17 April 2020 / Global real estate, Spire news

Bridge Investment Group CIO Updates

Please find the following CIO updates received this morning from our long-standing investment partner Bridge Investment Group.

If you have any queries regarding these updates, please contact us directly at info@spirecapital.com.au.

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Dear Investors,

All of us at Bridge hope you have remained well and are staying safe amid the COVID-19 pandemic. In the context of today’s global disruption, we wanted to update you on operations at our assets, as a follow-up to the webinars we have hosted and the written communications that we have sent to you over the past month.  Links to the webinars, which have been recorded, are included at the end of this email.

First and foremost, we remain closely engaged with our employees, property managers, residents and tenants at our properties and have implemented best practices suggested by the CDC and other governmental agencies, as well as relevant trade associations. These include increased sanitation and cleaning, communication and training around communicable disease and virus protocol and prevention.

At Bridge facilities – our five corporate offices in the US and at our sites — we have implemented best practices of working remotely, enhanced protocols around sanitization, social distancing and other practices, we have committed to all of our employees no layoffs or terminations due to the COVID 19 pandemic, that Bridge would fund any COVID 19 related diagnoses, and that all Bridge colleagues could work hard understanding that our Company was standing firmly behind them.  In addition, the Bridge Board of Directors, on behalf of the Partners at Bridge, have allocated to date over $1.25 million of financial support to residents in our multifamily assets (Bridge Cares: COVID 19 Relief Fund), with more expected in the near future.

We believe that Bridge invests in recession-resistant verticals within the value-add sector of the U.S. real estate market, and we have been and will continue to be conservative in our use of leverage.  We continue to see active leasing activity across many of our portfolios, and we are actively monitoring the markets and our operations daily.

As it relates to the verticals in which we operate, our CIOs have shared the observations below:

MULTIFAMILY and WORKFORCE & AFFORDABLE (Jonathan Slager & Dan Stanger):  We are pleased to report that April collections have outperformed our expectations. We have taken an “all hands-on deck” approach in reaching out to our residents to help them access available resources, and to work with residents to keep their rent current or on a manageable deferment plan. Bridge’s forward integration into property management, as well as our resident advocate approach, has enabled us to outpace many of our peers, even with the lower-income demographic of our Workforce & Affordable fund. As of April 15th, between 85% and 90% of the rent has either been collected or put on a deferral agreement. Approximately 2% of these totals are on the deferral, and the balance has been collected. The final April collections projected to be approximately 93-95% of owed rent, versus more typical collections of 98-99% of owed rent. Based on April collections, there has been no need to utilize the forbearance programs being offered by Fannie Mae and Freddie Mac, and all April debt obligations have been paid in full.

We have completed our first quarter asset reviews on all funds, and on balance, we came into second quarter in extremely strong position. Moreover, leasing activity continues at almost all assets, and the teams are converting using virtual tours at a higher rate than traditional tours, albeit on a lower amount of traffic. Renewals also continue well ahead of pace and are a strong offset to reduced leads and move-in activity and will also result in lower expenses.

OFFICE (John Ward): Although the majority of the U.S. is under “stay-at-home” orders, leaving many working from home, we continue to see inquiries about leasing, as many companies are still open for business. Approximately 90% of the owed rent for April 2020 has been collected (as of April 14th). Our Asset Management and Bridge Commercial Real Estate teams have combined resources to reach out and connect with every tenant to determine how their businesses have been affected by COVID-19, and to direct them to the PPP loans with the SBA. Factoring in current payments, the expected full payments, and the agreed-upon future payments under lease restructures with term extensions, the final April collections are projected to be approximately 95% of owed rent, versus more typical collections of 99.5% of owed rent. Based on April collections, there has been no need to utilize any forbearance programs from our banking relationships, and all April debt obligations have been paid in full. Many businesses in industries directly impacted by the virus are, as expected, exhibiting major stress. We are in dialogue with our tenants while they are working on receiving SBA loans, which will allow lease payments to be covered. Although a very small percentage of our tenant base, our tenants include companies that provide digital marketing to stadiums and movie theatres, companies that provide food samples in stores, as well as second-tier corporate rentals whose markets have been frozen.  On a more positive note, we have several larger high-quality businesses that are looking at early renewals with us, incorporating near-term abatements to help with their current cash management, but with significant lease extensions that provide Bridge with longer-term value accretion, which we view as a win-win situation.

SENIORS HOUSING (Robb Chapin, Phil Anderson & Blake Peeper): We are happy to report that only a very small number of our residents have been affected by COVID-19, with less than 1% of total residents in Fund I, and less than 0.3% of total residents in Fund II. Move-ins remain positive at approximately 50 per week, albeit down approximately 45% as compared to January and February. Move-outs are down 18%, and annualized turnover is trending down, with an expected drop in occupancy of approximately 2% per month in April and May. We have had strong results converting our lead inquiries to signed contracts and deposits.  Our current run rate is projected at 77 new move-ins for May, equally weighted across both funds.  If the COVID-19 curve continues to flatten, we are confident a large percentage of these deposits will move in prior to May 31st. We have no major collections issues at this time and will continue to monitor this closely.

DEBT (Jim Chung): In March, extreme dislocation in credit markets resulted in forced and indiscriminate selling of CRE-backed debt, particularly Freddie Mac K-series securities, which BDS III capitalized on by purchasing approximately $600 million of K-series securities at yields not seen in the sector since the aftermath of the Global Financial Crisis. To fund this acquisition, we recently called capital in BDS III to 90%.  Recently, we have seen an abatement of the forced selling in the market but liquidity remains challenged. Banks have largely ceased financing CMBS and CRE CLO bonds, while also pulling back on loan financings.  We believe further stress will come as some commercial real estate borrowers will struggle to meet debt service payments in the coming months and a large amount of forbearances, restructures, and defaults will result in rating agency downgrades on existing bonds and margin calls for leveraged investors.  Due to the heavy multifamily and office concentrations in the BDS portfolio, we have only received a small amount of forbearance requests and none have requested the elimination of interest or principal, only deferrals of payments. We continue to remain poised to take advantage of further disruption in the market as the combination of illiquidity, rising delinquency rates and rating agency downgrades should create an untenable situation for holders of CRE-backed debt with limited liquidity.

AGENCY MBS (Mohit Chandarana):  With funding costs near zero, and Agency MBS spreads at levels that we have not seen since the Global Financial Crisis, we feel that Agency MBS represents a compelling investment opportunity. Investors in the space stand to benefit meaningfully given the current wide spreads – as spreads normalize and revert to the mean over the coming months, investors will have the opportunity to capture significant capital appreciation in addition to quarterly distributions.

FUTURE BRIDGE OFFERINGS: Bridge remains active in identifying selected opportunities and is actively raising capital in the specialized sectors in which we do business, namely real estate-backed fixed income, workforce and affordable housing, seniors housing, opportunity zones, commercial office and multifamily real estate. We believe that in the aftermath of the current economic upheaval, opportunities will present themselves to investment managers which are well-capitalized and structured to perform.  We would welcome inquiry from all LPs regarding these opportunities and the investment theses behind our convictions.

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The principals of Bridge have been in the real estate market since 1991 and have seen good times and difficult times, and we believe we have the discipline and practices to work constructively through challenges, in the markets and at our assets, to deliver strong absolute and relative performance for our investors.

In the meantime, if you would like to discuss matters further, or share your views with us (which we would value very much), we would be happy to schedule a conference call or video conference.

Yours faithfully,

Dean A. Allara
Vice Chairman