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Revealed by the Hairline

November 2020 Insight

Haircuts have been few and far between for me over the last several months as I (and most everyone else) have tried to maneuver the various shut down rules, usually unsuccessfully. The first look in the mirror when the chair turned around revealed a hairline that appeared to run away and tried to hide. For most of my life my hairline has been pretty consistent. There was only one other time period in which it had much movement. That was in 2007 – 2008. At the time I thought it was just the natural progression of age (my mother’s father had been almost entirely bald). Only after the recession ended (both economic and follicle) did I make the connection that the hair loss was due to the stresses of the time. Being twelve years more advanced of age than in 2008, it could again make sense to blame the hairline retreat on age, and while it might well be the case, my sense is that I might be feeling more day to day stress than I realize.

While the impact of COVID and all the ensuing decisions made by our leaders have undoubtedly been impactful, I am one of the lucky ones. Past experiences (2007) have uniquely prepared me for real estate market disruptions and created high stress thresholds. I enjoy a strong family support system. My children have been fortunate to live on a property with lots of room to play. The “pods” of my kids include friends whose parents are also Melissa and my friends, so we have been able to enjoy socialization much more than many others. We have even been able to enjoy good health throughout. Altus as an operating company was initially damaged; but has shown resiliency and appears to be set up for stability and continued growth moving forward. The Altus investment portfolio certainly has some challenges, but overall has performed admirably, and certainly far in advance of our fears in the COVID-19 onset in the spring.

And yet, despite all the blessings, the lurking stress has been enough to cause hair loss. As most will know, there are two different kinds of stress; eustress and distress, or good stress and bad stress. Eustress improves performance and creates feelings of happiness and contentment. Distress, on the other hand, can paralyze our thought process, hinder performance, and if not dealt with correctly can cause considerable health problems. While under stress (especially distress) we are more likely to act out of “reaction” instead of “response”, which often results in us treating people (and pets, etc.) differently than we otherwise might.

While I have many associates that have been severely impacted by the COVID-19 lock downs (mostly professionally – leading to personally), usually through no fault of their own, I would hope that most readers of the Insight have faired much as I have over the past 9 months…more blessings than challenges. I would also venture to guess that most readers have felt stress, and likely more than realized.

There are multiple issues resulting from me not realizing or acknowledging the amount of stress I am under. For one, I could be treating people differently than I would otherwise normally want to treat people. This is doubly damaging since others are unquestionably also under stress. Secondly, not understanding my own stress may cause me to minimize the true extent of the situation. Or said another way, not fully comprehending the extent of stress others might be feeling, the extent of stress on the futures of children (i.e. being held out of school – especially those in the lower socioeconomic strata), the extent of stress upon various economic segments, the depth of stress upon governmental budgets, etc.  may cause me to minimize the potential downside impact. With more awareness, maybe I can be more empathetic for those feeling their own stress, and more aware of the dangers and opportunities around me.

This is an investment and economic publication, and though I feel the personal impact of “stress” is far more important than the dangers and opportunities of said “stress”, a focus on investment and economic impacts is more apropos for the following paragraphs:

  1. According to the US Census Bureau, between October 28th and November 9th, approximately 12% of Americans didn’t have enough food to eat. That equates to almost 40 million people. The same study revealed that less than half of families with children were “very confident” about being able to afford needed food for the next month. Food insecurity has doubled since this time in 2019, and for families with children, hunger rates are 3 times what they were at this time last year. An estimated 50 million Americans are expected to experience hunger this year, up from around 30 million last year. Tragically, 25% of children are expected to experience hunger.
  1. Roughly 21 million citizens that are considered “working poor” are unemployed and receiving government benefits. While the official unemployment rate is a relatively decent 6.9% (but rising), the U6 unemployment rate (which includes those “marginally employed”) in October was a little over 12%. This means that almost all of those “marginally employed” were working poor. These individuals don’t have reserves. They have government subsidies. Many of those subsidies, put in place through Trump’s executive order, are currently scheduled to expire December 31st. With Democrats and Republicans continuing to argue (since August) about the size of the stimulus and not actually putting stimulus in place, it is now likely there will be some window of minimal benefits until after Biden is sworn into office.

Gaps in trying to reconcile the measured unemployment rates to lost jobs can be understood by considering the labor participation rate (put simply – the amount of people working or actively looking for work). Even with some recovery from over the summer, the labor participation rate has dropped back to where it was in the late 1970s, well before women fully entered the workforce. Since GDP growth is defined as the change in the workforce combined with the change in workforce production, a drop in participation will be a long term drag on economic growth.

  1. According to the commerce data firm Womply (womply.com), 21% of small businesses have closed down forever. This is an increase from 16% in June. With spending at local businesses already down 27% in November from a year ago (versus 20% in October), and shutdowns increasing in response to increasing COVID-19 cases, these business failures can be expected to increase, and likely dramatically. From my own 2007 experience, I know the process. First the business owner foregoes their income trying to keep their team employed. Savings erode as the business owner does everything they can do to keep their life’s work alive. Eventually the employees are let go and the business owner works more and more hours, doing everything they can to keep the lights on. By the time the business reaches its end, many businesses owners have also exhausted all their own financial stability, not just resulting in a loss of their life’s work; but creating an almost insurmountable set of circumstances for recovery. This is admittedly very much my own editorial, but having been through the experience firsthand in 2006 – 2007, I am acutely in tune with the impact on the individual level, and more broadly the impact to the economy.
  2. According to a report by Bloomberg, 5.8 million adults are facing eviction or foreclosure come January 1, 2021. There are 17.8 million adults behind on rent or mortgage payments. I can speak from our own experience that a decent percentage of the coming evictions are direct results from their own choices and actions in taking advantage of the situation, and not because of economic necessity (why pay rent for months on end when you can’t be evicted)?. But there are millions of people behind on rent because they simply don’t have the means to pay the rent. Where are these people going to go? I can tell you that extending the eviction and foreclosure moratorium is not the solution. Within our own portfolio, and from conversations anecdotally within the portfolios of companies similar to ours, the short-paying tenants are in pockets, with certain properties being dramatically more impacted than others (with an acceleration in rent delinquency in October and into November). Most of the properties in our portfolio are doing just fine, and many even better than they were doing in March, but the properties that have been hit have been hit extremely hard. For much of the country, apartment operating expenses are around 50% of the properties stabilized revenue. Debt can eat up another 70 – 80% of the remaining net operating income, leaving only 10% – 15% of the stabilized revenue in free cash flow. If delinquency (or vacancy in combination) increases 10% of the revenue, the property is suddenly underwater. And yet, people living in units still require utilities, repairs, on-site staff etc. If a landlord doesn’t cover the operating costs, they can be sighted for code violations. This means debt doesn’t get paid. This means vendor payments get deferred. This creates carry on impacts to the economy that are just starting to spread. There are also the investors in those properties who depended on the income for their own bills, or those that are receiving capital calls to keep properties afloat that are otherwise stable properties sans the COVID-19 impact. This is a humanitarian issue. This is an economic issue. There is no easy solution.

But there will also be opportunity. Many of these impacted properties will not make it through this time period with the current owners in place. They will either be sold as distressed properties or returned to the lender, where they will in turn be sold as distressed properties. Many of these properties are physically solid and in good locations. At Altus, it is important that even while we deal with the ~10% of our portfolio that has been impacted by these delinquency issues, that we also stay aggressive in looking for areas where we can expand our portfolio. There will be opportunities to acquire properties that can be quality investments again with a little capitalization, patience, and creativity.

Difficulties and opportunities are really the yin and the yang of the current situation. There have been, and will continue to be, severe difficulties. Dealing with those difficulties will cause much distress. There will also be, as we are already seeing, solid opportunities. The key for us as a real estate investment operating company will be to not let difficulties (personal, social, economic, etc.) create biases that keep us from seeing the opportunities. Such is the challenge for all investors.

Before signing off, there are a couple more items worth sharing:

  1. Even though we might consciously acknowledge it, it can be close to impossible to avoid being influenced by our sources of information. Courtesy of Patrick Watson of Mauldin Economics, we can see how even two relatively middle of the road publications can have vastly different spins on the same information:

  1. It is understandable that people may expect an onslaught of inflation after the stimulus that central banks and federal governments have unleashed on the world since March. According to IMF statistics, many 1st world countries have provided stimulus 10 times more than that provided in the Financial Crisis, though the US response has thus far been a much lower, though still massive, 3.5X. For further context, on an inflation adjusted basis, the stimulus provided by Western European countries is 30 times larger than the money spent on the Marshall Plan to rebuild Europe after WW2 (McKinsey Global Institute). Inflation may indeed come to pass, but the calculation of money supply (M2) also includes the velocity of money, and the velocity has fallen off a cliff since March. The velocity of money is now at the lowest level in the history of the country. What we don’t yet know is if the flood of stimulus or the drag of the slower velocity will be a stronger force going forward. In a perfect Fed world, they will stay roughly in balance and produce a 2% inflation rate (though the Fed is now okay running hotter). In a dangerous world, one of the two forces is considerably stronger and we end up with deflation or much higher inflation. If I were a betting man I would bet on deflation, but coming out the Great Recession I would have said the opposite (and we know how that turned out). In practice, we (being Altus) try to measure the potential impacts of each factor and make decisions that maximize the advantages while minimizing catastrophic risk, even if it means we leave some money/returns on the table.

There is no question these are interesting times. All around us change is occurring at a previously unfathomable rate. Government and central bank actions that were previously considered hairbrained are now normal courses of business. Many of our information sources seem to be more and more biased in delivery of the “news”. Change and uncertainty can be scary (distress), but through a different, and more difficult to achieve, lens it can also be exhilarating (eustress). Throughout history, in times of such turbulence fortunes have been made and fortunes have been lost. Who wouldn’t be afraid of losing their fortunate, whatever it may be? Who wouldn’t be excited about obtaining a new and better fortune? May each of us wake up on the right side of the bed.

About the Author: Forrest Jinks is CEO of Altus Equity Group Inc and a licensed real estate broker. Forrest has decades of experience as principal in a variety of alternative investment segments including real estate (residential rehab, in-fill development, multi-family, office and retail), debt, and small business start-up (online marketing and site retail). He can be reached at fjinks@altusequity.com.

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