We recently spoke with Mark Mosch, founding partner and CEO of AndMark, a Los Angeles-based investment firm founded in 2014 with a focus of investing in the multifamily space primarily in secondary and tertiary markets across the U.S.
Below is an excerpt of our conversation on Thursday, April 30th. It has been edited for length, style and clarity.
Adjusting business practices under quarantine
Fortunately, because we are a distributed firm with our asset management and servicing team based in the Midwest, acquisitions on the East Coast, and executive offices and controlling accounting out in L.A., working remotely is just normal for us. The only problem is a lot of our business is physically going and visiting assets and seeing companies, seeing brokers and meeting with them. A lot of that personal interaction isn’t taking place now.
We set up a center of excellence within the company for all things federal. We gave our CFO the mission of learning about every single stimulus package that we could possibly get our hands on out there—federal, state, everywhere—so that we could make it available to tenants, to our property management companies and take advantage of it ourselves.
The next thing we did was widen the gap between income and expenses. The worst thing that could happen is the assets be compromised because they had short-term financial stress. We felt that whatever may happen is temporary and not something where we’re going into malaise for five years.
We decided priority number one is to make sure we had enough cash in the bank to cover mortgages and critical expenses on the properties.
After California went on lockdown and it looked like this is going to get very serious we set up meetings with all of our management companies and said, “Okay, here’s the expense reduction plans. We feel all employees can go to 32 hours from 40 hours. You’re locked in rooms, you can’t do a lot of work. So we’re going to ask them to do that.” We didn’t want to lay people off. We like this staff, we want to retain the structure and the employee base that we have, and that enabled them to keep their benefits. We didn’t want to have to throw anyone onto the street and not have them have health insurance.
Because of the shutdown, marketing became less critical. We cut our marketing budgets by 50%. We told everybody unless it’s life-threatening, or having to do with unit turns or mandated by lenders, stop all capital expenditures.
We then created a database and a model of every property and every fund and did sensitivity analysis and ran scenarios in pivot tables on how things would look. We took this model that said doing these cuts, we would have to get down to somewhere between a 20-25% drop off and collections, down to ~75% economic occupancy before we had a problem covering debt.
And then we worked to incentivize renters to pay. We wanted to make sure that they were not just paying because they could avoid it. We came up with some incentives to try to get the good payers to continue to pay well. In several places, we gave everybody a $25 Starbucks card if they paid by the first of the month. For May what we’re doing is we’re buying one big screen TV per location, and we are raffling it to everyone who pays by the first of the month.
The investment and lending climate
It’s difficult to transact right now. Entities like CMBS lenders just exited the market. There’s nothing going on there. Fannie and Freddie are still doing deals, but the problem is now they’re only doing the most vanilla of vanilla deals and with lower leverage, and they’re requiring you to put 6-12 months of a reserve in the bank when you close a deal, of principal and interest. That’s usually a pretty huge amount. Because of those reserve requirements, it’s making you have to come up with a lot more money to do deals. It’s making it more difficult to transact.
From a strategic perspective for 2020, we’ve told all our investors this is really difficult. But there’s also an incredible generational opportunity here, that could potentially come a bit later in the year. We’ve told everyone we’re going to slow down a little bit, but we also feel that there might be some very interesting opportunities coming up.
What’s going to be happening is the lenders are going to have non-performing loans in their hands. We’re looking at going to lenders and saying, “Hey, do you have some portfolios you’d like to get off your books?” We could buy the loans for 70 cents on the dollar, and then own the deed to the building and own the person’s personal guarantee, so we could just take over a building at 70% of what the cost is. The other thing that we’re seeing is deals falling out, because as these lender requirements change, deals are falling out. So everyone’s running around trying to find someone with cash that’s stable that knows how to operate these properties, who can buy the buildings.
Right now, distress isn’t terrible, but in the Fall, it could get ugly for a lot of people. So we’re talking about going back to our investors and saying, “Hey, we think there’s a good opportunity. Would you like to increase your commitment and go back to several other investors that just didn’t make our close?” And we think it’s prudent to look at doing that.
The role of technology
Since we are a distributed company, we used to have things stored in Dropbox, email and elsewhere. Different people were doing different things. Over the last year, we’ve consolidated everything and started using Juniper Square as our communications hub, which has given us a lot of efficiency advantages.
The statement process used to average 6-8 hours for each fund. Now with Juniper Square, we can do the whole thing in 15-30 minutes. We had a giant savings and my Director of Investor Relations is so happy.
Investors have told us they can deal with bad news, and just asked us to communicate with them about what’s going on. So we’ve been sending out emails and we’ve been telling them, “Here’s what April looks like. Here’s what we’re doing from a cost control standpoint. Here’s what we’re doing to incentivize payment. Here’s what we’re trying to do with the stimulus plans.” And then, we told them over the last few weeks, “We want to protect your assets, we want to have cash on hand, in case in April looks good, but in case May and June just fall off a cliff, we don’t want to lose any buildings because we can’t pay the rent, can’t pay the mortgage payment. We’re going to keep it in the bank, see how things go, come the end of Q2, if everything looks good in July, then we’ll give you all the money back.” We received a very good response to that and they said, “That’s very prudent, we support it. And we think you guys are doing whatever you can.”
It’s been a time for a lot of communication, and our investors are appreciating the transparency we’re showing.