Ethos Equity Roundtable Event

It is rare that I leave an event thinking it was time well spent and it is even more rare that I agree to attend an event and if I do, it is often begrudgingly and YES, I worried that perhaps that was too blunt a statement to make on here but if you are reading this, you likely know me or have worked with me and let's be honest, you aren't surprised.

This event piqued my interest because of a pretty interesting line-up of speakers who are super active and have invested in the Portland market (I wanted to know if they were still willing to invest here and why or why not). I also really like Matt Illias and Danny Natsch and have watched them get deals done and add value in one of the most volatile economies we've ever been in so to be perfectly honest, I wanted to know who their people were. I also thought the topics up for discussion were timely, interesting, and could potentially help sponsors look at their offerings a bit more holistically. Lastly, they called it a cocktail reception so that helped. Honestly, I probably should have put that first on the list.

I can't believe I am saying this but I AM SO GLAD I WENT. I not only enjoyed the event but it was so valuable - the discussion, the connections, all of it. To start, the event was well executed by the team. It was thoughtful and efficient. It was easy to attend and either be a fly on the wall (without feeling awkward) or mingle with folks you have most definitely worked with in some capacity which means the guest list was intentionally curated with attendees Ethos knew would add value and gain knowledge and/or connections from the event. The Ethos debt and equity team's primary objective is to source and place debt and equity so they want to be "in the room" with the most active, most reliable, and most creative sponsors, lenders, and investors so it makes sense that not only the speakers were top notch but the attendees are all active and working to get deals done. They weren't looking to simply fill seats and it showed.

The original agenda was to discuss distinct capital stack structures, the current market, investing in Portland and the Pacific Northwest, and trends in construction and value-add. NOT on the agenda was discussing the fact that the Federal Reserve had lowered interest rates by 0.50 percentage points (in it's first cut since 2020) the day before but they didn't miss the opportunity to ask the panelists about that which I really appreciated.

Before I begin on summarizing the panel which was the best part, I want to preface all of this with a couple points:

• I took these notes on my iPhone and some of what I wrote makes absolutely no sense.
• I am definitely paraphrasing some of what was more eloquently stated.
• All opinions are my own unless I call you out in the article, then you're on your own.

I'll start with the panelist intros:

Matt Jenson with Blackbird Investment Group, LLC out of Chicago

• Currently writing between $3mil - $5mil checks
• Will consider any property type anywhere in the US - they are multi-disciplinary and value-oriented. What makes the deal different? What makes the opportunity interesting?
• Currently building lots of industrial
• Looking for returns in the high teens

Brianna Rogers with Artemis Real Estate Partners

• Programmatic JV Relationships
• Looking to write checks in middle market - $20mil
• Focuses on core, core plus, value-add, and healthcare funds
• Side note about Brianna is that in addition to being one of the smartest people any of us talked to at the event, she is an ultramarathon runner. If you don't know what that means (I had to google it), it means she voluntarily runs anywhere between 31 miles to over 100 miles. She recently qualified for some prestigious national ultra marathon which means she wasn't just smarter than all of us but more fit and honestly just cooler too.

Greg Walsh with 凯雷投资集团

• Working on $8 billion opportunistic fund:

The fund will focus on property types with favorable demand prospects driven by demographic and technology shifts. Carlyle plans to invest the fund's capital through new development, renovation or redevelopment via joint venture operations, with a business plan of three to five years, according to investor documents.

• Deal size of $25-$45 mil

Kristian Peterson with Catalyst Opportunity Funds

• Focused on middle market $10-$20 mil
• Strictly high-impact capital which means most of their deals fall within 80% AMI and have some sort of government incentive.
• It was important to Kristian that he reiterated the fact that their work is non-concessionary meaning that investing in high-impact projects doesn't mean that your returns or investments are diluted. They believe that investing in high-impact, attainable housing is strategic and if well-executed can and will produce the same returns as other focus areas. It is needs based so the demand for this product type and investment thesis is high.
• Kristian was also the funniest of the group and made us all laugh which as you can imagine, I very much appreciated.

Lastly, Danny Natsch asked the questions and kept us on time. The panel lasted one hour. It was the perfect amount of time and he kept the discussion flowing without getting off track.

Question #1: What does yesterday's rate cut mean to you? Does it make a difference?

Consensus was no. 50 bps doesn't make a difference. There is not real impact on the proforma.

• Greg said that their group is demographically driven. The rate change doesn't change their view on what or where they're investing. Follow the demographics.
• Brianna mentioned that last year (2023) was the slowest year for deployment in 5 years at Artemis. YTD, they are nearly double last year so no, doesn't really make a difference.
• Matt agreed that it doesn't really change their position but that overall, it helps with momentum. People (investors) are hungry, the value of real estate is going up - he's bullish.
• Kristian said that opex is what's killing deals. Inflation. The rate would need to drop substantially to compensate for the pressure these deals are under from an opex perspective.

Question #2: What does it take for you to "pull the trigger"? What hurdles do you have in place? What makes you say yes?

• Brianna said that because they're working with a closed-end fund, they are mostly multiple and IRR driven. She also mentioned that while a lot of folks keep talking about positive leverage, that hasn't necessarily been as much of a hurdle for them. They look at the basis but it all matters.
• Greg also said multiple and IRR
• Kristian said because of the nature of their investment structure (remember impact), they are usually working within a 12 year vehicle so they're metrics are a little different. Looking at the basis play for sure, yield-on-cost - it's mostly about the spread for them. They need a 6.5 yield-on-cost untrended.

I was so excited when Danny asked this! I am so tired of investors being so incredibly narrow minded when it comes to their evaluation of a deal. You can't simply look at one singular metric to understand the opportunity. That's one of the reasons I loved when Matt Jenson said that the story matters to their team. He wasn't talking about the brand (although you know that I know that it also matters later on) but the story of the deal - what is the need? What is the opportunity? Why is it interesting? What is the exit? How you present your business plan should be just as fine tuned as the numbers themselves. Over the past 2 years, it has become increasingly clear to me how important it is for sponsors to invest in how they are presenting these opportunities on paper and in person - it is more important than you think.

Question #3: The thought was that we would be seeing a lot more distress than it appears that we have....that a lot of groups were sort of waiting on the sidelines for that distress to rear it's ugly head but a lot of those groups are still waiting. Have you seen as much distress as you expected?

• Kristian Peterson said he had recently (or somewhat recently) read an article that stated that $1.3 trillion of commercial mortgage loans will mature in 2025 and that 40% of that is in multi-family and that something like 40% of THAT is not meeting DSCR so yes, he believes we are going to see a lot more distress.
• Greg Walsh (remember - he was the guy that said they follow demographics) said they're not seeing as much distress on the west coast because people want to live here. It's a desirable place to live and there isn't enough housing here so it's easier for owners to keep their buildings full. He did say the west coast was isolated in this though and that he has seen more distress as you head east - nashville and atlanta both came up.
• Brianna came in hot disagreeing and we were all here for it. She was dropping names and knowledge and we loved every second of it. She quoted many deals barely selling above their note faces. These deals being the epitome of "distress". The problem is that EVEN DISTRESSED DEALS DON'T PENCIL. You could have heard a pen drop but instead someone forgot to turn off their volume and their cell phone interrupted the otherwise gloomy silence. She also mentioned that her team won't really look at anything below a 5.75 exit cap rate. Don't say I didn't warn you.

Question #4: We want to talk about Portland. We know there is a stigma. What do you all think? Outside looking in?

• Greg Walsh reiterated their thesis at Carlyle of tracking demographics and following the people. Where are people moving? Where are people working? Where do people want to be? Portland isn't experiencing a ton of population growth right now but the suburbs of Portland are (Beaverton, Hillsboro, Vancouver, Oregon City, etc.).
• Kristian had a very interesting answer to this and I loved it! He said they tend to spend quite a bit of time understanding transaction activity in a market. Are deals transacting there? Who else is active? Who is buying? All of this so they can understand the exit - who is their buyer? What do they want to buy and operate?
• Brianna said Artemis likes the suburbs of Portland and will look at Industrial all over Portland. They'll also buy senior housing at the right basis. Unfortunately, the City of Portland is just a tough story to tell right now. It's not even that population is declining or that there are homeless people on the street. It's that there is no clear path forward. There is no plan to bounce back. It's too hard to believe in something that doesn't exist. The city needs to create incentives for investors in Portland, businesses in Portland, residents in Portland. How do you plan to reactivate downtown? Is there a plan? (((((Do you hear that City of Portland ? Investors are struggling to invest here because they don't see a path forward.)))))
• Matt Jenson echoed the sentiment. He said he was pleasantly surprised at how good the city looked. It was beautiful. Portland has a perception issue.

Question #5: This question is somewhat specific to Kristian Peterson but would love to hear from anyone else on the subject too. What does impact investing mean?

• The idea with impact investing is that you are held responsible for the impact of your investment on or in the community. This isn't as complex as one might think. It can mean simply identifying a need in a community and meeting that need through housing, public art, gathering spaces, etc. It means making environmentally conscientious decisions and thinking about returns for the future. This can sometimes be naturally occurring like in a project that pencils at 80% AMI without subsidy - to be able to build this is the right thing to do. It can also mean partnering with local municipalities to meet needs in the community, providing services to the community, etc.
• Impact investing is growing in adoption which will serve the US well as impact investing is something we see a lot more of in Europe. Why is it growing? Well, women are in charge of more wealth which has led to more impact investing, younger generations are more impact focused, and education around impact investing is growing. As Kristian mentioned earlier on, Catalyst Opportunity Funds is a non-concessionary impact investment firm. This means that they do NOT trade return for the impact they are having which means your investment will go just as far as in a non-impact fund or investment opportunity.
• Greg Walsh followed this up with support of Kristian's thesis and the work at Catalyst. He mentioned that we all know there is a shortage of housing and that Carlyle specifically will always consider and/or participate in programs that can add affordable housing stock to a community. Not just from an impact perspective but that it's good business and if it makes good sense and serves their investment thesis well, then it's essentially a no brainer. I will quote him in saying, "Affordable housing on site is always a good thing. Affordability is important. That high rise glass building isn't the trophy we all think it is."

This is so true and I so appreciated him saying this. As an industry, we are often villainized as chasing that glass tower but at the end of the day, our business is quite simple. We are looking to own and operate a product with enough demand in a market that is growing. Regardless of what it looks like, what block it's on, or how high it rises, so much of a deal is dependent on demographics (growing markets), execution (good sponsors & operators), and collaborative partners & municipalities. We chase what works.

At this point, Danny opened it up for questions from the crowd:

Eric Cress with Urban Development + Partners asked a crowd favorite. He asked the panelists to describe a deal you funded in the last 6 months that you got excited about:

• Kristian essentially said that everything is hard right now so it's hard to get excited about anything but that Catalyst is working on some workforce housing in Spokane and that he's excited about working with the State of Washington as they are very progressive on housing policy.
• Greg Walsh at The Carlyle Group talked about The Mill on Maple in Oregon City. They partnered with Fore Property Company on this project and loved the location. Oregon City had mostly older apartment stock with very few elevator served buildings and a growing population. He said they closed on the land 18 months ago and the lease up is doing really well.
• Brianna mentioned a "3-pack" in Tacoma where they're assuming 3 separate loans. Going in cap rate was 6+ with high 3/high 4 fixed rate debt. Seller was looking for liquidity. She said this one gets her excited because they're just good deals. No distress. Seller is happy. Buyer is happy.
• Matt mentioned an industrial project.

Someone asked about cap rates:

• Consensus was that Portland is a 5.75 minimum

Someone else mentioned that they had heard from multiple partners that they are unwilling to consider anything older than 40 years old. Did the panelists agree with that? What were their thoughts?

• Consensus was that because of insurance and repairs & maintenance, it was hard to make anything pencil over 40 years old.
• Someone else mentioned that it depended on whether or not anything about the asset made it "functionally obsolescent" like ceiling heights.
• If there is too much capex required, you might as well build new.

And that is where my notes end. Hopefully you feel like you were there with me. Thank you to everyone at the Ethos Commercial Advisors team for having me.