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Why Debt is the New Equity with Malcolm Davies | StreetBeats Ep. 48

CrowdStreet's Ian Formigle is joined by Malcolm Davies to discuss why debt is the new equity.

by Shawna Wright-Smith
August 10, 2020 ·

CrowdStreet’s Ian Formigle is joined by Malcolm Davies, Principal and Managing Director at George Smith Partners, to discuss why debt is the new equity, how the current market has created incredibly favorable investor terms, and how an additional stimulus package can protect rent collections. 

Ian Formigle, Chief Investment Officer
CrowdStreet

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
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 debt, 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.


00:00:04    Hi everyone. I'm Ian Formigle Chief Investment Officer here at CrowdStreet. Welcome back to StreetBeats for August 5th. This is our ongoing series of videos intended to keep you up to speed as to what's going on out there in the commercial real estate industry. Uh, back from my weekly segment, as always, is my partner in crime, Malcolm Davies, principal and managing director at George Smith Partners. Malcolm, welcome back.  

00:00:28    Thanks for having me again,  

00:00:29    Ann. All right, so Malcolm, we enter, so this is August 5th, and last week we were hoping for some news, um, some possible news on the front of a deal we have. So I guess we gotta start right there. So I think when we think about things that happened in terms of the last week, um, no deal is maybe no news is the news.  

00:00:51    Yeah, look, I mean, I think we're all just, I think the, the government's gonna get it done. I mean, I think I even saw just right before we got on this that I think they're conceding on the unemployment benne, uh, unemployment, uh, weekly checks that will continue to go out. So as long as that occurs, I think we'll, we'll continue to over simulate ourselves through the rest of, uh, the summer and see what we can do going into the fall. But, you know, it is interesting times, I'll say the least.  

00:01:18    Yep. So, so the Malcolm, let's talk about some of the other things of the last week. Uh, we did have some news that came out in terms of we got some unemployment numbers that are gonna give us some indicators of the official number, I think coming out later this month. Um, so let's, let's get into that a little bit. So we, well, we got an a DP job report that wasn't so great. Um, so what are you looking at there?  

00:01:41    Yeah, look, I mean, a couple things from the macro. We always talk macro, micro and how it affects commercial real estate finance. But look, uh, employment numbers came in week. I think we're at 170,000 versus 1.6 million. The unemployment ticked up 50 basis points. So look, we were going down now we're kind of like going back up. Yeah. You know, and, and another thing we paid attention to is that you've never seen historical highs. You know, a lot of safe hardware investments, gold and silver. Uh, look, it's good for real estate, you know, hard assets and like, so that's something we're paying attention to. CMBS spreads are down to 1 0 1. So that's, uh, obviously we're starting to see some hopeful normalcy there. Um, you know, as it relates to the, to the financial markets and, and the health of the way the financial markets are looking and perceiving, um, at least from the debt world, I have not been busier, uh, all year than I am right now.  

00:02:31    And I think, you know, that's either people are just getting to a point where they've figured out how to work through, um, some of the either headlines, um, or just covid related at challenges, but frankly at they have to do something, right. Lots of folks have realized that they had money, they kind of held on the sidelines, they can kind of see the future, um, and they're looking at different things to put capital into, uh, and we are able to get our deals done. And so every week we're generating more and more, more revenue to the firm. Uh, and I think that you can see that. And so in that sense, we have a recovery going on right now, but just like you and I have talked about in the past, which is we're not positive. You know, it's bumpy, you know, it's just we're not positive about what's going on.  

00:03:14    Yeah. So, I mean, it's interesting that you know your busyness, cuz I think we're feeling a little bit of spike, uh, but in a different way, right? So it, it's still tough to get deals done out there. It's still tough, you know, debt as we ta kind of talk about right? Debt's the new equity, still seeing that, uh, paradigm continue to play out. Like every time that we think we've got, you know, solid debt in, in tow, things are changing or shifting. But I think where you hit the nail on the head is that you're seeing the urgency of the developer or operator come into play in that it's time to go do something and they're going to now go do that in, in a market that's challenging. And what that's now creating is, is that sense of urgency is then kind of brimming within them. And they're literally coming to us and asking us what will it take to go get the deal raised, get the deal done, because it's time for us to go do this deal. We're not gonna wait another month or two and we're gonna accept what the market will bear. And so what that's translating to honestly right now are some of the best investor terms that we've ever been able to procure like in our history. Absolutely.  

00:04:28    You know, but look, there's some things that we're also paying attention to, right? I mean, you and I chatted about this, uh, look, s c r in hospitality 48 1 0.1%, right? But I think to your point you mentioned earlier was China's occupancy numbers are in the sixties,  

00:04:42    Right? Yeah. So yeah, China just, just went over 60, so 60.9% for the weekend in July 25th, the first time that that market has broken above the 60% level. And up until this point, China has been the Liebing indicator for the United States, right? I mean, it started first, it exited, or, you know, it's exiting earlier. So, you know, we're hopeful that what we, we think what we can do should hopefully be the continuation of what China is doing. So yeah, to your point right now, if, if, if that's has been the Liebing indicator, you know, there is a question mark out there. Is it, are we starting to just dis, you know, are we starting to kind of dis correlate from them? Um, but if we can maintain that correlation, then you, you, you like, uh, some further gains in the, you know, in our terms of our occupancies as we get to maybe the fall, uh, you know, remains seen.  

00:05:32    Hopefully we can get back to some normalcy you're seeing that occur. And I'm hopeful that that allows us to trend backwards to, you know, some areas where we can get some growth, but again, we gotta move past stimulus and into a traditional economic growth. Yeah. And you know, we, we need that last stimulus.  

00:05:51    You've got some people that are op optimistic it's gonna get done next week. Other people saying it's not quite as optimistic, but it basically, they're gonna continue to extend, you know, the, or delay the recess until they get it done. So you kind of fi figure, okay, August is gonna get something done. You know, when we think about the multi-family front, we know that we need that stimulus. I I think that the, you know, national multifamily housing council data from July was showing you the beginning of the signs of some weakness because we were seeing some trends, you know, increasing trends, right? We hit over 95% collections in June. This is 95.3. If I, if I recall correctly, that was essentially,  

00:06:31    By the way, we don't even talk about rent collections anymore because we know they've been decent.  

00:06:36    They've been good, right? So, and they were still good in July, but now they're back in down in the 93% range, and that was about 2% lower year over year. So to me that that's like the beginning of the first kind of fall off where we had raced right back up to basically like unchanged year over year. And now we just fell off that. So again, it's totally incumbent upon this country to just like figure out, get it done, get some money back into, you know, the, the pockets of the people that need it to maintain, you know, maintain those rental payments, stay in their buildings. We don't want to see those massive, you know, we, we, we've seen tons of studies that show like what percentage of the US population is at risk of being evicted. And depending on put upon who you ask, it's somewhere between like 20 and 40%. And so it's a lot. And so obviously we're, we don't want to go there. So if we can get some stimulus going again, we're gonna give ourselves some more runway.  

00:07:30    Yeah. And, and you know, part of it too is, you know, as you and I have talked about in the past is that I think we're all pretty confident we're gonna get a vaccine here, but the part that we're not as confident is what changes are gonna occur in commercial real estate that we just, you know, we're sort of paying attention. Do we think that's gonna happen? Like, are people gonna travel less? Do we need office space the same way? Is, is the office in this urban versus suburban? Uh, those are questions we can't answer, but that's part of the fascination of working in our industry. Yes. And and that is also why we call debt as a new equity as well. Because while an equity investor sits there and says, I can see two to three years I predict this, and likelihood, you know, but they're gonna get paid for that, that that risk. You know, a lender's looking at it and saying, well, I don't know. So it's hard for me to make a loan when I don't know. And that's the hard part, uh, you know, about the financial markets today,  

00:08:20    Right now, uh, and to your, and to your point about, you know, when you're looking at deals right now and there's assumptions that need to be made and they're tough to make them, to me, it takes you right back to the strength of the sponsorship. You just gotta go tr you know, you work with the groups, the best companies, they've been in tough situations before. They know how to navigate challenges. But to me it boils down to like, you just gotta go with the great groups. They're the ones who are going to A, get the debt done, B, get the deal, see the deal through, and then, you know, they're gonna go figure out how to, to go grab the tenants. Even in a market where you might have to grab market share in a static market, they're gonna go get it. They're gonna win. Like I always go back to commercial real estate is a highly inefficient market. Yep. You, you can't look at it like the equity markets, right? I mean, right now we're, we're in a dislocation market, but that means that, that the spoils go to the winners. And so the winners are the smart groups. And so that's what we're, we just bring it always right back to the sponsorship. Any, anything else that you're looking at in terms of August that you think's important?  

00:09:26    Uh, well, it's my birthday, so, uh, I'll pay attention to my birthday tomorrow. Uh, not exactly and no, no fancy plans, you know, this year. But, uh, no, I think in reality this is a, I always use August as a barometer to set the stage for what is gonna be able to be able to accomplish in, in 2020. And then also I start to think about how I'm setting up the, the company for 21. So, uh, no greater challenge than we've seen in our careers since, you know, the great recession, the gfc. Um, so I don't know. Nothing crazy except for I'm hopeful that we'll see, you know, some changes on some of the stuff that's gone down this week.  

00:10:05    Yeah. Yeah. Me too. All right, well with that, I think that's a wrap. So Malcolm, thanks again for joining us this week as always. And so for everyone out there, we'll be back to you next week, uh, with some more updates and in the meanwhile out there, uh, everyone out there, enjoy the rest of the summer  

00:10:22    And stay safe.