COVID-19 Update and Outlook

It's been quite an interesting few months, to say the least. We hope that you and your families are remaining safe and well during these unique times. Since we originally notified you of the launch our real estate investment firm, CF Capital, the entire world has changed in profound ways due to the COVID-19 pandemic in addition to significant cultural and socioeconomic events. While we’re certainly living through history and much has changed, and the environment is continuing to evolve at a rapid pace; however, our intent to provide stable and quality multifamily investment opportunities to people like yourself and our best in class team remains rock solid. Our focus remains on opportunities that provide capital preservation, cash flow and stability in both the current and future environments. The current macro environment has strengthened our beliefs in the fundamentals of multifamily real estate, the acquisition markets we’ve identified and the performance metrics of apartments as the preeminent investment vehicle in both times of excess and in times of economic challenge.

HOW HAVE THE RECENT EVENTS INFLUENCED OUR OUTLOOK? 

When we launched CF Capital in January 2020, we felt very strongly this would be the best use of our time, energy and resources, because of how much we believe in the safety/security, inflation protection, cash flow, tax benefits, demographic and migration trends, patterns of rental by necessity and choice, the continued essentialism of housing, and the economies of scale in multifamily real estate while we put a best in class team on the field to execute conservative and realistic business plans. When we scan the economic and market landscape as a matter of realistic and eyes wide open evaluation, we are tremendously challenged to locate a better suited investment vehicle to participate in, now and into the future, with our own resources and alongside quality people like you. We continue to believe that multifamily real estate provides the most attractive average annual total returns of any commercial real estate sector coupled with some of the lowest levels of volatility.
 
Before the market adjusted due to COVID-19 we were in the midst of the longest economic expansion in American history. This economic expansion had created an extremely competitive market, however, at the time we launched the firm, we felt that with diligence and focus, a competitive advantage that includes extensive industry relationships and influence, we could thrive and provide outstanding opportunities for passive investors. We feel even stronger about this today with a shifting marketplace. While we are entering into a new market cycle, we’re remaining actively engaged in the rapidly shifting set of opportunities. What was previously a heavily weighted seller's market, is now shifting into balance and in many ways even more so a buyer's market. With this, our team is uniquely positioned to acquire attractive deals and provide not only a safety mechanism in our portfolios, but also opportunities to create long term value, capital appreciation, and cash flow.

WHERE DO WE GO FROM HERE?

We’ve been actively seeking opportunities in this new landscape and we wanted to touch base with you to let you know what we’ve been up to. While deal flow dropped off a cliff early on in the COVID-19 pandemic in March, things have picked up as of late. The slowdown in deal flow has been due to seller’s unwillingness to adjust fundamentals and operating assumptions to a post COVID-19 environment.  While buyers, including ourselves, began underwriting differently with a “forward-looking” approach, sellers understandably took a “backward looking” approach with pre-COVID pricing expectations in their minds. We are underwriting rent growth and vacancy differently in this post-COVID world to adjust for changing dynamics. Additionally, many lenders are requiring new principal and interest reserves they were not previously requiring, meaning we need to bring more equity to the table. All this together means that if our investment yield return expectations don’t change (they haven’t) then that means something must change – PRICING.

So how does this influence the buying opportunities today and into the future? Do we expect widespread distress similar to the Great Recession? Probably not, at least in multifamily. Will the current environment present situational distress? Yes, we believe so and feel that opportunities are presenting themselves today. On the opposite side of any crisis is opportunity.

We’ve been aggressively underwriting deals across our target markets and have several that are under serious consideration. We’ve been engaging with our teams from the financing, management, and tax perspective to ensure our assumptions are not only realistic but achievable taking into account the potential of an extended challenging operational environment.
 
Some investors have said “pencils down on underwriting any new potential acquisitions – be careful not to catch a falling knife.” We are holding that thought in our minds while also having an understanding that we live in a tremendously complex global environment and we cannot generalize on any policy or outlook. We’re cautiously optimistic that the future is bright, and at the same time, we’re considering the fact that rents may remain flat for a period of time in many of the markets we’re considering (as well as nationally, for that matter) and we’re hyper-sensitive to the fact that jobs are the driver to success of occupancy and demand metrics. With about 13-15% of the labor force (depending on the data source) currently categorized as unemployed, a vast increase from the historically low 3.5% in February, we are absolutely aware that value add propositions will not only need to be delayed but also certain operational expectations tempered. We do not live in the prior environment and what worked then will not necessarily work now. We do not have our head in the sand. You can be confident knowing that our property-level business plans will include goals and objectives that account for the macro-economic influences currently at play.
 
With that said our investment thesis remains the same - focus on quality assets with affordable metrics – B or C assets in A and B locations.  We want to provide our tenants a nice, safe, clean place to live and add value to those tenants along the way.  As you know, we are primarily focused on secondary markets because we are yield driven and we like to deliver Cash-on-Cash returns and current income to our investors.  This makes our approach sound not only in this market but market cycles to come.

IN CLOSING
 
With all of this in mind, we remain aggressively patient. We respect you and the future opportunities that we will create together, for what makes sense for you and your families. Stay tuned for opportunities to participate with us as we continue to work hard on sourcing attractive deals. The next several years will be one of the greatest opportunities of our lifetime to not only capture opportunities for you, our partners, but to make a great impact on the communities in which we are involved in the process, and to be a part of progress and a better future for our residents and employees.
 
On behalf of our team and our families we wish you well and look forward to collaborating in the near future and well into the next phases that await us. Thank you for your continued support and please feel comfortable reaching out to set up a call with either of us (Tyler or Bryan) to discuss anything further, and certainly check out our website for more information on what we’re up to.
 
Let’s be great. We're absolutely better together.

In Partnership,

Tyler Chesser, CCIM
Bryan Flaherty, MBA
CF Capital
 
P.S. Join us and RSVP here on June 18th from 5-6:30pm ET for the Louisville Multifamily Mastermind Sponsored by Park National Bank and our guest speaker, Market President Andrew Holden - live on zoom.

P.S.S. You’re invited to listen to Elevate, the masterclass where we dissect the elements of exceptional achievement and lifestyle design with a focus on personal growth and real estate investing.

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