Carl Icahn Bets Big on a 2020 Commercial Real Estate Meltdown and How Graceada Partners is Positioned to Thrive in Times of Distress

Carl Icahn, the famed billionaire activist investor, last week purchased a $400 million short position on the collateralized debt that backs thousands of shopping malls, hotels and corporate office buildings across the country. He is betting on broad defaults from landlords on their mortgages as their tenants struggle to make their rent payments while their hotels, restaurants, shops and offices sit idle.

As we enter what is effectively day 9 of the 2020 recession, now is a great time to reflect on the makeup of our current portfolio, and how we plan to take advantage of the same opportunity that Carl sees. These next six to nine months will be a shock to the system and the competitive landscape will change. We are well prepared to weather the current storm and leap ahead as significant opportunity presents itself.

A Portfolio Built for Distress

Graceada Partners was founded in 2008, at the beginning of the last downturn, in a time of great distress. That experience was foundational to who we are today. With each asset purchased during the last decade (927,000 square feet), there was great debate about what could go wrong and how it would impact the asset and our company. Always, we started with the idea that “you make your money going in.”  The cardinal sin of real estate investing is overpaying. When you pay too much up front, you overburden the investment from the start. All of our assets were bought at 20%-60% of replacement cost. This means that we have a hedge against new construction and can beat overburdened competitors on rental rates. We further increased our margin of safety by focusing on prominent assets within their submarket, often on well-trafficked corridors, to drive tenant interest.

We have also been careful with our tenant mix to create a diversified base of industries. Each sector responds differently (and often opposite) to economic downturns and, now, health/pandemic repercussions. While restaurants and health & beauty are hit hardest by the coronavirus, medical is growing. While professional offices will see a decline in business during a recession, education will see an uptick in business during that time.

Most importantly, “cash is king” in normal times, but in times of distress cash (and cashflow) are the emperor. This is why we work aggressively to add new leases, hold ample reserves at each property, and keep a conservative level of debt/leverage.

By owning high quality assets at a low-cost basis, with a robust mix of tenants, conservative leverage, and ample reserves, we are well positioned to navigate difficult times like these.

The Opportunity Ahead

These are the times when value investors thrive. We are in the business of solving distress and identifying when a fundamentally strong asset is undervalued. A month ago, we were sifting through top-of-market deals to find places where we could use our expertise to add value. Soon commercial real estate distress will be surrounding us. In 9 days, across the nation commercial rent is due. And some tenants will not be paying because they are, sadly, hit by the economic fallout of the coronavirus. Every landlord in the country is going to begin managing cashflow and working with their tenants so that all parties survive the best they can.

This is the time when well-capitalized, responsive landlords excel and overburdened, sluggish landlords falter.

This is the time to find quality assets at value prices. We see significant opportunities on the horizon.

We have dry powder for investing and are well poised to execute on exceptional investments to come. We will not hunker down and be fearful. We will approach the future with vigor as these dark days will soon pass and the world will awaken and get back to work.

https://graceadapartners.com/