CrowdStreet’s Darren Powderly is joined by Stephen Quazzo, Co-founder and CEO Chairman of Pearlmark, to discuss how the firm’s portfolio is performing now compared to the market uncertainty of 2009, how they’re thinking about risk management over the next two years, and how capital sources are changing.
Darren Powderly, Co-Founder & VP Capital Markets
CrowdStreet
CrowdStreet
Darren founded CrowdStreet in 2012 after identifying the need to radically improve people's access to commercial real estate investments via technology. Over his 20+ year career, Darren has transacted billions of dollars’ worth of commercial real estate investments and enterprise software contracts. Darren is a driven leader who loves building relationships based on mutual success. In addition to building businesses, leading teams and advising a prestigious list of national clients, Darren has personally owned commercial real estate, syndicated investment groups and developed properties from the ground up.
00:00:06 Hello everybody. My name's Darren Powderly, the co-founder of CrowdStreet. And welcome to our expedition of StreetBeats. Happy to have Stephen Cuso with us today, the co-founder and CEO of Promark in Chicago, Illinois. Steve, welcome to StreetBeats. Thanks for joining us. Uh, please give us a little bit of an overview of yourself, your bio, and, uh, perhaps a little tidbit on how you work with CrowdStreet past.
00:00:29 Great. Thank you Darren. Uh, great to be with you today. Uh, I'm Steve Cuso, as Darren said, and, uh, I'm the, the CEO of, uh, Promark, which is a, uh, 25 year old, uh, investment management boutique, uh, based here in Chicago. Uh, over, over our history of 25 years, uh, we've probably done 500 plus, uh, real estate investments in the us, uh, totaling over 13 billion. Uh, and that includes, uh, about 150, uh, mezzanine loans cuz we're active on the debt space as well. Um, our, our focus is, uh, value add, uh, under a hundred million in size. Uh, we focus on really three segments, uh, office, apartments and, um, industrial or pretty much the three categories that, that we stick with.
00:01:23 Pearl Mark's been a wonderful partner of CrowdStreets and, um, absolutely delighted to be working with, uh, with you and Doug Lyons and the rest of your talented team there in Chicago. What are your observations right now? Uh, I know you recently inked an article for the Urban AlAllander Institute, and, uh, you've been putting some thought into observations. Uh, what do you, what are some of the things that you're seeing out there?
00:01:48 Um, I, I would say I'm actually pretty upbeat, uh, uh, about what we're seeing and, and, and really for a couple of reasons. Uh, one is, you know, unlike 2009, we're not having to play a lot of defense in our existing portfolio.
00:02:03 Mm-hmm.
00:02:03 <affirmative> like, for instance, our debt, our, our debt portfolio. We've had no borrowers, uh, come back for any relief. Uh, our apartment portfolio, which includes two of the, um, of the CrowdStreet investments are our, our, our April and May collections are averaging 95%. And in the case of the Dallas property, we're actually pushing rents higher. So that has afforded us kind of the opportunity to not spend all our time on our existing portfolio, you know, putting out fires, and instead I think we've been able to be a little bit more offensive and, and pursue opportunities that, you know, we're starting to see, I think over the next 60 to 90 days. It's gonna take a while, probably the fall, but they're coming. And so obviously we wanna position ourselves for that. Um, and then, and then lastly, I would just say, and, and I think this el alludes a little bit to, to the article that you talked about, um, you know, I'm cautiously optimistic about our prospects for, you know, for economic recovery.
00:03:07 And I think at the end of the day, you know, real estate is sort of the ultimate long-term asset and it's an inflation hedged, uh, investment and it done right, uh, can produce great, great cash flow and, and, and great income over time. So, you know, I kind of like where we are and, um, and, and over the next six to nine months, uh, I think we'll see some good opportunities. The thing we think about the most today, I mean, we always think about risk, but I think even more so today, we really are thinking about risk management, meaning, as you said, it's, it's really an uncertain time right now. A durability of the NOI of the underlying income is uncertain as well. And so underwriting that, so that as you look out, particularly over the next two years, okay, how do I get through this period?
00:03:56 And if things don't work exactly according to plan, how can I protect myself? And I think that's more important than ever today. And I think it's sort of shaped what types of opportunities, you know, on the margin we're going after. For instance, you know, we're, we're, we're not chasing after development deals right now, or we're not chasing after, you know, a hundred percent unoccupied buildings. I mean, there's a lot of risk associated with that. You know, we'd much rather do, you know, light value add or, you know, more stabilized me loans because guess what, they're out there today because, you know, and the pricing is different than it was three months ago, and it's at attractive levels,
00:04:34 You know, for those, uh, listeners who are not particularly, uh, knowledgeable about me loans, uh, where it is in the capital stack. And when you think about downside, uh, do you think about it differently when you're underwriting a ME opportunity versus a common equity opportunity? Just speak to that for a moment for those.
00:04:54 So one is, um, you know, so kind of big picture. I think we've always liked Mez and we certainly like it even more in today's world because Mez tends to be a defensive, you know, type of an investment and it tends to be an income-oriented investment. It's, you know, we're trying to hit a single, maybe a double, you know, this is not home run. We expect to get repaid from our loans. So we're generally in the cap stack. We're in there from 55, 60 up to as high as 80, 85 on average, we're generally at 80%. And in today's world, we're earning double digit returns. You know, for that slice of the stack, that's probably up at least 200 basis points from where we were, you know, three months ago. At the more opportunistic end of that scale, it's probably double that. The spread has probably widened 400 basis points plus from where we were three months ago. So from a risk reward standpoint, in an environment where tenure treasuries are at, you know, 70 bibs, you know, we think that's, you know, a terrific, you know, return for the risk
00:06:00 Makes a ton of sense to me. Uh, and then I had a question for you that, so, so spreads are rising, um, because risk has become off, or maybe some capital partners are, are not participating in the market because they exactly do have problems in their portfolio. So they're busy asset managing. So you guys are focused, they're, you're, you're open for business and spreads are rising. It's a private market, and it's not as deep as, say the stock market with pricing efficiency, that that happens in milliseconds. Ho who determines that? How the movement of the spreads?
00:06:33 Well, you know, again, it's, it's supply of capital, you know, versus demand. And as you correctly pointed out, the, the supply of capital has dwindled. I, I wouldn't say it's gone, but you're right there, there are a lot of, uh, senior stretch private debt fund lenders who have had to exit the market, uh, because their repo lines or warehouse lines or their, their financing vehicles have been unavailable to them. Um, and so having to charge much wider spreads to hit their investor returns.
00:07:03 Indeed. Any, uh, any sort of closing thoughts, uh, for, you know, where the, where the future opportunities lie or, you know, what, what you get? We, we've talked a lot about what you guys are looking for and how you're positioning yourself, uh, in this, in this time. So we've talked a lot about offense, but, uh, you know, any, any other thoughts to share with the audience before we, uh, break here, Steve?
00:07:25 No, I, as I said, I think it's, you know, it's, be careful out there. I, I, I think managing risk is critical. Um, it's, you know, it's one of the reasons why as we, we talked about we, like me, one of the reasons why we like apartments, um, you know, we're not buying big, you know, trophy apartment buildings in downtowns. Like the stuff that we've done through your platform in Charlotte, in Dallas, in Nashville, you know, these are growth markets. These are, these are, I don't, you know, workforce housing. These are renters by necessity, you know, not by, you know, uh, by choice mm-hmm. <affirmative>. And so, you know, they're tied to jobs and growth and that's kind of why they're, they're doing well. So I think, you know, this is a time to, to be thoughtful, um, in the investing side and, and to, to focus on areas where your, your cash flow is, uh, is durable, as I said, and, and is protected.
00:08:18 Thanks for joining me for StreetBeats and, uh, we look forward to, uh, talking with you in the very near future.
00:00:29 Great. Thank you Darren. Uh, great to be with you today. Uh, I'm Steve Cuso, as Darren said, and, uh, I'm the, the CEO of, uh, Promark, which is a, uh, 25 year old, uh, investment management boutique, uh, based here in Chicago. Uh, over, over our history of 25 years, uh, we've probably done 500 plus, uh, real estate investments in the us, uh, totaling over 13 billion. Uh, and that includes, uh, about 150, uh, mezzanine loans cuz we're active on the debt space as well. Um, our, our focus is, uh, value add, uh, under a hundred million in size. Uh, we focus on really three segments, uh, office, apartments and, um, industrial or pretty much the three categories that, that we stick with.
00:01:23 Pearl Mark's been a wonderful partner of CrowdStreets and, um, absolutely delighted to be working with, uh, with you and Doug Lyons and the rest of your talented team there in Chicago. What are your observations right now? Uh, I know you recently inked an article for the Urban AlAllander Institute, and, uh, you've been putting some thought into observations. Uh, what do you, what are some of the things that you're seeing out there?
00:01:48 Um, I, I would say I'm actually pretty upbeat, uh, uh, about what we're seeing and, and, and really for a couple of reasons. Uh, one is, you know, unlike 2009, we're not having to play a lot of defense in our existing portfolio.
00:02:03 Mm-hmm.
00:02:03 <affirmative> like, for instance, our debt, our, our debt portfolio. We've had no borrowers, uh, come back for any relief. Uh, our apartment portfolio, which includes two of the, um, of the CrowdStreet investments are our, our, our April and May collections are averaging 95%. And in the case of the Dallas property, we're actually pushing rents higher. So that has afforded us kind of the opportunity to not spend all our time on our existing portfolio, you know, putting out fires, and instead I think we've been able to be a little bit more offensive and, and pursue opportunities that, you know, we're starting to see, I think over the next 60 to 90 days. It's gonna take a while, probably the fall, but they're coming. And so obviously we wanna position ourselves for that. Um, and then, and then lastly, I would just say, and, and I think this el alludes a little bit to, to the article that you talked about, um, you know, I'm cautiously optimistic about our prospects for, you know, for economic recovery.
00:03:07 And I think at the end of the day, you know, real estate is sort of the ultimate long-term asset and it's an inflation hedged, uh, investment and it done right, uh, can produce great, great cash flow and, and, and great income over time. So, you know, I kind of like where we are and, um, and, and over the next six to nine months, uh, I think we'll see some good opportunities. The thing we think about the most today, I mean, we always think about risk, but I think even more so today, we really are thinking about risk management, meaning, as you said, it's, it's really an uncertain time right now. A durability of the NOI of the underlying income is uncertain as well. And so underwriting that, so that as you look out, particularly over the next two years, okay, how do I get through this period?
00:03:56 And if things don't work exactly according to plan, how can I protect myself? And I think that's more important than ever today. And I think it's sort of shaped what types of opportunities, you know, on the margin we're going after. For instance, you know, we're, we're, we're not chasing after development deals right now, or we're not chasing after, you know, a hundred percent unoccupied buildings. I mean, there's a lot of risk associated with that. You know, we'd much rather do, you know, light value add or, you know, more stabilized me loans because guess what, they're out there today because, you know, and the pricing is different than it was three months ago, and it's at attractive levels,
00:04:34 You know, for those, uh, listeners who are not particularly, uh, knowledgeable about me loans, uh, where it is in the capital stack. And when you think about downside, uh, do you think about it differently when you're underwriting a ME opportunity versus a common equity opportunity? Just speak to that for a moment for those.
00:04:54 So one is, um, you know, so kind of big picture. I think we've always liked Mez and we certainly like it even more in today's world because Mez tends to be a defensive, you know, type of an investment and it tends to be an income-oriented investment. It's, you know, we're trying to hit a single, maybe a double, you know, this is not home run. We expect to get repaid from our loans. So we're generally in the cap stack. We're in there from 55, 60 up to as high as 80, 85 on average, we're generally at 80%. And in today's world, we're earning double digit returns. You know, for that slice of the stack, that's probably up at least 200 basis points from where we were, you know, three months ago. At the more opportunistic end of that scale, it's probably double that. The spread has probably widened 400 basis points plus from where we were three months ago. So from a risk reward standpoint, in an environment where tenure treasuries are at, you know, 70 bibs, you know, we think that's, you know, a terrific, you know, return for the risk
00:06:00 Makes a ton of sense to me. Uh, and then I had a question for you that, so, so spreads are rising, um, because risk has become off, or maybe some capital partners are, are not participating in the market because they exactly do have problems in their portfolio. So they're busy asset managing. So you guys are focused, they're, you're, you're open for business and spreads are rising. It's a private market, and it's not as deep as, say the stock market with pricing efficiency, that that happens in milliseconds. Ho who determines that? How the movement of the spreads?
00:06:33 Well, you know, again, it's, it's supply of capital, you know, versus demand. And as you correctly pointed out, the, the supply of capital has dwindled. I, I wouldn't say it's gone, but you're right there, there are a lot of, uh, senior stretch private debt fund lenders who have had to exit the market, uh, because their repo lines or warehouse lines or their, their financing vehicles have been unavailable to them. Um, and so having to charge much wider spreads to hit their investor returns.
00:07:03 Indeed. Any, uh, any sort of closing thoughts, uh, for, you know, where the, where the future opportunities lie or, you know, what, what you get? We, we've talked a lot about what you guys are looking for and how you're positioning yourself, uh, in this, in this time. So we've talked a lot about offense, but, uh, you know, any, any other thoughts to share with the audience before we, uh, break here, Steve?
00:07:25 No, I, as I said, I think it's, you know, it's, be careful out there. I, I, I think managing risk is critical. Um, it's, you know, it's one of the reasons why as we, we talked about we, like me, one of the reasons why we like apartments, um, you know, we're not buying big, you know, trophy apartment buildings in downtowns. Like the stuff that we've done through your platform in Charlotte, in Dallas, in Nashville, you know, these are growth markets. These are, these are, I don't, you know, workforce housing. These are renters by necessity, you know, not by, you know, uh, by choice mm-hmm. <affirmative>. And so, you know, they're tied to jobs and growth and that's kind of why they're, they're doing well. So I think, you know, this is a time to, to be thoughtful, um, in the investing side and, and to, to focus on areas where your, your cash flow is, uh, is durable, as I said, and, and is protected.
00:08:18 Thanks for joining me for StreetBeats and, uh, we look forward to, uh, talking with you in the very near future.