative of ours. We've a lot of legal documents and collaborating with other like minded folks across the country to figure out best practices. We were under contract in a deal, thank God, our money didn't go hard. We got in front of this guy a few weeks, we asked for an extension. But we are seeing some slowdown in CMBS and that was one of the vehicles that we were going to use, which required us to pivot a little bit and rethink this. A good friend of mine in the space, circulated a funny email and it was outlining what happened in the 1980s during the Savings and Loans crisis. Trammell Crow executives were sending memos to one another and the same message was sent over and over again from some of the best guys in the business: not getting over leveraged, staying lean and focused, hiring the right people, and just really doubling down on the fundamentals of the business.
We are patiently waiting on the sidelines with cash for Q3 as they think Cap rates will go even higher and there will be more advantageous opportunities. At that point, hopefully we'll see how a lot of these retailers have been furloughing their staff, how the SBA processes works for them, and there are going to be some real winners and some real losers in that space. I think the e-commerce onslaught is going to exacerbate a lot of the issues a lot of these retailers are facing. We're excited about the opportunities that are going to come in the next 12 months or so.
I did survive the 2009 crisis, and was heavy in real estate when that happened and watched a number of people get wiped out. This is very different, it's not the same at all. But this is interesting times. I'm not a typical value add guy. I've worked in all spaces, I'm hearing from people all over the country in all different types of properties in different classes and with different challenges and different issues right now. And the one common theme is it's too early to tell really anything, we just don't know. It depends on how far and how deep this goes. We do know that the capital markets are a little tight right now, and the rules are changing daily with that, in terms of what they're asking for and covenants and reserves. And they're getting down now to where they're underwriting specific assets and specific markets by the street and block on refinances, and especially cash out refinance, and acquisitions. So the credit markets are getting very interesting.
The debt markets with Freddie and Fannie are still active, but the spreads are growing. So we're not sure the real effect will be. We all do expect cap rates to rise here in the interim, but a lot of sellers have pulled back and just said that they're going to wait it out. There are some transactions that were in the pipeline where people unfortunately had hard money at stake and the rules changed midstream. So if you had a loan in process, all of a sudden your guidelines change, your covenants change, and your requirements changed. People were having to come to the table with one to 3 million extra dollars for reserves that they weren't planning on. And some of their investors were backing out.
So there has been a lot of challenges out there. But what I've told everybody is relax. The sellers aren't going anywhere. The buyers aren't going anywhere. Your investors aren't going anywhere. Everybody's just in a wait and see mode. How far is this going to go? How deep is this going to go? And how long is it going to last? And what is the real recovery going to look like? So for me, from an opportunistic standpoint, I'll be a buyer in Q3/Q4. I was getting ready to do four $30 million hotel deals ground up last year. And when the construction costs came back, I tabled those projects. And I'm glad I did now, we would have been coming to market here probably in the fall with four brand new 132 room hotels. Very lucky there, dodged that bullet. But it's very interesting times, it's very different times.
Make sure to have lean, focused, disciplined operations, keep your capital ready, this is the time to be raising capital and getting it ready to call so that when those opportunities do come up, you can strike. There will be opportunities to leverage your balance sheet and get involved in deals and acquisitions on an equity capital side with companies, as well as real assets. And there's also going to be an opportunity to come in and inject some liquidity into some deals and gain equity that way, as well as intellectual capital. So there's going to be a lot of people that need your expertise and your help, so just be patient. Be ready. And don't feel like you have to do anything right now because we just don't know what and when this is going to end.
So that kind of puts me in a bit of a unique category because this virus is sort of the angel of death for my clients and my staff. So that definitely gives me an interesting perspective, both from the human costs and also from the sort of the business perspective. We also do some build to rent townhouse projects. So we we develop those as well. I think anybody that sees the current situation as an opportunity is probably underestimating the virus, at least as it's going to take hold in the United States. And the one thing I have seen pretty consistently, is everybody that has underestimated the virus has paid a pretty heavy price. The Health Minister of Iran for instance called it just the flu. He caught it. And so there are a lot of examples of people being wrong about this. And so my approach really is definitely trying to stay a week or two ahead of what's happening.
And I think there will be there will be some some buying opportunities. But until we get comprehensive testing in place, until we have a viable mitigation strategy that doesn't tank the economy at the same time, my anticipation is that anybody that buys will buy early. The other piece of the puzzle for me is right now cash is king. But pretty soon cash is going to be trash. So we're in this really weird situation where people are going to literally transition from being "I need all the cash I can possibly get my hands on" to "Let me get rid of every piece of currency and every piece of cash I can get rid of because I don't think we are going to live through a more inflationary period in which you have a lot of currency injected into the system and lack of supply so you have lots of extra money competing for less goods and services". I can't define inflation more clearly than what's currently happening. I think that it's going to be interesting to see how cash gets deployed in the coming environment.
Multi-Family and Student Housing (Operator and Developer)
A lot of researching, a lot of anticipation. Strategizing about April 1, and 2nd. We do have a lot of low income tenants, and student tenants. I anticipate a lot of challenges in different ways. A lot of these people go from paycheck to paycheck, and they're not going to see a paycheck for two, three months depending on how long this will last. So I do anticipate a lot of collection issues in the next couple of months. I don't worry that we're going to lose our properties. But it is a question as to how long it's going to take for our properties to recover that cash outflow from collectible rent, because we do have pretty stringent eviction laws even when it is not under moratorium. And a lot of people do take advantage of that. And it is very costly for us to go through the process. We do anticipate a lot of challenges. And we'll be keeping an eye out for opportunities, which I do think will come as well. But for the time being, I think there's going to be a tsunami of documentation work in keeping up with rent collections on each property that we manage.
Multi-Family We had two sizable deals that we were doing raises for, one of which was very close to the closing table. That fell part. We went through the exercise of notifying and communicating with dozens of investors. I didn't know what to expect, I thought people would pull all their chips from the table. And that actually wasn't the case. We actually saw a lot of appetite and people still want to deploy cash, which is really great to see. I don't necessarily think there's going to be anything to move on right away, but it was really cool to see that. I sent out the notification a few days ago to investors to say that this deal is dead and that capital is going to get returned. And an investor responded "That was a really hard email to send. I really respect the fact that you sent it and you guys showed up spectacularly". It's in those moments where you realize that everything is going to be okay. I think they are sunny skies on the other side of all this, it could be longer than we all would want to hope. But I think there are a lot of people interested in jumping into deals when the right ones come along.
Multi-Family and Senior Housing
We are currently raising for a senior housing facility. We are still planning to close on the facility in two weeks, but we definitely saw some investors who had signed PPM's and were ready to wire funds, back out. And some of them were just concerned because of how the market was behaving, and some of them lost significant amounts in the stock market. They now want to hoard cash. But our lender still believes in the deal and the seller now has agreed to carry about half a million at second position for 8% interest. So we are still continuing to close on that deal. But other than that, I'm going to be in a wait and watch approach. I had about couple of other deals come by my desk where they were asking me to raise the capital. But I had to say no, because I want to wait and see, because I do anticipate some more deals appearing in Q3/Q4. The recovery is either going to be a V or maybe a hockey stick kind of recovery. On my one of my largest multifamily syndication, we are definitely anticipating vacancies, or low rent collections. So we have decided to not make any distributions to investors for the next six months.
Senior Housing, Hospitality, Multi-Family (Developer and Operator)
We are in an environment where the rules have changed and we don't know what they are. Until we know what the new rules are, it's going to be very difficult to play the game. Oftentimes you see people trying to play a new game by the old rules. And if they do, they'll get crushed. It really is like no other game. We're trying to do something that's unprecedented. Governments are trying to do something unprecedented, which is to try and put the entire economy into a coma for a period of time.
The one thing that makes that entirely impossible is debt. Because debt affects cost. The more leveraged you are, the more at risk you are. And we know that governments are going to helicopter in as much money as they can. But it's all based on assumptions. And the question is, are those assumptions valid? So much of the rhetoric is based on the assumption that we're facing something that's measured in weeks, or maybe a small number of months that you can count on one hand. I'm not sure that's true. We don't know the extent of this. Until we know the depth and the extent of it, and more importantly, who's going to fall through the cracks? The Federal Reserve is doling out money, but they're not sprinkling them uniformly. Out of the $2 trillion that was just passed, there was over 400 billion in a category called "other". I wonder what that is. Who's going to be the beneficiary of it, where's this money going to appear? We know that some of it is going to go into mortgage backed securities, which theoretically is going to help a portion of those that have money that's backed by one of the agencies, either Fannie or Freddie.
It's time for all of us that have assets now, to be taking a little bit of a defensive posture, making sure that we do leverage where possible, making sure that we conserve cash. If you don't have a lot of assets, and you've cash, at the right time you will be well positioned to jump in and get some amazing bargains. But that's not for some time to come. My feeling right now is that we are looking at two years of very steep decline in economic output. The initial estimates that I've seen for this quarter, suggested a drop in GDP of about 30%. And that the efforts by the government to mitigate that will cut that maybe in half. So we might be seeing a reduction of 15 to 17% of GDP this quarter. But we don't understand the full depths of leakages in our economy and how these all play together. George Ross said it quite well, if one person has a problem, and they default on a loan, then they have the problem. If millions of people have a problem and default on their loans, then the banks have a problem, and the government has a problem. The question is, how do you make sure that you don't fall through the cracks in that entire process? I think there will be another opportunity coming up in the not too distant future. But in the meantime, we've got to help a ton of people going through a tremendous amount of pain, and in every description, personally, familiarly, financially, socially. In times of crisis is the time that execution matters, my focus is more on the execution than on hunting for deals at this point.
Multi-Family Operator and Broker What has changed is that my time was always spent on brokerage and very little on asset management. I had staff doing that. I was relying on the property management company, and that has completely shifted. Right now brokerage is dead. I closed three deals last week and the rule of the game has changed at the last minute. I had a client that had a property closing tomorrow and Fannie Mae came back and said, "We're not going to close, now you need to put up $600,000 of reserves". So they had to scramble over the weekend to find that money. Now I have two pending deals for the end of the month that the odds of them closing are very slim. The challenge has working with some listing brokers, they're still living on cloud nine and thinking that nothing has changed. But no, everything has changed, even though we don't have the data yet as far as people not paying rent, we're going to start to have that within the next week. I'm encouraging them to buy a little bit of time, 10 days from now we can come in a much stronger position to either renegotiate or walk from those deals.
The challenge has been that they have $100-$150,000 of hard money, it's a very tricky situation. I feel very fortunate to not to be under contract right now. I've gone from believing this was a hoax and thinking that nothing is going to happen to good old America, to having a full swing and being on the other side. I also think this will take about two years. It's not going to be business as usual. I'm going to see a lot of people losing assets and properties if this goes for much longer. Surprisingly, though, a lot of people are paying rent. A lot of the C class tenants that we have are working in warehouses, grocery stores, cleaning, and they're actually been working over time, 14 hour days. No one really knows what to expect, I'm preparing for 50 or 60%, of rents, anything that I get above that, I'm going to feel very fortunate. As far as looking at the market, I am focusing on maintaining my assets, the rules are changing every day. Most of the brokers that I work with are on a holding pattern and just waiting to see what's going to happen.
Office, Medical, Industrial, Retail, Multi-Family (Asset Class Agnostic)
The first thing we are doing is minding our own house and understanding what, if anything can we do to improve our position with any of the assets that we own. That starts with taking advantage of any deferred payment options or forbearance that any lenders are providing. And then from there, we are seeing if we can create what might be a win win situation with our tenants, and up until point it has been commercial tenants. We haven't yet seen any data from any of our multifamily properties. April will of course be a big month. For our commercial tenants, for instance, we have some medical office tenants like dentists, dermatologists, physical therapists. And those businesses are shut down just like most traditional retail. Interestingly, we have tenants in other parts of the country like in the southeast, where we actually have had a little bit less immediate concern from some of our tenants in those other parts of the country. I think they will feel the pain in the first part of April. But what we've offered proactively is we will suspend rent payments for the next three months and we will amortize that rent amount over the balance of their remaining months in the term of your lease. It gives tenants an immediate cash flow relief. Luckily, we're well capitalized on each of our deals. That was part of our conservative nature, we try to have more cash than we ever think we're going to need. And luckily, we're in that position. So we're able to offer something like this, even if there isn't a deferred payment option from a lender. And we're seeing mixed responses, a third of our tenants have immediately accepted that offer. And two thirds of them have said that they're working through the SBA loan process and understanding what their options are, so they'll respond in a week or so.
It was important to be proactive and reach out to our tenants, it's not a very fun conversation. But if I'm a tenant, I want the landlord to reach out to me, and potentially offer a solution. We are continuing to look for acquisition opportunities, but proceeding with extreme caution. We have two deals in contract. One of them has some pretty lenient extension options. And the other has an early May closing timeframe. We're candidly just trying to figure out what to do.
One of the properties is an industrial flex in a great market, with strong fundamentals. The question is, what is going to change here and to what degree. We're still in contract, but being very, very cautious with how we proceed. We're also refinancing a couple deals and that is changing daily. And appetite goes up and down very quickly. I just don't have much confidence in anything until it is executed and locked. And I think that's a tough environment to do business and to take risks.
Mobile Manufacturing Housing (Operator, Construction, Insurance) We felt that because of the speed at which everything is moving, action was needed to be taken faster rather than slower and it was our goal to came up with some core values, which is basically protect the team, the investors and the assets. What that means is you have to cut deep but not so deep that you're going to impact the ability to protect the asset and protect the investors. Cash is king now and moving forward, so you stop all capex spending, unnecessary maintenance, and make these adjustments as you go. We laid off an entire construction team that we had mobilized because we saw the writing on the wall with a lot of these stay home orders, and the necessity to get them back to their families and not be locked down and in a small community away from them during this. We also saw the fact that we didn't need to be sitting on a lot of inventory for the next couple of months. It didn't make sense to have those just sitting and waiting.
Communication is key, even over communicating The wait and see idea is probably going to be more detrimental to you than reaching out and talking to your tenants, investors and partners. Making sure that they understand what actions you're taking and where you're going. We have reached out to 70-80% of all of our tenants, out of all our tenancies, we only have at this time about 25% of people who actually need some assistance. We have a process that we put in place, it's important that you have a standardized process. I don't think in times of crisis, you want to create policies, but definitely an emergency response process. We sent that down to our regionals and down to our managers that are in the communities themselves. And part of that is we need a voice conversation with each and every tenant, we need to let them know that times are tough, and we understand that they're going through some hard times. And if they need help, then we need to know about it sooner rather than later. We'd rather help them now then have them default or fall behind on payments. We also instituted some incentives for paying their rent. Food and rent are the biggest expenses and most people don't want to move. So how do we make sure that we're getting paid even with some of these moratoriums on evictions and things like that? We instituted a lottery system where people could win 25% off their current rent if they paid by the third. If they do that three months in a row, they could win a free space rent, or lot rent for that month. What we didn't want to do is over incentivize and collect 70% when we could have collected 80% or 85%. We're trying to be careful with that. But we've waived all late fees, we've waived all transaction fees, application fees, and we've actually seen a surge in applications and sold three homes just this week, and we've rented out four other ones. We don't have enough data to know if that's a trend that's going to come or not, but it's definitely positive.
The biggest thing is making sure that you're staying positive with your team and communicating with them on a daily basis, because this is stressful for them as well. And they need to know that you're there for them to help and support too. We also paused all acquisitions. And a lot of that has to do with the fact that we just don't know what's coming down the road, we don't know how long it's going to be. So we're planning for long term and hoping it's short term. But the way we see it, a T12 and what's current right now is not going to tell you what the next 12 months are going to do. It's, it's going to be drastically different. The world is going to be different on the back end of COVID-19, which is just the straw that broke the camel's back. We're holding out, we're still optimistic that by the end of the year, there's probably going to be some larger portfolios that are underwater and need to be acquired and we're going to be in a position to do that. As it sits right now, take take massive action quickly. But it's surgery. It's not lumberjacking. Don't cut too deep that it's going to hurt where you're going. And then just make sure that you're checking your expenses, your income, and staying on track of that. Protect the team, protect your asset and protect your investors. I think that's really where the focus comes in on what's truly important.
I think we don't know the rules right now, what's happening and what's coming ahead. We just don't know what we don't know at this point. This really is unprecedented. I don't think there's anything that we can look back in history that can even equate to this. I've seen a lot of people looking at what happened with SARS in the early 2000s. Forget about it. We're long past that, maybe two months ago if we had gotten ahead of it we could correlate to that, but that that ship has sailed. Shifting the mindset from profit seeking to capital preservation is really the big one. I syndicated a medical office building about two months ago. And we made the decision to just put that project on hold, we're in a position where we haven't broken ground yet. We can delay things for quite a while without accrued expenses. And if we look at things two months from now, and the project doesn't seem viable, then we can return investor money, we cut our losses, and we could have little to no loss for the investor. It's better to not lose money than to actually take a loss. Although with medical office, I do think there's opportunity there, we could be in a really good position with our project to capitalize. I think we're going to see a big demand in medical office, as we come out of this. It's going to take a little bit for that to present itself. But I think as we go into recovery mode, once we are out of this, the medical sector is going to see a huge boom. They haven't had a losing year in growth since 1975. And medical hasn't seen a losing month in terms of growth in over 20 years. I was bullish on medical coming into this project. Coming out of it once we get through this, I think medical is going to be a really good place to be. I have already heard some people looking at buying traditional office space, which is probably going to be the worst hit, and converting it to medical office building. I'm definitely bullish on that. It's just a matter of timing. We don't know when this is going to end, the longer we sit in this quasi quarantine period, the harder it gets to dig ourselves out. That's the thing to me that is really fascinating, the economic discussions, It's changing daily right now. And with the economy, you can't just snap your fingers and say, Okay, everyone, we're back on and expect this V shape recovery. Maybe if we stopped today, things could go back. But I think there are a lot of small businesses that are not going to make through this. And we're not going to see those jobs come back very quickly. The longer we stay in this, the harder it is to come out, and the harsher it's can be. So we'll wait and see how it will unfold from week to week, month to month.