Carter Multifamily and ExchangeRight Chime in on COVID-19 Effects on Alternatives Industry
April 1, 2020 | James Sprow | Blue Vault
We recently spoke with Lisa Robinson and Ray Hutchinson at Carter Multifamily and Warren Thomas and Joshua Ungerecht at ExchangeRight about the impact that the COVID-19 pandemic is having on their respective businesses and the broader alternatives industry. Carter Multifamily is just launching its second Reg. D offering to invest in multifamily properties. ExchangeRight has been offering DST programs for over eight years that invest in net-leased portfolios of single-tenant necessity retail. While our interviews covered a broad range of topics, including their longer-range strategies, we will focus here specifically on the current COVID-19 pandemic and its impacts.
Both Carter Multifamily and ExchangeRight have associates in various roles spread across the U.S. Executives in the companies can work remotely, while their teams continue to search for investment opportunities. Carter MultiFamily just closed on their first program, having raised approximately $176 million and investing in 22 multifamily properties. After selling one apartment complex, they now own 21 properties with just less than 4,000 units, all in the Class B and C categories. Their strategy of upgrading those properties, most constructed prior to 2005, is continuing, but the renovations they are doing to units in their value-add strategy is currently limited to those projects where materials are already on site.
ExchangeRight’s portfolios typically feature 20 to 25 necessity retailers in single-tenant properties. Those tenants are actually doing quite well in the midst of the COVID-19 crisis, proving that the strategy ExchangeRight has pursued, using what the founders learned from the global financial crisis of 2007-2008, is a sound one to preserve investor capital in difficult CRE markets. A typical roster in ExchangeRight portfolios will consist of corporate-backed retailers like Kroger, CVS, Walgreen Boots Alliance, Dollar General, AutoZone, Fresenius, and BioLife. These grocery, pharmacy, and healthcare tenants are not suffering the declines in sales and the risk of vacancies that other business types are experiencing. From their website, “When we founded ExchangeRight, we decided to focus on recession-resilient tenants with investment-grade credit in the necessity-based retail and healthcare industries. We could not have chosen a better asset class to protect the capital that investors have entrusted to us during the COVID-19 pandemic. As a result of the Coronavirus crisis, grocery stores, pharmacies, dollar stores, and other necessity retail and healthcare tenants are the only companies allowed to remain open and accessible across a growing number of areas throughout the United States.”
According to Carter Multifamily’s Ray Hutchinson, there is real uncertainty about the potential effects of government actions on apartment rental revenues as well as deal financing. Even though occupancy rates in the multifamily sector never dipped below 92% in the last financial crisis, this pandemic and the government’s actions to suspend evictions can have the effect of allowing renters to skip rental payments. Ray Hutchinson says, “The biggest question at the property level over the next ten days is “Are people showing up to pay rent?”’ On the investment side of the business, with the uncertainty present in the CMBS market, along with the difficulty of underwriting deals when rental revenues are riskier, it will be difficult to close new deals. Hutchinson says that “Fannie and Freddie don’t really want to do business right now.” For example, rate locks were normally allowed for 30 to 90 days ahead, but those are not allowed right now. “Some of the MBS participants were back in the market in the last few days but spreads were widening by the hour. There were just no buyers for the paper.”
Warren Thomas and Joshua Ungerecht at ExchangeRight also see the freezing of the CMBS market impacting sponsors of alternative programs. “Sponsors have to be nimble to be in the market,“ says Thomas, “being willing to do both cash and levered deals. Lenders are not going to be able to underwrite multifamily, for example. It will be very difficult to get a loan, and B/Ds will have trouble underwriting programs as well, and the B/D market will find it more difficult to pass the “best interest” test.”
The Principals at ExchangeRight may have a longer-term perspective on the current crisis. While they are continuing to raise funds for their 1031 net leased portfolios, they are also running a fund called Telos Capital, a Reg. D LLC that buys deeply discounted and distressed properties. That fund sold almost all its multifamily properties last year and is looking for new distressed and opportunistic investments that will certainly appear in this economy, with a time horizon of six to 18 months. Unfortunately, their view of the economic recovery is that it will likely take longer than we’d like, more of a U-shaped than a V-shaped recovery.
Joshua Ungerecht has some sound advice for financial advisors. Having gone through this type of financial environment before, he urges FAs to reach out to their clients. “Be willing to be there, let them talk through their feelings.” He says, “Phenomenal opportunities will be coming out of this, particularly in real estate because of its long-term nature.” By maintaining relationships with clients, FAs will both reduce liabilities and be able to deploy capital later.
Blue Vault will be providing more in-depth looks at both Carter Multifamily and ExchangeRight programs and strategies in upcoming articles. We also will be reaching out to other alternative investment sponsors to get their views on the current crisis. Despite the uncertainty and volatility experienced in the traded securities markets, commercial real estate has proven over time to be a valuable diversification for both retail and institutional investors.
