Damon Elder 00:00
Good afternoon and thank you for joining The DI Wire and the ADISA’s Alts Industry Update Webinar. I’m Damon Elder, the publisher of The DI Wire and I’m joined today by John Harrison, ADISA Executive Director, and our esteemed guest panelists, Taylor Garrett, Managing Director with Mountain Dell Consulting, and Kevin Gannon Chairman and CEO of Robert A Stanger and Company.
Taylor will provide us with an update on the 1031 sector, followed by John, who will give his view from Capitol Hill. And then, Kevin will give a high level look at non-traded REITs, BDCs, interval funds and perhaps, a few other offering types. Following the presentations will engage in Q&A and a discussion session.
We’ve already received several questions from our audience. Thank you for those. I encourage you to submit any more questions you may have during the webinar. Just click on the little Q&A button on the bottom of your screen and type in your question. We’ll try to answer as many questions as we possibly can. So, with that why don’t I go ahead and turn it over to Taylor Garrett, to give us a 1031 update. Take it away, Taylor.
Taylor Garrett 01:01
Thanks Damon, I appreciate the chance to be able to talk through it. We can you go over this presentation pretty quickly. Here’s just a quick history of really the syndicated 1031 space. Early 2000 is where it really got started, had up to 75 different sponsors at any given time. Smaller deal sizes and really, saw some pretty exponential growth, slowed down during the great recession.
Then we’ve seen some really phenomenal growth, but it’s been somewhat, tame compared to previous years. But you can see, in the last couple of years, we’ve really started seeing pretty tremendous growth, last year about 7.2 billion, coupled with another about 800 million in off-market type of transactions that were done as well for a total of 8 billion.
This shows a little bit differently. You’re talking 166 Active Programs, that’s deal that may have come out in 2021. But there’re out currently 41 different sponsors. We’ve really hovered around that high 30s, low 40s mark for quite some time. We’re starting to see more sponsors enter the space right now, but there are pretty significant barriers to entry on that, and just from a relationship standpoint or, bridge standpoint, it’s important to understand.
I probably see us doing about 100, 250 to 300 programs this year, which are obviously, larger deal sizes. Here are the sponsors. Every one of the 41 Sponsors that are currently involved in space, Ares and Inland, doing a tremendous amount of volume, their Capital Square, Carter Exchange, NexPoint, this is through the first half of the year to round out the top five sponsors.
Clearly an 80, 20 type of representation in the space of where the majority of the equity has been raised as top 10 – 15 sponsors being done, but a lot of phenomenal real estate sponsor continue to do— give good variety of the product and good types of programs. Asset type, this is as of the start of the year. This is where the equity has been raised. It’s the first time in ever that we’ve seen Industrial have this number.
We’ve had some massive deals come out to $300 million deals under Industrial and some big storage portfolio that really is skewed. Multi-Families, typically around 50 to 60% of the portfolios they are not there. This done differently with the same concept $2 billion raised in Multi-Family so far. I think of the 10 billion that I anticipate we may be rising this year.
We’ll probably end up seeing Multi-Family or, other assets that are similar to that, whether it’s Student Housing, Manufactured Housing, still represent 50% of the overall marketplace. This is as of the end of the first half of the year. This is a snapshot of what was currently available. As of June 30th, of this year, you are still seeing a strong Industrial that’s coming out big portfolio, $300 million portfolios that are coming out there that are currently out. Not seeing a lot of see Senior Housing.
We don’t have really any Self Storage, but those have been big numbers, year to date and I think, they’ll come back here shortly. There’s a lot of information on this page. I want to just dive through it very quickly. You’re looking at percentages of equity raise Multi-Family 2020 is 51, 49 now.
We’re down at 38%. Average days on markets bumped up a little bit from where it was last year. Last year, it started— I’d say overall the full year was a little bit longer than this year, but this year right now we’re seeing fast. The first half of the year was very quick to that number, starting to increase average cash flows.
We’ve seen this with debt that we’ll talk about more today. Interest rates going up, cap rates staying about the same. Cash flows have definitely come back down, from where they were total available equity two and a half billion In May, we had 1.1 billion a lot of supply that’s come online.
You hear the quick numbers through the first half year 5.3 billion, which tells us that 10 billion. I would say, we’re going to be a little bit slower the second half year, so probably nine to 10 billion of equities. I think will where end up being for the total year. 42 total sponsors done it.
There’s one that doesn’t report regularly, so we don’t include them there. Most of these deals are our DST programs. Some TIC deals, some one-off deals, but mostly done as DST transactions these days. definitely seeing 506 B has become— it started getting more 506 C, that’s reduced a bit. But I really do think 506 C will start inching its way up and become a much bigger part of the space over the next 12 and 24 months.
Average days on market, you can see those numbers. It’s come down since last year. The first half of the year was very fast. I think the second half of the year will probably be that medium, back up to where it was last year. For the markets, that most of the deals are being done at Texas and Florida. Have been, have had a lot of success, a lot of midwest are going to be Net Lease type of products, Industrial type of products, and Sell Storage type of products.
We are seeing almost every state is accounted for on deals that are coming out, maybe, only three or, four that we actually, haven’t seen products and so far this year. I think that will continue to be the case, trying to find, good cash flow, good oriented products for this space. In any markets, they can find as long as the economics makes sense.
This just shows where the numbers are. Clearly, we’re above, where we were at last year hitting that 7.2 billion of documented Information and equity that was raised. We’re already about, 5 billion for the year, annualized that out. It’s pretty simple to say, 10.6 billion. It’s projected but I do think it’ll be a tiny bit less than that. Some of the full cycle activity, we’re anticipating maybe, has been at least pushed-off a little bit, so that may not come in as quickly as we’re anticipating.
It’s a quick synopsis of all the information. Average equity raise per week, last year was 154 million, right now we’re 204 million is, where we’ve started to see, to try to move towards where we were up to about 215 million, about a month and a half ago. It’s come down a little bit since then. 11.9 weeks on Market. We have updated reports.
We’re probably going to start trending a little bit more towards 13, 14, 15 weeks of available Product, which means, we’re having much bigger offerings that are coming out so It makes sense that some of these deals are going to last longer out on the street. Average deal sizes 2015, we’re down to 10 million. Now, we’re at 31 million for average deal sizes, much larger.
We are seeing a bigger supply than we’ve had. Still have tremendous demand maybe, we’re down just I don’t know, 10% maybe, from where we were earlier in the year. But definitely seeing more supply come on market, which I think is good. Gives a good equilibrium for where the space is. Definitely, new sponsors are looking to enter the space. We’re having a lot of conversations with those groups.
I think full cycle activity last year, 2 billion. I think will probably be one and a half billion this year maybe, a little bit more than that. It’s where we’re at. Biggest challenge we’re facing right now, I think is probably in the leverage, challenge for 1031 Investors that need more leverage.
Don’t have the ability to get that from some of these deals coming out because of the debt service coverage requirements, cap rates, interest rates, so we’ll keep a close eye on that, and that’s been a very important part.
Damon Elder 08:07
Now, why don’t we turn over to John Harrison, Executive Director of an ADISA and he can give us an update on, what’s happening in Capitol Hill?
John Harrison 08:15
Right, it’s not going to be as the fire hose that Taylor just went through, because we’re talking government. Anytime you talk government, slow is the key word. Right now you have a couple of days ago, passed the Biden tax and spend bill called for optics obviously, the Inflation Reduction Act.
The only thing of Inflation reductionary about it in my view is, the fact that they tried to balance a bunch of spending with at least, a little bit of tax increase, that in order to minimize potentially, the inflation effect. But as we all know, the more the government spends it’s a fundamental that Inflation must result.
If a tax increase does not running around wondering, why there’s inflation when we threw $5 trillion into the economy? A couple of years ago, it’s a fact of life, I’m just amazed at the surprise, people have with all of that, so the long and short of it, what is that a tax and spend bill going to mean for the investment community? I think the bill itself is, designed primarily “Primum non nocere” first do no harm.
They’re trying to do as little damage as they can with us, I think. But the real thing is that they raise taxes, corporate taxes, you can see the 15% corporate tax, and then there’s a 1% excise tax on corporate buybacks. Those will obviously, serve to slow down the velocity of money, but they hope it’s not too much. Then the other is that the price controls on pharmaceuticals will also slow down research. But I think it’s primarily not going to be something that hits our investment community that hard.
That’s just my prediction a little bit on, how we got there? You see the FY 2023 Biden budget. This is sort of a misnomer because we haven’t had a regular budget in years. The budget that we have for proposed for 2023 was, the same one for FY 2022, which didn’t take either. So, what will happen is that we don’t have time for an appropriation. You go the next slide. I think we get to the appropriations part.
Normally, if you don’t have a Budget, then you run things by appropriations, which are just a series of bills. Appropriations were too late in the game for that, at this point, is my take and we’ll then need a continuing resolution, sometime next month. By the end of the month, in order to keeps the government running, so that CR will happen sometime, probably before the election.
I mean, before the end of September must have one, and then they may tinker with it. Going into the election probably, the Republicans want to stretch the time out. The Democrats might want to do as much as they can, if they fear losing the House, particularly so that’s where you’re going to get a continuing resolution and you will not probably, have a regular budget again next year.
Sometime in January, we have a new Congress. They will face this whole thing again. Now, where does this leave 1031? I think and this is my prediction, and it changes, but I think we’re safe. I’d say 80% chance. No change. That would affect 1030s because there’s no appetite for it right now. There’s no good place to have that happen.
You’re going to have some economic pressure as a result of, what’s going on with this optics bill that has just been passed the tax and spend for election purposes. Remember, you have to understand that people in Congress are in the re-election business. They’re not in the governing business. That’s my take on that. Let me go to the next slide. Has a little more broader look at, what we’re following. What we’re doing in DC. I just covered the 1031 situation.
We’re monitoring that of course. SEC has some priorities that we’ve been tackling this year. A couple of comment letters that we’ve done there’s the Share re-purchase disclosure, private fund Investor protection, and cyber security. We’re still working on that one. We just came out with our comment letter on the Sec, ESG. You can read it. It’s posted online. Now, it’s a short three pager that we just did on that. That’s so many practical problems with that, which mainly what we touched on in the ESG.
We did send a comment letter to FINRA on the complex products release and now the NASAA deal. As you know, if you’ve been reading ADISA our co-chairs John Grady of ABR Funds and Bowman, Catherine Bowman of Bowman law, met with NASAA and their whole CORPFIN group that is interested in this thing, and in NASAA’s proposal to redo the guidelines for REITs. We did to the credit of Mr. Grady and Miss Bowman. We did manage to get a delay that came out and there’s a coalition also that had sent in a letter to ask for the delay, so that we do have time to put some data together, to give them using a lot of data from Mr. Gannon, whose coming next.
I don’t want to take any more of his time, but I will say that there’s a cut. There’re several points of that you can go online to the NASAA Website and read it’s about 44 pages. Their proposed guidelines, I can’t give you any odds. There’s the concentration limit part and then there’s several parts to it. There’s investor qualification part. It’s all caused by the Reg BI and an attempt to understand how Reg BI is actually functioning. Is it making a difference? Precipitated all of this, we got to the bottom of it.
We think that it was precipitated by the number of complaints that state regulators are getting about non-traded REIT products that seem to be the gist of it. I’ll say about that number of clients complaints had to go up. What do you see Kevin’s numbers that he’s going to show you. The volume of non-traded REITs is high. When the volume is high, you get more complaints.
Now, what we need to figure out is, some rate and I’m sure Kevin could figure that denominator out for a rate that NASAA could use or, look at the argument. But it’s the rate of complaints that’s more interesting than an absolute number. I think we have a chance. We’re working on it. They’re good people and we just have to figure out, how to meet and how to explain things to them. Non-traded products are always been hard for regulators to understand.
John, that was very impressive coming from you. You were only three minutes over, which is great. And perfect transition, I think on to Mr. Kevin Gannett, who of course, is going to discuss in some detail of the non-traded REIT universe and some others. Kevin wants to go ahead and take it away.
Kevin Gannon 16:04
Thanks Damon, pleasure to be here. Thank you for having me. Just so everybody knows this whole slide deck I believe is going to be totally available to you. Don’t feel if we race through it too fast that you’re going to miss anything. First thing I want to point out is, performance. The performance of this space has been stellar. It’s been really good over the last several years in the Non-Traded REIT space. It’s outperformed Traded REITs. That’s the takeaway, right.
It’s irrefutable, and it’s based upon an appraisal based Analysis of each of these portfolios, right. That’s how the performance is derived. The dividend paid and the total return is derived that way, so you get a lot of good metrics, and they’ve outpaced the traded REIT market as measured by the MSCI, the FTSE, REIT, NAV Index, and the Cohen & Steers Indexes right. We’re outperforming that drives everybody crazy right, they’ve done really well. You know why?
They focused on the right asset classes just the guys in Taylor’s universe that focused on Multi-Family and Industrial. That’s what happened here in this space. That’s why they outperformed. There’s a list of the performance. Some of these guys Cottonwood at the top. Multi-Family, they knocked it out of the park. Ares with Industrial, Brookfield with a mixed bag of diversified portfolio. Same thing with Starwood, JLL, Blackstone, that’s typical. They’re typically diversified with a heavy slant towards Multi-Family and Industrial.
That’s why these returns have been so stellar. That’s why they’ve outpaced the Traded REIT Market. I went through the Lifecycle REITs out with the backward, they’re still good products. You got to have the right asset class. Remember, what happened the last 20 years? What happened was, we focused on the wrong asset class. We were buying a lot of office. We’re buying a lot of retail, those didn’t perform well. For reasons, we now know why. We didn’t know back in those days.
These guys are Multi-Family, some Hospitality, Self-Storage, certainly knocked it out of the park with Smart Stop, Lightstone with a variety of products in their Hotel and Multi-Family. The performance has actually been pretty good. The last couple years generally speaking, these real estate asset classes are different than the old Lifecycle REITs. This is performance of BDC’s. BDC’s have some worked to do yet. The new generation of stuff that’s come out is performing well. But the oldest stuff got tainted by a lot of energy deals, energy lending.
They got banged up pretty good. They didn’t perform as well as it traded REIT, the traded BDCs. Here’s a list you see, they’re in recovery now. This past year has been pretty good to some of them. The last three years, had some spotty outcomes with some of these guys. That’s what’s really dragged performance down. The new guys on the block, I think are going to produce some pretty good returns. The Blackstone’s of the world, then the HBS’s and Owl Rocks.
We see some good numbers starting to come out. We don’t have a lot of duration with them yet, but we’re expecting some good things out of those deals. Interval Funds, quite a few Interval Funds out there. Look at the Real Estate last 12 months 20% up right. That’s a lot of straight Real Estate into odyssey funds or, Traded REITs. All done quite well. We think those things will continue to perform well. Last 12 months look pretty good generally speaking. Distribution rates in the force, roughly three to four years pretty typical and normal, and customary.
Capital market sponsor activity. A lot of M&A in this space, I don’t know if your guy’s screens are covered, the numbers are covered, but you’ll see when you get the hard copy of it.
But you see a lot of M&A involving these non-traded REITs they merged together and got ready and positioned themselves to do a listing or to position to do an M&A trade out. Starwood, CIM, Franklin BSP, Benefit Street, InvenTrust listed, CION listed. American Healthcare REIT merged their entities together. Phillips Edison did a list thing. Griffin Realty Trust merged a bunch of their entities together and merge with the CCIT program and Resource in 2021, merged all their deals together. $45.7 billion were the trades.
These guys don’t sit around and put their head in the sand. They look for the exit. That’s the important takeaway. This year so far, $47 billion for the M&A trades.
A listing by Modiv, Sierra did a merger with Barings. Resource merged with Blackstone. Preferred apartments merged with Blackstone. PS Business Parks taken out by Blackstone. The Blackstone took them out. They were traded. REIT CPA 18 merged with Carey. American Campus Communities took out– was taken out by Blackstone. Bluerock taken out by Blackstone with their deal that had done all that creative preferred– Preferred deal like for departments.
It’s non-traded preferred so interesting concept, it worked like a charm they hit homeruns. Marine camp bar did well and the folks Lenny Silverstein and the boys down at Preferred departments did really well with those deals. SmartStop possible listing, Cottonwood merge several other entities together $47 billion worth of equity merged around this past year and– Or so far this year, and all great transactions and great opportunities to hit the exit. That’s what they’re looking for.
Fundraising alternative investment space, you can see that– We can see that it’s covered by those numbers, but you see we have a good year rocking here. $61 billion year to date, in our space in all categories, non-traded REITs, BDCs, Interval Funds, Preferred, DSTs, OZ deals. Weak run 61 billion last year 87 billion, 28 billion, a year before 29 billion. We got a big surge here. We think this year will be $120 billion.
All classes we think non-traded REITs be about 35 billion or 36 billion this year. Non-traded BDCs, maybe $10 billion less than that but strong numbers.
You see what– Many of the sponsors are doing. They’re in multiple silos. They’re offering non-listed REITs, non-listed BDCs, preferred stocks, interval funds, DSTs, other private placements, OZ deals, etc. and they’re in multiple silos because I’ve tried to appeal to various groups, various parties, various distribution channels. So that’s a very common theme that comes out.
We don’t see many people. Today I’ve got probably 50 people that have looked at entering this space, 50 firms that have looked at entering this space so far this year, that not all make it, but they look at multiple silos, not just one because they realize that breadth of product is going to be important. Look for more of that coming down the pipe.
The alternative for 2022, same thing. You got this and a whole bunch more additional sponsors that are in this space and you got that list to look at.
Fundraising, we tried to track it after COVID. After COVID took a big dip in fundraising, it rallied since and it’s off the charts now. We’re at a pretty good pace now with non-listed REITs. Basically, two and a half billion dollars for the month of June. So big number.
We predict for the year we’re going to be about 35 billion versus 36 last year, up our prior peak was 2013, 90.6 billion in those days. Those were all lifecycle REITs. Today, 98% of the money is being raised by NAV REITs.
There’s a couple of non-traded lifecycle REITs we like but they’re not raising the money compared to the Blackstones and Starwoods of the world.
Fundraising through June 30th you see the leaders of Blackstone, Starwood, Ares, FS, Hines, JLL, Nuveen, Ares, KKR, Brookfield, CIM—Well, CIM kind of out of it really with their NAVREIT not big fundraisers this year. So Clarion, REEF, Cottonwood, Invesco, Griffin and Inpoint that’s the guys the last several years. You can see their fundraising for the year to date period, $21 billion. The dominant players certainly Blackstone and Starwood.
In terms of assets, very similar to what you saw with Taylor a little bit ago, a heavy residential 46% industrial 24%, and real estate debt securities about 11%. So because these NAV REIT guys that have reached out to maintain liquidity, they generally tend to do that, generally tend to be involved in in real estate securities that are– That create that liquidity sleep for them. BDCs number of them out there, Blackstone, Blue Owl, HPS and Apollo are really taken up all the oxygen. FS had a deal out there but the big guys this year to date are Blackstone, Blue Owl HPS and Apollo, more guys come in. It’s going to get busier out there buy what we see a lot of traction in that non listed BDC space.
Here we’ll find this year 2021, we had $18.6 billion, you’re always going to see quite a bit of redemptions, 30, 40% will come down– Well come to the that space over time in terms of the total redemptions but full year last year was $33.5 billion on $18 billion raised. This is 2022. Year to date $13.6, $2.5 billion redemptions, year to date. Pretty good pace there.
The debt and fixed income, interval funds and the real estate interval funds take up a lot of the oxygen in that space. We see from inception, these guys together have amassed $67 billion, redeemed about 19. So, you see the redemptions tend to add up over time with interval funds. The real estate deals $16 billion versus debt and fixed income, 32 billion so real estate has done quite well.
Top interval fund sponsors you see Cliffwater, SilverBay, Apollo, Bluerock, Pacific PIMCO, CION, Ares Variant, Pioneer, Lord Abbett, Carlyle, Rise, Liberty Street, FS, Blackstone, City National and all the others combined. You see a pretty good list and it’s getting bigger all the time.
We see interval funds a couple every month get filed, and we’ll see– We’ll expect to see a lot more of that.
In terms of what they own, equities, debt or make up the provider portion of it and it’s a big chunk of real estate about 90% of the equity the, of the assets out there.
Private placements, we see a lot of private placement activity. Blue Owl’s very big. Inland certainly with their DST products primarily QOZ and other Reg D, Ares big with DST, ExchangeRight certainly all know them. Capitol Square, Cantor, Barings, NexPoint, Bridge, Greenbacker, Griffin and Passco, that’s the top 12 there of the guys that we tracked. Year to date, that $9.8 billion, so pretty good fundraising this year. Last year was 15 billion among those sponsors.
Now a list of preferred offerings we see those done really well. Bluerock and Preferred Apartments exited this past year and hit it out of the park. Absolutely, it’s a moonshot and so we expect to see more of them coming down the pike here. We know Prospect is out there and Braemar’s out there raised some money as well as Gladstone and Creative media is getting going here.
At the end of the day, we see—Expect to see a lot more of this. It’s got a good strategy. You got a good yield on these products. They’re convertible into preferred stock, into common stocks and got a good track record, particularly Preferred Apartments and Bluerock, they absolutely had a moonshot.
Private equity funds we’re seeing. Private equity come to this space with a product, with tender offer funds. They’re not trading close-end funds, we’re seeing Conversus StepStone, Blackrock, Ares, Conversus StepStone with another deal, Constitution Capital, they’re basically bringing private equity opportunities to the retail channel, right and it’s time for that to show up and then see some good strong doses of that.
They’re done with tender offer funds, same kind of liquidity we get out of the NAV REITs so good product structure.
This is the most important slide in whole deck. We throw– My family throws a St. Patrick’s Day party every year. Last year, we did it 337 pounds of corned beef and we always tell people that when we do that, it’s for– It’s the weight of the fattest Gannon. That’s how much corned beef we cook up and we actually eat it all. Couple 100 pounds of potatoes and cabbage pipe band, Irish step dancers.
We’re excited about this next year, March 11th. The hall we’ve had it in for over 50 years was just sold to a mosque. We’re not sure they’re going to let a bunch of Irish guys, Irish Catholics show up and throw a party there. We’re not sure but we’ve got it. We’ve got a new place lined up, and we’re trying to bring in the flogging Molly’s to entertain us. A couple of years back bought in Ronan Tynan, the Irish tenor, so if you can drive a car, you need to get in it maybe on March 10th of this coming year and drive to Bouton, New Jersey for this party. Doesn’t cost you anything. You just show up. We’ll feed you and water you for a couple hours and you’ll listen to a lot of good Irish tunes and it’s all about friendship and we do it in honor of all first responders.
My family’s big in law enforcement, but we want to make sure that we don’t forget those guys. Firemen, EMTs all those guys. They’re different than us. Right? They’re different. They step in the way of danger. They step into tragedies, and they save us right? And we got– We can’t forget those guys and we remember them every year, throw a big party and we have a good time to boot. So, thank you.
Damon Elder 29:54
Thanks so much, Kevin Gannon. Now, we’ll go ahead and open up for the rest of the webinar to discussion and Q&A. Like I said we’ve already got quite a few questions and a few more have come in. I’m going to end the screen sharing and we’ll go ahead and go into general session here.
So guys, actually, I’m going to start off. Kevin Gannon, I want to come back to you. You touched on capital markets transactions with the REITs, the non-traded REITs. So, I want to dive into that a little bit. Obviously, the markets this year have been on quite a roller coaster, and I know there are a few of the old lifecycle REITs out there, particularly HR, the old Griffin, American REITs and SmartStop. They’ve both announced that they are planning on pursuing listings, obviously, I think timing– Market timing is probably very challenging for both of those management teams and I’m sure there are others who are looking for liquidity. What’s going on out there? What can you share? I mean, how’s it looking? Modiv I know debuted this year at a high price, plummeted quickly InvenTrust didn’t experience that. What can investors expect?
Kevin Gannon 31:00
It’s all about the asset class, Damon. Right? If you’ve got the right asset class, we’ll go– We’ll do an exit. The exit might be a listing or it might be an M&A trade, right? You don’t want their common different tool but at the end of the day, both those outcomes are possible and what’s happened over the last several years, we’ve had this space focus on the right asset class, right? We’ve got a lot of multifamily, we got a lot of industrial building up in this space and the older guys got to wait for their moment in time, right? The guys who raise money for office might have to wait a little longer. Office is tougher, retail’s tougher but if its healthcare, healthcare is doing OK. Right?
In the trading read space, self-storage is screaming in the traded REIT space. When I first started in this business long time ago, cap rates for self-storage were 10. Now they’re 4. I mean, crazy, right?
Totally crazy. So, it’s a great time to own these assets and I think what you’re really paying for in our space these days, Damon is for the experts to coach you to buy the right asset class. It’s not just throw it against the wall but find those asset classes, I think are going to do well and it looks like the non-traded REIT space, as well as DST space are very much mirroring each other with that acumen, that quality, and the assets of their options and their exits are going to be wonderful, right? They’re going to really be either an outright sale or merger transaction or listing transaction if the assets get aggregated. So, there’s the opportunity and we think it’s great.
Damon Elder 32:34
All right, well, let’s move on to a more general question. I think, obviously, the interest rate environment, inflation, etc. There’s just a lot going on out there right now.
Obviously, for decades, I think the Alts space, particularly the non-traded Alts space, one of the clearing calls has been that they’re very attractive in the low rate environment but for the first time in a long time for maybe not those of us on this call aside from Taylor, but for the first time in a long time, I think many of our viewers are probably experiencing for the first time, a non-low-rate environment as we’re seeing interest rates tick up to try to combat what’s pretty rapid inflation. What are all of your views on the impact that we’re going to see from increasing interest rates on new and current offerings as well as closed offerings that are in their operating phases?
Taylor Garrett 33:22
I could speak about it to you from a DST perspective, right? I mean, interest rates, increased cap rates have stayed pretty comparable, right? It creates a challenge even more so in 1031 exchanges, right? If you have.
If I sell a property for a million dollars, and I have 500,000 of equity and 500,000 of debt for 1031 purposes, I have to invest at least 500,000 of equity and at least a million dollars total value, which can be done both with debt or with bringing money to the table.
If you’re in a scenario where DST sponsors are working to get financing and Fannie’s only saying, Hey, we’re going to give you a 50% financing on this, which after syndication means it’s a 42% loan to value than that. I can’t invest in that. Even if I love that asset, the only way I can invest is if I bring 10s of 1000s of dollars to the table to be able to write what’s the requirement there.
I think that’s going to impact– I’m not sure my crystal balls is hazy as anybody’s of where all that’s going to go and where cap rates are going to follow interest rates but I think in an inflationary environment and I’m not an economist, I don’t even want to try to pretend to be one but in an inflationary environment, having these kind of hard assets and I think there’s a lot of demand, a lot of money that’s out there and people are looking for something that can grow with inflation whether that’s apartments, whether that’s industrial, even that lease where you’re buying something with in place rents, but that are then under market by a pretty significant amount when that lease comes through.
There’s a lot of ways to make money in it in real estate but it is a unique time. I remember when I got married, my interest rate was I think six and a quarter on the condo that I bought. That was really high interest. It’s a bad time just like all of you have seen throughout your life.
Damon Elder 35:06
Kevin Gannon, how far out from the non-traded REITs or the other asset class space? How do you think this environment is going to affect them and the industry as a whole?
Kevin Gannon 35:15
Yes, I think the smart guys are going to be bullish on certain asset classes whose top line is going to grow well in excess of inflation and those asset classes are multifamily and industrial still and self storage. They’re just killing it. If I’m borrowing– If I’m growing the top line at say, 5 to 10%, which is not unreal. That might be light in some multifamily properties, right? Those are light numbers and I’m borrowing at 5. I’m doing that all day long. That’s a steal to do that because I’m buying assets they’re going to appreciate at phenomenal numbers.
If cap rates tick up a little bit. Yes, we’ll deal with that top line growth is going to weigh more than offset it and so that’s what I’m excited about.
In terms of fundraising, fundraising has taken a little bit of a dip here, but I think that’s fundamentally related to asset allocators that are looking at our space, right? They’ve been raising money and they’ve looked at our space, and they said Hey– we see our stock portfolios taking a dip. We’ve got to rebalance. Right? We’re going to rebalance, we’re not going to emphasize real estate, we got to pull that back a little bit. So that’s what we’re going through here.
In addition, I think you got some international players taking money off the table because the dollar has been so strong. So, at the end of the day, I think all of that will work itself out, but fundamental US real estate is hot. It’s hot, it’s going to stay hot and if you’re smart, you won’t be bugged by a little bit of a tick up in the interest rates.
You do have a little disconnect between buyers and sellers right now because cap rates should have tweaked up a hair, but sellers always want to wait for last year’s cap rate and last year’s price, right? So, it’s going to be a little bit of a slowdown there but at the end of the day, if that top line keeps growing at 10%, you need to buy it today at the current cap– Whatever that cap rate is even if it’s last year’s cap rate, otherwise, you’re going to be weight price out of the market in next 18 months.
Taylor Garrett 37:10
Yes, Damon maybe just to say one other thing, if you don’t mind on that. As far as 1031s go, right? I mean, if you bought anything prior to 2020, you have a lot of value creation that’s happened, most likely, right? And so from a 1031 perspective, even if we’ve had a little bit of a pullback in some of the pricing and things, there’s still anybody who’s looking to go from an active real estate management lifestyle, right, where you own a fourplex or you own a farm or you own a dental practice, whatever that is and you’re selling, chances are you have a lot of value creation that’s happened during that time and so you’re looking to get to a passive type of investment vehicle. I think that’s why DSTs have been so beneficial. I think there’s still so much room for DSTs and 1031 demand for passive real estate ownership to be to be big.
I see, at least from this small industry’s perspective, I think there’s no reason why we’re not going to continue to grow as people get more and more comfortable with the– As Kevin Gannon was saying, apartments, self storage, industrial and all these type of stuff that we do almost exclusively in the space, just a lot of demand for that and for a 10 year investment profile, great assets to be in for long term.
Damon Elder 38:26
Well, let’s talk. I mean, specifically on multifamily, because both of you pointed out that a lot of the success we’ve seen in the industry lately has been because people have been focusing on good multifamily assets, in addition to some industrial whatnot but I think, as you both pointed out, there’s just a massive supply of multifamily assets in many of these offerings but we’ve also seen massive cap rate compression come along with the feeding frenzy for multifamily assets throughout the country, even into some tertiary markets. Not to mention primary and secondary markets.
At one point, do apartments just not work anymore in a DST offering or in other offerings, whether they’re REITs, or whatever the case may be, when does that yield get to the point where it just doesn’t make sense? Or does it always make sense because of the tax benefits that you get with a 1031 and obviously other built-in benefits with real estate?
Kevin Gannon 39:24
Well, from my perspective, there’s always that top lines rocking and rolling like it’s been rocking and rolling. It’s pretty easy. I mean, to make the case for multifamily and for industrial. The numbers are staggering. We’re shocked, we’re stunned sometimes at the growth that we’re seeing out of these assets but as Taylor said last couple of years is staggering profits and the cost of money is still pretty cheap. I grew up with a cost of money that had double digits man. I came out of college and a Taylor wasn’t even born yet. It was 1978 and–
Taylor Garrett 40:04
Didn’t Happen. I don’t believe you.
Kevin Gannon 40:08
1978 and interest rates were double digit. Taylor talked about a 6% on his condo. A girl, I worked with at Deloitte had a 16% on her condo.
Taylor Garrett 40:19
My parents had 14%.
Kevin Gannon 40:21
Why? Because the growth was gigantic. Right? So, 5%, that’s not a high interest rate, it’s higher than what we’ve been used to. It’s just got to [Business school]. You can’t model it more than a three and a half, but we’ve been around a long time and when that top line is growing.
Damon, I promise you, those top lines are just– They’re staggering. They’re 10, 15% growth and top line on some multifamily and in industrial, you’re seeing guys that are growing 5+% and even more depending on how long ago the contract was struck.
If the contract was struck 4 years ago, it’s about to roll. I mean, those guys are just making crazy money on that roll of the lease. It’s a good time to be long real estate and I don’t see that change and in the short term, and a little bit of interest rate, inflation is kind of good for real estate generally. We used to say that because it grows the top line and your leverage, right? Your top line’s a greater number than your expenses.
Your expenses are 35% of the revenue. If they’re both grown at inflation, you’re still doing well and when inflation is hot and ticking up and other supply demand factors kick in, about to grow that top line more, it’s good time to be along these assets. I’m excited about the next couple of years.
Jhon Harrison 41:36
Well, the demographic trends would also help because look at the number of people looking for housing and the multifamily is going to continue to grow. There’s over a million homes shortage. Currently, we’re way down on new home construction. So there’s all kinds of pressures out there, mostly the supply demand but I think the demographics are strongly in favor of that asset class.
Taylor Garrett 42:04
I mean, look at just Utah itself, right? I mean, all of us. In this neck of the woods, everyone seems to have quite a few kids and people moving here from the Bay Area or California coupled with organic growth and technology.
I mean, we can’t build houses fast enough places that people need to rent and you just–Right now, I think what happened in 2008, you kind of got behind and we haven’t ever caught up and now you’re probably seeing another time where developers are going to stop building as much and doesn’t mean that people are not looking for places to stay and move in the right location. Apartment seems to be a great– I mean, we’re dealing right now, negative leverage is something that we heard for a blip back in maybe 2008. For a moment of time and the transaction stop now. We’re hearing it all the time, but I think what Kevin Gannon aid is a phenomenal point which you can grow out of negative leverage really quickly.
I think it’s hard for most sponsor and real estate groups, our clients at Orchard Securities, I mean, talking about this every day with our different clients, and it’s– You can’t underwrite 10% growth, but everything’s telling you it has 10% growth. It’s fascinating, right? I mean, a property on the East Coast has 16, 18% growth on a property or you’ve had moratoriums in Maryland, right, and all of a sudden, you’re seeing a wow, you’re going to see this crazy growth, it’s going to happen because they have been able to grow since COVID.
It’s just– It’s hard to underwrite that because you can’t say we have been using 3% for at least a long time while I’ve been in this space over the last 19 years but right now is a unique time coupled with the inflationary environment. Your debt becomes less valuable over time because you know, you had $100,000 loan back in 1978. That was probably a pretty massive loan. Today, that’s peanuts. Right and I think inflation just supercharges that.
Damon Elder 43:50
Well, let’s stick with you for a second Taylor, because one of my favorite topics, and I think our audience, certainly large segments are interested in something you touched on briefly, and I want to go back to so with private placements, Reg D 506, B’s or C’s, and others but B’s are the primary vehicle upon which these private placements come out in our space, but C’s seem to be emerging and I think you’ll agree with me that we’re going to see more and more of those but what are we seeing? I mean, you said there was a little bit of a pullback thus far this year over year and could you start out by giving the audience a basic introduction as to what the difference is between 506 B’s and C’s?
And let’s talk a little bit more about that. What are we seeing? I mean, I know that Passco introduced at least one deal this year, their first as a C. Capital Square for the last several years, at least we know has been syndicating their deals almost lucidly, it sees their exchange rates doing some and C’s. So, what are you seeing out there?
Taylor Garrett 44:46
Yes, I mean, simply stated a 506 B allows you or 506 B is the traditional Reg D program where you can generally solicit the program generally solicit as in very simple terms. You don’t know who your audience is that seeing the product right so you don’t– You can’t say hey, here’s the deal that we have available and I’m going to post this on LinkedIn or Facebook or anything or just on the worldwide web, right? You can’t do any of that with a 506 B, 506 C. There’s a little bit more requirements to make sure that your investors accredited but it’s the same accreditation requirements, but you can generally solicit at that time.
We have a put a plug for a ADISA’s best practices memorandum that’s been updated, very important for everyone to read that I think it’s a phenomenal document, Darrell and Tom and everybody did a phenomenal job. Brought up– These people that put this together. I think it’s an amazing document. It goes over this a lot. There are benefits to both, I think but 506 C, the reason why probably you’ll see that there’s a lot of advertising being done online these days. I see stuff on social media all the time.
I chuckle a little bit, I have no idea how they can put that stuff in there but the stuff, the hoops we have to jump through with FINRA and the SEC, but I think that we will see a transition to more 506 C. I think it’s a comfort level on what can be presented to investors to help condition them to make investment decisions. I think there’s a give and take there and I think everyone’s trying to get more comfortable with it but yes, there has been a pullback. I think mostly just because the amount of equity raised for some of these really big groups that raised tremendous amount of equity at 506 B and so if you’re raising 300 million, and it’s 506 B, there’s a ton of equity raised in it but it still only counts as one and the same person on 506 C but we have been seeing more.
A third of them demonstrate how to succeed and obviously two thirds haven’t been done 506 B but that’s– It’s pulled back for whatever reason. I just think some of the players that do a lot of 506 C are doing some bigger offerings and not quite as many offerings as all the other people coming out with 506 B programs.
Damon Elder 46:46
Obviously, there’s a lot of 506 C’s that are out there from crowd funders and other we were going straight to investors are trying to anyway but obviously the capital squares of the world, the Passco, the ExchangeRight, they’re still distributing through the wealth advisory channel, IBDs and whatnot, are we seeing the broker dealers loosen up and an acceptance of the 506 C’s?
I know there was a– When they first came out, maybe a lot less understanding. I know a lot of broker dealers objected to allowing on their platform. Is that loosening up a bit? Are we seeing more broker dealers embracing?
Taylor Garrett 47:20
I think it is a little bit but here’s– I mean, if I look at this simply just as– I mean, I own a broker dealer so I understand it a bit but I’m not a retail broker dealer, but we’ve been around this for a long time. The biggest challenge is if an investor gets their hands on an offering and they see it before the broker, before the advisor, financial advisor can understand their financial situation, that investor may fall in love with the deal prior to the financial advisor really understanding where they’re at and if that deal doesn’t make sense for that investor from a financial advice standpoint, there’s friction there. Challenges can happen in arise on that. I think that’s where retail broker dealers have questions on, hey, does it make sense to allow investors to see all this stuff? And they’re really kind of pushing where it is? Or do we let the financial advisors understand their financial situation, understand the deals all of them before to present the best potential risk adjusted return because let’s face it, some investors that if they have 5 deals put in front of them and you know, if cash flow is the most important thing, and then they’re going to point to the one, the one that has the highest cash flow, maybe that doesn’t make sense and that’s a financial job, financial advisors job to try to see if that makes sense for that.
I think that’s where we get a lot of push back from broker dealers from the sponsor, perspective, 506 C makes all the sense in the world because it takes away the chance that a Reg D exemption can be blown. If someone does take a 506 B does generally solicit it and yes, I mean, there’s a lot of variables inside of there. I don’t want to overplay that, but there could be challenges that happen if someone does something that they’re not supposed to on the opposite side of it.
It’s– I get both sides of it and it’s, it’s on a case-by-case basis, do I think broker dealers are getting more comfortable with it? In some ways they are and, in some ways, they’re not and I don’t know where it’s going to shake out.
I see the benefits of both sides and we just try to listen to the market as best we can and try to come up with the best structure and program possible for both sides to have a deal. That makes sense.
Damon Elder 49:19
Alright. Well, thanks for those insights. That’s good to hear. Let’s turn back John… for a moment. We’ll talk a little about what’s happening with the regulators and maybe in Washington, DC. So, you touched a bit about the Green Book this year, Biden’s budget proposal, calling yet again for a limitation on 1031 exchanges. You know obviously in the election year, this came up. It was a big headline. And you know we always take note of this, but you know… Congress did nothing the last time around. I anticipate we don’t expect Congress to do anything again… I mean, is that your take and we don’t want people to be complacent, I suppose. But I mean, what are you hearing? What do you see in on Capitol Hill in regard to 1031?
John Harrison 50:02
So, the fact that it was in the FY 22 Green Book was simply because they didn’t do any work from the Green Book the year before. I mean, it was basically the same thing. And so, I don’t think there was a lot of thought in it. I think they do realize that we go and visit congressional offices all the time. And once people understand 1031’s, we keep the syndicated out of it… Taylor, it’s just too difficult for them to wrap their minds around, we’re just dealing with a… you know straight 1031 Exchange, simple not syndicated. And once they understand that… that it’s a… it’s simply there’s a no lose for the government. And this thing in fact it adds to the GDP. And so, the… we ran another study. We updated the study that Milena Petrova had done and the numbers came out huge in our favor.
You’ve got a cost of possible revenue gain of 2 billion against an annual you know 70 billion GDP hit if you take it away… what it’s… these are big numbers. And we can, with the help of I know, some of the data that we get from people like Taylor and others and IPX, and these folks were able to go into an office and actually have an effect for a particular state or district. So, I don’t see it changing. But that doesn’t mean we don’t have to keep educating. And the other part of that is I do worry when you get some folks on say the Senator Warren camp or whatever that just really think that are apparently have it out for the finance industry. At least that’s my interpretation. That may not be completely fair. But our big worry is we… you know, get swept up baby with the bathwater kind of thing on some of these. But that’s the risk… I think we’re good.
Damon Elder 52:11
Well then let’s turn to one other thing that I think is probably a bit more pressing. And that are the NASAA non-traded REIT guidelines that are currently being worked on. Like you said… I know that your group had met with folks from NASAA, IPA and others, have been working on this issue as well. And at the very least, we have a small victory from the industry’s perspective… I guess and that they’ve delayed and given another 30 days for the industry to provide data and comment on the revisions… the proposed revisions.
So where are we on that? I understand that the NASAA REIT guidelines like you referenced earlier, really come down to Reg BI and making sure that things are being compliant in the space a lot more complaints, according to the NASAA staff, from a non-traded REIT perspective but one of the underlying things is they’re talking about revising you know, concentration limits, the amount of the high net worth or an accredited investor can have invested in a non-traded REIT. There also… I believe, correct me if I’m wrong, they’re particularly talking about changing some of the accreditation standards and applying inflation I guess, adjustment to the accreditation standards. What’s going on there and to the greater panel as well, what if these NASAA REIT guidelines are enacted? What impact is that going to have on the non-traded REIT segment of our industry?
John Harrison 53:30
So I… the devil’s in the details… There are states that already have concentration limits. However, how do you measure that… Is it aggregated? Is it per the issuer? Is it… When does the trend… Is it when the transaction happens? Is it over time? Do you rebalance out of it? All these kinds of things are not thought through. So, we don’t know what it looks like it is. At this point with we’re putting data together for them. So, one, the basic argument was non-traded REITs don’t perform well. Well, I got some data that show that the one… that’s a bad idea and the other is that they’re meant to be a non-correlated product. So, I think it’s a matter of education for the NASAA folks that once they see these data, the success how these products are used, then I think we have a chance if it goes south and then NASAA would come up with some sort of large scale suggestion guideline for the states. But ultimately, the states themselves are sovereign. So, they’re the ones who are implementing this in. NASAA can only say what… they’ll give guidelines out in the states can do it themselves. So, then we go state by state…
Kevin Gannon 54:58
Let me throw two cents in there John… Number one, the NASAA guideline people, the NASAA commissioners, they’re focused on lifecycle rates. It didn’t perform well because they invested in the wrong asset class, right… That’s step number one, you know then we attracted because we restructured NAV REITs fundamentally and we attract these monstrous asset managers who gave us good insight into what assets to invest in at multifamily, industrial self-storage, etc. And we did that. And they gave us liquidity and all these other great things in their programs with regular appraisal process. And so, the industry evolved, and it morphed and they’re trying to apply a new set of rules to the old product that’s gone you know, for the most part… So to me… they kind of missed it. And they didn’t understand that the market changed the way these products were designed. And… built and sold, right. That’s what they missed.
They’re missing that we’re working with… we’ve worked with your organization as well as the IPA. We’re drafting our own letter to lay all this out because we think they just missed it. And by the way, by changing those standards, there’s an argument you could make in terms of who qualifies to invest in these things? That you’re taking the little guy out of the opportunity to invest with some of these monstrous real estate companies, right? The Blackstones and Starwoods, the Nuveens of the world… they’ve created these great products and you’re only putting up a small amount of money. You should have an opportunity to do that when you saw the rates of return on my chart. They’ve been off the charts, right? And you’re taking that out of their hands. That doesn’t seem like the answer we should be shooting for, right?
And any event… I think a lot of information is based upon you know… it’s like looking at TICs to look at how DSTs are performing, right? Taylor, we were doing different stuff you know, 15 years ago, right? Different products, different design, different managers, right? We changed all that. And it morphed and the industry kicked out the guys who were no good. And we went forward with these new great… great household names you know, so I think so much has changed. It’s really hard to describe it all. I just wasted two minutes describing it. But that’s how I feel about it…
Damon Elder 57:22
Thanks… Kevin on that, Taylor you have anything to add? Sorry…
Taylor Gerrett 57:27
No I’m… I know we’re… I know we’re over time. But yes, if we were doing the same stuff, we were doing back in 2004, 2005 and 2020, when the pandemic happened, we’d be you know… we wouldn’t be talking, we wouldn’t be part of this right now. I mean the great thing about this industry is it’s meant to be right down the middle of the road, somewhat plain vanilla, good… good assets, good locations but we’re not trying to hit home runs in the DST space. We’re trying to do well for investors trying to preserve their capital, give them some meaningful cash flow. But it’s when you’re past that stage of your life going into more passive stuff. And that’s why apartments and net lease and industrial long-term leases and these kinds of products make a ton of sense you know.
Multi-tenant office… if we had a multi-tenant office in March of 2020, there was a DST or high leverage you know… hotel deal, they wouldn’t have survived this kind of structure. So, I’m excited where we’re at. I’m excited where the broker dealers are, what they like, what kind of assets they’re comfortable with. And I think the risk adjusted returns that are there make all the sense in the world for this space long term and it’s great for everyday investors to be able to invest in very institutional quality real estate that’s never been available to them instead of selling a fourplex down the road in Salt Lake City and moving to Provo to buy another fourplex… you haven’t really changed your stars right? But if I can now take that million dollars and go into you know some product in Florida and Texas and self-storage and apartments and Charles to him… you just do all this different kind of product. It’s… and that’s an amazing portfolio for some person that happens to live in northern Utah County…
Damon Elder 59:00
But I got to tell you, we are just over our allotted time. And I have so many more questions I want to ask so I guess we’re just going to have to do this again soon…
Taylor Garrett 59:09
We didn’t do 721 exchanges. That’s a big one. So…
Damon Elder 59:11
I wanted to talk about 721…
Taylor Garrett 59:13
Sorry I… That’s my fault. I should…
Damon Elder 59:15
I wanted to talk about…
John Harrison 59:17
People could come to the ADISA conference in October, and you know…
Damon Elder 59:24
We just had JP Morgan debut their first non-traded REIT… I wanted to talk about that and all these institutions coming into the place wire houses… where’s the money coming from? How can… so many more questions. So, guys put it on your calendar, we’ll figure something out. We’ll get this group together again and we’ll have a lot more to discuss down the road. But for now, I want to thank you on behalf of the DI wire and John… why don’t I turn it over to you… our cohost for you to give a closing statement.
John Harrison 59:49
Thanks so much… Damon and forgive my shameless plug. But these gentlemen, everybody on the screen will be there so you can answer your questions. Get your questions answered later as well. I want to thank Taylor who has done a great job and also helped with the product that we just turned down on the best practices of 1031 DSTs. And Kevin Gannon is always reliable and ready to help with any project we have. So, you have two of the great titans of the industry and very good hearted folks and I want to thank them for that. I want to thank our relationship with DI wire. And Damon… your excellent leadership there so on behalf of all of us… Thank you very much for joining us. We’ll see you soon…
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