April 16, 2020
ExchangeRight’s Strategy Is Right for Times Such as This

ExchangeRight has been sponsoring 1031-exchangeable DST offerings of net-leased portfolios since 2012. Blue Vault recently interviewed Warren Thomas and Joshua Ungerecht, Managing...

ExchangeRight’s Strategy Is Right for Times Such as This

April 15, 2020 | James Sprow | Blue Vault

ExchangeRight has been sponsoring 1031-exchangeable DST offerings of net-leased portfolios since 2012. Blue Vault recently interviewed Warren Thomas and Joshua Ungerecht, Managing Partners at ExchangeRight, to find out how the company has been successful at dealing with the current crisis. What we’ve learned is that the strategy they’re pursuing was really born of their experiences in the last financial crisis and the “Great Recession.”

Joshua Ungerecht started out our discussion with his views of how the partners’ experiences have guided their approach to the current crisis.

“We have been preparing for quite some time for a recession, and for a crisis.  We’ve felt that valuations in the market have gotten really overstretched.  Everything that we’ve been doing has been really built around the concept of structuring offerings that would be recession-resilient. Because of that we’ve been focused on necessity retail and healthcare tenants that are investment grade, that have long-term leases where they’re obligated for all the operations, property tax and insurance, and the rent payment.”

“Though we were preparing for a recession, we don’t want to pretend that we had any idea that there would be a pandemic crisis like this. In many cities and states, where most other businesses are closed, our tenants are primarily pharmacies, groceries, dialysis, healthcare, and because of the nature of their businesses, they are remaining open, even in those states and cities where just about everything else is shut down. Not only are they remaining open, they’re experiencing record-breaking demand, primarily driven by the fear that everyone is experiencing.”

“Nobody really knows how bad it can get, and they’re obviously facing quarantine situations and shelter in place situations, so all of our tenants are experiencing tremendous, record-breaking demand for their products and their services, and they’re rising to the occasion and they’re drawing upon their logistics infrastructure to meet that demand, to re-stock.  And then in many cases many of the same tenants are drawing upon the same logistics infrastructure to help fight the Coronavirus.”

According to Ungerecht, a typical 1031 program portfolio (they are now on program number 33) would consist of necessity-based retail.  “The typical portfolio, just to give you an idea, would be a combination of a Kroger, several CVS’s, several Walgreens, several Dollar Generals, possibly a couple Auto Zones, a couple Tractor Supplies, a BioLife, a Fresenius, all tenants investment grade or otherwise creditworthy national tenants, all corporate-backed, leases typically anywhere from 10 to 20 years, weighted average lease term is going to be 12 to 14 years per portfolio.” We noted that even their healthcare-oriented tenants are recession-resistant.  Fresenius is a global dialysis provider and BioLife is a plasma company, a major international company owned by Takeda Pharmaceutical. 

Warren Thomas, CPA, who co-founded ExchangeRight after observing that his clients needed better choices for their 1031 exchanges, explained their investment strategy in simple terms. “We only do necessity retail.  We don’t do malls.  We only do stand-alone boxes.  We’re not concerned about a Papa John’s going out of business in a shopping center.  We don’t buy that building, or the entire shopping center. We’re only buying the grocery store in the shopping center or adjacent to it.  We don’t have any co-tenancy go-dark risk.  Our tenants still have to pay if an adjacent tenant goes dark. We’re really very well protected that way.”

Joshua Ungerecht shares their history lesson.  “Warren started in this business in 2002 and focused on the retail advisory side with clients. I joined him in 2006 on the due diligence side, and then became partners with him in 2009, and then we went through the Great Recession together, and when we came out the other side, the scars we got from the Great Recession, watching how all the other sponsors handled their investments, that’s really what’s shaped us and shaped our philosophy in terms of what kinds of investments we were going to be investing in in the future.”

Warren Thomas shares that perspective.  “When we started in 2012 we were building our first portfolio it was Portfolio #1 and we’re now on Portfolio #33, and we tried to re-build the product taking into account the pain of the last recession.” That meant reducing the leverage in a typical offering.  “When we were doing debt portfolios [we brought] our debt in at a 53-54% level rather than the old 63% to 68% stuff prior to the old recession. And then we would do a portfolio approach, so it’s very typical for us to have 20 to 25 properties in one DST, and those properties would then be blended with all those necessity retail, with long-term leases in place, and then we utilize very modest debt. We now have 675 properties across 38 states. By 2015 we were the third-largest sponsor in the space, and out of more than 50 offerings, we have never had a missed or lower than projected cash flow payment to investors– it’s indicative of the way we’ve been building, the type of tenants we’ve been willing to buy. Although we don’t know what to expect in the future, we expect the tenants to be able to pay their bills because of the type of tenants we have.”

ExchangeRight has also been able to pass along a higher percentage of commissions to broker-dealers. According to Thomas, “We’ve had an advantage on the commissions.  We’ve been able to pay the broker-dealer community more because we haven’t needed the managing broker-dealer services that most of the other sponsors build in. They typically build in 2 to 3 points, we’ve been able to do that at ½%, so we’re able to be at the same commission level or lower and be able to pay the B/Ds more. They can then work with their reps and get more net.”

Ungerecht also has some advice for financial advisers on how to deal with clients in this very unusual economic environment:

“I think one of the things I’d want to share, and this would be to the benefit of all the advisers out there and reps.  Warren and I have gone through this before. We’ve gone through the great recession and our experience has taught us that, as painful as that is, we want to encourage the reps and the advisers and the broker-dealers out there, and the RIAs out there, to reach out to your clients. Be ever-present.  Be willing to have the difficult conversations and be willing to just be there for as long as they need you to hold their hand and to talk through whatever it is that is causing them to be nervous or scared.  And there will be opportunities.  There will be phenomenal opportunities on the other side of this.  So those advisors and those reps who are willing to make the investment of time and the emotional outlay of dealing with frustrated, possibly angry and scared investors, there’s just the most phenomenal opportunities.  Particularly in real estate, particularly because it’s an inefficient market, there’s just fantastic opportunities that come on the other side of this. If they can keep their investors calm, if they can keep that relationship strong, they greatly reduce their potential liability, and they greatly increase their ability to work with those same clients to redeploy capital a little bit later.  For example, if they were positioned into apartment buildings or student housing, or discretionary retail, they are going to probably go through some pain. But I think if they can do a good job of being present for their investors, they can get to the other side with those investor relationships intact.  And then there’s a lot of goodwill that comes from that, that they can then turn that into an investment and a really great opportunity.”

Sound advice from a program sponsor that has learned from the past and prepared well for a time such as this. 


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