CrowdStreet’s Ian Formigle is joined by Malcolm Davies, Principal and Managing Director at George Smith Partners to discuss the AirBnB IPO, what happens when debt is the new equity, and how universities are handling the fall semester and what that means for college towns.
Ian Formigle, Chief Investment Officer
Ian is a real estate professional and serial entrepreneur with 24+ years of experience in real estate private equity, startups, and equity and options trading. At CrowdStreet, Ian serves as the key decision-maker for all investments on its Marketplace, totaling over 400 offerings and some $13.7 billion of commercial real estate. Ian is the author of “The Comprehensive Guide to Commercial Real Estate Investing” and he is a contributing author at Forbes.com.
Prior to joining CrowdStreet, Ian was VP of Business Development for ScanlanKemperBard Companies, where he managed the firm’s alternative investment platform and served as a senior acquisitions officer on a team that acquired some $500 million of commercial real estate assets during his tenure. Previously, Ian co-founded and served as CEO of Clarus Property Ventures, a regional real estate private equity firm that focused on multifamily acquisitions. Ian began his career as an equity options market maker and member of the Pacific Exchange. Ian holds a BA in Economics and a BA in Political Science from the University of California at Berkeley and has held numerous securities licenses including Series 7 and 63.
Malcolm Davies, Founder & Sr. Managing Partner, Way Capital
Malcolm has over 25 years of experience as an award-winning capital advisor and developer, having advised and been involved with over $15B worth of total capitalizations, both in the equity and debt markets. Davies has utilized his expertise to lead developers and investors to structure and capitalize billions of dollars-worth of commercial real estate ventures. He has extensive experience in structuring transactions across the capital stack, including non-recourse senior and stretch-senior debt, mezzanine and preferred equity financings, and Co-GP and LP equity financing solutions for development, value add and stabilized projects.
Malcolm has vast experience in structuring various scenarios within the capital stack including non-recourse senior debt, mezzanine, and preferred & JV equity financings in the construction, value add, and permanent finance marketplace. Malcolm’s expertise as a developer has been instrumental in advising his clients through his real-world experiences in various stages of the real estate cycle, including the Great Recession.
00:00:03 Welcome back to StreetBeats for August 25th. This is our weekly segment where we cover c r e capital markets, debt, finance, economic trends, and how they're affecting commercial real estate. And as always with us, we have Malcolm Davies, principal and managing director at George Smith Partners. So to get right into it, w you know, what are some of the trends that you were seeing from last week? Important things happening, um, while I was outta town?
00:00:29 Yeah. Well, the, you know, the world does go on, Ian, unfortunately when you're gone. So, uh, we, we missed you though. Uh, Henry did cheated. Great, though. So, look, I think there's a lot of things, this is typically the slower time of the year. We think of, you know, August, everyone's on vacation and the like, but I think this year we're starting to see some things that are occurring. So we're, we, were fortunate and happy to report that we closed our first hotel acquisition loan, uh, in five months last week. So, you know, that was pretty cool. Um, undisclosed location. But, um, you know, it's good to say that, you know, there are, there are hotel lenders that are out there. So I think in that sense, we think that transactional business will start to flow a little bit in hospitality. You and I have talked about this week to week.
00:01:11 Look, the performance numbers aren't bad, so I'll let, we'll get into that in a little bit. But frankly, um, you know, things that we're paying attention to a little bit, restaurant bankruptcies we're worried about on the retail side. You know, a lot of it here in California, for example, we're most restaurants have to be outside. And even here it does get a little cooler, you know, in the winter. And so how will that affect restaurants going forward nationally? Um, some people are calling it the Covid Winter. Um, look, COVID cases are going down. I think that's great to see. It's, it'll help us reopen. Schools have a little bit more of a semblance of a normal life. And I think the masks are working. You know, I, I'm not a doctor, but, you know, I'm not an epidemiologist, but it seems like that's the case. Other things, look, JP Morgan, I think a couple minutes ago, announced that they're gonna completely revamp their whole workforce working environment, meaning, you know, work at home, work in the office, have it be a hybrid model, which really will have transformative effects on, you know, office use and space. So those are some of the things that have occurred since you've been gone. But let's, let's get into some of the stuff that, the data points that you and I were chatting on, uh, a few minutes ago.
00:02:13 Yeah. Uh, thanks. Well, first, congratulations on closing the hotel loan. Um, getting one of those done right now is, is nothing short of nearly miraculous. So congratulations. Um, and I would, I would agree that I'm hoping that that's an indicator that we're gonna start to see a few more lenders lean in and, you know, look at some of these basey resets and, you know, and take advantage. Um, there's, there's honestly, uh, you know, win tells due trade. Um, there's a very compelling story for why they could trade right now and why they could be, you know, maybe one of the best investments you can make today. Um, all about the deal. But, but how
00:02:46 About the basis?
00:02:47 All about basis? Um, so, you know, some of the stuff that I think that struck me when I got back into town was first, you know, reading about the Airbnb I p o. Really interesting story there, right? Because we, we have, you know, we got a private company that we've been tracking for years. We get been getting these data points on valuation. 2017, the company was valued at 30 billion. You know, now going into Covid, as we all know, it was hit really hard. Uh, you know, we saw a massive drop off in bookings led to, to layoffs of the company. You know, they went out and did a, a dead offering, you know, in the early phase of the pandemic that pegged the valuation of the company with the warrants at about 18 billion mm-hmm. <affirmative>. So right now, to me, very curious to see where that I p o debuts and if it debuts anywhere near the 18 billion valuation we saw earlier this year, probably not.
00:03:36 But even if it's in the low twenties, it could be a great deal. Uh, you know, you, you like what's gonna happen to that company over the long term? And I think what's happening today is indicative of that because, you know, we've now seen year over year growth in their bookings, uh, you know, in July and June. So to me, just a fascinating story to see, you know, a company lean into what's going on in the equity markets. They're robust, as we can always see, we're, we're back to record highs. Um, so I, I think a pretty cool story there.
00:04:08 Yeah, no question. I think your reality is, you know, investment appetite is big. And, and if you look at the stuff that you say, look, if it's i p o evaluation and at what it's at, that also is an indication of, you know, what we just talked about, about hotel financing. You know, that was a very strong acquisition on a price per key basis. I think you're gonna start to see, hey, is that a, is that a price per key? You know, the hospitality sector or price per foot and retail, you know, these are spaces that have an ability to transact. And if the price is good and you think that, that you can make money, um, at that basis with lots of variables going on in the world, uh, that's where opportunities are certainly gonna lie. Again, what we talk about a lot, you know, where debt is, the new equity is to get lenders to sign off on, you know, what is, you know, the risk profile for them and what are they comfortable with doing. But frankly, you know, we're, we're able to show stuff. I mean, we talked about this. Look, the TSA counts, right? I think what we're about one third, but before, what were we at before? I mean,
00:05:09 We were, yeah, we, we are, we're sitting right there. I mean, this last week, you see individual days that are looking like 33 to 34% of the same weekday last year, you know, just a couple weeks ago we were on this segment talking about how they punched through 30% for the first time. So again, 10% both over just a couple weeks ago. So we're, we're now seeing that people are getting out and traveling, um, you know, talk, continuing along with the thread of the hotel segment. You know, look at the s t r week over week data. Yeah. You know, big week this week, over 50% occupancy for the first time nationwide since the beginning of the pandemic, right? It's not insignificant. Uh, you know, we're now, we've now seen 17 out of 18 weeks of positive gains in occupancy. So we, again, we all know the hotel recovery is gonna be long. It's gonna be protracted, but we're see, but the journey continues and we are getting there.
00:06:03 But I do think, you know, the fall, what's it gonna be like, you know, um, that that'll be an indicator for us. You know, look, we're still a couple weeks away from, from Labor Day holiday. Um, kids are going back to school. Um, we gotta get 'em back into the classrooms. And so we're hopeful that cases can go down in, in major markets. A lot of places in the country have already sent their kids back to school. Um, we'll see how that goes. Obviously with the universities, you've seen some, some Covid spikes, um, and then they've gone kind of virtual,
00:06:31 You know, when we think about getting through Labor Day and looking at, at heading into September, you know, to me right now the, the university's story is kind of the story to watch. Um, we have, you know, so we've got the Davidson report that talks about how 47% of universities are in, you know, going to some form of either hybrid or online curriculum. So that's gonna play out at a bunch of universities this fall. And to me, that's, that also has obviously economic ramifications on those college towns, you know, and you know, to me, the really, the, the, where this is going, the big story is, you know, this to me ultimately boils down to, you know, big universities probably benefiting, unfortunately at the expense of the smaller universities. They're, those are the, the big universities in the major conferences, they're the ones with the deep endowments.
00:07:18 They're well capitalized. They're going to, they're gonna get through this, they're gonna see it through whether or not we have, you know, obviously we have the fall start at U N C, they're gonna get through it. It, it's just a matter of time. The, the small universities that are struggling right now, they don't have that luxury. They might not see it through. Right. We are gonna see some colleges close around the United States, ultimately, potentially to the benefit of the big universities that pick up, um, those, those U students in the years ahead. So, you know, when we look at student housing, and we are looking at it right now mm-hmm. <affirmative> mm-hmm. <affirmative>, um, I think that we're, you know, we're looking at it from that lens. We're looking at, you know, well located properties, you know, so basically adjacent or near adjacent major universities in major conferences, like, to me, that's the play. Um, so that, that's how we're looking at it. And again, I think we'll be, be very interesting to keep watching how, you know, the, the fall curriculum kind of rolls out and if we can keep the kids in the classes, and if we can, then, you know, maybe, obviously that's good news for everybody. Um, but we know for some universities it's basically just a matter of time until things do return to normal while for minutes, some of the others perhaps not.
00:08:24 Right? And, um, you know, to take back to how these deals are all getting done right now, you know, we're, we're a, we're, we're a an organization tries to get as much in the non-recourse, uh, financing world as we possibly can, you know, but reality is, we talked about this last week with Anna-Marie. She's, we said, well, you know, how do you solve the challenge of a deal to give a creative equity returns if the sponsor's willing to, you know, quote unquote put their backstop on their guarantee? It does get us through this time. And you're starting to see lenders now step in and say, okay, we'll do that deal, even though I don't really love the asset class right now for myself, but I'm okay with your balance sheet, your capacity, and we will let you do that, deal with a, with a little bit of recourse, you know, to it. And, and I think that we're gonna see that going through the fall and hopefully coming out another end where, where more non-recourse can come back. Um, but that's a good way to get around and that's good to see the lenders are looking that way now.
00:09:17 Yeah, no, absolutely. And you know, and again, it, it just continues to reaffirm that when, when basis is good and you have a business plan that can see through to the other side of the pandemic, you know, all of a sudden then recourse isn't so scary because you feel like you're getting rewarded adequately on the backside, you know, in 23, 24 when you go to exit that property. Absolutely. And these are the times to take risk. And sometimes taking risk means putting your balance sheet on the line. Um, but we all know that these are the times that you do it, right? You don't do it at the end of a cycle. You do it at the, at the, at the trough of a cycle. So, which, you know, I think the last thing, and I think this is gonna wrap it up, you know, speaking of the trough of a cycle, you know, uh, I recently just watched, you know, for anybody who, who knows Peter Linman out there, you know, he's a renowned real estate economics or economist, you know, been at the University of Pennsylvania for a bunch of years now.
00:10:06 He has his own consulting firm called Linman Associates. He recently held a webinar on August 13th for anybody who wants to watch it. It's very easy to find, go to YouTube, you know, search Peter Linman with two ends. He essentially comes out and just says, we hit bottom in June with the data is now there. Um, to me that's huge going forward. Now we know that we are, you know, we are definitely at the beginning of a protracted recovery, um, new, you know, and, and Peter Linman even has a new way to describe it, which I thought was hilarious. It is. He's calling it the butterfly going up the hill recovery. It will be slow, it will be, it will flutter, it will move around. It will not be linear, but we will eventually get there. And so, you know, I, I think that's a great way to characterize where we sit in August, is that we are this butterfly now fluttering up the hill.
00:11:00 Um, but it means that we're, we're at the beginning of the recovery, right? Which means that we can have confidence going forward that things, when we think about things in quarters and now years, the ensuing quarters and years will be better than the previous quarters and years, right? So that's, that's the part that I think gives everybody a lot of optimism now, heading into the fall, knowing that we still have, you know, some tough months ahead of us, you know, but hopefully at this point we're talking tough months, not tough years. Um, so that, I think that was the big takeaway. Well, you know, I, we've covered a lot of stuff for today, Malcolm, so I think that's probably a wrap for, for now. Yeah. We've bit off a lot this week. Welcome
00:11:38 Back, Ian. We're we're happy to have you back, bud.
00:11:40 Glad, great to be back. And also important to note for everybody out there that now that we've moved into, we're gonna start alternating weeks, uh, now that we've had Anna-Marie come in and do a segment with, with us. We thought it was, was, it was awesome. And we want to keep, keep doing that. Uh, so look forward to her coming back next week and doing this segment with Malcolm. And then I will do the following week, and we're gonna go from there. So you'll, you'll start to get a different take from CrowdStreets, investments team, uh, on going forward and then, you know, obviously anchored with Malcolm every week. Um, so thanks Malcolm. Great. See you this week. Thanks everyone for tuning in, uh, until I see you again in two weeks,
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