Hypothetical - what do REPE funds do now?

In light of these down markets, let's say this virus launches us into a recession. A recession not caused by overblown real estate values.

What do private equity/debt funds do in an environment like this? How does the strategy change? Is it a just wait it out and see?

This doesn't seem like a situation where there's be boat loads of NPL portfolios hitting the market, maybe not as many distressed properties to buy up, but I guess I could be wrong there. What's the play?

Maybe someone who was in repe during the dotcom bubble could enlighten us on RE plays through that crash.

Comments (96)

Mar 9, 2020 - 10:22am
decrebepro, what's your opinion? Comment below:

If anything I think real estate is one of the safest sectors right now. Look at REITs compared to the rest of the market today. Growth obviously slows and retail/hospitality will get hammered but the yield will be way more attractive on a relative basis in products like apartments and industrial. Buildings with high WALE are worth their weight in gold.

Also - a credit crunch/liquidity trap scenario is exactly when you'd expect under-performing properties to start hitting the market...

Mar 9, 2020 - 5:07pm
Invalid_CREdentials, what's your opinion? Comment below:

WALE = weighted average lease expiration/expiry. Interchangeable with WALT

Don't @ me

  • 3
Funniest
Mar 13, 2020 - 11:13am
prospie, what's your opinion? Comment below:
applestw0apples:
What is 'WALE'?
Wale is an American rapper from Washington DC. He would probably be best known on WSO for his hit featuring Rick Ross, "Ambition."
Learn More

300+ video lessons across 6 modeling courses taught by elite practitioners at the top investment banks and private equity funds -- Excel Modeling -- Financial Statement Modeling -- M&A Modeling -- LBO Modeling -- DCF and Valuation Modeling -- ALL INCLUDED + 2 Huge Bonuses.

Learn more
Mar 10, 2020 - 6:32pm
Disjoint, what's your opinion? Comment below:
decrebepro:
If anything I think real estate is one of the safest sectors right now. Look at REITs compared to the rest of the market today. Growth obviously slows and retail/hospitality will get hammered but the yield will be way more attractive on a relative basis in products like apartments and industrial. Buildings with high WALE are worth their weight in gold. Also - a credit crunch/liquidity trap scenario is exactly when you'd expect under-performing properties to start hitting the market...

Yea bro - am loading up on some 20 year WeWork leases - weight in gold! Because when the economy turn they'll never walk away from that long lease! What about all the other companies who will be experiencing some level of bankruptcy as PE fund loaded them up on cheap debt with rock solid ICR ratios of less than 1.

Mar 27, 2020 - 8:06pm
Gordon Chang, what's your opinion? Comment below:

When you look at a single tenant building, the credit is what matters. But when you look at multi-tenant buildings where nobody is more than 20% of the building, then WALT is more focused on than tenant credits.

A building with 10 private credit tenants with good operating history vs. a building with 7 BBB rated tenants and 3 start-up companies, I don't think the latter is a clear winner.

WeWork though, if a building is 100% leased by them, I would avoid at all costs.

  • Analyst 1 in RE - Res
Apr 7, 2020 - 12:52pm

The idea that commercial property w/ higher WALE/WALT being safer during a recession makes sense to me; however, wouldn't a major caveat to that metric be that it doesn't take the risk of tenants seeking rent relief/default risk on their rent payments into account, correct? And couldn't you expect that to happen in the next few months for commercial property, particularly retail?

Mar 9, 2020 - 10:38am
BMCM, what's your opinion? Comment below:

Just quickly opened several tabs and wanted to follow this one without noticing it was on top, no worries I'm 100% mammal

  • Intern in IB - Gen
Mar 9, 2020 - 10:41am

There is no recession- it's just a panic. Markets will recover from coronavirus in a few months time- max probably 5 months. As for the recent drop in crude prices, this entails cheaper resources for most companies (airlines, etc.). Real estate will be fine, as for every industry unless you can think of a specific reason as to why it will be affected, it will be fine.

Mar 9, 2020 - 10:55am
maineiac42, what's your opinion? Comment below:

To play devils advocate... the us economy is largely driven by consumer demand and cheap shit from Asia. If people are afraid to go out and travel and our supply chain is disrupted in Asia it will have a ripple effect on every sector of real estate. Hospitality, retail, industrial could all see primary effects while MF could see secondary effects due to layoffs as companies start to fold and payrolls fall.

Array
  • 2
Mar 9, 2020 - 11:03am
Ozymandia, what's your opinion? Comment below:
Intern in IB - Gen:
There is no recession- it's just a panic. Markets will recover from coronavirus in a few months time- max probably 5 months.

So in other words, there will be a drop in GDP for 2 straight quarters.

Also known as the literal textbook definition of a recession.

  • Intern in IB - Gen
Mar 9, 2020 - 11:27am

Lmao I'll concede, I was thinking more so along the lines of a major recession (I grew up in the financial crisis era so that's what comes to mind), but you're right that it "technically" could become one using the more explicit definition of the word in terms of economics.

Mar 9, 2020 - 11:44am
maineiac42, what's your opinion? Comment below:

Nah fam, you seen these rates lately?

Array
Mar 9, 2020 - 11:53am
CRE, what's your opinion? Comment below:

Why?

Commercial Real Estate Developer

Mar 9, 2020 - 12:22pm
Sham Wow, what's your opinion? Comment below:

From what I understand, As rates decrease lenders put a higher spread on their loans because if rates move up significantly and their spreads are too low they could be out a lot of money in the securitization process.

Mar 25, 2020 - 11:18pm
Blake w Mitch and Murrary, what's your opinion? Comment below:

We had a call with a national multi family brokerage (CBRE, cushwake, etc.) Tuesday and buyers fall into three buckets; half are putting every thing on pause, another quarter are actively looking but are asking for 1-5 percent discounts because of the uncertainty, and another quarter that are predatory/opportunistic and waiting for distressed situations.

Mar 25, 2020 - 11:35pm
REISSL, what's your opinion? Comment below:

True. All debt brokers are saying the same thing, and personally we fall into all 3 buckets. I think most people are waiting to see what happens next week.

Half of you says: nothing has fundamentally changed, the asset is still a good buy, and this will work itself out

The other half: Okay, but what happens if the class B/C tenants just dont pay for 3 months, and stimulus runs out if it comes at all, and the insurance company and bank are knocking on your door?

Then the other other half says: what the above happens, leading to repricing of the asset, even by 5% or so; so now you're in an asset x% above market rate, with no ability to create value for 1-2 years, and in fact you are navigating maintaining current value, in order to hope to return capital at ~8%, when your competitors held cash a few months and were able to create alpha, and now your investor is asking why?

The prudent choice is definitely to sit and wait it out a few weeks, but real alpha will be realized or you'll lose a lot in the very near term. I dont think my capital, personally, is going to pull the trigger soon tho (like in a week or two)

Mar 9, 2020 - 1:57pm
promoteseeker, what's your opinion? Comment below:

We are proceeding business as usual. Pausing on some markets that we think will be more volatile (Houston and Orlando), and running more downside scenarios as part of our underwriting/investment documentation for all other deals.

My concern is 1) debt markets/liquidity and 2) fundraising/investor appetite in the space (though, given the alternatives, I would bet most institutional investors allocate more to the space).

Mar 9, 2020 - 7:51pm
b3h3lit, what's your opinion? Comment below:

I'd guess because the local economy is very tourism heavy, just as houston is very O&G heavy. Not sure how much the coronavirus would affect things like MF long-term, but hospitality is likely in for a nasty time for the next couple quarters.

Mar 19, 2020 - 2:01pm
KClubs, what's your opinion? Comment below:

REPE could be seriously affected if this situation gets drawn out enough for businesses to start shutting doors. RE income is not linear so losing tenants usually creates a large "step down" from the previous income. RE would probably be the last domino to fall, but if it does it probably won't be able to be stopped

Most Helpful
Mar 19, 2020 - 2:16pm
surrealassets, what's your opinion? Comment below:

REPE shops with a flexible mandate will temporarily down tools on private market auctions because capital markets have dried up and they can't get the leverage they need to hit their returns. They will start screening public market opportunities where the underlying sector won't get hammered (like retail or hotels) but where the company may need liquidity soon (e.g. large bond repayment in 2020 but not enough cash and no refi options because financing markets are on hold). You don't need to take the company private but can just carve out a part of their portfolio for a discount and provide them with the cash they need. They may have to stay unlevered but given the discount their day-1 yield will be higher and this will hurt less. Then refi once markets stabilise. This is how prudent PE shops should be making money now - not buying stabilised real estate in auctions and betting on yield compression.

Mar 25, 2020 - 11:44pm
REISSL, what's your opinion? Comment below:

you would need a shit load of equity , and very flexible IC to execute this no?

Not saying it is wrong at all, but this would take an absolute shit load of capital to pull off unlevered ... and big nuts

Mar 26, 2020 - 12:34pm
prospie, what's your opinion? Comment below:
surrealassets:
They will start screening public market opportunities where the underlying sector won't get hammered (like retail or hotels) but where the company may need liquidity soon (e.g. large bond repayment in 2020 but not enough cash and no refi options because financing markets are on hold). You don't need to take the company private but can just carve out a part of their portfolio for a discount and provide them with the cash they need. They may have to stay unlevered but given the discount their day-1 yield will be higher and this will hurt less. Then refi once markets stabilise.
good stuff!! thanks for this one
May 13, 2020 - 3:15am
mclovin1225, what's your opinion? Comment below:

I Actually would like to connect with you about this. We have some deal flow buy no capital right now. We are trying to find an outlet for our loans.

  • Incoming Analyst in PE - Other
Mar 29, 2020 - 10:25am

For larger sponsors using a fund structure there are a few options: draw down on lines of credit, call additional capital (usually only ~95% of committed capital is called during investment period), or obtain capital from other debt sources (bridge loans, etc...). It is the smaller managers who do not have access to these sources who will be hurt if they experience large credit losses and/or vacancies as lenders (direct lending) has dramatically slowed/stopped financing.

The property managers aren't going to run out of cash because managers can just defer capital improvements/maintenance. The risk is more on the side of covering debt service/maintaining debt service coverage covenants.

Apr 3, 2020 - 9:25pm
MidMarketMcLovin, what's your opinion? Comment below:

Agents are saying everything is fine, vendors think their land / asset is still worth what it was 2 months ago, and bank are too busy dealing with liquidity / covenant issues for operating assets (hotels or leisure) to lend. Trying to price stuff is difficult when people have no idea what the impact from Covid really will be.

For REPE funds which have the ability to invest in public RE opportunities (REITs or RE backed companies) it's a very interesting time as there are companies where the sell off does not stack up with the value of the underlying assets.

Apr 3, 2020 - 9:28pm
zwpeng, what's your opinion? Comment below:

For REPE funds what should they look at when determining which REITs to double down?

If you look at AG MIT and MFA they look pretty bad and will it be a good investment?

Apr 3, 2020 - 9:36pm
MidMarketMcLovin, what's your opinion? Comment below:

Alias voluptatibus culpa architecto maiores. Excepturi sint deleniti ducimus officia. Atque non illum expedita velit molestiae fugit delectus aut. Reprehenderit tempora nemo ad praesentium reiciendis.

Odio magnam est ut quo et fugiat dolore. Tempora dicta ipsa possimus et libero et. Et molestias aut nisi et totam illum omnis ab. Soluta cupiditate pariatur et dolor dolores.

Nobis est hic sint tenetur aspernatur sed quia. Aliquid animi sequi officia ad inventore autem autem. Sunt cupiditate beatae voluptas nobis ex sunt.

Sed labore amet perspiciatis possimus exercitationem ex. Repudiandae non et est occaecati ut iure odio enim. Voluptatum facere dolorem sapiente vel omnis qui eum dolores.

Apr 6, 2020 - 7:10am
Kisame111Hoshigaki, what's your opinion? Comment below:

Delectus nisi exercitationem ut iste corporis quidem facere. Quo sit perspiciatis debitis laudantium saepe. Tenetur dolore dolores officiis cupiditate adipisci neque optio ut. Ea voluptatem quas quos est animi labore occaecati.

Velit aut consectetur et dolores non perspiciatis cum commodi. Enim perferendis vero ipsum laudantium. Et quaerat laboriosam delectus architecto.

Start Discussion

Career Advancement Opportunities

September 2022 Investment Banking

  • Jefferies & Company (▲05) 99.6%
  • Lincoln International (= =) 99.2%
  • Bank of America Merrill Lynch (▲04) 98.8%
  • Financial Technology Partners (+ +) 98.5%
  • Evercore (▽02) 98.1%

Overall Employee Satisfaction

September 2022 Investment Banking

  • Jefferies & Company (▲12) 99.6%
  • Greenhill (▲07) 99.2%
  • Evercore (▲01) 98.8%
  • PJT Partners (▽02) 98.4%
  • Macquarie Group Limited ABN (▲21) 98.1%

Professional Growth Opportunities

September 2022 Investment Banking

  • Jefferies & Company (▲05) 99.6%
  • Lincoln International (▲03) 99.2%
  • PwC Corporate Finance (▲12) 98.8%
  • Bank of America Merrill Lynch (▲05) 98.5%
  • Houlihan Lokey (▲05) 98.1%

Total Avg Compensation

September 2022 Investment Banking

  • Director/MD (10) $613
  • Intern/Summer Analyst (318) $407
  • Vice President (38) $392
  • Associates (208) $257
  • 2nd Year Analyst (130) $163
  • 3rd+ Year Analyst (18) $159
  • 1st Year Analyst (437) $151
  • Intern/Summer Associate (83) $150