Altus Insight May, 2018

~~The Altus Insight
Market news, commentary and relevant topics for today’s alternative asset investor

Date: May 31, 2018
FR: Forrest Jinks
RE: From Under the Umbrella

I am terrible at vacationing. As in possibly historically bad. By its very definition “vacation” is a suspension of work. However, I am a little addicted to work and when wifi is ubiquitous nearly anywhere that might be considered vacation (at least places that are reasonable for kids), I have extreme difficulty turning it off. This is to my detriment. Loving my career doesn’t mean that it is without stress. The effects of stress without periods of relief are well documented. Even without stress it isn’t healthy to never take a break from any one particular thing, even if that something is what makes a person tick.

I have struggled with this since at least 2008. Before 2008 I wasn’t so bad. I took at least one international trip a year during which time I was able to completely disconnect from work, allowing for relaxation, a reset, and most importantly, time to reflect and brainstorm on my life and my business. But it was easier then. Wifi wasn’t common and phones didn’t work as easily across borders. I should note that my business structure pre-2008 was considerably different and lacked many of the responsibilities I currently have to my employees (paychecks) and that Altus has to its investors.

Don’t get me wrong, my definition of being a “good” vacationer doesn’t mean I wouldn’t think about the business or investing (or my life in general). It is the stresses of everyday businesses I need to get away from, not the contemplative thoughts and brainstorming that come from a clear mind in a non-everyday living environment. In the pre-2008 days I would come back from trips energized, recharged, and raring to work on the notebook full of ideas that I had written down during the trip. Not all those ideas were good ones, but enough had value that the business continued to grow steadily.

By now you are probably asking yourself, what in the world does vacationing have to do with investing, business or economics? Why is this a topic for an Altus Insight? I am writing this with a pretty nice view in Cabo San Lucas.

We return to the States tomorrow and like all vacations for the past many years, turning off work was a constant struggle. But I feel like there was some improvement this time. There have been several periods during this trip where I was able to not be checking email and instead read a book next to the pool. And in other instances I enjoyed time on the ocean with my family without internet or phone service.  Still a couple additional occasions of walking or driving through non-touristy areas when I was able to observe local business, customs, and interactions. It is these times when business operations are not inflicting my mind from which the greatest benefit is had. I don’t know that I have had any new or enlightening thoughts, but I definitely have benefited from previous ideas or thoughts becoming more salient, to the point of spurring future action.

The most important moment of clarity was the one in which I realized how important it is for me to take time away from business operations. Whether considering new investment strategies or ways to grow the business (or live my life differently) it is very difficult for me to get outside the box unless I get outside the box. Without new ideas or time to think through strategic challenges and opportunities, Altus’ growth will be severely stunted.

I also obtained more clarity around Altus as a business versus Altus’ product. Not dissimilar to more traditional businesses, we might have a great product without having a healthy and growing company. However, unlike a product or service that transacts at a period, or periods of time, alternative investments exist across a time continuum. Even the best alternative investment in the world needs an ongoing business concern to make sure the investment is operating appropriately or that the business plan for that particular investment is being executed well. Even the best business concern or the best underwriting doesn’t ensure a successful investment of course, but the absence of a strong sponsor certainly reduces the chances for success. We have been fortunate to uncover some great investments over the years and hope to continue to do so.  But great investments don’t ensure a strong business. We need to make sure we are also focusing on our business operations, fundamentals, and growth.

Sometimes I think we believe that Altus needs to come behind the investors in order of priority. Sitting beside the pool I realized that the goal of a growing and strong Altus isn’t, and shouldn’t be, considered to be done at the expense of our investors. Rather a strong sponsor entity provides stability to the ongoing investment. Additionally, by not coming up with additional product (investment opportunities) we are not servicing our current or future investors who want and need places to put their money. Despite strong demand, we haven’t been good about providing those opportunities for the past year. Circling back to vacationing. I, and other Altus team members, need to take time outside the day to day operations to come up with new products (investment strategies) and develop ideas and plans for growing our business so we have the skillsets and resources to handle the increase in product needed to service our growing investor database. This realization, combined with my book of choice for this trip whose main tag line is “If your dreams don’t scare you they are too small”, has opened my eyes to the need for Altus to transform into something greater than it already is. This isn’t to belittle what we already are; we have offered a good product and have a great client base, but we can’t continue to grow and provide a great product to our growing investment base without taking the next step in our journey. I don’t know exactly what this will look like yet (maybe I need another vacation) but I now know it is a riddle that needs to be solved, and relatively soon. As we develop our plan for growth we will share it with our Insight readers, hopefully obtaining support for our goals.

Separately, as we spent time on some of the back streets of Cabo and saw how the population dealt with trash and dirt I thought back to other places I have travelled in the world. Japan was spotless. Germany – well cared for and maintained. Paraguay, Honduras and Guatemala?  Much more on the level of what we saw here in Mexico. Other countries, like Chile, Taiwan, and UAE fall somewhere in between the extremes. I don’t know if it is causation or correlation, but the economic fortunes of the full populace spectrum seem to track the way a country and their populace deals with trash. Regardless if causation or correlation, the lesson for me is that how we deal with the details of our business is important to the economic success of our business. Do we have clean books? How do we deal with the reams of paperwork that our business creates? What systems do we have in place to make sure we are communicating consistently across time and team members? Etc. This isn’t rocket science and many of you are probably rolling your eyes at the obviousness of it, but complacency can lead to sloppiness, and this observation is enough to scare me back from complacency.

The last observation I will share is specific to investing.  These are old thoughts of mine now brought to the forefront of consciousness.

  1. Incrementalism and
  2. The importance of interest rates

These two things are so, so important to the product (investing) of our business; the first as something we can influence that can have a far outsized impact on results, and the second is something we have no control over but also can have far greater impact on our business than we, our investors, and certainly the larger investment industry as a whole, give it credit for. Incrementalism acts as a long lever of operational excellence (or lack thereof). Interest rates are so incredibly impactful on investment returns.

Let’s use the example of a recent Altus experience to illustrate both. Altus sponsored the purchase of the 98 unit Sunset Ridge Apartments in Edmond, OK in June of 2016; promptly changing the name to Bennett Pointe Apartments as part of our larger repositioning efforts. The repositioning went well and fifteen months into a twenty-four month pro forma time line we had re-leased to 91% occupancy. This was September of 2017. Our refinance was lined up through Freddie Mac and all we needed to lock an interest rate was one additional lease to get us to 92% occupancy. That type of loan product is priced off the ten-year treasury rate which was at 2.1% at the time. September is also the end of the leasing season in Edmond and for the next several months we were only able to tread water, never able to get to the 92% occupancy needed until this Spring (we are now at 99% occupancy). The ten year treasury has since increased to over 3%. Thankfully we were able to lock the interest rate for this loan in February when rates were a little lower but still much higher than where they were last September. The higher interest rate reduced our refinance amount by $350,000, increased the accrued preferred return by $100,000, and steepened the amortization curve by increasing the loan interest rate to 4.74% from 4.15%. Based on the final loan amount this interest rate difference reduces the cashflow over the ten-year life of the loan by roughly $300,000. Despite the fact we outperformed pro forma on our timeline, that incremental one unit that we weren’t able to get leased, paired with an only sixty basis point increase in the ten-year treasury dropped the investor IRR by about 5% while also reducing Altus’ revenue by ~$150,000. This is still a great investment with investors expected to receive over an 8% yield (and growing) going forward. But it could have been better. And, with its junior equity and return position, Altus feels the outsized impact of the reduction in investment returns.

So here’s to more vacations, more time outside my box, and less time working in the day to day operations of the business. Or said another way, not less time working on the day to day, but less time thinking about the day to day operations when I am not working on them. This time instead can/should be spent on improving and growing myself, our investment portfolio, and that same business.

Am I being hypocritical in writing this Insight while on vacation? I don’t think so. The Insight is one thing each month that forces me to step outside the daily operations and focus on the bigger picture. To me it is natural fit to be working on this while on vacation, when I should be thinking about the bigger picture. Getting on the plane to leave for vacation I had no intention or thought that this would be the topic for this month’s article. But such is the benefit of me being on vacation, or at least the benefit to those isolated times I was able to fully get into the vacation mode. Summer is here. It is the perfect time for growth. I fully intend to make the best of it.

Happy Investing.


Forrest Jinks
Altus Equity Group, LP
off: 707/932-5887
fax: 707/544-2972
www.altusequity.com