This week we spoke with RJ Palano, who operates his own properties in Atlanta and is one of the leading authorities on single-family property investing in the U.S., with more than 40 years of experience as an investor in this asset class.
Continuing the series of conversations with U.S. operators that we have been conducting to understand how they are preparing to weather this period of uncertainty, RJ Palano discussed the impacts on the residential market, the outlook for the coming months, and his long-term view on single-family homes and healthcare real estate.
Video transcript
Renan: Hello everyone, my name is Renan Barros, I am the CEO of Ativore, and I am here today with Pedro Barreto, Chairman & Founder of Ativore, and also with RJ Palano...
Renan: RJ is in fact our first business partner in the U.S., and we have been working together successfully since 2013 on several different fronts.
Renan: So thank you very much RJ, and thank you Pedro, for speaking with us.
RJ: A pleasure to be here, Renan.
Renan: RJ, let's start with probably the question you are hearing most these days: How has the coronavirus impacted the multifamily residential market so far, specifically in Atlanta and in the properties you invest in as well? And how have you been handling this so far?
RJ: That's a great question, and it has in fact impacted everyone involved in U.S. real estate and probably the whole world, when you have 140 countries fighting the same enemy. It is the first time in human history that the entire globe is together fighting an invisible enemy. It is a little frightening because, even though Pedro and I are older than you, we did not live through the Great Depression, or the true depression. We look back at the last financial collapse, but nothing like this, where everything is shut down.
RJ: In the U.S. we were in one of the longest growth periods in the stock market, and also in real estate, the economy, and jobs... And all those gains were, I don't want to say wiped out, but they were hurt. There have been many losses since Trump took office... It's not his fault, this is entirely external, but it has impacted us tremendously.
RJ: The first thing we did, Renan, was contact every one of the tenants. We wanted to get out ahead of the wave in terms of communication. So I reached out to Anthony (the manager) and we put together a communication plan, and all the managers acted on it too, which was extremely well received by the tenants. They were very grateful to have someone to talk to, and the communication paid dividends. This month I thought we would be in trouble, that April would be a problem, but I just got off a call with Anthony a few minutes ago and we have already collected 72% of the month's rents, which is great news. My forecast, if we did well, was to collect 80%, and Anthony believes we will reach 80%. My worst-case scenario, and all I need to do is look here because I have all the year's numbers lined up with my forecast... My worst-case scenario was to reach 30% in April, my worst case. We are nowhere near that, and it looks like we are on track to collect 80% of the rents, and now we are starting to wonder about the months ahead, but I believe it will be less. The tenants have been very good; we have around 600 tenants and only 8 of them truly cannot pay us anything right now, from what we have checked. That's it, just 8. And one of them is in one of my houses, my most expensive property, of course. He lost his job.
RJ: And what is going to happen is that it will not affect only single-family homes, and it won't matter whether you have a Class A, B, or C property. Everyone will be affected, but there is good news, and Anthony shared this with me today because many people are already receiving unemployment assistance, so in the worst case we will see a decline, but I don't believe we will see the extreme numbers I predicted three weeks ago. I think we will be significantly better off because the unemployment aid is coming in, and we have to act humanely here, which is: we cannot simply evict people. Not to mention that they have banned evictions, so even if we wanted to, we couldn't. So by getting ahead of the wave we are saying: "Hey, let's talk, and if there's a problem let's discuss it and solve it together. And the whole story is that we are in this together, we have to work together." And that has been received extremely well.
Pedro: We are looking at the short term, where we will be watching for problems that will impact distributions, but for those who acquired the property without leverage, in the long term what do you think the risk is? Over the next 12 months.
RJ: I don't believe the risk is that great. My properties are primarily debt-free as well, and when that is the case, there is no one we need to pay. We have to pay taxes, insurance, and the bills if it's vacant... But I think in the short term, Pedro, to answer your question, we will see a decline in distributions for a while as we work with tenants so they can defer payment, trying to collect it later. We are not forgiving it; we are trying to recover it in the future, and in the end the investors will be fine.
Pedro: To sum up, are you comfortable with your investments despite the crisis?
RJ: That's the best question I think can be asked! Because what this allows us to do now, Pedro, is look at all our balance sheets and see how we performed. "Should I have bought this one? Maybe I shouldn't have bought that one." To your credit, you have all your investors diversified, which I think is absolutely brilliant in Ativore's philosophy, and I think it's fantastic because they are spread out, the risk is spread out. When I look at my own situation, I tell myself that. And by the way, Renan, you were right about the multifamily property with Frank in Cleveland*.
* A project that Ativore evaluated and decided not to offer to its investors.
RJ: I hadn't had the chance to tell you... He has had several headaches and you were absolutely right... He was in the restaurant business, and they are all closed. His hotel, where we stayed, is closed. And I also want to give you tremendous credit for the way you evaluate every deal.
RJ: That investment I went into, and Frank is buying me out and paying me 12% interest on my money, and I can't wait to get out because it didn't perform... He is doing the right thing, but you were correct not to go into those deals. So I look at all these things and I say this, speaking for myself and I can only speak for myself: I am very happy with the single-family homes I went into and I can weather the storm. I am very much at ease with that. I am going to buy more, I am going to keep buying more, and I will always have single-family properties in my portfolio. As I look deeply at things, however, I want to make sure I have good distribution and diversification in the medical segment, with the OrbVest* team, because I like that asset so much and they are so good at management. And they are not going through any problems either; all the rents are being collected and the distributions are being made as planned.
* OrbVest is one of Ativore's partner operators.
Renan: The last question: April isn't over yet and we are at 70% so far, right?
RJ: Yes. Anthony believes we will reach 80%, and my advice would be, to all my friends in Brazil, all my friends who trust me and invested with me, I just want to say this: "Hold tight, we are better off than probably 98% of the world. We have to stay in control, let's not hurt ourselves. We are not going to miss a meal, or a glass of wine."
RJ: There are so many people who cannot do anything for themselves, there will be so much hardship, so my final words are "help others, help people, don't worry only about yourself, because we are in great shape, we are blessed in many ways, and we are better off than most people. We just have to not panic, knowing we have been through something similar in the past. Problems happen, and we need to solve them and move forward. Just hold tight, we will come out the other side like everyone else."
RJ: The thing we don't know in the U.S. is this: We don't know whether the recovery will be U-shaped, V-shaped, or L-shaped. If this ends quickly, it's V-shaped, we'll be back at the top. The stock market has already posted gains; I'm actually curious and I'm going to check my phone right now to see how it's doing today, because it's a good benchmark... It fell to 3,000 and 28, but it had risen thousands of points last week, no surprise. So if it ends quickly it's a V shape and, if not, it could be U-shaped. Other parts of the world I believe will be L-shaped, and it will take a long time (to recover). And part of the fear in the U.S. is this: many jobs that were lost will be gone for good, but new jobs will be created, so we will have to work on the unemployment issue again. Yes, I believe Trump will be re-elected, which I think is the best thing that could happen to the country, because he has done a great job up to this point with the virus and in handling the virus situation.
RJ: So my advice is: take it easy, relax, look for opportunities, there are always opportunities in pricing, and that is exactly what I have been doing. We are doing well operationally and in good shape on that side.
Renan: All right, thank you very much RJ for sharing your experience and all this information with us. Let's do this together, perhaps a month from now, and have news to show our investors. And thank you very much to you and to Pedro...
Pedro: Thank you, and thank you to RJ.
RJ: I was about to say... I invite all the investors in Brazil to contact me by email, please reach out to me and I will speak specifically about whichever properties you'd like.
Renan: Of course, of course. Thank you, and it was great talking with you.
RJ: It was great to see you both.
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