Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Economic Storytelling

Tyler Stewert
September 2, 2021
Podcast - Economic Storytelling

Paul Kaseburg, Chief Investment Officer at MG Properties Group, joined us on the podcast to discuss the story that numbers can tell about a real estate deal.

Paul joined MG Properties Group in 2010 and is responsible for the firm's acquisition, disposition, and capital markets activities. At MG, he has been involved with the purchase of approximately 18,000 units totaling $3 billion in total consideration.

Paul has 17 years of experience in real estate private equity investment, capital markets, and corporate M&A. Prior to joining MG, he held various roles in commercial real estate debt and equity acquisitions, development, and financing.


Click here to check out Paul's book: Investing in Real Estate Private Equity.

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RealCrowd (00:00:00):
All opinions expressed by Adam Hooper, Tyler Stewart, and Podcast guests are solely their own opinions and do not reflect the opinion of real crowd. This podcast is for informational purposes only. It should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Paul Kaseburg (00:00:22):
If you want to look into some of those assumptions we've talked about in the past. The most important thing you can do read the PPM. So PPMs are going to have a section where it talks about these assumptions. They should lay them out so that you have a sense of what are the key inputs into this model and what's the sponsor's game plan?

Adam Hooper (00:00:48):

Hey, Tyler.

Tyler Stewart (00:00:51):
Hey, Adam, how are you today?

Adam Hooper (00:00:54):
Tyler, we're back in the studio and I got to be honest. It's definitely nice to be able to have a familiar spot, to get back into some conversations about something that our guests are so passionate about. And hopefully bring some clarity around our little world of real estate investing.

Tyler Stewart (00:01:12):
Yeah. And who better to bring us some clarity than longtime friend of the show, Paul Kaseburg, Chief Investment Officer at MG Properties Group.

Adam Hooper (00:01:20):
Yeah, it's been a long time since we had Paul on the show and a lot has changed since we spoke with him last. So it was good to catch up with him and get his take on how they're seeing things evolve in their portfolio, some of the things that they've discovered during the crisis. And we talked a little bit more about the concept of economic storytelling and forecasting given everything that's going on right now.

Tyler Stewart (00:01:43):
Which was great because we brought on Paul a couple years back to talk about economic storytelling. And it's a whole new conversation now with the environment we're in, with what's going on with the pandemic. So it was good to have Paul come on and just give us the basics again of, how do you tell a story with the numbers? And then as a listener and as an investor, how do you dive into that story and uncover what's a realistic assumption for an opportunity?

Adam Hooper (00:02:12):
Yeah. And we talked a little bit about what they're seeing in the market right now with pricing in this post-COVID world. They're just starting to get back out in the market looking at new acquisitions to have a little conversation about what they're seeing there. To peel back the curtain a little bit on what they're seeing across different property classes within their portfolio and geographically. So again, I think Paul said they have 22,000 units right now in a pretty well geographically spread environment. So they've got a pretty good insight into what's going on certainly on the West Coast. So that was interesting to hear about.

Adam Hooper (00:02:45):
Again, just another fantastic conversation with Paul, super grateful for him coming on and spending this time with us today. And hopefully listeners will get a little bit of info out of this and be able to have a better sense of how to look forward to your rest of this year. And even talk a little bit about what we might expect early next year from the recovery. So another really solid episode with Paul.

Tyler Stewart (00:03:06):
Absolutely. Thanks again, Paul, for coming on and listeners, we'll have links to some sources that Paul listed, especially his book. So be sure to check the show notes for link to his book.

Adam Hooper (00:03:17):
Yeah. And that's again, check the show notes, always have some good info down there. And again, a way to get in touch with Paul. So as always, if you have any comments or questions, feedback, let us know what you want to hear on the show. Let us know what you'd like us to cover next. Send us a note to and with that Tyler Stewart let's get to it.

Adam Hooper (00:03:39):
Paul, we're jumping in here. We were just talking before we started recording and there was so much good stuff we had to hit the record button. So we'll start with first thanking you for again, coming on the show. It's been some time since we spoke. A lot has changed, a lot has happened and we're excited to chat with you today about what you guys are seeing out there.

Paul Kaseburg (00:03:59):
Well, thanks for having me. It's always great to be on the show and indeed it is interesting times that we live in. So glad to be here.

Adam Hooper (00:04:06):
You were just talking about how you just went to tour one of your assets and maybe go look at a few new properties. So give us an update on what you guys are seeing in your portfolio, where activity's going, and some things you guys are looking at out there.

Paul Kaseburg (00:04:21):
Sure. So I guess the progression of how this all occurred for us was, clearly when the extent of COVID became apparent. Our first focus was just focusing on our portfolio and making sure that we were doing whatever you can to get ready for it. And I think we, and probably the rest of the multifamily industry have been pleasantly surprised, I guess, if that's the right phrase to use about how it's impacted our operations. No one really knew what delinquency would be like and just how this would impact our onsite operations.

Paul Kaseburg (00:05:05):
So for our portfolio, we're right around at the end of the month for the last couple of months. We've been around 5% delinquency. It looks like we're probably trending toward ending up for each of those months being more like 2% delinquency. So we're maybe we're twice or a little bit over what our usual delinquency is. But absolutely manageable, certainly given the context of how things could have gone and how it's going in some other industries.

Paul Kaseburg (00:05:31):
So first of all, just very thankful to be in the multifamily industry. And it could be much worse. And I think once we got through that and manage that, we transitioned to, "Okay, well, what do we think is going to happen going forward?" And that means thinking about our operations, deciding what do we think is an appropriate amount of cash to distribute every quarter to our partners. Because it's hard to say, we know where we're at right now. We don't know exactly what will happen going forward. We want to be conservative, but at the same time, we don't want to just sit on cash. I'm sure people appreciate it right now. So we had some of those decisions to make.

Paul Kaseburg (00:06:13):
And then also making the transition to looking for opportunities right now. And I was just saying that I made my first trip, Southwest Airlines heading to Las Vegas for the day to go tour some properties on Monday. And it was a little bit of a surreal experience for someone who travels all the time to not travel for a couple of months. And just be at home mostly and not get on an airplane. It just felt really weird to go back to the airport and get on a plane. But it was great to get out there. I toured with brokers and did official tours, walking, vacants, doing a normal property tour, meeting with the onsite teams. So I think everyone's just figuring that out, what to do.

Paul Kaseburg (00:07:03):
While I was there, I also just stopped by our properties. We have a portfolio in Vegas and it gave me a chance to talk to our onsite team too. And I think it was interesting to talk to everyone because this crisis is just so different than everything else that none of us really had a playbook to work with for this. So I think history doesn't repeat itself, but it rhymes. And this particular crisis, it doesn't even really rhyme, it just is really different. So I feel like we had done as much as we could to really prepare for the downturn. We knew that one would come in the next couple of years, but we didn't know what would cause it and what it would be like.

Paul Kaseburg (00:07:53):
So I think some things that we did really prepared us well for this in terms of our leverage levels, the types of properties that we've been buying. But some things I don't think anybody could really prepare for in advance without knowing what was coming. Because there's just no real recent precedent for how to deal with this from an operations perspective. So talking to our onsites, all of our onsites, obviously we have a team at corporate who's working with our onsites. We have really reallocated our team to figure out, how can we support our teams onsite? Really prepare some materials for them to give to residents who've been impacted. And give them access to resources, help them access those resources, if they can't by themselves to help manage the crisis.

Paul Kaseburg (00:08:45):
And then talking to our onsites. Normally, there's a real process for managing a property. And there are a set of rules and regulations and you follow the process and you have measurements and you just do the same thing. And this just threw all that into disarray. So actually, it made me very appreciative that we self-manage. Because we have the kind of flexibility to just make decisions and implement them without a lot of bureaucracy. So that came in handy in a couple of occasions. And then the other thing is it just really allowed, I think our onsite teams to shine because they had the autonomy to say, "Look, there's no handbook for this. I'm just going to do what is appropriate and figure it out."

Paul Kaseburg (00:09:32):
And could there have been a lot of companies that have a reputation for that. It's like FedEx famously had employees handle that, Southwest does that and they pride themselves on it and it's like, "All right, our employees just took ownership of our properties and did a fantastic job." So it was great to see that and great to get out and talk to them in person and just hear how things are going on the ground. So yeah, there's definitely a lot going on except in the transaction world.

Adam Hooper (00:10:00):
Yeah. So a couple things I want to dig in a little bit before we start with the main topic of today. But from the transaction side, a lot of the challenges that were forecast with this current crisis and situation is just, how do you diligence an asset? How do you do a property tour? And from the leasing perspective as well, how has that shifted for you? Have you been doing virtual tours? Are you relying on video more? Do you see more of a return to traveling and onsite visits? What has that dynamic been like so far?

Paul Kaseburg (00:10:36):
It's really interesting to see how principals and brokers are figuring that out. And there's no real normal yet, but there's starting to be some trends emerge. So we had a portfolio that was under contract to sell… Well, it wasn't under contract. We had just awarded it right before this. So it was so early in the process that the buyer dropped out of that, which not too surprising. I had heard that the vast majority, basically every deal that was non-refundable dropped out contract because of this. And a lot of deals that were non-refundable also dropped out of contract. So it was a real extreme event in terms of just disrupting the transaction process. And it happened because of both process and because of potential change to value that no one really understood.

Paul Kaseburg (00:11:33):
So with the process, what we're seeing right now is for tours, there haven't been a lot of deals that have been launched post COVID yet. But we've just seen the first trickle of them over the last week or two, which has been great. As a transactions guy, I'm very happy about that. So I've seen a couple of actual broadly marketed deals get launched. And the way most of those are being handled is if there's a shorter desktop underwriting period, they'll have an offer. And then if people are competitive, then they'll go out and tour it then have the best and finals.

Paul Kaseburg (00:12:15):
So it's switching up the process a little bit, it's actually probably maybe a little bit more efficient than the normal process, to be honest. But that allows people to do homework on a lot of deals, but be judicious with their travel and their tours. So I think that makes sense, given the circumstances. There have been a couple of deals launched where people are just touring like normal too. So we're seeing some of that. I think it's just a little tricky, because we're on the bubble in terms of what different States are allowing in terms of access and being out and about.

Paul Kaseburg (00:12:51):
So I think we'll get back to normal very quickly once stay-at-home restrictions are lifted and everyone has the ability to just freely go out and about. I think there are some companies, especially some big institutions that aren't allowing their employees to travel. So that's creating a little bit of a drag on the process as well and that needs to get figured out. So definitely some video tours, a lot of videos, a lot of detailed materials being provided for people to underwrite on a desktop. And then everyone's just doing their best to check the box as much as possible.

Paul Kaseburg (00:13:28):
And then in the due diligence process, what appears to be the way to get through that is lenders right now are fine with third parties just touring common areas and units in the multifamily space. And just vacant units, not occupied units. And then they have more significant than normal holdbacks and those burn off in the future. So I think they're just saying, "Look, our holdbacks are big enough that we're not worried about the unit by unit blocks." Because those rarely turn up anything that's that material anyway. And from a buyer and seller perspective, I've heard of some holdbacks for units that couldn't be accessed during due diligence. And that would be held back for a certain period of time until the ultimate owner could get in there and see what's going on. So I think everyone on both sides wants to transact and everyone's just happened to be flexible about how to get it done.

Adam Hooper (00:14:24):
So you mentioned in there those deals that fell through early crisis, largely because there's a change in value that nobody understood. Where do you think we are in terms of understanding that change in value now three months on from the beginning of this?

Paul Kaseburg (00:14:42):
It's still early. So what we've seen is there have been very few deals, actually priced post-COVID, but they're having a couple. So I can think of a couple in Phoenix that they priced for basically pre-COVID pricing, definitely a sub 5% discount to pre-COVID pricing. Same thing with a couple of deals in Denver. What we're seeing emerge is there are a lot of buyers who are interested in buying deals from high single digits, call it an 8% to maybe a 12% discount in most markets. And there are a lot of sellers who are interested in selling deals from a 0% to a 4% discount from pre-COVID prices. So there's a bid-ask gap there and so nothing's transacting. And I think there will be a lot of sellers who would transact if it was clear that the market price was more discounted. But they don't want to be the first ones to transact.

Paul Kaseburg (00:15:48):
And I think about when you value real estate, one of the three pillars is sales comps. And you look at sales comps from the perspective of, I already know what I'm willing to pay because of my proforma underwriting. But sales comps just keep me from paying more than I should. Because I can look at what other people have been paying and I just don't want to pay more than that. But right now there's been such a disconnect that there are no data points. So nobody wants to look dumb because they're the first person to transact. And then three, four months from now, people look back and say, "Oh, why'd you sell it for that? Or why'd you buy it for that?" So everyone's just being conservative. So it's just going to take a little while for the market to get some momentum.

Paul Kaseburg (00:16:31):
I think the early indication right now with very thin offerings on the table is there's not much of a discount. There are a lot of people who want to buy. Multifamily has seen such a minimal impact to operations that it's not like buyers can look at the operations and say, "Well, analyze down 20%, because it's not." So I'm not foreseeing, if things continue to trend the way they are right now, significant distress or discounts in the institutional multifamily space. I think it's hard to say what changes economically and operationally, because we just don't know how this plays out and we're still so early in it. But based on what we're seeing right now, which is real early in the process, not a lot.

Paul Kaseburg (00:17:24):
Other product types, just talking to people who we work with our equity partners and such who are in other asset classes. I think there's the potential for a lot more dislocation, certainly hospitality, retail, those assets. I was talking to one of our partners and he was saying that they were negotiating with their lender on a hospitality asset they had in New York City. And his only leverage was he said, "If you don't work with me, I'm going to give you this back," and they don't want it. So it's just a really different situation there. So I think there's a lot of focus on that right now.

Adam Hooper (00:18:00):
And then one more point on your current portfolio. Remind us again, just quickly composition of by property class. And have you seen anything interesting between tenants moving either up or down a class or staying the same? Or have you seen any trends at this stage across the different property classes that you guys are operating?

Paul Kaseburg (00:18:24):
Sure. So our portfolio, we have about 22,000 units in Washington, Oregon, California, Arizona, and Nevada. And we're a little weighted towards Southern California, but pretty evenly spread between those markets. And the early trends are, we have a lot of B and we have some As and some B minus, C plus. And I'd say that the B minus, C plus has a little bit higher delinquency rate so far. But definitely not bad in comparison to what we were worried it might be. I'm a little more worried about A properties for the next six to 12 months, because those are properties that are going to be exposed to the new pipeline, new supply. Construction still continues on deals that had already started construction. So those are going to get delivered into a difficult leasing environment. And I think they're going to be more concessions than normal.

Paul Kaseburg (00:19:27):
So although the A properties have performed really well so far, I think there's a yellow flag up on those that we just need to watch them and see how those perform. And there might be some interesting opportunities in that space. We're actually seeing some on the transaction side, although there's not much being marketed. We've been putting out a couple of offers a week through just direct relationships with people who we've transacted before. And some of the most interesting opportunities are in the merchant build space. Because that's an area where I think there's just a little bit more dislocation. So that's what's going on in our portfolio.

Paul Kaseburg (00:20:05):
By region, interestingly, the worst region by far is Los Angeles. And L.A. is not a property class question there. Even our nicer, newer, well-located properties, the delinquencies are higher than we would've expected and higher than other markets. And I think that has a lot to do with the political climate and just the general politics of being a landlord and being a renter in L. A. is different than in Phoenix or Oregon even. So L.A. is a little tough. The Bay Area also, I think for probably similar reasons has a little higher delinquency.

Paul Kaseburg (00:20:52):
Phoenix just really has outperformed expectations. During this, it's done really well. The delinquency is very low there. And even Las Vegas, which for a lot of reasons that market, it's so tourism and entertainment driven that I think a lot of people are concerned about that. So far, at least it's outperformed expectations. So we'll see going forward, but that's the early indications from the portfolio.

Adam Hooper (00:21:25):
Yeah. And the comment you made about L. A., that's something we've talked about a little bit on the show is oftentimes the landlord is expected to shoulder all of that burden. You're getting squeezed from both sides. You've got banks that are maybe willing to do some forbearance or lenders that are willing to do forbearance. But at the end of the day, you still have a mortgage to pay, utilities, taxes. You don't get a break on those necessarily.

Adam Hooper (00:21:51):
And then there's a lot of incentives and stimulus that's going to help with the actual tenants and help that financial picture. But it seems like the property owners get lost in all of those different programs and have to shoulder the burden of that risk. How do you view that in that position? How's that something that you guys look at?

Paul Kaseburg (00:22:16):
Yeah. It is a complicated political situation. And I guess the way we look at it is, the vast majority of our portfolio is agency financed by Fannie Mae or Freddie Mac. And the agencies have rolled out some limitations on operations that limit what their agency finance landlords can do onsite. Those haven't really impacted us much because we've really so far taken the position that we are going to work with our residents as much as we possibly can to try to come up with a solution that works for everybody. Because this is really just nobody's fault. And we're in it for our residents to succeed. We're in the business of providing housing, not taking it away. So we've just been really, really proactive and I think maybe more so than some other groups.

Paul Kaseburg (00:23:15):
And I think that's contributed to things working out a little better than expected so far. I think in L.A., generally it's a little bit more of a polarized environment. One thing you mentioned is forbearance and Fannie and Freddie, as part of the limitations that they rolled out, they also rolled out a forbearance program for borrowers. And that's something that we're not planning on participating in. We don't need to, at this point, based on the way it looks like things are going. But I do think that there are probably a significant number of borrowers who have that as a backstop. And that is one other factor that's probably going to limit distress in the multifamily market. Because there's so much agency lending and there's forbearance, this option that's going to backstop some people who might otherwise be in distress. So I think that just adds a shock absorber to the system too.

Adam Hooper (00:24:14):
Yeah. And it'll be interesting to see again, as we were talking before we started recording how the second half of the year plays out. The Fed acted so quickly with so much stimulus to pump a lot of capital and resources into the system. That's helped, I think, bridge the gap, certainly here in the short-term. It's going to be interesting to see what happens if that gets extended. If it's not extended, what that will do to all these things that we're talking about today, occupancy and collections and valuations. So we're definitely keeping an eye on that. Are you guys doing anything different or preparing anything today? I know you said you're keeping an eye on how much you're distributing from that cashflow. Anything you guys are doing to prepare for what might come second half of this year or beyond?

Paul Kaseburg (00:25:06):
Our strategy has really been, try to look at how operations have changed so far and take a fairly conservative view of what might happen for the rest of the year, even if it's a little bit worse than expected. And then take into account the current cash position of each of our properties. And then distribute based on what we think for the most part operations would support going forward. And just try to maintain an appropriate cash balance at each of those properties so we have a little bit of downside protection.

Paul Kaseburg (00:25:47):
So it's property by property specific, but I think we just want to be conservative about it. But we don't want to be overly conservative and punitive about it either. So fortunately most of our properties are in a pretty good operating position. So I think if things erode more, we'll have the ability to cut distributions in the future. And likewise, if things turn out better than they might, then we'll have the opportunity to increase it. So I think we're just trying to be more flexible than we normally are. Normally, our distributions just don't change that materially very frequently. And now just really each quarter, we just want to start from scratch and really think about where we stand.

Adam Hooper (00:26:30):
Yeah. Flexibility is huge right now, isn't it?

Paul Kaseburg (00:26:34):
Yes, it is. We've really rolled out some new tools. Again, on the operation side, it gave everybody a chance to shine. And even on the corporate side, our asset management team has been just creating tools from scratch to try to re-forecast on an ongoing basis. And think about all these factors that we don't normally think about. So it has been keeping everyone busy and creative.

Adam Hooper (00:27:02):
Yeah. And that's a good segue into what we're hoping to chat with today, a chapter out of your book around this concept of economic storytelling. What can you learn from the numbers? What kind of story can you tell with the numbers? And I guess first, maybe we can start with, how much of what we used to think about forecasting or assumptions is still relevant today?

Adam Hooper (00:27:29):
It seems like everything we thought we knew in February is almost irrelevant now with how fast data is changing, how many different data sources everyone's paying attention to right now. Your uncertainty around making a determination of a future outcome with any real confidence behind it. How do you forecast in today's environment with some of these different things going on?

Paul Kaseburg (00:27:56):
Yeah. It's a real challenge and I think it just highlights the difficulty with forecasting. And as part of this, I went back and I read the chapter about economic storytelling and market forecasts. And it's funny because I hadn't read it for a while and it comes across as being a little bit cynical. It really was meant to be tongue in cheek in a lot of ways. But I was being, I think, provocative on purpose because it's easy to overestimate and be overconfident in your ability to forecast. And especially when you're reading the forecast that you pay a lot of money for, from some very smart economists, some teams who spent a lot of time coming up with these forecasts. I think it's easy to overestimate the accuracy of those. And just underestimate the amount of uncertainty in the world. And this last couple of months has just been a reminder of the importance of humility and just uncertainty and having flexibility to be able to roll with some unforeseen events.

Paul Kaseburg (00:29:15):
So I think in terms of how do you forecast, I think this is where at MG, at least we are long-term owners and investors. And we try to think about forecast in the context of seven to 10 years, as opposed to six to 12 months. So this is where, from my perspective, it's really important to have a conservative capitalization. So you can withstand some downturns and be picking deals that are going to be good 10 years from now. And regardless of what happens in the next 18 months, I think eventually we all agree, we're going to get through this.

Paul Kaseburg (00:29:56):
The economy is resilient, the human race is resilient. We're going to grow our way back out of it. And I think 10 years from now, it's hard to say that we'll be in a materially different position economically than we would've been expecting three, five months ago. So I think it's just a question of what's our path along that way. So I think that's the most important thing about forecasting is if you can take a longer view of things, then a lot of the volatility and the noise drops away and you don't have to worry about it as much.

Adam Hooper (00:30:35):
And since this has happened, are there any changes to the inputs that you guys are looking at or how you're weighting different inputs or factors? Are there new dynamics or new trends that you guys are trying to surface given what's going on? Or is that still yet to be determined?

Paul Kaseburg (00:30:56):
There's certainly a lot of discussion about what our assumptions should be and it's just a difficult environment because who knows, in the short-term. So I think the way we've approached it is we start out by being, I think pretty conservative about what we think will happen with operations over the course of the next year or two. Generally, with the deals that we're underwriting on the acquisition side right now, a lot of these are in the mid or high teens in terms of economic loss from vacancy and concessions and bad debt, et cetera. And that's pretty high. Normally you're in the single digits easily maybe mid-single digits.

Paul Kaseburg (00:31:39):
So I think we're being pretty conservative about that. But then we also step back and say, "Where would we have been going over the course of 10 years? And then what do we need to believe that we're going to get back generally to that area by the time we sell this property?" And then we correct everything else over the course of the following years to get us back on track. So I think that's generally our view on how we're underwriting deals right now, although there's some markets nuances to that and some deal nuances to it.

Adam Hooper (00:32:18):
For listeners out there, maybe run through some of the most key inputs that you guys are looking at when forecasting. And maybe given the current times, how can investors be not necessarily cynical, but cautious or look at them with I think, not less trust necessarily, but just more uncertainty in this time. So what are those factors and how can investors be maybe a little more scrutinous of looking at some of those inputs?

Paul Kaseburg (00:32:49):
Sure. So I would break the inputs into three categories, basically. There's the revenue inputs and the dollars coming in the door and that's, what are your market rents? What's rent growth, concessions, vacancy, bad debt, non-revenue units? And then there's a whole category of other income that comes in with RUBS, revenue, that comes from utility reimbursements, like parking, laundry, retail, all that. So that all falls into the revenue bucket. And then there's the expense side, which is things like salaries. It's administrative, marketing, turnover, contract services like security and elevators, landscaping, that kind of thing. Repairs, maintenance, utilities, insurance, taxes, those are all on the expense side. And then there's recurring capital that goes into that, which is the money that you spend on your property to just keep it physically up to the same standard.

Paul Kaseburg (00:34:01):
And then there's a third category of assumption, which is the other. And that's things like exit cap rates, your debt terms, transactional expenses, like legal, transfer taxes, third-party costs, things like that. Those are in that third category. So all three of those buckets end up impacting your overall valuation. And I just mentioned all those because models are so complicated and there are so many inputs. And not only is there an input, but there's a different input for each of the next 10 years and different growth rates. And the ultimate seller, in some cases, won't underwrite the same thing that the current operator has. We have a different insurance costs than a lot of sellers do. So you have to correct for that or admin costs.

Paul Kaseburg (00:34:55):
So it's really a complicated thing and so it's really hard for investors to evaluate from scratch. So I'd say if you want to look into some of those assumptions we've talked about in the past, the most important thing you can do read the PPM. So PPMs are going to have a section where it talks about these assumptions. They should lay them out so that you have a sense of, what are the key inputs into this model? And what's the sponsor's game plan? What's their expectation for how the world will unfold over the course of their hold period? So I would definitely go to the PPM and usually, if there's a slide deck or something like that, usually it has a couple pages in there that have a summary of the financial model. So it's worth looking at that.

Paul Kaseburg (00:35:44):
And I think in terms of how do you evaluate the reasonableness of that? Probably the best way is to just look at a lot of offerings, because that just gives you a good sense of what's normal and what's not. And then you can look at sponsor A and sponsor B and compare them and say, "Boy, sponsor B really has a different expectation for their value-add premiums on deals that look pretty similar." Or, "Boy, I wonder why the payroll is so much higher on these two deals that are otherwise similar." So you can think about those things. And there are probably reasons for most of those differences that you see. But it helps you start get a sense of what's normal and what's not. And just understand how the inputs go in there.

Adam Hooper (00:36:30):
I know you mentioned earlier on the revenue side of that equation, your portfolio and again, that of a lot of the managers that we're talking with right now. Hasn't been too materially impacted thus far, at least again in the multifamily space. How has the expense side of that equation held up in your opinions? Are you guys incurring more operational costs? Have you been more efficient in this current timeframe? Or what does the expense side of that equation look like these days?

Paul Kaseburg (00:36:55):
So we're in a really transitory period right now while the shutdown was in place. And as we start to emerge from that, I think the expenses will go back to close to what they were pre-COVID. So in the shutdown period, expenses did go down some. And I think probably the biggest difference was CapEx, because we're just not spending CapEx like we were before as proactively. And maybe some of that will be catch-up for some different things that we had planned. But some things like value-add renovations to units, I think we need to reevaluate the market environment for each of our deals individually and decide what were we doing for renovations before? What is the current environment? And what's demand for innovations? What's the right spec for that going forward? And reevaluate each of those properties differently.

Paul Kaseburg (00:38:01):
I suspect we'll probably make some changes to those scopes, at least at our different properties. So I think some of our CapEx spending could go down. Obviously, if you start to decrease the pace and the scope of your renovations, then that's also going to decrease the rate of increase of your rents too. So there are a whole variety of impacts that has to the model going forward.

Adam Hooper (00:38:28):
And if you had to crystal ball what's going to happen to rents in the short to medium term, how are you guys looking at that? Are you still forecasting or underwriting rent growth? Are you forecasting a decrease, keeping it flat? How are you guys looking at that metric? Obviously market by market, but-

Paul Kaseburg (00:38:51):
I wish I had a specific numerical answer for that because that's something we think about a lot in the deals that we're looking at. But I think the way that we are thinking about rents is for a period of time, everyone's number one focus was delinquency. And can people pay rent? Are they going to pay rent even if they can pay rent? And I think we're getting through, we have a couple months under our belt now and we see how that has trended and that's been probably better than expected. But at some point now we're going to shift from thinking about delinquency, to thinking about what are net effective rents, taking into account the concessions right now. And our face rent levels. So we use revenue management software. We also strategically use concessions depending on the circumstance.

Paul Kaseburg (00:39:45):
So really at the end of the day, the thing that matters the most is, how many dollars are coming in the door? Whether that comes from the [concessed 00:39:53] rent or just the lower face value rent, because you have higher rent, but you have high, bad debt. Really at the end of the day, you just want to collect more revenue. And I think our expectation is we're going to transition from worrying about delinquency to more seeing an erosion in net effective rents over the next couple of months. And I just think it's hard to imagine that doesn't happen for a little while given the magnitude of the impact of this to the economy. And obviously with some pretty exceptional unemployment benefits burning off here in the next couple of months, unless those are extended. That could have an impact too.

Paul Kaseburg (00:40:33):
So I think we're at least operating under the assumption that we're going to see net effective rents decline. I don't think precipitously, but we think that they're probably going to be going down in the near term. And hopefully they snap back up after that fairly quickly. But I think we want to be conservative and expect the decline.

Adam Hooper (00:40:57):
Again, a lot of that is based on employment and jobs and job growth, or return to jobs now, I guess is probably more appropriate than job growth necessarily. How are you guys looking at the granularity of that in terms of job sectors or different employment centers in some of the markets that you guys are looking at? Are you getting down to any granularity of what the composition of those jobs are? How do you look at jobs in these different markets?

Paul Kaseburg (00:41:27):
It depends a lot, each market is different and then each sub-market has its own quirks and nuances. And sometimes, a property within a sub-market just has a location that makes it particularly appealing to one resident or another. So it's all of the above. And I think the general things that we're keeping an eye on are, certainly Las Vegas, like we mentioned has a high entertainment percentage of workforce there. So that's something that we're keeping a really close eye on. Seattle is mixed, because it has a lot of tech. Obviously Amazon is there and that's probably a good sector to be in at the moment, given the current circumstances. But at the same time, Boeing is also a big employer there. And that's not a great area to be in right now.

Paul Kaseburg (00:42:22):
So it's mixed there. Portland's fairly diversified and we've seen it perform fairly well. Southern California, also fairly diversified. Some pockets of it have some entertainment or tourism exposure. Obviously it has a little bit different political risk than some other areas. Phoenix really outperformed much more diversified back office types of jobs that have, I think held up a lot better than in some prior downturns. And then Reno, it's a very small market so is maybe a little bit more volatile, but has performed really well so far.

Adam Hooper (00:43:05):
Okay. And then you mentioned before a lot of the forecasting and sources of data from very well-known large institutional data providers. How are you guys looking at where you're sourcing this data from, confidence in that data? And are you looking more internal within your own portfolio? Are you still looking to external data sources? How do you weigh or validate the source of the data now with everything changing so quickly?

Paul Kaseburg (00:43:41):
It is hard. And what I will say is we rely on multiple sources and really those sources, I think when we go out… And it's important to understand what those sources are. So you have sources that I won't go into by name, but large name brand real estate companies who employ a lot of economists. And they come up with research reports that forecast exactly what rents and vacancies and concessions and deliveries will be in each particular market. So every major real estate company has a division that does this. And each of those divisions have, I'd say different incentives which we talk about a little bit in the book. If you're getting your information from a real estate broker, the real estate brokers tend not to be too bearish, because they are in the business of selling real estate. So there's a little bit of an incentive there to be somewhat positive.

Paul Kaseburg (00:44:46):
And then if you're getting your reports from a third-party provider, where you pay often 10s of 1,000s of dollars a year to get these reports. In some ways you would think, "Well, their only incentive is to be accurate." But really the incentive there is they want people to pay a lot of money every year to buy their reports. And if you're in the business of buying real estate, you're not going to spend that much money to buy reports that are telling you, you shouldn't buy real estate. So there's definitely pressure, I think, to be a little bit optimistic, probably throughout the industry.

Paul Kaseburg (00:45:28):
So I think the way that we think about economic forecasting and reports overall is definitely, we don't just take those numbers and plug them directly into our model and just use that and not think about it. I think the most valuable parts of those reports are where they describe why they're forecasting, what they're forecasting. And rather than the specific numbers, there's really, really valuable information in there that goes into things like the development pipeline, where that is. So for instance, any deal that we look at, we're pulling up those services and we're looking at the development pipeline in three miles, from that property. One mile from that property, five miles from that property. What is that as a percentage of existing stock? What's the timeline likely for that? So that type of data, really valuable.

Paul Kaseburg (00:46:18):
And then other contextual information like what's happening with the job markets in the area? Who's hiring a lot? Who's laying off? What have the trends been in terms of operating performance? That kind of qualitative information is just as important as the quantitative information in terms of just understanding the dynamics of a market. Because if one of these services has a rent forecast of 3% growth next year, that could be because there's tremendous job growth and it's a very dynamic market. And there are also a lot of units being delivered and there's competition between properties for renters and it matches that 3%. Or it could be because there's no job growth, it's this really anemic economy, and there's also no supply coming in. So it also happens to be 3%. But those two situations, are really different investments.

Paul Kaseburg (00:47:25):
That really changes the way that you think about your risk profile on a property and the type of property that you might want to buy. So I think with market forecast, the real value is in really digging into them and reading what they have to say and all the context. As opposed to just pulling the top level, what are they forecasting every year for rent growth.

Adam Hooper (00:47:49):
What the heck does the life of an appraiser look like right now?

Paul Kaseburg (00:47:54):
I just cannot imagine how hard it would be to be an appraiser and you have to be. So we're in the process of refinancing a couple of properties right now and obviously an appraisal is part of that process. So it needs to get done. And it hasn't been an issue for us knock on wood so far, but I think it's very difficult because every part of that appraisal process is hard. So basically when we talked about it before, there are three parts to valuing real estate from an appraisal perspective. So there's the market comp part. And we talked about that. There are no market comps post-COVID, very few. So it's hard to say realistically, what something should trade on, just purely based on what other people are paying for it.

Paul Kaseburg (00:48:44):
The second part is what's replacement cost for that property? And right now, so many parts of that are up in the air. So right now it doesn't seem like construction costs are down materially, but that's because there's this pipeline that's still in process. Six months from now, 12 months from now, when there's not a lot being built, if that is the case, then do materials costs come down? Do labor costs come down, likely? What are land costs today? That's your independent variable there. So that part's really hard. I'm thinking through how difficult that would be. And then obviously there's the discounted cashflow part of it. And that part, like we talked about a lot of those inputs have a lot of uncertainty, so that's tough too. So I don't know, that's a tough business to be in.

Adam Hooper (00:49:37):
So you mentioned again, back to the example of a 3% rent growth could be composed of very different stories behind it. The raw number might be the same. There's a very different picture with both of those. When you combine that with this incentive structure, like you said again with maybe some of the data providers switching that now to the manager's perspective. If you're out, you have a deal and your contract and you're trying to raise capital. How can investors again, understand the incentive of a manager who's trying to raise capital for a deal?

Adam Hooper (00:50:15):
Obviously they have to feel pretty positive. They have to paint a good picture about that investment. How might that change from where we were three, four months ago, pre-COVID to current days of an investor really understanding the story behind those numbers? Again, I know it's obviously going to vary by the manager and the integrity and the whole picture combined. But is there a way for investors to get the story behind those numbers rather than just take them at face value?

Paul Kaseburg (00:50:46):
Yeah. This really goes back to some of our previous conversations too, about the importance of really picking the right manager. Because so much of this is really hard to evaluate from the outside. There are just so many pieces moving behind the scenes and so much complexity that it's just hard to evaluate. And the devil's in the details on these. So from a practical perspective though, I think again, looking at a lot of offerings is really important to get a feel for what's normal. And then if you can get access to some market reports, that gives you some context for asking the right questions, although you may not get the, just take those numbers and use them. At least it gives you a sense of the important factors that are going on in the market. And the other thing that is, I think probably easier to do than probably most people give it credit for is evaluating rents, if you want to, in multifamily, especially.

Paul Kaseburg (00:51:50):
So a multifamily, one of the really key drivers, there are basically two key drivers to it, but one of them is, what's your revenue coming in the door? What's your rent growth? And what's your value-add assumption? What's going to happen with your rents over the course of your whole period? And the value-add assumption especially, and the market rents are something that are pretty easy to evaluate on your own. Because anybody can go online and just Google, what are rents at this property? And you can just go online. They're all right there. It tells you if there are any specials.

Paul Kaseburg (00:52:25):
And then what are the rents at the properties around it? And you look at the operator's plan for the property and it says, "Oh, I'm upgrading the kitchens and they're going to look like this." And then you go online and you say, "Oh, well, competition across the street has the same thing and their rents are X dollars above it. And does that match up with this business plan?" So that's actually a pretty easy way I think, to evaluate one of the most important assumptions.

Adam Hooper (00:52:49):
Good. Are there new questions that investors should be asking in the current climate and going forward that they might not have thought to ask or need to ask pre-current situation?

Paul Kaseburg (00:53:04):
Wow, that's a great question. And I can just think of so many directions that could go. I think probably, one question that's important to have a good answer for is the downside protection for transaction. And really understanding, if we're wrong about the near term, how wrong can we be before we run into cashflow problems? So that's a real important thing to think through is what's my leverage level? What's my cashflow situation? What are the assumptions, but then what happens if those assumptions are wrong? And then what does that do to my deal? So I think that's where I would probably spend some time focusing on making sure I understand that.

Paul Kaseburg (00:53:54):
And then it's always important to pick a great sponsor. But it's especially important to pick a great sponsor right now. And I think the reasons for that are, if you have a sponsor that has a great deal, but then your sponsor's platform is in distress. That's not going to result in a good outcome for your investment. So it's important that their real estate is good, but also their sponsor is a strong, liquid, well-capitalized platform that has the experience to manage through and handle just a really uncertain environment. So I think maybe this is the environment where you don't spend as much time with emerging managers. Maybe you step back to managers who are a little bit more proven.

Paul Kaseburg (00:54:44):
And one other reason why I think that's helpful right now is for instance with us, the transaction market is almost closed right now. They're just a handful of deals that are being marketed and hopefully that'll go up in the future. But we actually have been really busy over this entire time underwriting deals, working with groups who we've transacted with before to try to put some deals together. And that's just because we have that history with people. So I think that even as the market re-emerges, those personal connections, the transaction history, and the relationships. Not to mention platform, liquidity, and ability to close deals, if things don't go as expected. I think that's really going to be very important in tying up deals at a good price. Because it's not just a beauty contest anymore to go out and win deals. It's really about, "Look, I want to sell this deal and I want it to trade the first time. I don't want to have to go back to market."

Adam Hooper (00:55:48):
How can an investor get a perspective on the sponsor's portfolio health? Again, like you said, I think that is crucial, if they're going to be bogged down with legacy assets that are going to be impacted or challenged by this. Regardless of how good that new deal is, that's going to cause a drag on operations and focus to manage that legacy portfolio. How can an investor ascertain the health of a, outside of asking for a balance sheet? Are there any metrics that you would suggest they look at or questions that could be asked to get to that information?

Paul Kaseburg (00:56:26):
Yeah, I don't think that's an unreasonable question to ask a sponsor if you're thinking about investing and just let them describe the situation. I think if you're evaluating from the outside, probably the factors I'd take into account are, look at their existing portfolio and understand the product type makeup. So if you're looking at a multifamily deal with them, but their main focus is retail and hospitality, that might just be something you want to think about. Because their focus may be on those other parts of their portfolio playing defense on those. Or they may just [inaudible 00:57:05] some resources on them.

Paul Kaseburg (00:57:06):
So I think the existing portfolio makeup and how much that existing portfolio is being impacted by the downturn, that's probably something we're thinking about. And then also, what's their general business plan? Are they generally high leverage, high return value-add, short-term investors? Is that business plan that they've been doing for the last couple of years, is that likely to be significantly impacted by the downturn? So I think getting a sense of what their portfolio looks like and what their normal business plan is, that should give you a pretty good idea of what kind of situation they're in.

Adam Hooper (00:57:45):
And we've taken almost an hour of your time. I'm curious though, as we round it out. If, and when we check back in early Q1 of next year, what are we going to be talking about?

Paul Kaseburg (00:57:56):
Oh, man, hopefully we're going to be talking about how quickly a recovery is going on at that point. It's hard to say exactly when effective treatments or a vaccine come out. And I think in the meantime, it's hard to say exactly what happens with the economy. But hopefully by the time we get to next year, we're starting to get to the point where either there's a way that we can treat this or vaccinate against it. Or that's in sight and there's a timeline to get there.

Paul Kaseburg (00:58:38):
And I think in the meantime, there's so much uncertainty about what's going to happen fundamentally with the economy. And we're just going to be understanding how much of that is temporary and how much of that is permanent and needs to rebuild over time. So hopefully by the time we get to next year, we've rounded the bend and we're heading back up. And it's just a question of how quickly can the creativity and the dynamism of our economy dig us back out of this?

Adam Hooper (00:59:10):
Okay. We'll be sure to get you back on and we'll test that forecast. Anything else Paul, that investors should be thinking about or asking at this time? Or again looking forward in the latter half of this year, things that we should be paying attention to that we didn't cover?

Paul Kaseburg (00:59:30):
I think it's a really interesting time to be an investor. So this is the time when, if you're a little conservative about the way you invest and you've set aside some cash and have some liquidity. These are the days that you're waiting for. And it's unclear how much and where the distress might show up. Although I think in the multifamily space, we're seeing less distress than some other areas, which is great. And I think we're probably going to see some people move into multifamily space because of that.

Paul Kaseburg (01:00:06):
I think there's some pockets where there might be some really interesting deals on some good real estate. And certainly in some other product types already, I know there's going to be some dislocation. So I think if you're an investor and you're looking to do deals, this should be a really exciting… I hesitate to say fun, but it should be a really exciting time and a really dynamic time. And these are the opportunities that we all wait for.

Adam Hooper (01:00:32):
Yeah. And again, we haven't been able to say that for almost 10 years now so I think it's similar. We're looking forward to seeing where those opportunities arise and how we can help investors take advantage of those.

Paul Kaseburg (01:00:47):

Adam Hooper (01:00:48):
Perfect. Well, Paul, again, great to catch up. Really, very much appreciative of you taking the time to chat with us today. How can listeners learn more about what you guys are up to or get in touch if they have some questions for you?

Paul Kaseburg (01:01:02):
I have zero presence on social media. I should probably be better about that. But you can always reach out to me, shoot me an email Check out our website, and I'll get back to you as soon as I can.

Adam Hooper (01:01:19):
Perfect. So Paul, again, thank you so much for coming on today. And we look forward to that conversation in Q1, if not before to check in on things.

Paul Kaseburg (01:01:27):
All right. Thank you so much for having me. It's been great.

Adam Hooper (01:01:29):
All right, listeners, that's all we've got for today and as always send us a note to for any feedback. With that, we'll catch you on the next one.

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