Roundtable Discussions: Real Estate Investment Deals In The New World Of COVID-19
In modern history, few events have shaped the course of the world like the COVID-19 pandemic. Every societal norm, from shaking hands to eating out in a restaurant, has been shifted, and the economy remains as uncertain as ever. It's like living in a zombie apocalypse movie, except instead of zombies we just have everyone wearing facemasks.
The Stoics would have us believe that behind every challenge is an opportunity in disguise. For real estate markets in particular, the numbers paint a difficult picture: downturns, defaults, price and value drops. But if true, where exactly are the opportunities?
Our attorneys sat down (virtually, of course, because we're practicing safe social distancing) with some key syndicators and investors in real estate who had a lot to say on the topic.
Our Panel:
Sergio Altomare is the Co-Founder and CEO of Hearthfire Holdings, a boutique real estate private equity and property management company based in the Philadelphia area. He positions their firm as a "wealth-building factory," as they work with new and seasoned real estate investors to build and grow wealth through their unique model that spans education to passive investing.
Patrick Dunne is the Director of Investments for ALX Real Estate. ALX is a private investment firm focused on value-add multi-family and ground-up townhome developments in Texas.
Logan Freeman is the owner of LiveFree Investments and Co-Founder and the Chief Marketing Officer of FTW Investments. Mr. Freeman oversees the company’s capital outreach, capital stack, investment strategies, and on-going investor relations.
MWL: So, tell us – how bad was it, really? What was your biggest challenge with respect to your business/industry?
Sergio Altomare, Co-Founder and CEO of Hearthfire Holdings: We believe that the market is full of uncertainty and has become stagnant in many respects. Real estate buyers and sellers are very far apart in valuations because there is a lot more time needed to determine the breadth and depth of the economic and real estate fall-out as the economy opens back up. The uncertainty has also impacted lending and financing, which is all over the place in terms of underwriting and valuation processes.
Patrick Dunne, Director of Investments at ALX Real Estate: For a number of reasons it wasn’t as bad as initially thought. As far as multi-family properties are concerned, the fears quickly became will tenants be able to make rent and will there be tenants who take advantage of eviction moratoriums. Our portfolio was largely spared from these concerns, driven by a couple of reasons. First, I think many underestimated the impact of the increase to unemployment payouts. For renters in Class C apartments where rent isn’t a big dollar figure, that’s a huge inflow of cash that enabled them to stay current. Second, the strength of the underlying Texas economy cushioned the blow compared to other parts of the country. Texas makes up almost 9% of GDP, but unemployment claims are only about 5% of the US total. The businesses closing permanently are the ones who already had underlying problems. That’s exactly what an economic shock does: it magnifies existing problems. With Texas, and especially DFW where oil and gas is less impactful, the contraction has been less severe because of a more solid economic structure.
Logan Freeman, Owner of LiveFree Investments; Co-Founder and CMO, FTW Investments: The pandemic has shown us our vulnerabilities in our business, we use this time to be self-aware and figure out what we needed to improve. We have systems, processes, and technology that we needed to implement. We also double down on our marketing efforts to make sure that folks knew that we know how to navigate this type of economic climate. We were able to close over 11 million dollars’ worth of acquisitions during this time and raised around 4 million dollars in equity. The biggest challenge was talking with folks about why commercial real estate is an investment vehicle that they should continue to look at even when all the media is telling you the opposite. However, the fundamental value of commercial real estate and reasons why we invest in this vehicle is because of the opportunity to grow wealth over a long period of time.
MWL: What are some strategies you’ve put into practice as a response to the market?
Sergio Altomare: We have focused on investor, owner and tenant communications, rent management plans and risk assessment. We are also launching a new pooled investment fund that aims to take advantage of what we believe will be a tremendous opportunity to acquire assets at a discount starting in 6-18 months from now.
Patrick Dunne: The biggest strategy shift for all operators was to leasing. Retention immediately became every economist’s favorite word. It became important to us, as well, but we also pivoted our leasing strategy in another direction that proved fruitful. This is not revolutionary by any stretch, but as collections became more uncertain, tenants with government subsidy of any kind became more valuable. So we continued to work with local housing authorities and actually signed 9 new leases at a property in April, at a time when conventional wisdom was that leasing was at a standstill. I think this is another reason class c properties have outperformed analyst expectations thus far.
Logan Freeman: Our underwriting has changed and a lot of that is due to perceived vacancies that we believe will be coming in the near future. additionally, we have really relied on our banking relationships and not the agency lenders to come through on our acquisitions. We've been able to see less competition on projects which means better pricing for us and our investors, so we really do believe that right now is a great time to invest and we're focused on continuing to find assets that fit our core investment strategies.
MWL: Have you had to pivot any of your projects? If so, what did you do?
Sergio Altomare: We began our pivot in 2018 and 2019. Having recognized the last growth cycle being long overdue for a correction, we capitalized on the market by selling several assets in multi-family and moving to self-storage. Our strategy has proved to be accurate, so we look forward to coming out of this recession in a very strong position.
Patrick Dunne: We slowed our renovation timeline on a value-add project. It confirmed our strategy, though, of buying properties not only with upside but with in-place cash flow, so when the unexpected happens we aren’t negatively impacted. If you don’t have strong enough in-place cash flow and are pushing back your renovation timeline, then you’re going to burn through your reserve to make debt payments before you see the increase to rents which can create a problem.
Logan Freeman: we have not had to Pivot any of our projects, we are still implementing the value-add strategies on multiple projects in the multi-family space. Our biggest exposure has been in our Hospitality Holdings, which we had to go to our lenders and request forbearance during this period of time.
MWL: How are your lenders reacting to this?
Sergio Altomare: Most have significantly tightened their underwriting standards, greatly reduced LTV requirements or some other combination of controls to reduce risk and exposure.
Patrick Dunne: Another part of our strategy has been lower leverage, funding all of our renovations with equity and never with subordinated debt. It slightly reduces investor return but proves valuable in times like these. We haven’t needed to have any conversations with our lenders and our payments have been serviced as agreed.
Logan Freeman: It's very specific use case on every scenario but most of our lenders have been open to working with us through this. Of time and allowing us to be flexible.
MWL: What do you see as an opportunity in this climate, both in the short term and in the long term?
Sergio Altomare: In the short term we are heavy in encouraging liquidity and access to capital. While we would not advise acquisitions right now, we believe there will be great opportunities once we open the economy back up, identify the market and behavior shifts that are inevitable, remove the backstops and support from the Fed and government and then see which sectors offer the greatest potential for growth over the next 5-7 years.
Patrick Dunne: We absolutely see opportunity right now. In fact, we are under contract on a value-add project today. While many competitors paused when the uncertainty hit the market, we saw opportunity knowing that our plan has always been to serve an undersupplied community. The value we see is in the long term. Workforce housing is still grossly undersupplied so there will always be a need to be met. So we identify properties that are well-located, have stable tenant bases, but need to be improved. With patient capital not looking to be out in 18-24 months, we create an opportunity for high cash yielding investments that still have great upside at our sale at a 5 or 7 year horizon.
Logan Freeman: I think that I spoke to this a bit earlier but less competition in the market allows for better pricing for us. We're local to our market and we know the value of the property and being able to get a discount on the going in price points is making our deals very attractive.
MWL: What is the new definition of a good deal in your industry today?
Sergio Altomare: We are on the sidelines for the foreseeable future, but a deal that can be had a 30+% discount from a valuation in February could be advisable. Sellers are not there yet, so we expect it to take time to flush out the good to great deals.
Patrick Dunne: I don’t think it has shifted much. A lot of buyers seemed to assume immediate price decreases and therefore new opportunity, but that hasn’t panned out either. For those of us who thought certain multifamily classes and markets could still hold up well, we didn’t have a misaligned expectation of immediate price depression and were able to win bids that would have been much more competitive a few months ago.
Logan Freeman: One that can sustain 20% vacancy rates.
MWL: Anything else you’d like to add?
Sergio Altomare: This is a time to evaluate strategies, markets and assets to be prepared to pivot coming out of the shutdown. What we are experiencing on a global scale is unprecedented, so it's critical to be patient and not rush into new deals too soon. We need to remember that most good deals coming out of the great recession where found to be exposed in 2010 and beyond, so missing the first few percentage points up is much better than jumping back in too soon only to get hit with a false start and another double digit drop in value.
Logan Freeman: Like Warren Buffett says be greedy when others are fearful and be fearful when others are greedy. Make smart, prudent decisions that will allow you to build incremental wealth over time. Remember, real estate is a long-term game.
Ultimately, of course, no one knows what will happen. However, many of our clients and other investors are seizing opportunities that didn’t exist 6 months ago. Commercial transactions were trending before this pandemic at all-time high rates, and then right at the onset of the pandemic, everything came to a halt. Now, as things start to pick up again, we think savvy investors will be able to seize opportunities and navigate through this time.
Before your next transaction, give us a call for a free consultation at (972) 460-8353 or drop us an email at kavish@mwfirm.com or adnan@mwfirm.com. Best wishes to all. Stay Safe. Stay Healthy.
Kavish Wazirali and Adnan Merchant are partners at M&W Law, PLLC, a Dallas-based business law firm. Mr. Wazirali specializes in real estate transactions of all kinds and is a title escrow officer. Mr. Merchant specializes in corporate structuring and investment finance, specifically private placement or syndication deals. Mr. Matthew Myers, who practices investor immigration law, also recently joined the firm as a partner.
Disclaimer: this article is should not be taken as legal advice, as each situation can be unique. Please consult your attorney prior to taking any steps. If you do not have an attorney, please feel free to give us a call to set up a consultation.
