Highlights from Blue Vault Bowman Alts Week 2020: Day 4
May 7, 2020 | James Sprow | Blue Vault
The Blue Vault Bowman Alts Week 2020 virtual conference re-convened on Thursday, beginning with a panel discussion moderated by Jay Steigerwald of Ashford Securities: “COVID-19: Challenges, Outcomes, and Opportunities.” Panelists were:
• Catherine Bowman – The Bowman Law Firm
• Keith Hall – Pacific Oak Capital Advisors
• Bill Leitner – Leitbox Storage Partners
• Dan Shaeffer – Cottonwood
How has your firm been doing in the COVID-19 crisis so far? Cottonwood has collected 98% of its April rents, which has been a very pleasant surprise. Keith Hall at Pacific Oak mentioned the September merger of the two nontraded REITs, and so far the portfolios have held up well. Their hotel in New Orleans has had to close, but the hotel in South Carolina has reopened and had 80 rooms booked immediately. Leitbox has had no fall-off in self storage rent collections, perhaps because of their using 95% auto-debit collections.
Catherine Bowman says the NTRs are being challenged to handle NAVs and know how reliable they will be, and the implications for new investors. Dan Schaeffer says the multifamily sector has been very resilient, but they foresee a long recovery period. In the 13,000 units, they’ve only had 2 or 3 reported COVID-19 cases. For his staff, it’s been all-hands-on-deck operationally.
What kinds of opportunities do you see in the market right now? Keith Hall sees the traded REITs as having been heavily discounted. His REITs are not sellers in this environment. They have bought into certain listed REITs that have dropped 60%, seeing them as opportunities.
Bill Leitner is looking to see if the urbanization trend will be reversed. It will be interesting to see if the pandemic changes that trend.
What will it take for sponsors and BDs to feel comfortable with their NAV determinations?
Catherine Bowman feels it will take some time. The BD’s don’t have access to the same information that the sponsors have regarding valuations. It will take a lot of communication between sponsors and BDs. It is a risk management situation. With less transparency in the market, the BDs need to get better clarity and better comfort with what’s going on in the underlying market. The BDs are taking a deeper dive into the valuation processes to see if the NAVs are really reliable. Third-party valuation firms are having to use anecdotal information from brokers due to the lack of transactions.
How have the cuts in dividends and redemptions been received in the BD community?
Around 40% of the products have done something with distributions, DRIPs, and SRPs.
Catherine: Over-distribution has never been viewed in a positive light. While no one likes to explain to the investor why they can’t get their distributions or redeem their shares, in her view, they have probably been the prudent thing to do. REITs are required to distribute 90% to qualify as REITs, so in the case where they haven’t had a disruption income, they may have to make it up at the end of the year, which may provide an opportunity.
What has Cottonwood’s strategy been for deployment of capital over the next two years?
Dan: Construction lending has been much tighter. A lot of deals that have been near completion are having trouble getting financing. They are looking at deals where they can feel comfortable owning the real estate and doing the lease-up or taking it over. They like that they can do the deals at high returns. He doesn’t think there will be a lot of assets changing hands, but a lot of deals for re-financing. High quality developments are still out there. Construction costs have come down. If you can knock 5 to 10% off the cost of the project, that’s an advantage.
Jay: What about the prospects for inflation? Can rents actually go up?
Dan doesn’t see inflation in the near term. They are already seeing some supply chain issues. Values are down so that suggests some deflation in the near term. If you can get a lower cost basis in the ground it’s going to be an advantage over the next few years.
Jay: Keith, are you going to be incorporating things into the new deals going forward?
Keith: There are lots of things you’d like to do, but you aren’t going to be able to do. In office, there’s the idea that everyone is going to be working from home, but he sees the possibility of tech tenants using more square feet per employee. Buyers and sellers have different views right now. We won’t see a lot of transactions over the next quarter or so. There are opportunities in the debt space and in the distressed space. We do see a lot of opportunity in the for rent single family space. We do workforce housing investment and some of the smaller owners are wanting to get out, so they are going to be raising capital for investments in that space in the near future.
Bill: The Leitbox strategy is a niche or sharpshooter approach. The opportunity that he sees is situational. He is looking for assets that are near lease-up that need recapitalization.
UMB Bank
Vincent Quealy and Staci Walls presented for UMB.
UMB has total assets of about $26.6 billion, deriving about 39% of their revenues from fees. They are a national firm. Their institutional custody covers every market segment. They have a high-touch relationship manager, with a client relationship manager assigned at onboarding. UMB has provided custodial services since 1948. They have no off-shore processing, with all processing handled in Kansas City. They can integrate with all accounting platforms in the alternative space.
Stacy Walls in Alternative Investment Services mentioned that UMB has had no furloughs or layoffs in the pandemic. As a national leader in mutual fund and alternative services, they have $253.8 billion in AUM.
They have experienced teams with long-term tenure. Their technology sets them apart, with highly functional web portals. They do electronic documentation and tax reporting. Their proprietary AltPro – Web Portal is fully functional in mobile. They say they are “Big enough to matter, small enough to care.”
The Entrust Group
Mindy Gayer presented for The Entrust Group.
The Entrust Group provides a comprehensive advisor portal to manage their client’s alternative investments. They integrate with money management platforms and tools and accurately identify the sources and types of returns associated with each type of investment. Entrust can collect and payout advisor fees, can conduct transactions on the client’s behalf, and advisors can receive all information on the client’s account.
Mindy identified all of the different IRA, HSA, and ESA plan types, as well as 401(k)s that Entrust manages, as well as all the varied alternative asset types that are allowed in IRAs. She went on to identify prohibited transactions and the parties to those transactions, as well as acceptable transactions, including real estate.
BNY Mellon / Pershing
Avila Sukhram presented for BNY/Pershing.
She started off with typifying the current environment with the acronym “VUCA,” characterized by: Volatility, Uncertainty, Complexity, Ambiguity.
BNY Mellon has a 230-year history and Pershing is today the #1 U.S. clearing firm and the world’s largest custodian.
She emphasized the need to provide holistic wealth management solutions. Investors expect their advisors to be involved in all of life’s events. According to surveys, 75% of clients say they want holistic advice, but less than half are currently receiving it.
62% of advisors are focusing their technology spending on integration. 45% state that improving the client experience is their #1 goal. 37% say their biggest challenge will be implementing technology.
They have associated with iCapital, CAIS, and Artivest and integrated with them to provide an automated subscription process, transparency & flexibility.
Going forward she said, “VUCA 2.0” will be: Vision, Understanding, Courage, and Adaptability
Panel Discussion: “Technology in Alternatives – Why Now is the Time to Implement”
Angie Fisher of CIM Group moderated the panel of:
• Megan Bosch – WealthForge
• Chris Shaw- SS&C ALPS
• Brad West – AIX
• John Yuhas – KALOS Capital
This topic was important prior to COVID-19, but it is now even more important.
With COVID-19, what indicators are telling you that now is indeed the time to implement?
Megan: COVID-19 has accelerated the process. We have alternatives that weren’t available several years ago. This has made remote work an absolute necessity. The options that are available are proven and COVID-19 has given us the sense of urgency. A lot of custodians are also wanting to participate.
Chris: We’ve seen that we’re able to do it. We’ve had the technology for a number of years. The problem was we had compliance and risk officers telling us we couldn’t do it. COVID-19 has shown that we can work in this environment. Some of the considerations that were impediments have been proven to be not as critical.
Brad: Intuitively people know that there is a better way to do business. This has created a sense of urgency and a sense of necessity. Because you can’t be in the same space with a client, and there are a lot of risks in paper processing in the same environments. If you want to protect your employees and your clients you have to find a new way of doing business.
John: We’re seeing that our advisors and reps are now willing to take on the technology. Also, custodians are adopting technology in a matter of days. I don’t see it leaving anytime soon and this is the way it’s going to be moving forward.
Angie: How are we going to motivate the industry to move on this?
Chris: The technology is there, it’s really a matter of advisors and BDs comfortable with it, comfortable with the risk profile. I see the risk in the new environment as being less than with paper. Getting past that risk component and getting advisors more comfortable, will eventually drive down the cost.
John: The biggest component is the cost of it. As you get economies of scale you will be driving that cost down. We would like some kind of standardization. Ultimately, it will lead to just a couple different players in the market.
Megan: Shifting your mindset is the most important. Risk is actually mitigated in this. We do need to do a better job of this. Look at the cost of not implementing the technology and the savings on other costs associated with paper methods.
Brad: There was a misconception several years ago. When we talk about straight-through processing it means different things to different people. It’s more than just investing. You need to look at the ownership portion of the life cycle. You need to be aware of all those issues, like redemptions and tenders and maintenance transactions. You can address every one of those value points.
Question: What might be unique at the BD level for consideration?
John: Our biggest thing right now is making sure the advisors and their clients understand the technology. The mature clients are now comfortable with the technology and adoption at high levels.
Question: Chris, what key indicators are you seeing shifting in your business?
Chris: Over the last few months we’ve seen an acceleration of our advisors asking for digital solutions. The appetite and indicators are coming from both sides. Asset managers, custodians, etc. All have accelerated at all levels.
Question for Megan: what is the biggest misconception regarding adopting the new technology?
Megan: We can accommodate the existing processes, we are not going to ask them to change their processes. It takes very little time to get oriented. We don’t have a help button because you are not going to need it.
Brad: It’s a difference between incremental progress vs. geometric progress.
Angie: Asking each one of our panelists, if there is one statement that summarizes the reasons to implement now, what would it be?
Brad: There’s an opportunity to do something really meaningful to help the business and the industry.
John: Now is a perfect time to do this.
Chris: I don’t think now’s the right time. I think five years ago was the right time, but now is better than never. A lot of industries are adopting this, like buying a house. Why not have the infrastructure in place so that we can do what we should have done five years ago?
Megan: The time has been now for a time now. COVID is just the pressure we needed to make a behavioral change.
Pacific Oak
Keith Hall presented for Pacific Oak.
Pacific Oak Strategic Opportunity REITs I and II will be converting to a continuous offering NAV REIT structure. Going forward the goal is to provide even better liquidity. StratOP 1 and StratOP 2 will merge in September. The Go Shop period is completed. They will convert to the NAV structure under Pacific Oak Strategic Opportunity REIT rebranding. To make it more after-tax efficient, investing gains in a QOZ fund will create completely tax deferred total return. All the QOZ fund values will be reflected in the NAV going forward. The REIT will be pursuing a multi-sector, deal-by-deal strategy, with a short-term hold of 2-3 years. It will maintain low leverage of 45% – 55% and target mid-teen returns.
Pacific Oak Residential Trust bought REVEN, a 993 SFR portfolio in 6 MSAS. Every month rents have gone up. Average homes are $120K, with average rents of $1,020 per month. The plan in the future is to be a portfolio aggregator in the single family rental market.
Pacific Oak completed their first DST last year. Hall: “The trouble with all markets now is you’re not going to find any practical adjustment. Sellers aren’t selling where buyers want to buy.“
Question: With the assets in StratOP taking a hit, will you be revising the merger price?
Hall: If you were to re-price, assets in StratOp (hotels), StratOP II has land, if you go through the comparisons, there is very little adjustment in the stock-for-stock ratio.
Carter Multifamily REIT II
Ray Hutchinson and Lisa Robinson presented for Carter Multifamily REIT II.
The strategy for Carter Multifamily REIT II is to buy Class B and Class C. These are typically owned by mom and pop operators. In many cases they’ve never been updated. They invest CAPEX in these properties and install professional management. They can bump rents about $120 per month.
The offering is a REG D for up to $200 million, with $50K minimum investments. They offer an early investment discount which can increase early investor returns significantly.
The experienced team has gone through many economic cycles, with transaction experience managing $76 billion in multifamily properties and portfolios totaling more than 950,000 units, and developed over $1.3 billion in multifamily projects.
According to Lisa, 50% of apartments were built before 1980; there are still a lot of regional owners, mom and pop owners; the REIT brings in professional management, will focus on interior improvements, and can track back to revenue enhancement.
The demand for housing will never go away. Multifamily continues to perform.
There is and will continue to be a critical shortage of housing. Deliveries have been in Class A. That is the only product that you can develop economically. The bulk of the demand is in the affordable product. Carter Multifamily’s product after renovation is about $1,000 per month. The tenant base is primarily made up of typical working people making an average of $37000 per year who can afford $1,000 per month.
Occupancy has never dropped below 92% since 2000. Even during the pandemic.
The nation will need 4.6 million units only 247,000 units were delivered per year from 2009 to 2018. About 100,000 units are lost to obsolescence annually. 51% of the existing stock were built before 1980. We are going to have a severe shortfall.
Day 5 Agenda
Presentations for BDs and RIAs on Friday, May 8, include:
• Inland Real Estate Investment Group at 11:15 AM
• Legendary Capital at 11:50 AM
• CIM Group at 12:25 PM
