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Every Friday, join us as we dive into the latest in real estate multifamily with David Moghavem, Head of East Coast Acquisitions at Trion Properties. David invites top experts who know the ins, outs, and trends shaping the real estate multifamily market across the nation!
Whether you’re a seasoned investor or just curious about where the next big opportunity might be, Deal Flow Friday brings you the weekly inside scoop on what’s hot, what’s not, and what to watch for in today’s ever-evolving real estate scene.
Ray Cleeman (01:44)
I came here specifically today because I understand that if I do good job here, I get to go on Joe Rogan next. Exactly. So if I nail it now, I got nothing but upside from here. You say it's you Rogan first. Okay, Joe Rogan. okay. As you know, he's a fan of public. Yeah, he's hilarious to some extent.
David Moghavem (01:45)
came here specifically to get you do that for me? Yeah, think I'm Joe Rogan. Exactly. So if I nail it now, I got nothing but upside. They say it's Joe Rogan first, and then Joe Rogan. That's what Fulvikay says. As you know, he's a Santa Cormac. Yeah.
Yeah,
Well, so, of course, you know, of that makes me. Yeah, I think what might be a little bit about where we are, where we are today, it had us, how we got there. And then we can talk about the future, both how.
Ray Cleeman (02:07)
So thanks for inviting me. I know kind of directionally what we want to be speaking about. As I mentioned to you, I think what might be helpful for the audience is to talk a little bit about where we were, where we are today, the catalyst for how we got there, and then we can talk about the future, both how people
David Moghavem (02:31)
people who currently have loans,
Ray Cleeman (02:31)
who currently have loans
need to be thinking about it and both for acquisitions and refinancing.
David Moghavem (02:34)
you can thinking about it and go for access.
So let's turn back the hands of time to 2021-22. I don't need to tell you it was a crazy time, super prolific, everyone was doing deals. What was the catalyst for them? The catalyst was the capital that was available. You had debt and equity. Let's talk about each one. On the debt side,
Ray Cleeman (02:39)
So let's turn back the hands of time to 2021, 2022. Look, I don't need to tell you it was a crazy time in the market. It super prolific. Everyone was doing deals. But what was the catalyst for that? And the catalyst was the capital that was available. You had debt and equity. Let's talk about each one. On the debt side,
you had at that time LIBOR, which is today SOFR, which was down at five basis points.
David Moghavem (02:59)
You had at that time, live board, which is today's sofa, which was down at five base.
So you could buy a deal and get 300 base points, maybe 280 over. So if you went out and bought a three 75 cap rate or four cap rate, you were still in a positive arc, right? 300, 305. And so you were very.
Ray Cleeman (03:05)
So you could buy a deal and get, call it 300 basis points, maybe 280 over. And so if you went out and bought a 375 cap rate or a four cap rate, you were still in a positive arm, right? Cause 300, 305. And so you were very,
you were still making money. Anytime you can make call it a hundred to 150 basis points spread between your cost of capital and.
David Moghavem (03:25)
You are still making money anytime you can make 100 to 150 basis point spread between the cost of capital and
Ray Cleeman (03:34)
Sort of your cap rate. You're talking about mid to high teens returns, maybe even 20. Yeah, we'll talk about equity a second, but 100 % right. Yeah, we'll talk about that. But so on the debt side, you know, a lot of people said, OK,
David Moghavem (03:34)
Sort of your cap rate you're talking about Mid-time teens returns, maybe even 20. we say cost of capital It's not just on your car sub borrowing, but probably even the cost of that hoodie as well Yeah, we'll talk about it a second 100 % right? but on the debt side You know a lot of people said okay
Ray Cleeman (03:54)
I will buy a value add deal. And their pro forma said, OK, I'm to be able to push rents by X amount. I'm going to put.
David Moghavem (03:54)
I will buy a value in and their pro forma said, okay, I'm going be able to push rents by X amount. I'm going
Ray Cleeman (04:02)
$300 a door in or you know, I don't know, know there it was it was something simple all the way up to you know $30,000 a door but people started seeing this accretion and it was really more inflation that was driving that than necessarily the improvements that they were doing but
David Moghavem (04:03)
to put $300 a door in or there. was, it was something simple all the way up to 30,000. But people started seeing this a creature and it was really more inflation that was driving that than necessarily the improvements that they were doing.
but everyone's pro forma showed the same pockets. And so if they bought a four-trap, okay, I'm gonna put a four-mop,
Ray Cleeman (04:22)
everyone's pro forma showed the same hockey stick and so if they bought a Forecap and said okay, I'm gonna pro forma
a five, five and a half, and I was borrowing at 300, I'm making a 200 basis point spread, their Excel sheet showed 25 % returns to their investors. So that was very attractive. That's the debt side. The equity side, we had a lot of what I call tourist dollars. And the tourist dollars came from two directions, right?
David Moghavem (04:30)
five-file, half, far away from 300, and you tour the basis point spread, their Excel sheet show 25 % returns to their list. So that was very attractive. That's equity side. We have a lot of what I call tourism dollars. And the tourist dollars came from two directions.
Right? What you had is you had people who were desperate for yield on their job. And you couldn't find it in the market.
Ray Cleeman (04:52)
What you had is you had people who were desperate for yield on their capital, right? And you couldn't find it in the market.
You couldn't find it in the debt product, but you could find it in real estate. And so you had literally tourist dollars because we had a lot of European dollars coming into the US because you had negative rates in the banks. So people had to move their money out of Europe into the US. And then you also had a lot of people who were
David Moghavem (05:00)
You couldn't find it in the debt product, but you could find it in real estate. And so you had literally tourist dollars because we had a lot of European dollars coming into the U.S. because you had negative rates in the banks. So people had to move their money out of Europe into the U.S. And then you also had a lot of people who were
smaller investors who were desperate for opportunity. so, the large media, desperate for
Ray Cleeman (05:20)
smaller investors who were desperate for opportunity. so a lot of people, yeah, desperate for yield.
David Moghavem (05:27)
young. And so what they were looking for is they would strike a check for 25,000, 50,000. And they were eager to put this capital out because they were looking at these pro forma's and they would see some of the real numbers because they would see, okay, the rent went from $400 to $1,500.
Ray Cleeman (05:27)
And so what they were looking for is they would strike a check for 25,000, 50,000. And they were eager to put this capital out because they were looking at these pro formas. And they would see some of the real numbers because they would see, OK, the rent went from $1,200 to $1,500.
And that was very exciting to them. And they could actually start to see that upslope. And so you had, as you said, you had great equity. You had super cheap debt.
David Moghavem (05:46)
And that was very exciting to them and they could actually start to see that upslope. So you had, as you said, you had great equity, you had super cheap debt,
Ray Cleeman (05:57)
And that was the perfect storm for opportunity. So a lot of people went out and just started buying. Not always experienced people who didn't necessarily have the experience to have lived through a cycle before. And so it was all
David Moghavem (05:58)
and that was the perfect storm for opportunity. So a lot of people went out and just started buying. Not always experienced people who didn't necessarily have the experience, they have lived through a cycle before. And so it was all...
Ray Cleeman (06:15)
happy times. So that's good. Obviously, the big transition was rates, right? And that impacted both the debt side.
David Moghavem (06:16)
Happy times. So that's good. Obviously the big transition was rates, right? And that impacted both the debt side
Ray Cleeman (06:27)
and the equity side. Put a pin in the rates for a second, because we'll come back to that, because I think we need to talk about that sort of separately. And so push forward now to 2024, 2025. Clearly, SOFR really ran up.
David Moghavem (06:27)
and the equity side. Put a pin in the rates for a second because we'll come back to that. I think we need to talk about that separately. And so push forward now to 2024, 2025. Clearly SOFR really ran out.
Ray Cleeman (06:45)
And now you're at, I think, like 432, 433. So you went from five basis points to 435 basis points. And that obviously changes the whole market.
David Moghavem (06:45)
And now you're at, I think like 432, 433. So you went from five basis points to 435 basis points. And that obviously changed the whole.
So if you still had a 300 basis points spread, and tell me if I'm being too technical. No, this is perfect. You're like saying in the weeds. So if you have a 300 basis points spread to 430, it used to cost you 305.
Ray Cleeman (06:56)
If you still had a 300 basis point spread, tell me if I'm being too technical. this is perfect. You like to the weeds. So if you have a 300 basis point spread to 430, it used to cost you 305,
even if you had a minimum base of three and a quarter. And now you're talking about something in the mid-sevenths. how do you buy? The cost of capital and debt. Yeah, on your debt.
David Moghavem (07:13)
even if you had a minimum base of three and a quarter. And now you're talking about something in the mid-set. So how do you buy... On a positive capital debt. Yeah, on your
debt. So how do you buy a four cap, a five cap, a six cap, even a seven cap? Yeah, no matter what the upside was, you weren't solving to a yield on cost that was going to justify any sort of situation where your positive capital is growing 300, 400 bits during the whole...
Ray Cleeman (07:24)
So how do you buy a four cap, a five cap, a six cap, even a seven cap?
any sort of situation where.
Yeah,
David Moghavem (07:42)
Yeah, not possible. And so even if you had a value add, it was exciting on an Excel sheet, but it wasn't coming to fruition. So I think what happened is a lot of these inflationary trends that we saw in rents all of sudden came to a screeching halt. So again, those people who were paying $1200, $1300, no longer could they afford to
Ray Cleeman (07:42)
not possible, not possible. And so even if you had a value add, it was exciting on an Excel sheet, but it wasn't coming to fruition. And so I think what happened is a lot of these inflationary trends that you saw in rents all of a sudden came to a screeching halt. So again, those people who were paying $1,200, $1,300, no longer could they afford to pay.
David Moghavem (08:07)
pay $1500, $1700. That really trained them.
Ray Cleeman (08:07)
16, 1700 that gravy train ended
David Moghavem (08:11)
ended because there's only so much, right? You have inflationary rents, but the income from these people didn't match the inflationary rate. And so these people went home and they said, well, my discretionary dollars don't allow me to both go to the grocery store and pay these crazy increases in rent. So I have to decide which ones were important. As a
Ray Cleeman (08:11)
because there's only so much right you have inflation and rents But the incomes from these people didn't match the inflationary rate and so these people went home and they said well I my discretionary dollars don't allow me to both grow to go to the grocery store and pay these crazy increases in rent so I have to decide which one's more important as a
real estate owner, potentially even developer,
David Moghavem (08:37)
real estate owner, potentially even developer,
Ray Cleeman (08:40)
what happened was you had this unbelievable amount of real estate that was delivered during this time. And so you'll have pockets like Phoenix and Nashville that had thousands upon thousands of units that all came at one time. Yeah, because they're also using yesterday's costs with future rents. It made sense to build over buy. Exactly.
David Moghavem (08:40)
What happened was you had this unbelievable amount of real estate that was delivered during this time. So you'll have pockets like Phoenix, Nashville, had thousands upon thousands of units at one time. Yeah, because they're also using yesterday's costs with future rents and it made sense to build over buy. Exactly.
Ray Cleeman (09:06)
So now you have a situation where
David Moghavem (09:06)
So now you have a situation where
Ray Cleeman (09:08)
everyone's pro forma is just completely smoke and mirrors, right? And no one's going to be able to achieve those rents that they had anticipated. So if you can't achieve those rents, now put yourself into today's mindset. Your occupancy rates aren't where you thought. Your rent levels are not where you thought.
David Moghavem (09:08)
Everyone's pro forma is just completely smoke and mirrors, right? And no one's going to be able to achieve those rents that they had in tiscy. So if you can't achieve those rents now, put yourself into today's lines. You, your occupancy rates aren't where you thought, right? Your rent levels not where you thought.
Ray Cleeman (09:32)
Your concessions are significantly higher. Your cost for marketing and sales is significantly higher.
David Moghavem (09:32)
Your concessions are significantly higher. Your cost on marketing and sales are significantly higher.
Ray Cleeman (09:37)
So your NOI has been eviscerated tremendously. Now, remember, the NOI has a compounding effect. And so you don't have to go that high to really have a benefit to your NOI. You get rid of concessions and move occupancy a little bit. That has a dramatic positive impact to your NOI. But you're not seeing that.
David Moghavem (09:37)
your NOIs viscally tremendously. Remember, the NOI has a compounding effect. So you don't have to go that high to really have a benefit to your NOI. You get rid of concessions and move occupancy a little bit. That has a dramatic positive impact to your NOI. But you're not
seeing it today. So a lot of those proformers have just not
Ray Cleeman (10:02)
And you're not seeing it today. And so a lot of those proformers are just not happening.
So the people who are delivering assets today are concerned that they may not be able to achieve the kind of results that they had hoped for, which means that what they built for, those cap rates, aren't really there. And that means that their cost that they built to is not there, and the debt that they have maturing
David Moghavem (10:07)
People who are delivering assets today are concerned that they may not be able to achieve the kind of results that they have hoped for, which means that what they built for those cap rates aren't really there. Now that means that their cost will be built to is not there. the debt they have incurring
Ray Cleeman (10:31)
is significantly higher than what they build to the yield that they build to.
David Moghavem (10:31)
is significantly higher than what they built to the yield they built.
Ray Cleeman (10:36)
So you have that and then you have the people who actually own who are now fighting the same tide. And so. Just to you know there's a lot there. So yeah. Just to back up the first.
David Moghavem (10:37)
So you have that and you have people who actually own who are now fighting the same time. by just, you know, there's a lot there. So just to back up the first
part, we were talking about cap sat distress, right? The cost of capital going 300, 400 bits. Now it sounds like there's a second kind of tidal wave coming, which is a little bit of operational distress where you're not just seeing muted drug growth, but you're seeing a little bit of
Ray Cleeman (10:52)
Yeah.
David Moghavem (11:04)
higher concessions to the supply finally coming online. You're seeing delinquency where people are stretched thin to make ends meet to pay rent. So that's, guess, the second part of what you're talking about of how NOI group is also getting muted one way or another on top of the cap stack stress. Yeah, imagine if you're someone who's out of school and you're in mid-twenties just starting your career and you weren't paying.
Ray Cleeman (11:16)
Yeah, imagine if you're someone who's out of school, you're in your mid-20s, you're just starting your career and you were paying
$1,400 a month for a 1995 asset, which was nice. It had some amenities, but now a quarter of a mile away is a brand new asset that they're giving three months free rent. So effectively, you could move in for the equivalent of $1,400 a month. You're up and out, right? Because you don't have that much stuff, and so you can move out.
David Moghavem (11:31)
$1,400 a month for a 1995 asset, which was nice. It had some amenities, but now a quarter of a mile away is a brand new asset that they're giving three months free credit. So effectively, you could move in with the equivalent of $1,400 a month. You're up and out, right? Because you don't have that much stuff. And so you can move out.
Ray Cleeman (11:58)
And then you just keep playing that game as these deliveries happen. And then the current sponsor is looking at that and they're saying, okay, you want to move? I'll match that three months. Okay, so now everyone is suffering because whether or not you bought a 1990 vintage asset and you put all that value add into it, or you delivered a brand new asset, now you have the same issue. So now it's a really compounding effect.
David Moghavem (11:58)
And then you just keep playing that game as these deliveries happen. And then the current sponsor is looking at that and they're saying, okay, you want to move? I'll match that three minutes. So now everyone is suffering because whether or not you bought a 1990 vintage asset and you put all that value added to it, or you delivered a brand new asset, now you have the same issue. So now it's a really compounding effect.
Ray Cleeman (12:26)
on sponsors, whether it's a new delivery or whether it's an older asset, whether it's an older asset that's been value-add. So it's very difficult for people to justify a new acquisition today, unless you have a very, very specific plan for a very unique asset. And I think that's exactly what's happening in the market today. And we'll talk about this in a little bit. But the majority of what
David Moghavem (12:26)
on sponsors, whether it's a new delivery or whether it's an older asset, whether it's an older asset that's been down with it. So it's very difficult for people to justify a new acquisition today, unless you have a very, very specific plan for a very unique asset. And I think that's exactly what's happening in the market today. And we'll talk about this a little bit, but the majority of what
Ray Cleeman (12:54)
we did at Pensum, and I guess we should have started with what we do, I'll do that. We'll do that at the end. We'll do that at the end in case, you know, if people are still paying attention by the end. you know, when in 2001, 2022, we did almost everything was acquisitions, right? It was people who wanted higher leverage solutions that 75, 80, 85 % LTV last dollar, which is what we focus on.
David Moghavem (12:55)
We did intensive, yes, we should start with what we do, don't think I'm. Yeah. If people still take attention. But when in 2001, 2022, we did almost everything was acquisitions. It was people who wanted higher leverage solutions that 75, 80, 85 % LTV last dollar, which is what we focus on.
Ray Cleeman (13:24)
And we were busier than a beaver.
David Moghavem (13:24)
And we were busier than a beaver. And I would add to that, we've
talked to you guys many times, and one of the strategies we were doing pre-rate hike was underpaying for the real estate in order to, by assuming the debt, that was not accretive, right? Because on paper it looked like a high rate and low leverage, and we'd come to you guys to kind of juice the returns to match where returns expectations are.
Ray Cleeman (13:35)
getting underpaid for the real estate.
the death that was not accreted.
and low leverage and we'd come to you guys to kind of juice the returns to match where returns at expectations are but
David Moghavem (13:53)
but at a lower basis. And so that was like a few strategies that we were looking at. think a lot of folks were kind of looking at it that way as well. Yeah, I understand. We'll talk about how this structure works. So we've been very, very busy on the acquisition. Now, pretty much the only thing we're doing is refinancing.
Ray Cleeman (13:53)
at a lower basis. And so that was like a few strategies that we were looking at. think a lot of people were kind looking at it that way as well. Yeah, 100%. We'll talk about how the structures and strategies work in a minute. So we were very, very busy on the acquisition front. Now, pretty much the only thing we're doing is refinancing.
David Moghavem (14:14)
Yeah, rescue capital. Is that fair to say?
Ray Cleeman (14:16)
Yeah,
we don't like hanging nomenclature to things because I think people are trying to avoid labels, but we call it structured financing, right? And we're trying to figure out how to be helpful to sponsors to get them through their financing. And again, we'll get to the different ways that we've structured solutions for people. So you can't really justify acquisitions right now.
David Moghavem (14:17)
We don't like hanging nomenclature to things because I think people are trying to avoid labels. But we call it structured finance. And we're trying to figure out how to be helpful to sponsors to get them through their finance. And again, we'll get to different ways of the structures. So you can't really just apply acquisitions right now.
Ray Cleeman (14:44)
We have to do a lot of refinancing.
David Moghavem (14:44)
We have to do a lot of refinancing.
Ray Cleeman (14:47)
And so now it would be a good point for us to just talk about, and the tourist dollars have gone away. Right. So now all of those people who were writing the $25,000 checks and $50,000 checks, because they can find yield in other places, right? Treasuries are in the mid-fours. They touched five. mean, if you can get a tax-efficient treasury at $430,000,
David Moghavem (14:47)
And so now, now it'd be a good point for us to just talk about, oh, and the tourist dollars have gone. Right. Right. So now all those people were writing $25,000 checks, $50,000 checks, because they could find yields in other places, right? Treasuries are in the fours, you can get tax-efficient treasuries at 4.30,
Ray Cleeman (15:13)
or 450, right? That's
David Moghavem (15:14)
4.50. That's
Ray Cleeman (15:16)
very interesting to you. And then you take no risk whatsoever versus someone who may show you a 5 and 1 half cash on cash with some future opportunity to make some low double digit return. So you've seen that go away. Obviously, the European dollars have completely gone away because people are reshoring their dollars. So the debt has changed.
David Moghavem (15:16)
very interesting to you and you take no risk whatsoever versus someone who may show you a five and a half cash on cash with some future opportunity to make some low double digit. So you see that go away. Obviously the European dollar is completely gone because people are reshoring their dollars. So the debt has changed,
Ray Cleeman (15:42)
the equity has changed. And now
David Moghavem (15:42)
the equity has changed and now
Ray Cleeman (15:45)
there's a whole new real estate dynamic that needs to be addressed. So let's talk a little bit about interest rates. We did a ton of research. When I say we, I'm talking about my analysts, right? I don't do the computer thing. So we did a lot of work on looking at the last several cycles that
David Moghavem (15:45)
The whole, there's a whole new, or a real estate dynamic that needs to be addressed. So let's talk a little bit about, about interest rates. We did a ton of research. When I say we, I'm talking about my analytics. Do the compute thing. So we did a lot of work looking at the last several cycles that
Ray Cleeman (16:10)
have gone through the US. And in reverse chronological order,
David Moghavem (16:10)
have gone through the US. And in reverse chronological order,
Ray Cleeman (16:16)
you look at COVID. So the Fed reacted pretty properly, They first, COVID happened. So the first was like a very small change, right? Decrease, and all of sudden, like a precipitous rock. They just dropped it to zero, right? It's almost like that when a cartoon character runs off a cliff, and then just
David Moghavem (16:16)
You look at COVID, so the Fed reacted pretty properly, right? They first, what would happen? So the first was a very small change, right? Decrease, then all of a sudden, like a precipitous drop. They just dropped it to zero, right? It's almost like that cartoon character runs off on a cliff and then just
Ray Cleeman (16:39)
Boom, right to the bottom. Which at that time was the right move.
David Moghavem (16:39)
boom, right to the bottom. at that time was the right, at that time, sort of.
Ray Cleeman (16:45)
So you had COVID, boom, right down to zero. Go back to 2008, the Great Recession, same thing. A little move and then boom, they dropped it right down to zero. Turn back the hands of time to 2001 when you had the dot com explosion, same thing. Precipitous drop all the way down.
David Moghavem (16:45)
So you had COVID, boom, right down to 2000. Go back to 2008, great recession. Same thing, a little move, boom, they dropped it right down to 2000. Okay. Turn back to 2001, .com explosion, same thing. Recipit is dropping all the way down.
Ray Cleeman (17:07)
And some of them were big. think one of them was like a 600 basis points change. The smallest one was 275 basis points.
David Moghavem (17:07)
And some of them were big. think one of them was 600 basis points change. The smallest one was 275 basis points.
Ray Cleeman (17:14)
the COVID, would say, rates were already pretty low. That's what I'm saying. Yeah. So we actually have the numbers here. COVID was 225 basis points to get you to effectively zero.
David Moghavem (17:14)
COVID I would say rates are already pretty low. That's what I'm saying. Yeah, so we actually have some. So, so, so, so, so, so,
so, so, so, so, so, so, so, so, so, so, so
Ray Cleeman (17:29)
Right, right, because you were already so low on a percentage basis change, was pretty dramatic. But this is where
the real focus should be. In 1996, which was arguably the last time that the Fed actually engineered a soft landing,
David Moghavem (17:40)
real focus should be. In 1996, which was arguably the last time that the Fed actually engineered a soft landing,
Ray Cleeman (17:53)
You want to take a guess at how much rates went down?
David Moghavem (17:54)
You want to take a guess at how much rates went down?
No, you tell me. 75 basis. Yeah. Right. One down from... Yeah. It went from six to like... I don't know. Just over five. Yeah. That's it. And then it applied to go for one, two, three, four, almost five, almost five years. So when we talk about what the future could be, you have to make a decision.
Ray Cleeman (17:59)
75 basis points.
Yeah, it went from six to like, I don't know, just over five? That's it. And then it plateaued for one, two, three, four, almost five, almost five years. So when we talk about what the future can be, you have to make a decision
as a savvy real estate owner-operator.
David Moghavem (18:29)
as a saddened real estate owner outpouring.
Ray Cleeman (18:33)
Am I in a recession right now and can I really expect rates to drop precipitously, a la dot com explosion, great recession, COVID, or is it a little bit more like the 96 effect where I'm going to have continued growth and the incentive for the Fed to drop rates other than political pressure is not existent?
David Moghavem (18:33)
Am I in a recession right now, and can I really expect rates to drop considerably? How long? Thought-com explosion, great recession, COVID? Or is it a little bit more like the 96 effect where I'm gonna have continued growth and the incentive for the Fed to drop rates other than political pressure is nonexistent?
Ray Cleeman (18:58)
And if that's the case, then
David Moghavem (18:58)
And if that's the case, then
Ray Cleeman (19:00)
the argument for I'm going to hold on as a sponsor till the very end and just see what I can do because I think it's a fallacy to believe that rates are going to come down precipitously.
David Moghavem (19:01)
the argument for, I'm going to hold on as a sponsor until the very end and just see what I can do, because I think it's a fallacy to believe that rates are going to come down. And when you say presumptive, I think at this point, it's like if it drops below three and half for treasuries, that's like, all right.
Ray Cleeman (19:23)
below three.
I'll share with you a very very funny anecdote and We We we can we can take take it for a grain of salt. Okay, I'm gonna I'm gonna share these numbers. I I don't want to point fingers at anybody but So so the Federal Reserve Bank of st. Louis What they did is they they do what's called the blue chip survey
David Moghavem (19:27)
share with you a very, very funny anecdote and we can take it for a grain of salt. Sure. I'm going to share these numbers. don't want to put my fingers at anybody. So the Federal Reserve Bank of St. Louis, what they did is they do what's called the blue chip server.
Ray Cleeman (19:53)
sounds very ominous, right? The blue chip survey. They took the 50 top professional forecasters and they said, okay, give us your range for the next 12 months of where you think SOFR is going to be. The range is from 3.9 to 4.5 percent. Okay. And what they did, that's the top 10 average and the bottom 10 average. So,
David Moghavem (19:53)
something very, sorry, the blue chip survey, they took the 50 top professional forehead and they said, okay, give us your rating for the next 12 months. Where do you think SOFR is gonna be? The rate is from 3.9 to 4.5%.
And what they did, that's the top 10 average and the bottom 10. So
Ray Cleeman (20:22)
3.9 to 4.5 % over the next 12 months.
David Moghavem (20:22)
3.9 to 4.5 % over the next 12 months. It's like 4.3 right now. Right? Now, the kick in the shin is, this is crazy, from 1983 to 2024, do you know what their success rate of getting it right in the band is? Zero. No, it's 40%. 40%.
Ray Cleeman (20:28)
Right now, the kick in the shin is, this is crazy, from 1983 to 2024, do you know what their success rate of getting it right in the band is? No, it's 40%. 40%.
So you have a better chance of flipping a coin than getting it right and getting it in this, getting in this ribbon. So
David Moghavem (20:48)
So you have a better chance of flipping a coin than getting it right and getting it in this ribbon.
So, you know, we take it to the brain of salt. We look at where we think rates are going to go over the next 12 months, because that's really what drives our business. And we take a step back and say, if I'm not in a recession,
Ray Cleeman (20:58)
You know we we take it again with a grain of salt We look at where we think rates are going to go over the next 12 months because that's really what drives our our business and we take a step back and say If I'm not in a recession,
and I don't think that rates are dropping two three hundred basis points because because we don't Can they move? Another 30 basis points, maybe 40 basis points
David Moghavem (21:16)
And I don't think the rates are dropping to 300 basis points because we don't. Can they move another 30 basis points, maybe 40 basis points?
Ray Cleeman (21:28)
Maybe, maybe there is one person out there who is plugged into the Fed who suggested, I think it was October or November when
David Moghavem (21:28)
Maybe, maybe there is, there's one person out there who is plugged into the Fed who suggested, think it was October or November.
when rates started creeping in, that you might see 100 basis points decrease in 2025. That's when the five, and I'm sorry, I'm talking more about the five year than
Ray Cleeman (21:45)
rates started accreting again, that you might see 100 basis points decrease in 2025. That's when the five year, and I'm sorry, I'm talking more about the five year than...
the 10 year, the 30 year. Right. So.
David Moghavem (21:56)
the 10 year and the 30 100 basis points decrease on the five year. Right, yeah. So. Not on the Fed funds rate, like not on the average cut. No, I'm sorry, not 100 basis but dip cut. I'll talk about the five year, but we'll talk about that got impacted by all this in a sec. Sure.
Ray Cleeman (22:03)
No, I'm sorry a hundred bit cut I'll talk about yeah, I'm sorry I'll talk about the five-year but we'll talk about how that got impacted by all this in a second But
so the Fed basically said this one person the Fed basically Telegraph that when it was at 450 you might see a hundred basis points drop to three and a half now if you've watched the the scale I think it was
David Moghavem (22:14)
So the Fed basically said, this one person, the Fed basically telegraphed that when it was at 450, you might see 100 basis points drop to three and a half. Now, if you've watched the scale, I think it was
September, pretty sure it was either August or September, I think it was September, it hit 347. Now, that was the.
Ray Cleeman (22:32)
Pretty sure it was either August September. I think it was September. It hit $347. Now, that was the busiest
David Moghavem (22:40)
busiest month for us because sadly real estate people started picking up the phone and dialing the government. They said, I'm going to refinance. I'm going to review. So we had the best view for, since I joined the firm in years, because again, lot of said it ain't getting better than this. Yeah.
Ray Cleeman (22:41)
month for us because savvy real estate people started picking up the phone and dialing for dollars. They said, I'm going to refinance now. I'm going to refinance. And so we had the best Q4 since I've joined the firm in 10 years. Because again, a lot of smart people said, it ain't getting better than this.
David Moghavem (23:01)
And that's just their perspective. Wasn't that one, the five year time it took to like, No, that's it. Exactly.
Ray Cleeman (23:06)
No, that's it. Yeah, exactly.
And so that's why I'm trying to marry a little bit of the two. So you saw...
David Moghavem (23:09)
And so that's why I'm trying to narrow you a little bit to so you saw you you saw
And that was before the Fed actually cut. Yeah. And then they cut. But they get telegraphed. But they're telegraphed. Right. And it's getting priced in. Exactly. And it was before the election as well. So that's exactly what you heard. So you had this telegraph of the counter basis point. And then the five year reacted to it. Again, we'll talk about
Ray Cleeman (23:20)
Yeah, right. The Fed hasn't cut, but they were telegraphing. Right. Exactly. So that's exactly what you heard. So you had this telegraph of 100 basis points, and then the five year reacted to it again, and we'll talk about how
they trade differently. The five year reacts to it, it drops all the way down to 345, 347, whatever. And then a lot of people jumped in.
David Moghavem (23:39)
they trade differently. A five-year reacts to it, it drops all the way down to $3.45, $3.47, whatever, and then a lot of people jumped in
and those people who did it because they said, okay, now it's at $3.47, now it's going to go down to $2.47, and then I'm going to be saved because that core cap that I bought three years ago, I can't even refinance now, but I'll be fine. And they totally missed.
Ray Cleeman (23:51)
And those people who didn't, because they said, OK, now it's at 347, now it's going to go down to 247. And then I'm going to be saved because that forecap that I bought three years ago, I can't even refinance now, but I'll be fine. And they totally missed it.
And so we're seeing a lot of people because now it's the five years back up, 100 basis points, right? It's 430 something. And so now it's a tough position, right? I mean, you know, there's the world of could have, would have, should have.
David Moghavem (24:08)
we're seeing a lot of people because now it's five years back up 100 basis, it's 430 something. And so now it's a composition, right? And there's the world of what it should up,
Ray Cleeman (24:20)
But now let's talk a little bit about how SOFR and the treasuries, how they trade individually. Because I think it's important to kind of understand that and how they interact,
David Moghavem (24:21)
but now let's talk a little bit about how SOFR and the treasuries, how they trade individually. Yeah, right. Because I think it's important to kind of understand that and how they interact.
Ray Cleeman (24:37)
then how they don't act together. Sure. And to set the stage.
David Moghavem (24:38)
than how they don't. Sure. And to set the stage,
the five year and so far pretty much tie in. Right? They're close, they're close, but that's an excellent point because they're not inextricably linked. Right? And so it doesn't absolutely say, if this is moving here, this moves here because... So let's get into it. So for a set by the Fed.
Ray Cleeman (24:45)
They're close, they're close, but that's an excellent point because they're not inextricably linked. And so it doesn't absolutely say, if this is moving here, this moves here. so let's get into it. Sofa is set by the Fed. Jerome
David Moghavem (25:07)
Mr. O'Pallol wakes up one morning and says, it should be this. Now,
Ray Cleeman (25:07)
Powell wakes up one morning and says, it should be this.
It dropped 100 basis, he actually moved it 100 basis points in end of Q3, Q4 of last year. We're here. I've heard lots of arguments that the 50 basis points was completely unfounded. I forgot there's a Fed governor from the Midwest, her name escapes him right now.
David Moghavem (25:13)
it dropped 100 basis, he actually moved it 100 basis points in Q3 and Q4 of last week. We're here. I've heard lots of arguments that the 50 basis points was completely unfabbed. I forgot there's a Fed governor from the Midwest, her name escapes me right now.
Ray Cleeman (25:35)
But she is the first time that they didn't have unanimous decision on a rate cut.
David Moghavem (25:36)
She is the first time that they didn't have a unanimous decision on a rate.
Everyone was unanimous on 25, but she was following 25 people were unanimous. No, no, at the 50. Okay. basically said, you know, we're going to decrease it. But you had one vociferous voice saying 25. Let's not get ahead of our speech. Right. Because we missed it on the way.
Ray Cleeman (25:42)
Everyone was unanimous on 25, but she was.
No, no, at the 50. Sorry, at the 50. They basically said, yeah, we're going to decrease it. But you had one vociferous voice saying, 25. Let's not get ahead of our skis, right? Because we missed it on the way down.
David Moghavem (26:03)
down, let's not miss it on the way up and never do it.
Ray Cleeman (26:03)
Let's not miss it on the way up and overdo it.
David Moghavem (26:06)
I remember when 50 people were huddling in the office after Act meeting and they announced that you were 50. Yeah, and to make sure it's 100 % justified, I'm not in that game, right? I don't think I'm going over that much. So you've seen a hundred base stocks out. Remember, we just talked about 1996.
Ray Cleeman (26:11)
Yeah, yeah, yeah, and and so I'm not sure it's a hundred percent justified but it I'm not in that game, right? I don't I I don't have a dog in that hunt So you've seen a hundred basis points now Remember, we just talked about 1996
where they dropped at 75 basis points and then it leveled for three four years So the question we all have to ask ourselves is
David Moghavem (26:31)
where they dropped it to the five basis points minute level for three, four years. So the question we ask ourselves is,
Ray Cleeman (26:39)
Again, if we're not in a recession, because I don't think anybody believes that, I think we had like two and a half percent growth in the last quarter. And I'm pretty sure everyone feels very excited about the new administration and then how that's potentially going to move the economy stronger going forward. So that's the case. I don't know that there's
David Moghavem (26:39)
again, not in a recession, I don't think anybody believes it. I think we had like two and a half percent growth in the last quarter. And I'm pretty sure everyone feels very excited about the new administration and then how that's potentially gonna move the economy stronger after the fourth. So that's case. I don't know that there's...
Ray Cleeman (27:01)
that much need to lower rates right now.
David Moghavem (27:01)
that much need to lower rates right now.
Ray Cleeman (27:05)
So, I mean, that obviously is a decision the Fed will have to make, but it's tough to put that into an actionable thought process. You know, should we really be lowering rates right now?
David Moghavem (27:05)
So I mean, that obviously is decision the Fed will have to make, but it's tough to that into an actionable whole process. Should we really be lowering rates? Well, I think one of the, I heard this from Ray Dalio was on a podcast, the All In Podcast, and he had a great take out the real
Ray Cleeman (27:20)
I heard this
take out the real healthy
David Moghavem (27:30)
healthy way
Ray Cleeman (27:30)
way.
David Moghavem (27:30)
to lower borrowing costs is to follow through with cutting spending because cutting spending is recessionary technically, but it's also healthy for the deficit we're in, which will lower rates and lower our rate of increase of a deficit. So I think that's kind of the strategy that should happen. We'll see if Doge follows through.
Ray Cleeman (27:33)
is to follow through with cutting spending. Because cutting spending is recessionary, technically, but it's also healthy for the deficit we're in, which will lower rates and lower our rate of increase of a deficit. So I think that's kind of the strategy that should happen. We'll see if DOGE follows through. Yeah, but it's a process, right? DOGE is
a process, right? We in...
David Moghavem (27:59)
We found $40 billion in
Ray Cleeman (28:01)
the USAID, which is great, but we need to move a trillion, right? And so it's gonna be a process and we need to be patient through that process. So just circling back now, again, just talking about how SOFR, which is set the Fed funds rate, right? And the treasuries trade, right? Most of what we look at in our business
David Moghavem (28:01)
US GIT, which is great. But we need to move a trillion. Right? And so it's going to be a process and we need to make some room for that process. So just circling back now, again, just talking about how SOFR, is Fed Funds Rate, right? And the Treasuries Rate. Most of what we look at in our
business is 500 or 10
Ray Cleeman (28:28)
is the five year and 10 year.
David Moghavem (28:30)
years because that really drives the fixed rate market, which is from Freddie and family. And it used to be that everyone went right into a 10 year. You're seeing, you saw a little bit less of that because people again were concerned saying, well, if the rates come down again, do I really want to be locked into, you know, a near
Ray Cleeman (28:30)
because that really drives the fixed rate market, which is Freddie and Fannie. And it used to be that everyone went right into a 10-year, right? You saw a little bit less of that because people again were concerned saying, well, if the rates come down again, do I really want to be locked into a near 6
%?
David Moghavem (28:58)
6%. Not sure, maybe not. So the 10-year right now trades 20 basis points, 5 years, and 50. Now, let's just say your 1.30 basis point spread to your Treasury metric, right, with the 5-year 10-year. So again, you're in point of loss.
Ray Cleeman (28:59)
I'm not sure, maybe not, right? So the 10 year right now trades 20 basis points wide in the five year, so it's like 450. Now, let's just say your 130 basis points spread to your treasury metric, right? Whether it's the five year 10 year. So again, you're, and you've boiled it down.
Yeah, exactly. if you go to Freddie or Fanny today and again, after a buy down and everything else, you're saying to yourself, I'm at, I don't know, $580 or something like that. You know, that's attractive. You still have a negative arp to a $5.50 cap, right? You're getting a lot closer if you're buying a $575. You're in the money if you're buying a $6 cap. But it's really more...
David Moghavem (29:24)
Yeah, exactly. if you go to Fred and your Fanny today, a buy down on everything else, you're saying to yourself, I'm at $580 or something like that. You know, that's attractive. You still have a negative arc to $5.50 cap, right? You're getting a lot closer if you're buying a $575. You're getting money if you're buying a $6.50 cap. But it's really more...
Ray Cleeman (29:53)
Focused on people who are trying to refinance right and they said I've moved the needle. I did my value add I need to refinance my existing Debt stack because it's come due. I had a floater, which is a three-year term effectively I need to figure out how to how to get out of it. So So people looking at the the fixed rate market We I will tell you people don't always
David Moghavem (29:53)
focused on people who are trying to finance. I I've moved the needle, did my value add, I need to refinance my existing debt stack because it's come due, I had a floater three years to come effectively, I need to figure out how to get out. So to people looking at the fixed rate market, I will tell you, people don't always
Ray Cleeman (30:22)
appreciate the nuance of the fact that the five-year, 10-year, and let's just call it more holistically the treasuries, they trade based on a trader's mentality. Where do I think, again, more holistic pieces of the US economy are going to trade? And I wrote this down because I love the saying, I want to get it right.
David Moghavem (30:22)
appreciate the nuance, the fact that five years in here, and let's just call it more listed to the treasuries, they trade based on a trader's and a talent. Where do I think get more holistic pieces of U.S. economy to be traded? And I wrote this guy, I love the saying, I want to get it right.
Ray Cleeman (30:49)
on treasuries, deficits matter. And so when people look at where we are today, they say, OK, the Fed dropped its rate, so the treasuries have to drop. Yes, there's absolutely a link between the two. But when you have a runaway deficit, that gets baked into the treasuries.
David Moghavem (30:49)
on treasuries, deficits matter. And so when people look at where we are today, they say, okay, Fed dropped its rate, so the treasuries have dropped. Yes, there's absolutely a link between the two, but you have a one-way deficit, that gets baked into the treasury.
Ray Cleeman (31:15)
And why is that? Because we have to finance our deficits somehow. I think this is the first time in history outside of the major wars where the cost of our debt, how much we're paying in interest, will exceed our defense budget. Now that's mind blowing. People just say, it's just OK, so what? It's a big deal.
David Moghavem (31:15)
And why is that? Because we have to finance our deficits somehow. I think this is the first time in history outside of major wars where the cost of our debt, which we're paying in interest, will exceed our defense budget. Now that's mind blowing. People just say, know, it's just, okay, so what? We deal.
that
Ray Cleeman (31:45)
the three largest expenses we have in this country, right? You've got Medicare, Medicaid, Social Security, and military. So if you've already broached military, you're in rarefied arena. And I think we all need to be very concerned about what that means to us, to our children, and how that will impact the country going forward.
David Moghavem (31:45)
the three largest expenses we have in this country, right, we've got Medicare, Medicaid, Social Security, and military. So if you've already broached military, you're a rarefied arena. And I think we all need to be very concerned about what that means to us, to our children, and how that will impact the country going forward.
Ray Cleeman (32:13)
So the treasuries reflect that. A little bit of a scale anecdote, right? So 30 % of all US treasuries outstanding have to be refinanced in 2025.
David Moghavem (32:13)
So the treasury is reflecting a little bit of a scary anecdote. So 30 % of all US treasuries outstanding have to be refinanced in 2020.
Wow. Mind blowing. I don't know why nobody's focused on that. And here's the other kick in the shit. Our average
Ray Cleeman (32:32)
Right? Mind blowing. I don't know why nobody, nobody's focused on, right? And here's the other kick in the shed. Our average
cost of this debt is 2.9%. Okay. Now we refinance in today's environment. That goes up dramatically. And right. So, right. So now think about this.
David Moghavem (32:43)
cost of this debt is 2.9%. Now we refinance in today's environment. That goes up. Traumatically. And that's that 400 vips. Right. It's quite. Now think about this.
Every 1 % increase in cost of capital, which is $2.5 trillion.
Ray Cleeman (33:02)
Every 1 % increase in the cost of capital equates to $2.5 trillion. Okay.
Where are we getting that money from? So I'd like to pick up your comment about what Ray Dalio said, and the only way we're going to pick this one is we need to cut somehow. We're to need to figure out how to move the economy forward. So...
David Moghavem (33:14)
Yeah. So I'd to pick up your comment about Ray Dalen said. The only way we're going to take this one is we need to cut somehow. We're to need to figure out how to move the economy forward.
So lots of growth and cost savings is probably the only way we're going do it. Right. And it's tough because the way the political structure is set up, there's no incentive to cut.
Ray Cleeman (33:31)
Lots of growth and cost savings is really the only way we're going to be able to do it.
there's no incentive to cut.
There's no incentive for constituents to cut their programs. So we're not built as a government to be cutting, which is an issue. But if we're successful in cutting, it will solve the treasury interest rate issue in order to get back to our world, buyers and sellers to transact again.
David Moghavem (33:42)
There's no incentive for constituents to cut their throat. So we're just not, we're not built as a government to be fed, which is an issue. But if we're successful in cutting, it will solve the treasury interest rate issue in order to get, you know, back to our world buyers and sellers to transact with. Yeah.
Ray Cleeman (34:09)
Again, I'm very loathe to
David Moghavem (34:09)
I think again, I'm very low.
to talk about politics because I know what's good for a country. And I think if you put everyone in a vacuum, you say, is it good to cut our deficit? I think everyone will say yes. If you ask everyone is it good to grow our economy, again, taking it out of the political realm, everyone will say yes. So if that's the case,
Ray Cleeman (34:12)
talk about politics because I don't go blue or red. I know what's good for a country. And I think if you put everyone in a vacuum and you say, it good to cut our deficit? I think everyone will say yes. I think if you ask everyone, is it good to grow our economy? Again, taking it out of the political realm, everyone will say yes. So if that's the case,
Let's figure out how to do it.
David Moghavem (34:38)
let's figure out how to do it.
Ray Cleeman (34:40)
A few other scary points. The deficit will be 7 % of GDP this year. The CBO.
David Moghavem (34:40)
A few other scary points. The deficit will be 7 % of GDP this year. The CBO...
And to that point, I think again what Ray was saying is like we need it at like 3%. Yeah, not higher. 100%. To be healthy. The CBO, is, you know, they're neither Democrat or Republican, right? They basically say the Fed...
Ray Cleeman (34:56)
Yeah, not higher, 100%. Yeah, at most. To be healthy. Right. The CBO, is, you know, they're neither Democrat or Republican, right? They basically say the Fed
deficit will be higher than total GDP in next few years. Okay. So now we have these scary statistics and we know that we have to constantly use debt to pay down our old debt.
David Moghavem (35:09)
deficit will be higher than total GDP in the next few years. Okay, so now we have these scary statistics and we know that we have to constantly use debt to pay down our old debt
and to pay the cost of that debt. So now who's buying that debt that we have to issue? So historically it's been lots of stock and both.
Ray Cleeman (35:25)
to pay the cost of that debt Okay, so now who's buying that debt that we have to issue? So historically it's been lots of software wealth funds, right? You
the largest buyer of it was the Bank of Japan What's really interesting in the last and I didn't write these statistics down. I meant to before I got here, but The Bank of Japan was the largest in the last
David Moghavem (35:37)
The largest buyer was the Bank of Japan. What's really interesting in the last, I didn't make any statistics down, I meant to before I got here, but the Bank of Japan was the largest. In the
Ray Cleeman (35:55)
In the last auction, they came in very light and they are reducing their holdings. So we need to find new buyers, right? So Japan,
David Moghavem (35:56)
last auction, they came in very late and they are reducing their holdings. So we need to find new buyers. It's Japan.
They're reshoring their dollars because there's growth available. And so we need to find new buyers. Well, how do you incentivize new buyers to to the table? You got to pay them. So are you constantly increasing the
Ray Cleeman (36:07)
they're reshoring their dollars because there's growth available in Japan. And so we need to find new buyers. Well, how do you incentivize new buyers to come to the table? You got to pay them. So are you constantly increasing the
David Moghavem (36:24)
cost that you're willing to pay to these investors? Does that mean like you're borrowing it? Exactly.
Ray Cleeman (36:24)
that you're willing to pay to these investors.
Exactly. Now, now,
David Moghavem (36:35)
to help with the domestic economy, but you also have a yield that's attractive for farmers to buy our debt. That's interesting. Yeah. And so we're caught in a little bit of a crack nire, right? Because we're, I'm not going to quibble over whether it's 28 billion or 33 billion, we'll have to think what's off balance sheet, what's on balance sheet. It doesn't matter. Whatever it is, it's an enormous number.
Ray Cleeman (36:41)
Exactly. right. Right. Yeah. And so we're caught in a little bit of a quagmire, right? Because we're, you know, I'm not going to quibble over whether it's 28 billion or 33 billion people have something like one's off balance sheet, one's on balance sheet. It doesn't matter. Whatever it is, it's a enormous number.
And so the question that we have to take a seat back and say, does it make sense for us
David Moghavem (37:05)
And so the question that we have to take a seat back and say, does it make sense for us
to use more debt, payroll that to pay? mean, it's like people who say, I'm going to borrow from this credit card in order to pay this credit card. And then I have to get a third credit card to pay the interest on this credit card. Eventually that very go round and stop because the rate becomes too high. So I think.
Ray Cleeman (37:11)
to use more debt, to pay our old debt, to pay, I mean, it's like people who say, I'm gonna borrow from this credit card in order to pay this credit card, and then I have to get a third credit card to pay the interest on this credit card. Eventually, that merry-go-round stops because the rate becomes too high. And so I think
when we talk about where we think the five-year and 10-year are going,
David Moghavem (37:35)
When we talk about where we think the five-year and 10-year are going,
Ray Cleeman (37:39)
Do I think it comes down over the next 12 months? Yeah, I think it comes down marginally, but it ain't going down 100 basis points. And so I think a lot of people just need to bake that into their pie when they're thinking about, as I go through 2025, and I do have a maturity of something, how do I address that?
David Moghavem (37:39)
do I think it comes down over the next 12 months? Yeah, I think it comes down marginally, but it ain't going down a hundred basis points. right. So I think a lot of people just need to bake that into their pie when they're thinking about, as I go through 2025 and I do have a maturity of something, how do I address that?
Ray Cleeman (38:04)
And what can I do to
David Moghavem (38:04)
And what can I do to
look at my portfolio and do something smart about it? Yeah. I want to take a second to also address the viewers a bit. I think some people might say, well, we're getting really macro for just figuring out our business plan and multifamily real estate, right? But it's so important to think about these things from a macro level in addition to what we think about geographically, pockets,
Ray Cleeman (38:07)
look at my portfolio and do something smart about it.
say, well, we're getting really macro for just figuring out our business plan and multifamily real estate, right? But it's so important to think about these things from a macro level, in addition to what we think about geographically, pocket,
what we're bullish bearish on, in order to have a comprehensive business plan and a thesis as a north star for what you're buying. Like you need to think about these things, take a second, step back from the Excel sheet and say, okay,
David Moghavem (38:34)
what we're bullish bearish on in order to have a comprehensive business plan and a thesis as a North Star for what you're buying. Like you need to think about these things, take a second, step back from the Excel sheet and say, okay,
Ray Cleeman (38:47)
What do I think, where's my thesis and my attack based on a thesis and a North Star? and I'll continue with your point to bring it home from the macro. Now I'll bring it to the micro.
David Moghavem (38:47)
what do I think? Where's my thesis? And then, you know, attack based on a thesis and a North Star. I'll continue with your point to bring it home from the back row. Now bring it to the micro.
Ray Cleeman (39:01)
I think that was a great secretary. I don't know if you handed me that grapefruit purposely, but I will now nail that grapefruit. Why all this talk about interest rates, why does it matter?
Okay, okay, I'm throw out a few more really interesting and some scary statistics. This is information from TREP. 62 % of outstanding floating rate debt is under a 1.25 coverage. Okay, why is that important? Most senior lenders, when they look to refinance a loan,
David Moghavem (39:13)
Okay, I'll out a few more really interesting and scary statistics. This is information from Trev. 62 % of outstanding floating rate debt is under 1.25 % Why is that? Most senior lenders, when they look to refinance or
Ray Cleeman (39:41)
like Freddie or Fannie, look to make a 125 coverage ratio, debt service code, DSCR. So their underwriting is going to mandate that their total loan proceeds has to fit at least that box. There going to be 100 other boxes that you have to fit, but that's one which is easily identifiable. So if you have a loan as a sponsor,
David Moghavem (39:41)
like Freddie or Fanny, look to make a 125 coverage ratio. That serves them as DSU. So their underwriting is gonna mandate that their total number of dates has to fit at least that box. There are gonna be a hundred other boxes that have to fit, but that's one which is easily identified. So if you have a loan with a sponsor,
Ray Cleeman (40:09)
and you're not achieving a 125 DSCR, that means that the senior loan proceeds you're going to be getting are lower than your loan proceeds today. That's just simple math. Now, throw out another crazy statistic. Just over 30 % of all floating rate loans are below a 1-0 DSCR. Now, that's a problem.
David Moghavem (40:09)
and you're not achieving a 125 DSCR, that means that the senior loan proceeds you're gonna be getting are lower than your loan proceeds today. That's just simple and clear. Now throw out another crazy thing. 30, just over 30 % of all 40-grade loans are below a 1-0 DSCR.
that's probably
it but but not surprising right but my god not surprising right like think again so let's talk macro again we're looking 2021 when people were bar weighing 325 basis points cost of capital and buying the forecat it was okay because it had a 75 basis point spread now you have the negative of r and so
Ray Cleeman (40:38)
But not surprising, right? Oh my God, not surprising, right? And again, to your point, let's talk macro again, right? Where were we 2021 when people were borrowing, you know, 325 basis points cost of capital and buying a four cap. It was okay because they had a 75 basis point spread. Now you have the negative ARB. so
almost by definition.
David Moghavem (41:03)
Yeah, mean if it That wasn't my definition.
Yeah, if those debt funds were uncapped today, know, and debt funds were probably like, what did you say, 300 over? Then, yeah, mean you're, what is that, like 8 %? Yeah, it's over 4 for the reason that you're reading that. It's a tough place to be. So now, you have billions of dollars of real estate loans that out there that can't come.
Ray Cleeman (41:16)
Yeah, it's 300 over the 430 so it's 730 735. Yeah, it's it's it's a tough place to be so now you have billions hundreds of billions of dollars of Real estate loans that are out there that can't cover
All right, and so
David Moghavem (41:34)
And so... this is
where the answer comes in. Well, yes, I won't make it an absolute answer for me yet. Absolutely yes is exactly where the answer comes in. I'll give my answer and stay tuned. But what are your options? Okay. So what's really interesting is the number of loans that got done in 2021 and of the end beginning of 2022.
Ray Cleeman (41:37)
Well, yes, it is. I won't make it an ad for me yet, but absolutely yes is exactly where Pentium comes in. I'll give my ad at the end, so stay tuned. But what are your options? Okay. So what's really interesting is the number of loans that got done in 2021 and kind of the beginning of 2022,
David Moghavem (42:03)
get hundreds of billions of dollars
Ray Cleeman (42:03)
again, hundreds of billions of dollars.
David Moghavem (42:05)
and that all can do in 2024. lot of the, just to provide debt funds, some of the bank, something, they, all those loans started to do it. Anything that was put into it, this is before my own. CLOs are trading great. I haven't quite figured it out. There's obviously,
Ray Cleeman (42:05)
And that all came due in 2024. lot of the, just the providers, the debt funds and some of the banks and something, all those loans started coming due in 2024. Anything that was put into a CLO, and this is even more mind boggling, CLOs are trading great. I haven't quite figured out.
There's obviously a
play that I'm sure Ray Dalio has already figured this out, right? Because I'm seeing a little bit of a rain cloud and the CLOs are seeing a sunny day. So there's some sort of dynamic play going on there, but no one wants to take a black eye in a CLO. And so how do they address that if they know that they have these loans that don't necessarily work, right? Can't get out of them, can't refinance them.
David Moghavem (42:32)
I'm sure Ray Galeon's going to figure this out, right? Because I'm seeing a little bit of a rain cloud and the CLOs are seeing this tiny bit. So there's some sort of dynamic play going on there, no one wants to take a black eye on this, too. And so how do they address that? If they know that they have these loans that don't necessarily work. Can't get out of them, can't refinance them.
Is the reason sorry, just to kind of double click on it for me to understand is a reason because the CLOs are at a more easier cap stack or like more shirty cap stack like an a note or no. No, they are. But it's like their values are down, but it's not that bad compared to what's trading on the CLO from an LTV perspective. Is that, is that why it's a sun? That's what I'm trying to understand. Yeah.
Ray Cleeman (43:01)
Is the reason sorry? Yeah, please.
is the reason because the CLO-
easier cap stack or like a more shirty cap stack like an A note or no? No, they are at the A note level, 100%. But... So it's like...
from an LTV perspective. Is that why it's a sunny day? which I'm trying to understand.
David Moghavem (43:30)
I'll be back in the beef and we'll just talk about the seal a little more. That's another hour long conversation. But take it for granted today, filo's are treating well and there's a bit of a mismatch because not some of the lungs, but a good portion of the lungs
Ray Cleeman (43:30)
So I will come back in two weeks and we will just talk about the CLO market because that's another hour long conversation onto itself. take it for granted today, CLOs are trading well and there's a bit of a mismatch because not some of the loans but a good portion of the loans
don't necessarily perfectly underwrite to a refinance rate.
David Moghavem (43:54)
don't necessarily perfectly underwrite to a refinancer.
Ray Cleeman (44:00)
And some of them may be missing a little bit some of them are missing a lot Some of them the equity is completely wiped out and we'll talk about that in a minute and so people need to take a step back and say Okay, where where am I? In my ability to refinance this
David Moghavem (44:01)
And some of them may be little bit, some of them are missing a lot. Some of them the equity is completely wiped out. so people need to take that back and say, okay, where am I in my ability to refinance this?
Ray Cleeman (44:22)
There's what we call in in our shop the shadow market
David Moghavem (44:22)
There's what we call in our shop, shadow margin.
Ray Cleeman (44:26)
You had a lot of these loans that came due in 2024 leading into 2025. And what happened is the senior lenders, without wanting to have a mark to market on their books, are kicking the can down the road. So if you're a sponsor and you didn't qualify for an extension, sometimes they're willing to play ball.
David Moghavem (44:27)
You've had a lot of these votes that came through in 2024 leading into 2025. And what happened is the senior lenders, without wanting to have a mark to mark on the books, are kicking the can down the road. So if you're a sponsor and you didn't call a lot for an extension, sometimes they're willing to play ball.
Ray Cleeman (44:51)
The senior lenders are saying, look, I can't get blood from a stone. Right? And if this thing's just not working,
David Moghavem (44:51)
Senior lenders are saying, I can't get a lot from this guy, right? And if this leaves you some money
for me to take back to the fees, it doesn't make any sense because I'm not going to do any better than the guy that I'm operating. So even though the metrics may not work, that's coverage ratio, the debt you owe the TV or whatever it is, people are going to take a step back and say, I got a thousand better than you, so I'll give them a one-year option. You've to buy the right cap, so there's a little bit of money you have to come out of your pocket.
Ray Cleeman (44:56)
for me to take back the keys doesn't make any sense because I'm not going to do any better than the guy is operating it right now anyway. So even though the metrics may not work whether it's service coverage ratio or the debt yield or LTV or whatever it is, people are going to take a step back and say I got nothing better to do with it so I'll give them a one-year option. Got to buy the rate cap and so there's a little bit of money you have to come out of your pocket Mr.
Sponsor. And some are asking for
David Moghavem (45:21)
sponsor and some were asking for
Ray Cleeman (45:25)
buy downs, but they also realize that if someone was maybe a syndicator and they don't have access to that capital anymore, tourist dollars are gone, then they may not be able to get it. And so asking for it, they can ask for it, they may not get it. And so I think there are a lot of senior lenders who are willing to play ball and just to see what happens.
David Moghavem (45:25)
buy down but they also realized that if someone was maybe a syndicator and they don't have access to that capital anymore right first dollars we got it then they may not be able to get it so we asked for it they can ask for it and i get it so there are a lot players who are to play ball and just see what happens you think that's going to continue in 2025 though i think the sentiment
coming out of NMHC is that that's going to probably stop at this point. So we'll love to hear your take that. And so I was going to end with that as a point, which is what do I think of 2025? I think that 2025 is the year of recognition. And I think at some point during the course of this year, again, all the macro that we've been talking about,
Ray Cleeman (45:55)
So, yeah, and so I was gonna end with that as a point, which is what do I think of 2025? And I think that 2025 is the year of recognition. And I think at some point during the course of this year, again, all the macro that we've been talking about
will come home to roost. And I think a lot of these senior lenders are just gonna say, look,
David Moghavem (46:19)
will come home to roost. And I think a lot of these senior lenders are just going to say,
look, I can't kick the can anymore. We need some solution. Yeah, most lenders did kick the can to 2025 because that was a sentiment is that things will get better in 2025. And I think what we're seeing in 2025 is not necessarily better or worse, but stability. And so it's like, hey, this is what it is.
Ray Cleeman (46:25)
can't kick the can anymore. We need some solution here.
seeing a 25 25 is not necessary.
So it's like, hey, this is what it is.
You got to work with what we have now, which is 4 % treasuries, low force, silver. Exactly. make a move. This is new paradigm. you have to live within this paradigm. I can't be exposed anymore. And so pay me down. I'm going to replenish an escrow. You just have to do something. We can't stay in stasis.
David Moghavem (46:47)
You gotta work with what we have now, which is 4 % treasuries, low floors, sulfur, and make a move. This is a new paradigm. And you have to live with it as a paradigm. I can't be exposed to it. So, pay me down, punish the acro, you gotta go. It's half the use of me, you can't stay in spaces.
Ray Cleeman (47:14)
And so I think a lot of things
David Moghavem (47:14)
So, I think a lot of...
things are going to start happening in 2025 because the senior lenders are looking at the statistics that we've just talked about. They're I don't see rates of problems. Not enough to the game. And if they're not, I need a solution. On those deals where you get blood from the stone, maybe they'll be more flexible,
Ray Cleeman (47:16)
are going to start happening in 2025 because the senior lenders are looking at the statistics that we've just talked about and they're saying, I don't see rates dropping. All right. Not enough to move the needle. And if they're not, I need a solution of something on those deals where you can't get left from a stone. Maybe there'll be more flexible.
But if the senior lender feels, I believe,
David Moghavem (47:42)
but if the senior lender feels the need.
that they, their money goes, even though the equity is wiped out, I think they're gonna start moving on a lot more assets. We've seen that there are two or three debt funds out there that are very, very actively pursuing loans, really, think, for a dollar good. And the sponsors just can't raise the money. Yeah, and so I think you're gonna see more of that.
Ray Cleeman (47:45)
that they're money good, even though the equity is wiped out, I think they're going to start moving on lot more assets. We've seen that there are two or three debt funds out there that are very, very actively pursuing loans where they think that they're a dollar good. And the sponsors just can't raise more money. And so I think you're going to see more of that in
2025. So we've talked a lot about macro, we've talked a little bit about micro, what that means for us. And so now what's the solution? Okay, and here I'll give a 30 second plug for Pensum. Okay, now I'll give a 30 second plug. So I'll give a holistic overview first of what Pensum does, and then I'll drill down to how I think
David Moghavem (48:11)
But so we've talked a lot about macro, talk a little bit about micro, what that means for us. And so now what's the solution? Here, I'll give you a 30 second. So, so I'll give you the first of what Henson does and then I'll drill down to how I
think
Ray Cleeman (48:40)
our solutions help sponsors today. So, Pensam is broken up into two operating divisions. You have an equity arm and a debt arm. On the equity side, we actually own something like 13,000 multifamily units, a lot of value-add product. We're vertically and horizontally integrated in the sense that we own an equity interest in a third-party property management firm that runs
David Moghavem (48:40)
our solutions help sponsors today. So, so Petsco has pro-culture two operating divisions. have an equity arm and a debt arm. On the equity side, we actually own something like 13,000 family units. A lot of value to add. We're vertically, horizontally integrated in the sense that we own an equity insurance with a third party property management firm that runs
Ray Cleeman (49:08)
I think it's like 120 or 130,000 units in 30 some odd states. So that gives us tremendous reach in knowledge, expertise, and experience. And then we also do a lot of the value add in-house as well. And we're also a Freddie Maxleck sponsor on that side. that'll play into the other side in a minute. that's the equity arm. The firm itself said, well, if we have all this knowledge, expertise, and experience in multifamily, can we leverage that?
David Moghavem (49:09)
it's like 120 or 130,000, it's 30-something states. So that gives us tremendous reach and knowledge. And then we also do a lot of value add in-house this one. And we're also a very back-end sponsor on that side now. That'll play into the other side. So that's the equity arm. The term itself said, well, how long does knowledge, expertise, experience hold for the family? Can we leverage that?
Ray Cleeman (49:38)
and to a broader real estate investment platform. And so what I focus on is what we call the Capital Market Solutions Group. And we provide higher leverage financing solutions to other real estate sponsors. Again, focused exclusively to the multifamily arena. Think about us again, 75, 80, 85 % LTV loans. And we provide that at two buckets. The first is preff and mez behind other senior lenders.
David Moghavem (49:38)
in terms of broader real estate investment levels. And so what I focus on is what we call capital market solution group. We provide higher leverage finance solutions for the real estate sponsors. Again, focus exclusively to the building effect. Think about us again, 75, 80, % of the loans. And we provide that at two buckets. First is prep and management, and then other senior lenders.
Ray Cleeman (50:07)
And the second is whole loans or stretch seniors. On the prep and med side, we're agnostic to who the senior lender is. We do a ton of Freddie Mac, ton of Fannie Mae. I think we did 10 agency prep deals last year. I think it was four Fannie, six Freddie, I think. Commercial bank debt fund life company. We've gone behind everybody.
David Moghavem (50:07)
And the second is, full of or stretched. On the prefect best side, we're agnostic to the CB line. We do a ton of Freddie back, a ton of Fannie Mae. I think we did 10 agency press deals last year. think it was four or many, I was Freddie, think. Perfid bank debt folk life company, we've gone behind every.
Which is impressive. mean, talking to other providers, it's not easy to get behind agencies. yeah, yeah. Well, it's nice because we're so much about it's pretty much overstand the work process, which is great. So so anyway, can write a small as three million as large as a hundred and all the money comes off my own balance.
Ray Cleeman (50:42)
Yeah, yeah, well it's nice because we're at a point where we do so much volume with them that it's it's pretty much a rubber stamped approval process now, which which is great so So anyway, we can write a check as small as 3 million and as large as a hundred million and all the money comes off my own balance sheet
so we can be unbelievably flexible and really tailor make a solution for any sponsors
David Moghavem (51:03)
So we can be unbelievably flexible and really can make a solution for any sponsors,
Ray Cleeman (51:11)
either short-term or long-term needs. So how do we play for these sponsors? So when we talked earlier about not having the 1.0 or 125 DSCR, that means that when they go out, the sponsor goes out to refinance, they're not getting the same last dollar.
David Moghavem (51:11)
either short-term or long-term. So how do we play for these sponsors? So when we talked earlier about not having the 1.0 or 1.25 PSCR, that means that when they go out, sponsor goes out, finance, they're not getting the same last time.
And we call that the reactive cash neutral. So someone took a $50 million,
Ray Cleeman (51:34)
And we call that getting back to cash neutral. So someone took a $50 million
David Moghavem (51:40)
let's call it debt-fuck loan, green piece of paper, it's come to do. And they said, geez, I need to get back to 50 because I can't draw equity anymore from my pool. So what do I do? I'm only getting a $42 million seat. So Petsum will come and give the $8 million shortfall.
Ray Cleeman (51:41)
Let's go debt fund loan floating rate piece of paper. It's come due and they said, geez, I need to get back to the 50 because I can't draw equity anymore from my pool. So what do I do? I'm only getting a $42 million senior loan. So Pensum will come and give the $8 million shortfall
and we'll do that in a a prep piece. And that that's a great solution to people because
David Moghavem (52:03)
And we'll do that in a fresh piece. And that's a great solution to people because
Ray Cleeman (52:10)
They don't have to take a dollar out of their pocket. They have to believe, and we have to believe in the thesis, that over the next three, four, five years, there will be incremental increase to the NOI so that there will be an opportunity to refinance us. But I do believe there's been a bit of a dip, again, as we talked about
David Moghavem (52:10)
they don't have to take a dollar out of their pocket. They have to believe, we have to believe in thesis that over the next three, four, five years, there will be incremental increase to the NOI so that there will be an opportunity to finance us. And I do believe there's been a bit of a dip, again, as we talk about.
Ray Cleeman (52:31)
what's going on macro-wise in real estate, whether it's too much deliveries in one area, whether there's too much
David Moghavem (52:31)
what's going on back door wise, real estate, right? Whether it's too much deliveries in one area, there's too much
Ray Cleeman (52:39)
pressure on rent growth or concessions or something. And I think we're going to start seeing that. I think we've hopefully seen the bottom of that. And hopefully we'll start seeing that flatten and start to accrete a little bit over time. So that's how we bring value
David Moghavem (52:39)
pressure on rent, both sessions or something. And think we're going to start seeing that. I think we hopefully see the bottom of that and hopefully we'll start seeing that flatten and start to improve a little bit over time. So that's how we bring value.
Ray Cleeman (53:00)
to a lot of these sponsors who are sitting there saying, I need a solution. And I don't want to do a capital call.
David Moghavem (53:00)
to lot of these sponsors who are sitting there saying, I need a solution. And I don't want to do a capital call
where I'm out raising new fund and I don't want the black guy going back to my investors and showing them, hey, we did a lot of these deals but they're working out. How do I solve that? I bring in a pencil. And I would just add to that. There's always a question of.
Ray Cleeman (53:08)
or I'm out raising a new fund and I don't want the black eye going back to my investors and showing them, you know, we did a lot of these deals, but not really working out. So how do I solve that? I bring in a pencil.
David Moghavem (53:27)
Why are sales volume so down? Obviously with rates so high, like, why are sales volume so down? Why haven't we seen the distress? And I think, I think this is your answer, right? There's so much capital, like a pensum, that are willing to solve the cap stack distress by coming in to be cash neutral in order to give more runway for the property rather than selling at a loss. Yeah, a hundred percent. And that's really the value of that.
Ray Cleeman (53:37)
that are willing to solve the cap stack distress by coming in to be cash neutral in order to give more runway for the property rather than selling at a loss. Yeah, 100%. And that's really the value add that
we bring to the table. And I think it's really important that people understand, and people who have worked with us understand a few things. One, certainty of closure.
David Moghavem (53:56)
bring to the table and I think it's really important people understand. People who have worked with us a few things. One, certainty of closure,
which is absolutely important. We have never issued a term machine test before
Ray Cleeman (54:08)
which is absolutely imperative today. We have never issued a term sheet of pensum where we haven't closed.
David Moghavem (54:15)
have. So very shortly again, someone came to us back in November and had 1031 lifeboats in his gear.
Ray Cleeman (54:15)
So a very short vignette. Someone came to us back in the beginning of November. had a 1031, had it closed by the end of the year.
We bid it. We were off by 25 basis points. They went with someone else. We just said, look, for 25 basis points, you're better off going with us. They said, no. We're big boys. They went with the other group.
David Moghavem (54:25)
They went with someone else. said, look, 25 basis points, you go with us. They said, no. The boys, they went with the other group.
Ray Cleeman (54:38)
They put their expense deposit in two weeks later. Right after Thanksgiving, he called me and said, look, they proverbially went back to committee and now they're short, $5 million in the proceeds they promised, and their rate went up 300 basis points.
David Moghavem (54:38)
their expense deposit in two weeks later, right after Thanksgiving. They said, they proverbially went back to committee and now they're short $5 million in the closest they promised. And their rate went up 300 basis points.
Ray Cleeman (54:54)
Can you step in? So we could have stepped in and really ramrodded, but we honored the term sheet that we offered them originally.
David Moghavem (54:54)
Can you step in? So we could have stepped in and really ramble on it, but we honored the term sheet that we marveled at originally.
Ray Cleeman (55:05)
and now I've got a friend for life. And so he said, look, you guys came to the table four weeks to close, which was amazing. You did it at the same rate, even though you knew you could have tattooed me. You didn't. We really appreciate that. And he's been a great spokesman
David Moghavem (55:05)
And I've got a friend for him. And so he said, well, you guys came to the table four weeks to close, is amazing. You did it at the same rate, even though you knew you could have tattooed me. You did it. We appreciate that. And he's been a great sculptor.
Ray Cleeman (55:23)
for us.
David Moghavem (55:23)
Yeah,
I want to say on this for a little bit because what people overlook when they think about equity, like it's not just another way of saying as its actual partnership, right? You're sitting in the operating structure with them. And so you are creating like a joint venture and you're in this partnership together. And that's where relationships matter. It's not just about the rate and the last dollar. It's about obviously certainties closed.
Ray Cleeman (55:28)
People overlook when they think about equity.
100 % yeah structure with them and so you are creating like a joint venture and you're in this partnership together and That's where relationships matter. It's not just about the rate and the last dollar It's about obviously certainty of clothes,
but even after clothes being with someone that's not adversarial and someone that can work with you right and Getting that business plan through the finish line, especially in this era
David Moghavem (55:52)
But even after close being with someone that's not adversarial and someone that can work with you and getting that business plan through the finish line, especially in this era
Ray Cleeman (56:05)
Yeah. Where most executions are rescued capital. won't say rescue capital. Capital is structured. Structured, right. I'll tell you another short vignette. We had a deal actually very close to here in Miami. It was a two-year loan intended just
David Moghavem (56:05)
of high interest rate period where most executions are rescue capital. I want to say rescue capital, but capital restructuring. Yeah. I'll tell you another story. We had a deal actually very close here in a two year low.
And we up holding on for five minutes.
Ray Cleeman (56:21)
for them to get through the end of COVID. And he was one of those guys who tried catching a falling knife, right? Rates.
He
David Moghavem (56:54)
And so we work with senior lender and
Ray Cleeman (57:02)
We gave them comfort that Pensum was going to be there, right? A lot of senior lenders like the fact that we are a operator ourselves, and because of that, they view us as a credit enhancement on any turn.
David Moghavem (57:02)
we gave them a comfort that compensation is going to be there. A lot of lenders like the fact that we are a operator ourselves and because of that they us as a credit enhancing company.
Ray Cleeman (57:15)
The agencies view us as a credit enhancement. Life companies view us as a, you know, the debt funds love us. They're like, hey, we borrow from them, and we also leverage on top of them. And so they say, look, if for whatever reason the sponsor doesn't come through,
David Moghavem (57:19)
The debt bars were up. like, hey, borrow from them and we also leverage them. And so they say, look, if for whatever reason the sponsor doesn't come through,
Ray Cleeman (57:31)
We know Pensum will step in and help fix things. So that's a little bit. I want to talk about one structure we actually just did. We actually did two of them in 2024. And I think we're going to see a lot more of them in 2025.
David Moghavem (57:31)
we know Enciple step in and help fix this. So that's a little bit. One structure we actually just did, we actually did two of them in 2024 and I think we'll just deal with that little bit. I hope one of them
That you talk about is the one that you did with Henry and Ricky back in our podcast episode two. Okay. So, that's how we connected here in the 1st place. I would love to hear that we actually want to deal nearby. yeah, no, I will do it. I'll talk in round numbers. Sure. Yeah. think it's important talking numbers because it helps the stage for what the boss is an opportunity. Sure. So.
Ray Cleeman (57:49)
is the one that you did with Henry and Ricky. I will, yeah. Back to my podcast, episode two. Okay, I will.
I'd love to hear that. actually ordered a deal nearby. sure. Yeah, no, I will. I will. I will do it. If it's OK, I'll talk in round numbers because and I think it's and I think it's important to talk in numbers because it helps set the stage for what the losses and opportunities were. So
so a very good sponsor went out in twenty twenty one and bought great asset in Orlando. Strong pocket. And let's just say he paid
David Moghavem (58:17)
So a very good sponsor went out in 2021 and bought great asset in Orlando, strong pocket. And let's just say he paid
Ray Cleeman (58:26)
72 million for it back then it under wrote it worked well But then you had a flood of deliveries. All right, and then so as we were talking about the macro effect, right? rents came down concessions went up occupancy levels went down and so
David Moghavem (58:26)
72 million for it. Back then it underrode, it worked well. But then you had the flow of deliveries. then, so as we were talking about the back roads, rents came down, sessions went up, occupancy levels went down. And so,
Ray Cleeman (58:45)
He he had a 53 million dollar debt fund loan the loan came due August last year
David Moghavem (58:47)
He had a $53 million debt to one of them. The loan came due August last year.
Ray Cleeman (58:54)
In April, May, he went out to the market to try to find a buyer. And the bids he was getting were, call it, $58 million. Now, people were taking advantage, because everyone knew that the lender had already come due. And so the value was probably higher than that. But the sponsor was sitting there saying,
David Moghavem (58:54)
In April, May, he went out to the market to try to find the buyer. And the bids he was getting were all 50, set the bid in 50, 80 million. Now, people were taking advantage because everyone knew that the loaner already could do it. So the value is probably higher than the other. But the sponsor was seeing this saying,
Ray Cleeman (59:15)
I can't take a $15 million loss and wipe out all my equity. One, he himself.
David Moghavem (59:15)
I can't take a $15 million loss to wipe out all my equity. One, he personally
Ray Cleeman (59:21)
personally had millions of dollars invested. Two, it would be difficult for him to raise his next fund. And he believed, as did we at Pensum, that if you could kick the can down the road four or five years, you'd see, again, what we talked about on the macro level, the digestion of all the new deliveries, you'd see a completely
David Moghavem (59:22)
had millions of dollars invested. Two, it would be difficult for him to raise his next fund. And he believed, as did we at Peso, that if you could take the $10 road for four or five years, you'd see, again, we talked about the macro level, the digestion of all the new deliveries, you'd see a complete
completely different dynamic on the rent side, concession side, the occupancy side, and he'd move the NOI again,
Ray Cleeman (59:43)
different dynamic on the rent side and concession side and the occupancy side. And he'd move the NOI, and again.
because it's compounded effect, exponentially changes. The NOI goes up a little bit. Even if he didn't reclaim all 72, he'd reclaim a super majority of that. And so what we did is we gave him that solution to kick the can down the road, and he didn't have to take a dollar out of his pocket. We did better.
David Moghavem (59:49)
because it's compound with the fact that it potentially changes. The NOI goes up a little bit. Even if he didn't reclaim all 72, he'd reclaim a super majority. And so what he did is weak at solution. He'd take the can down a row. He did have to take a dollar out of his pocket. So you got him to cash control. We did better.
Ray Cleeman (1:00:12)
We actually came to the table, I think it was 56 and chain, let's just say 56.
David Moghavem (1:00:12)
We actually came to the table, think it was 56 and chainlages, 50 cents.
Ray Cleeman (1:00:20)
So that was enough to pay off the $53 million senior loan. It was enough to give him a few million for CapEx and then working capital and some payables they had to pay off. Senior lender was thrilled, right? They got paid out. Sponsor's thrilled because
David Moghavem (1:00:20)
So that was enough to pay them $53 million senior loan. It was enough to give them a few million for CapEx and then working capital and payables they had to pay. Senior lender was thrilled, right? They got paid out. Sponsors thrilled because
Ray Cleeman (1:00:41)
he got everything he needed plus the dollars to do his value add, which
David Moghavem (1:00:41)
He got everything he needed, lost the dollars to do his value add, which
Ray Cleeman (1:00:46)
was working and he was getting like two $300 rent bumps.
David Moghavem (1:00:46)
was worth it. He getting like two, $300 red bucks. And the senior loan I'm assuming is obviously attached like would be lower than what the original loan was. So it was delevered from that. Well, so we bought a whole loan at $56. Oh, we did the whole stack. We did the whole stack. We We did the whole stack. did did did did did did did did did did the whole stack
Ray Cleeman (1:00:57)
Well, so we brought him a whole loan, right, at 56 and Change. We did the whole stack. We did the whole stack. So, Pensum brought him a whole stack solution, and we said, okay, we're giving you the
one-stop shop solution. He was thrilled. He doesn't have to go out and sew together a few things.
David Moghavem (1:01:10)
one-stop shop solution. was was he doesn't have to go out and sew together a few things. round numbers.
How did you cut that up of credit versus graph versus? Yeah, yeah, I'll look through that. But so it worked for everybody, right? We liked it because we thought we were in the right LTV. Sponsor loved it because he got his four years kicked the can down the road. Obviously, the current senior gets paid off. He walks away and
Ray Cleeman (1:01:21)
Yeah, yeah, I'll walk you through that. so it worked for everybody, right? We liked it because we thought we were in the right LTV. Sponsor loved it because he got his four years, took the can down the road. Obviously, the current senior gets paid off, he walks away, and
everyone was happy. What Pensom did in this scenario is, again, round numbers. We got a $42 million senior loan.
David Moghavem (1:01:39)
Everyone was mad. What Pensive did in this scenario is, get round numbers, we got $42 million to the U.S.
Ray Cleeman (1:01:49)
And then we wrote a $14 million dollar pref piece on top of that.
David Moghavem (1:01:50)
then we wrote a $14 million press piece on top of that.
Ray Cleeman (1:01:55)
Beauty of this is the sponsor at any time over the next, let's go four years, they can refinance the asset, sell the asset, or take out just our prep piece. He can find a new person, you know, just to take our prep piece down. So he's in a really good position and he has the control that he wants for his own destiny. We're happy because we...
David Moghavem (1:01:56)
The of this is the sponsor at any time of the next, let's go four years, they can finance the asset, sell the asset, or take out just our prep piece. You can find a new person, you know, just to take our prep piece. So he's in a really good position and he has the control that he wants for his own destiny. We're happy because
Ray Cleeman (1:02:24)
We ended up, and this is a little bit of a nuance, we liked the asset so much and believe in the business thesis so much that Pensum, and we don't do this on all the deals, but we actually signed on the senior loan. We signed on the senior loan, we signed the carve-outs, because it was a Freddie Mac loan. So we brought Freddie Mac to the table, we did a loan that covered the 125.
David Moghavem (1:02:25)
We ended up, and this is a little bit of a nuance, we liked the asset so much that we believed in the business pieces so much that we some, and we don't do this on hold, but we actually signed up a senior. We signed up a senior loan, we signed a garbage, because it was a Freddie McAdams. So we brought Freddie McAdams to the table, we did a loan that covered the 125.
Ray Cleeman (1:02:52)
Great loan, locked in a great rate back from September. you know, Freddie was thrilled. We're in a great place. We took over asset management and we helped pick the right property manager for the asset. He's now in a position where he's got an amazing property manager. He's got us doing the asset management, so he doesn't have to deal with any of this. And there's a perfect alignment of interest between
David Moghavem (1:02:52)
Great loan, locked in a great rate back in September. So, Fred was thrilled. We're in a great place. We took over asset management and we helped pick the right property manager for the asset. He's now in position where he's got an amazing property manager. He's got us doing the asset management. So he doesn't have to deal with any of this. And there's perfect line of interest between
Ray Cleeman (1:03:22)
Pensum and the sponsor.
David Moghavem (1:03:22)
Pencil and the sponsor.
Which is key. think when you're giving these breath pieces, it's all about aligning the two. Making sure that people on St. Puget doesn't get adversarial once the dollars are in because again, it's a partnership. Exactly. You said best earlier, you said it's a true partnership and that's exactly the way to do it because we came together and we're saying our success is your success.
Ray Cleeman (1:03:29)
Yeah.
once the dollars are in, because again, it's a partnership. Exactly. You said it best earlier when you said it's a true partnership. And that's exactly the way we view it, right? Because we came together and we're saying, our success is your success.
And so there's no light in between us. And he gets weekly updates, just like we do. He sits on the same calls as us. Gives his investors some runway, too, right? Obviously,
David Moghavem (1:03:50)
And so there's no light.
He gets weekly updates just like we do. He sits on the same pole as us. Gives his investors some runway too, right? Obviously
they're now subordinate to a new stack, but it's better than the alternative of selling at a loss. So you get the runway to make your dollars up. That's exactly it. You have the capex down to grow the to give yourselves a chance. Right. That's exactly the opposite.
Ray Cleeman (1:04:05)
Exactly. Right. That's exactly it. Right. That's exactly the opportunity
David Moghavem (1:04:21)
That's why Sparxer and his investors were so excited. He was so excited about it. actually personally and a few of his investors actually came back into the deal. Sorry, was it with us?
Ray Cleeman (1:04:21)
and that's why the sponsor and his investors are so excited. He did, he was so excited about it that he actually personally and a few of his investors actually came back into the deal, pari-pasu with us. Right.
David Moghavem (1:04:34)
So we're seeing a lot more of it. We're lot more deals where the equity is impaired.
Ray Cleeman (1:04:35)
So we're seeing a lot more of those. We're a lot more deals where the equity is impaired.
Sometimes the senior is impaired. But we're trying to work with sponsors and debt holders to see how Pensum can come to the table and come up with a solution that saves the day.
David Moghavem (1:04:50)
sometimes seniors there, but we're trying to work with sponsors and debt holders to see how Pennsylvania can come to the table and come up with a solution that saves the debt.
Ray Cleeman (1:05:05)
So we're seeing a lot more of those. I think we're going to see again 2025, the year of recognition. think that's what we're going to be seeing. So that was a very long diatribe. you guys were,
David Moghavem (1:05:05)
So we're seeing a lot more of those and I think we're going see again 2025 year of recognition. I think that's what we're going to be seeing. That was a very long diet ride. Hopefully you guys were working.
Ray Cleeman (1:05:20)
hopefully everyone's still awake.
David Moghavem (1:05:20)
Hopefully everyone's still awake.
no, that was great. I think one thing I'm asking everyone in the interview right now is the outlook of multifamily in general, operationally. I know we dug very deep in the weeds from a cap stack perspective and rates and viewers loved hearing that as well. But I think operationally as an asset class for multifamily, how do you see the outlook in the next three to five years?
Ray Cleeman (1:05:35)
very deep in the weeds.
and viewers love hearing that as well.
see that
Pensum takes a very long-term view on multifamily. think over the last, I don't remember whether it's 75 or 80 years, it's been the best performing asset class. We're going to continue investing in multifamily. Everyone needs shelter. And our strong belief is over the next 70 years, it's still going to continue to be the right asset class.
David Moghavem (1:05:52)
And some take a very long career time. think over the last 75 or 80 years, it's been the best performing asset class. We're going to continue investing in health care. Everyone needs children. And our strong belief is over the next 70 years, it's still going to continue to be the right asset class.
Ray Cleeman (1:06:20)
Everyone who puts sticks in the ground in 2021, 2022, even places like Nashville or Austin, where it's been currently overbuilt, that will get digested. And once it gets digested, all those sponsors are going to be great. All the debt is going to be great. It's just time, right? Time heals all real estate wounds. And so we are very, very bullish on multifamily. That's why we're willing to go higher in the capital stack now.
David Moghavem (1:06:21)
Even places like Nashville or Austin where it's currently under built, that will get digested. And once it gets digested, all the sponsors are going to be great. All the debt is going be great. It's just time. And time heals all real estate loans. So we are very, very bullish on multifamily. That's why we're willing to go higher in the capital stack now.
Ray Cleeman (1:06:50)
to provide solutions. We're very confident over the next three, four, five years things are going to be great.
David Moghavem (1:06:50)
to provide solutions. We're very confident for the next three, four, five years, things are gonna be great.
Yeah, and I think the strategy you guys have today of coming in as that prep structure, which obviously it's your guys' business plan, but you're doing more of that today, getting people cash mutual than you were doing free rate like. That is a great way to still be risk adjusted, getting your strong return.
Ray Cleeman (1:07:11)
That is a great way to still be risk adjusted, getting a strong return,
David Moghavem (1:07:18)
while
Ray Cleeman (1:07:18)
while staying optimistic about the asset price. So think it's a good position to be in. Yeah, yeah. That's not to say we don't have issues in our own portfolio. Everybody does. I don't want it to sound like it's all candies and rainbows, but the way we work now with our current sponsors is different, right? We don't hold a hammer over them, again.
We understand because we have so much knowledge and experience in real estate, what's realistic and what's not.
David Moghavem (1:07:48)
Yeah.
Ray Cleeman (1:07:48)
What can be done, what can't be done. And so if a sponsor comes to us and says, I don't like my current property manager, I don't think they're doing the best job, we will help them. We sit with them, we interview new property managers, we're doing this on an asset in Alabama right now. They're not happy with the property manager.
We went out and we found five guys for them to interview. We interviewed with them. We have a deal in
Las Vegas. Same exact thing. Property wasn't optimally operating. And so we sat with them. We said, here are the guys. Let's interview them all together. We did. They picked one person. And that group has done an unbelievable job.
David Moghavem (1:08:16)
Vegas, same exact thing. The property wasn't optimally operating, and so we sat with them, we said, here are the guys, let's interview them all together. did. They picked one person, and that group is an unbelievable job.
Ray Cleeman (1:08:36)
And the reason we were able to identify them is because we have loans all over the place and we look at, and the metrics of,
David Moghavem (1:08:36)
And the reason we were able to identify them is because we have loans all over the place, and we look at metrics.
Ray Cleeman (1:08:45)
which asset is operating most efficiently and which property management group does the best job. Exactly, exactly. And we can identify that talent because we have that breadth of knowledge.
David Moghavem (1:08:45)
which asset is operating most efficiently and which property management group does the best job. And get me that talent. Exactly. We can identify that talent because we have that talent. Yeah, that's what's
beautiful also about multi-family. It's the people behind the numbers. The foods that we self-manage as well and what you see on paper, on the P &Ls, on the rent rolls, on the trade-outs, it's all a function of who's on the boots of the ground.
Ray Cleeman (1:09:02)
Yeah.
what you see on paper, on the P &Ls, on the ramp rolls, on the trade-outs, it's all a function of who's on the roots of the ground
and performing the work. And so taking that extra second to find that talent and put them in the right properties that it is the recipe for success. Yeah, we 100 % agree. Ray, I would ask, how can listeners get ahold of you and hear more about PENZO? I know everyone's looking.
David Moghavem (1:09:15)
and performing the work. So taking that extra second to find that talent and put them in the right properties that need it is the recipe for success. Yeah. Right. would ask how can listeners get ahold of you and hear more about Pensum? I know everyone's looking
for some sort of capital restructuring heading into 2025. How can people get ahold of
Ray Cleeman (1:09:36)
for some sort of capital restructuring heading into 2025, how can people get ahold of you? Yeah,
it's super simple. All you have to do is go into Google, type in Ray Clemon Pensum. My personal phone and email is listed in LinkedIn. You just click Contacts. any time you go to... You get hit up a lot. I do, I do. Sometimes unsavory folk, but that's okay. It comes with the territory.
We'll also, anytime you just go onto literally any website, our Pensum website, you'll see my name in there. Anytime we send out a flyer by email and my cell phone number are there, call. Call. I tell people all the time, just pick up the phone and call because you never know. We can provide a solution to someone. mean, the one thing is we tell everyone 100 units or more.
David Moghavem (1:10:14)
there. We kind of send out a flyer by email and email phone number there. Well, I tell people all the time just pick up the phone and call because you never know we can provide a solution. The one thing is we tell everyone 100 units or
more for 1985, 1985, it's nowhere. Not doing construction right now. did six construction deals last year.
Ray Cleeman (1:10:33)
We prefer 1985 vintage or newer. We're not doing construction right now, but we did like six construction deals last year.
So we're a little bit full up on that bucket. Other than that, we want to see things. And things are always changing too, right? Your cartoon is different from the 100%. 100%. 100%. 100%. Definitely stay in touch with Ray. Absolutely.
David Moghavem (1:10:43)
to a little bit pull off on that bucket. Other than that, we'll, we want something. And things are always changing too, right? Your criteria today is very different from the ones for you. Definitely stay in touch with Ray.
I'm have you. Thank you for the opportunity. have lot of knowledge and always a lot fun.
Ray Cleeman (1:11:03)
Thank you for the opportunity. By the way, if you tell that to
my wife, she won't believe you.
I'm going to make her watch this. We'll make her watch this and make sure she
awake as well. That'll be good luck. All right. Thank you, everybody. Thank you for listening.
David Moghavem (1:11:14)
you everybody. Thank you for listening.