Generally, construction has slowed as a result of the indigenous shock of COVID-19. New projects are fewer and far between while pre-existing projects are progressing as planned. Construction contractors are finding fewer ways to provide their services, leading to an increase in the pool of independent labor workers.
Speaker 1: Welcome to Non-Beta Alpha. On today’s episode, we have Darryl Robinson from NewQuest Crosswell, a Houston based real estate developer and investment firm, going to talk to us today about how construction development and real estate will be changing in the years and months ahead, this is Non-Beta Alpha.
Darryl, welcome to the show, thanks for joining us today. And we appreciate you coming on to talk to us about commercial real estate development and some of the retail tenants and what’s going on in the future. So welcome to the show.
Darryl Robinson: Thanks for having me.
Speaker 1: So Darryl, you guys do a lot of development across we call the Southern Smile States and you do quite interesting work. We’ve gotten to know each other over the years. You guys have been building a lot of brand-new construction for this retail that’s been servicing the wave of people moving to this kind of Southern Smile States. Maybe you could talk a little bit about how your business was going, leading into 2020. Did you see any clouds in the horizon prior to the pandemic and then how the business has changed and maybe how your view looks going forward?
Darryl Robinson: Sure, well leading up to say 2014, Houston was, and that’s where we’re based, we’re a Houston based development company, was on fire and it had continued to be on fire even post ’09, ’10 period. We just never really felt the effects of the downturn. But leading up into 2014 we were just hermit. I mean, three of the largest masterplan communities throughout the country are based here in Houston, Cinco Ranch being one of them and also Howard Hughes’ project, which is called The Woodlands. Unprecedented growth, people fleeing obviously from tax burdens, states coming into a really friendly no state income tax and just really easy to work state. Our business was flourishing as it relates to retail. And we started seeing tremendous amount of obviously with rooftops come retail, come your catalyst, i.e. your grocers, in other large box users. And with that smaller service retail and co-tenancy retail.
And then in 2014 team, we saw little hiccup in the energy space and a lot of production coming online, a lot of competition forcing that price then to a lower level. And we saw really kind of a pause, and that pause is kind of been there and has remained there. I mean, there’s been ebbs and flow of low production and price spikes, but nothing to the tune of $80, $90 oil, which is where, really, was driving the market from 2011-2014.
So we were kind of a little, not flat, but just not the growth that we historically have seen. And then couple that with just the total change in, or structural change in sticks and bricks in retail, and how people were purchasing. I think everybody got the Amazon fear, and when that happened, a lot of the grocers then pulled back. And they work on low margins to begin with so we started seeing a tremendous amount of, “Let’s reconsider our larger space, should we consider drive up, let’s get in possibly the delivery service side of the business.” And we were still doing a lot of business, but we started seeing our pipeline just kind of slow down a bit, but we were doing more mid-box, small box, 24 Hour Fitness, Ross, TJ Maxx, not necessarily needing a larger catalyst to drive the deal.
And so now we are where we’re at retail is just basically, it’s really crushed at the moment. I could talk specifically about our portfolio with NewQuest or company’s portfolio, which comprises around 13 1/2 million square feet. And we’re fortunate that we got great tenants but we are seeing some of our national tenants’ kind of pull back, want concessions, just like everybody’s requesting.
But I have to say in April we had kind of a dismal collection, but across the board, I think we’re still 200 basis points higher than, I would say, actually, I’m sorry, 20% higher than maybe kind of the national average. And then it May we saw just a tremendous uptick in receivables, or I should say rent payments, but going into June, I’m not sure what to expect.
I mean Texas is one of those states that opened early, we’ve got a very pro-growth, pro-business governor, I think he’s done a phenomenal job. And you have people that are just saying, “Listen, I got to go back to work, I got to feed my family, I got to keep my employees alive.” I’m seeing that day in and day out when we talk to our tenants. And we did a lot of, call it 45 days just on the phone everyday with our tenants talking to them, how can we help you? How can we get you in the loan program? What can we do to help you?
Because if it was a local mom-and-pop, I mean, how long can they really stay afloat? I mean, how much capital do they really have that they can continue to, if it’s not paying their employees, pay their rent, pay their operating expenses and pay themselves. And most of them, maybe 45 days, 30, maybe 60 max, so that’s what we’ve seen. And I’m cautiously optimistic, but I am concerned going forward on retail.
Speaker 1: No, it seems like the… we haven’t seen the delinquency wave that we would have correlated to a such a high unemployment number. And so, it seems that the policies of the administration and of Congress have started to really work, to get the money into people’s hands. But I don’t know if we have a new program coming in the next 10 weeks. And so, as you look at collections and you’re forecasting out, what are the banks saying, how are the banks acting in the space? Are they doing a lot of forbearance and how much forbearance can they really give if there’s just a bunch of businesses that have a kind of a hole in the capital structure?
Darryl Robinson: Well, I talk to banks quite regularly and you’re going to ask me, we’ll talk a little later on what am I doing as an individual to educate myself but what I’m doing is talk to a lot people. And the banks, not only the community banks, as well as the money center banks, as well as the investment banks, they’re all concerned. I would have to say the regulators and the federal government is going to get banks and pass until maybe October, November, and that’s probably going to bleed into the new year.
So banks are just really trying to tend to their flock at this moment. I mean, they’re working with their borrowers, they’re seeing where they are, and they’re kind of going to be in a position where they’re going to have to act in the new year. And so the question really is will it be what’s that going to do to some of these banks that, granted they’ve had to play, they’ve had to had certain capital requirements they’ve set forth in the last downturn, but is that going to be enough? That’s the question.
And particularly, in segments that small business lending C&I loans and in real estate, for that matter, particularly real estate that is an SBA business owned, or if it’s not SBA, it’s operating company business. I think that’s going to really affect their balance sheet. And I think you’re going to see a lot of banks that are going to tighten up, they’re already tightening up. I talk to a lot of real estate, the committee itself, that’s reviewing it basically on a high level, board level. And they’re telling me they’re not even looking at loans or if they are, it’s very, very specialized.
So I think you’re going to see that tighten. What’s that going to do? I mean, it’s kind of a trickle-down effect, what’s that going to do to businesses and their ability to have access to capital? And I think it’s going to hurt them. And those that, as I mentioned earlier, are already teetering and even the mid-level companies that have breached covenants and maybe don’t have access to really raise capital or they do, but there’s just nobody they’re biding what’s going to happen. And I think you’re going to see; you’re going to see a lot of bankruptcies without question.
Speaker 1: Yeah, and then you saw Bank of America just did last week, announced a $5 billion loan loss reserve. You brought up a great point, a lot of these small retail tenants are also SBA customers. They’ve gone out and got SBA loans from SBA lenders because they’re small, medium sized businesses. And I haven’t really dug into that issue. I’m just wondering, and they’re the most thinly capitalized businesses, these kind of mom-and-pop retailers, wondering what the loss curve is going to look like there, it’s probably going to be high. So as the banking system starts to see-
Darryl Robinson: They can get a federal government backstop, you know what I mean? The banks liable for certain amount of it up to a certain amount, but at the end of the day, banks love those loans because they just mitigate risk. And so, the question is the federal government, you may see a lot of those, in a portfolio based, speak sold, but for the most part, I think the federal government’s going to have to step in on those situations.
Speaker 1: No, no. I do think that’s right, I think the SBA is going to probably have to do the uncomfortable, start to start asking for capital to set up a loan loss reserve to start making some of these banks whole on those guarantees. So I think that’s going to be an emerging story in the months to come. So retail has changed, people are having to find new revenue models in every industry. What creative things are you seeing in the marketplace today from tenants on how they’re kind of shifting gears in a no touch economy?
Darryl Robinson: Well, I mean, obviously if you wanted to open your doors you’re going to have curbside service. And if you didn’t have a drive through, in like a QSR setting, then you’re forced to do that. I think that there’s more of kind of a grassroots movement to… I use this in more of the restaurant industry because they’re the ones that have really just taken a beating. They’re having to reach out into the local community. I don’t care if you’re a national brand, you’re going to have to reach out into local community and bring people back in, the old story is when you lose a customer, it’s going to take you a year and a half to change what you offered them initially, for the reason you lost them, to come back.
Now you’re not losing them because you gave them something they didn’t like, but you’re having to change that habit of, “Do I need to go out? Is it safe for me to go in that store?” And you’re going to have maybe 20%-40% of those people that shop there when you say that. The other 60%, 70% are going to… their issue’s going to be more of a capital, in other words, what kind of money do they have to spend? So I think all in all you’re going to see… I know there’s some little tricks that people are doing some really cool things, but is it really going to boost up their revenue at the end of the day? I think we’ll have to wait and see.
Speaker 1: No, it’s right. So I think Texas is now at what, 50% occupancy, and a lot of other states that have opened up earlier starting to allow occupancy. But I mean, a lot of these restaurants and a lot of these retailers, they need 80% occupancy to breakeven to stay open. So we’ve been telling all of our friends and we’ve been following schedule. We’re trying to get back to the restaurants, even if we’re just picking up for take out, just to try to help keep those jobs in place. But-
Darryl Robinson: I think that’s been a big movement is that support your local restaurant here, support your local businesses during this time. At least in Texas, I’m seeing, and I know I’ve talked a lot of people in New York, New Jersey in the East Coast, as well as the West Coast and they’re doing the same thing.
Speaker 1: Yeah, because otherwise you’ll be stuck eating your wife’s cooking and have nowhere else to go. Well, I’ll tell you… she did I’m getting a look right now, but it’s one of those things where they’re saying that it was about 11 million of these 30 million jobs that aren’t going to come back and this has an impact on the consumer. And I think that the programs have bought us some time, ironically maybe through election year to really bridge the gap. But the pivot that happened here, going from 3% full employment down to almost maybe 25-30% unemployment, that’s going to definitely change the credit profile of retail centers. What’s your view in the future and what are you guys doing? Are you still developing or are you taking a pause on that? What’s your outlook for retail in ’21?
Darryl Robinson: We still have a pipeline. And we have commitment from some larger tenants that we feel comfortable with their credit. We did have a situation where we were going into the… this happened about two months ago where we were kind of coming into the early stages of COVID and we had signed a lease and they wanted to consider getting out and we considered it, but we were in a situation where we had obligations to other tenants. And so, what we were able to do is kind of push the delivery part of the project back for them to help them to soften their delivery. And so there’s some risks there, certainly, but I think we feel comfortable with our balance sheet.
But going back to your point, yeah, I mean, we’re going to have to transform a little bit of the way we do business. I mean, we’re going to be kind of have to be extremely scrappy and looking at opportunities that work. And I think I stress this to our team that we’re going to have to kind of reach outside of our box and we’re going to have to explore. And the only way we can do that is to constantly talk to people and kind of collaborating on ideas and we don’t know where this market’s going at the end of the day. I mean, I don’t think anybody knows.
I mean, when you look at the market, I mean, even stock market, one day it’s just unprecedented rise and there’s no really rhyme or reason. I mean, you have most of the companies that are driving this rise, their earnings are dismal or at best are going to be just awful this quarter, as well as the next quarter. So what is it? And I just think there’s a lot of just capital that’s kind of out there that really wants to find a home. And I think that will help the economy at the end of the day. It’ll prop up some of these opportunities or investments who are retailers for that matter.
But I see looking where there’s cracks and we’ve developed a little bit of two or three different kind of strategies that we think we’re going to approach or use this downtime to do a lot of diligence, looking at a lot of assets that aren’t necessarily on the market, but we potentially think they could be made available. And when that time comes quickly, we can pounce. One last thing, we’re a little unique in that we went into kind of coming out of ’09 and ’10, we really started de-levering portfolio.
So I lived in Miami, I lived through the downturn. I saw what a lot of people were seeing on the West Coast, Arizona; people just weren’t shopping, people didn’t have jobs, it was a financial shutdown, and I didn’t want to be in that situation again. So we made a point to do things on a lower leverage, raise more equity if we needed, or put more of our own capital deals. So we’re going to continue to do that. We just made do fewer deals, but we’re going to continue to find our way.
Speaker 1: Well, that’s a good point you make is the cap structure is going to probably shift. Banks are going to require a lot more equity into new development deals probably going forward. I mean, what was the kind of typical capital stack prior? This was like 50%, 60% leverage on a loan to cost on a development deal and where do you see going forward?
Darryl Robinson: If you’re a pure development play where you’re large scale grocer anchor, or catalyst driven with some cotenancy, and then you have your pads up front, or you’re doing in the building, so ground leases, et cetera. Provided you have an anchor and you have a credit anchor, I mean, a lot of the developers not necessarily the institutional developers and the retype developers, but your private developers, putting anywhere between 70%-80% leverage, we historically have kind of stayed around 60%,65%.
And try to even bring that down lower, depending if we take that catalyst and we’re able to capitalize on ground leases and other where we’re maybe bringing our overall capital outlay down at the end of day. But we’re being very mindful on how we build, we want to build on a certain return on cost. And that’s the challenge is one of our other divisions, which is more of a smaller scaled single-tenant rollout retail, which we were doing a lot of restaurants, we would do a lot of kind of smaller strips with smaller anchor, there was, call it 2013 through ’17, we were doing 20-30 development deals a year in that space. And then what happens, a lot of capital realized that, “Wow, I need to be in this space either on the lending side where I’m going to back developers who are under capitalized, or I just want to be in there as an investor in that space.”
And then you had the secondary market, which was propped up by the 1031 market, which is still very robust and strong, it was driving cap rates down. So then you had the tenants saying, “Well, I want to benefit from a low cap rate and a low interest rate environment.” So the returns on cost started to get really squeezed. And you’re working for 100, 125 basis points, you get a shift in the marketplace, like what we’ve seen.
Now, it hasn’t really impacted that industry yet, but we’ll talk about that in a minute, but it’s just too tight, it’s too risky. And so we started to see where we were working at 150-200, maybe 250 basis points, depending on the credit of the tenant, we just started to see that erode. And so we pulled back from that space, as we have a debt fund. And so we started financing that stuff in that space, knowing that we would do 70% on valuation based on having an assigned tenant, knowing that if or fell down, we could step in complete, execute on the transaction, we still had enough movement in there.
And then we would charge a little bit more on interest rate than your traditional banks up quite a bit more, maybe double the cost, but for the sponsor we would be flexible on 95% proceeds as opposed to the traditional, which I just mentioned, which could anywhere from 65% to say 80% leverage.
Speaker 1: No, I think it’s interesting the typical commercial bank lender does not want to step into development halfway through, but somebody, an organization like yourselves, who have that expertise it could be happy hunting right now for a lot of failed development projects to get them from the banks. And so, have you started to see competitive developers in some of the market you’re in give back projects that are halfway that they’re not going to get to delivery, or are banks starting to call people, experts like yourselves and say, “Hey what’s your capacity to take over projects?”
Darryl Robinson: Well, those projects that were problematic prior to this, obviously they’re moving towards and which were few. I mean, the default rate was relatively low in that space. There was always a sponsor that could either go out locally, raise enough capital, or maybe to extend the loan and put in a year’s interest reserve or whatever the case may be to satisfy the lender, satisfy regulators. At the end of the day the banks were kind of kicking the can down the road, thinking that the economy is strong, it’s going to continue to stay strong and we’re going to earn our way out of this, those deals we see, and we have seen them for the last 90 days.
But the stuff that has been impacted specifically due to this pandemic, we’re not seeing it yet. I mean, we’re getting phone calls on the debt side and the equity side saying, “We’re going to probably need to look at a raise, but there’s a lot of money out there.” And so, I would think that as an equity, I mean, there are those projects that just it doesn’t matter how [inaudible 00:21:27], they’re just smoked at this point. I mean, they were over-leveraged to begin with, the roosters will come home, but it’s going to be awhile, I think we’re going to see it shake out within the next six months. Well, my phone is now ringing off the hook for COVID type deal problems, let’s just say. I mean, there’s conversation taking place but nothing of desperation.
Speaker 1: Well, I think this virus, the way I look at it, accelerates trends. And so, what the federal government did is it arrested that acceleration of just the velocity of change. And so, I think those things are going to probably still come home to roost, but just going to take some time for the stimulus impact to wear off. And that’s what I think why we’re seeing a lot of real estate folks around the country shake their heads like, “We’re expecting distress, but it’s not here yet.” When it does come though, what kind of discounts do you think you’ll be seeing on prices, or how much will cap rates start to gap out? What’s your expectation of that?
Darryl Robinson: Well, I mean, if you kind of go back to ’08, ’09, I think everybody was kind of penciling it or putting those type of assets in kind of almost like an RTC type structure and that never transpired. And there was a wave of investments where people jumped in and many jumped in a little bit too early. They didn’t get hurt, but it just pushed back their exit horizon. So, I think there’s going to be a little bit of that that goes on and I think it’s going to be driven by asset class specifically. And I think if you look at the two classes, I think that have just been crushed are retail and hospitality, in hospitality, probably, more so.
So I think those opportunities are going to be there and I think we’ve already seen it. I mean, we’ve seen Starwood take a run at some pretty noted assets, and have won some, and have lost some. But I think if you have long-dated capital, you’re patient, you’re a really good operator, you know what you’re doing, I think, if you focus on really good assets, and good markets and growth markets, I think it’s all about the buy. So what’s the discount? I can’t tell you a percentage of… we go 20, 30% lay down, I don’t know right now, but I have to think that hospitality is going to be really, really… the newer developed deals are going to be really, really difficult. And I think you’re going to have to see dramatic valuation to be able to move those assets of today or a dramatic decrease in value.
Speaker 1: Yeah, I don’t know if you saw this, but Extell in New York City, just today, across the city, a discount to their units for high end residential about 20%. And it kind of took the market by surprise because everybody was still in that amended and pretend mindset. But the folks at Extell just said, “Just cut them and sell them.” And so, it’s going to be interesting. Mortgage applications are surprisingly up at an all-time highs, obviously, low-interest rates, but it’s going to be interesting. There’s a lot of cross-currents, it’s going to make it very interesting to see how real estate prices get impacted in the coming year.
Darryl Robinson: We didn’t talk about office, which is really interesting is how are people going to work going forward? I was reading Facebook, felt like 40%, I think, don’t quote me on these numbers, but I think 40% of the people that they send home, maybe 25% of them never come back [inaudible 00:24:59] office anymore. So I think the way we do business is going to be really different. But listen, we’re humans, we’re people of collaboration, we want to be around people, we’re social, so I don’t think it’s going to be… We’re all going to live on Zoom, but I think that there’s going to be more of a shift in how we office, more of the Tuesday, Thursday, Monday, Wednesday, and then two Fridays a month kind of thing with people.
And we’re doing it now in our office just to abide by the safety procedures set forth by the CDC and also State, and we’re functioning. I mean, I was reading a piece before we had our time this morning and it said that… and I think this piece was done in New York says that productivity with a lot of these companies that have employees that commute, like in New York City, has risen by 40%. And just from the mere fact of not having to have that commute time. And so the question is, what is that going to do at the end of the day when people realize that, “I can increase my productivity, but I also can decrease my operating cost of having office space.”
So if you just take half of that right now, I mean, I think that’s going to be a dramatic impact on the office environment. I mean, I know that there has been some people that have come forward, I think it was one of the former presidents at Google or CEO that said that this COVID is going to require more office space for companies because people are going to have social distancing, you’re not going to have cube on cube, you’re going to have more single independent offices, but you got a couple that with the fact that people can work remotely too. So, I’m not sure I fully buy into that.
Speaker 1: No, I think there’s going to be more studies done on productivity gains from lack of commuting. And I also think there’s an intangible that people need to look at as just kind of an organizational training or… I’m worried about some of the younger employees in our organization who aren’t getting that one on one time with the boss, or can’t sit in the meeting to learn about how to kind of rise to the organization, and how the contextual thinking goes through an organization. So institutional knowledge and the value of that is really critical.
And I also think there’s going to be a new… what’s the right way to put it, a new deal coming because if the government can’t guarantee health care outcomes and safety, then you can’t send your kids to school. If you can’t send your kids to school, employees need to start taking on a role as parent-teacher, which a lot of parents don’t want to do. And unfortunately, you’re seeing child abuse skyrocket right now, it’s terrible. There’s a therapeutic need in going to the office. And so, it’s going to be an interesting kind of dichotomy of, it’s great to work in your pajamas. On the flip side, are you getting fulfilled professionally by not being part of that cohesion of the team? But yeah, we’re looking at doing some of these types of benefit programs, letting people work from home as long as they’d like, but what we’re finding is people want to come back to the office, they need a mental health day at the office.
And so, we’re rotating people through to make sure there’s not too many people here given that we’re in the wealth management industry, we’re an essential business, but yeah, it’s hard to work from home. And so, I think families are going to have to figure that piece out. One question that I had is you mentioned the Amazon effect earlier on, so Jeffreys came out with a study this week on consumer confidence and it said only 20% of consumers are going to return to stores until there’s a vaccine. So as states are reopening, a lot of people still don’t want to go back out and risk it. Are you seeing that in the traffic numbers? And then, two, is it checkmate? Do the digital retailers, I mean, they need logistics and kind of freight forwarding, but has that model trumped bricks and sticks in your mind?
Darryl Robinson: Well, I think it certainly has disrupted even more having a pandemic, but to answer the earlier question, we’re seeing people coming back. Yesterday, because Friday was one of the days that we’ve increased to 50% as you know, and then, some of the other service, or I should say more of a personal service type retailers were able to open. And I think some of the other retailers that have historically kind of pulled back and closed have now said, “Listen, I’ll limit the certain number of people in my store, but I want to open.” So I’m seeing more traffic on the road. And I drive a lot during the day just because I’ve been going to about six different projects and a lot more people are in the retail center, I’m seeing a lot more traffic on the road, but I’m still not seeing that full center, full boatload of cars, of people that are shopping right now.
But I will tell you, last night I was out late, coming back after picking something up and there were people out partying. And so, I think that it just shows that people are just kind of tired of being home, they want to get out, they want to be able to go to the bar, they want to be able to go have a drink with friends in the restaurants. You live in Texas, Texas people eat out and they love their restaurants. And so, people are patronizing them and they’re going out, I think they’re just kind of capitulating to the point of saying, “Listen, I don’t have it, my friends don’t have it, in my social circle, you have not see the whole lot of it, and I’m going to wear my mask, and I’m going to be safe, and I’m going to protect myself, and go for it, so.” But that study may be right, it may be the 20% of those people don’t come back. If it does, it’s going to really impact the real estate as a whole on the retail side.
I mean, because a lot of these particularly I can speak to like single-tenant because you can really define revenue stream. When a buyer, back in the day, they just looked at what kind of credit the tenant had and what kind of rent they are paying, and then they paid the cap rate and they’d buy it. And they said, “Listen, it’s triple maths, it’s almost like mailbox money, it’s what I want in my portfolio.” Then the investor start starting to get a little bit more sophisticated and said, “Well, what kind of revenue is that store doing out of that store? Or if they’re not and they’re new, what are they doing across the portfolio? What’s the national average on that company, or that business, or what’s that franchisee doing in his whole portfolio?” And they’re really digging into the credit of that tenant. So, then they started to say, “Well, if that store’s not doing the average then I got to be concerned they’re going to shut that store down.”
So now you’re coming back to those stores reducing their volume by 20-30%. And in the mark or I should say, when you look at buying one of these assets you say your fixed costs of real estate in operation or occupancy I should say, shouldn’t be more than 8%, 9% percent. Well, now when you reduce that top-line revenue, you’re putting it in at 15%-16%. It’s really difficult for that tenant to make money unless that tenant’s rent’s reduced, unless you recast his lease.
So I think there’s going to be a lot of shuffling going on that space. And I think there’s going to be a lot of that type of real estate that people are going to walk away from. Franchisees don’t have guarantees on them, they’re in their kind of burn-off period and they’re just like, “You know what, I’m going to go dark.” And so you’re going to see a number of kind of vacant QSRs and also small, fast-casual restaurants on the marketplace, particularly in the bigger saturated markets.
Speaker 1: Yeah, It’s interesting to see though, it seems like the fast-food restaurant model is going to be the one that wins right now. I mean, I think the full-service restaurants, for the most part, all shut. I don’t know too many of them that are open. And so, I think it was probably the first to come back. Question for you is, people are outside, there’s probably the ability to social distance, but how have construction sites changed through kind of the pandemic? Because I see buildings going up all over the place, so they’re still active, but have they taken different health precautions?
Darryl Robinson: I think they have, but not to a level of what you see if you… I drove through the drive through at Starbucks today and now they give you your coffee and your muffin or whatever you order in a cup. So I mean, it’s changing the way they serve you. But I did shut down one construction site. I mean, I had a period of time where I was careful and I had to, but I have one project, it’s in the Med Center, which was critical because we service about 1800 parking spaces in the garage and then our future development which we’re working on now. And we were critical service line, we were parking doctors, and nurses, and people that worked in Medical Center. So I just kept the operations going as I was allowed.
But yeah, I think they’re being mindful with better sanitary conditions and so forth for their workers. Because you hear about these meat facilities which are big breeding grounds for the virus and you know this because there are a lot of people together. And so, in construction sites, same way, but I didn’t see construction slow down a bit. But I am receiving a lot of calls from contractors, engineers, and architects that are concerned about their pipeline going forward. And so, it goes in the next piece of, I see construction crisis going on a little bit and we’re actually rebating three of our projects right now. And I know that a couple of my buddies are building on or developing on sites that we’ve sold them, particularly multifamily, are also doing the same thing and I think they’re seeing some savings.
Speaker 1: Well, that’s right. So the forward-looking pipeline is starting to tail down, do you see construction prices and actually input costs of the materials start to come down too? Are people trying to fire or sell those?
Darryl Robinson: That’s the thing I’m not sure about, you know what I mean, production’s diminished in most of these facilities. So it’s kind of you get kind of an inflationary push right there, so does it kind of balance out at the end of the day? But I think pure raw physical labor, people looking for work. I mean, I used an example that I go to Home Depot and I’m always buying something. I like to do things around my house. And I go probably maybe twice a month, and I have noticed when I go early in the morning and I see a lot of labor workers at Home Depot, most of them I’ve never seen them before and that are out of work and it depends on day labor market, but potentially are not natural citizens or citizens I should say. So that tells me that a lot of these contractors have laid or not using them because they’re not as busy as they were or concerned.
Speaker 1: So you’re in a Houston kind of the capital oil and gas market and that that sector has been crushed and we’re investors in it. And as a kind of an ancillary business to oil and gas sector because you’re so close to it, you’re ground zero, what’s your view on what’s going on in that market and how is it impacting Houston’s economy? How’s it spilling over into adjacent markets?
Darryl Robinson: Well, I think Houston did a good job over the last say 20 years of trying to not be so energy-dependent but it was hard. And I think maybe at one point they were closer to 40%, 45%, 50%, now it’s down to 30%, 37%, 35%. But it’s hard not to be impacted from all the way down how that trickle-down effect impacts everybody in that service industry. I mean, you kind of look at the hotel industry, when a hotel isn’t open, think of all the people that service that hotel that aren’t actually employed by that hotel all the way down to the flowers that are delivered to that hotel on a daily basis. So same thing in the oil and gas industry.
I know that we were personally investors in a lot of production on a mineral side, mainly just from our landholding and I received some letters and I’ve received one last week from a noted company that said, “We’re going to have to cease operation on developing this project. I know we have leases on the ground but we’re not going to be able to sustain going further developing right now.” And then I received some other letters that stated basically that, “we’re just basically to shut down production.” And so what does that mean? These are all different wells, so you shut them in because it’s just too expensive to operate, I mean, you’re losing money operating them or you’re having to write a cheque every time you go take oil out of a storage facility or pipe it for that matter.
So I just think we haven’t seen it yet but we’re seeing a lot of it. I mean, you look in the business journal and you see pretty on a regular basis, weekly bankruptcies in these smaller downstream companies that or just service companies, particularly that just aren’t going to make it, so do they impact Houston? Yeah, they certainly do, a lot of those workers and a lot of those companies are in the oil patch area but there’s still an impact here in Houston with job loss, tremendous job loss.
Speaker 1: No, there’s a lot of these knock-on effects. I’m curious because Houston there’s a saying that none of the good oil deals get out of Houston, none of them really for sure get out of Texas. The storage capacity, I’m surprised that the real estate community hasn’t found a way to take advantage of kind of storage. Real estate folks build buildings and we store all sorts of people, goods, products, have you seen anything like that? I mean it could be a killing for somebody to start building infrastructure to store more oil capacity and sell it late, have you heard of any deals like that?
Darryl Robinson: I don’t know enough about it but I just know that in general, there’s a lot of regulation around. There’s also the ramp-up time frame to build that type of facility then what, call it a year from now kind of have some balance in the marketplace. I think it would be a little risky at the end of the day. I mean, I was reading today that you got Russia, this morning, is trying to kind of regroup internally and they’re just reeling from this right now from a country. And they’re one of the ones that took a big position to take a major cut with OPEC. And so, now you have the fracking industry kind of just shut-in at this point. So do you see this whipsaw effect where you burn through the crude that stored or you’re not going to burn through it but you’re going to diminish it at some point and then you play this catch-up game and then all sudden prices rise.
And then the question is, does capital go back into that market, does it go into that space, is it too soon? Back in ‘O8, ’09 when we had that dramatic pushup and then all of a sudden the fall off the cliff, people didn’t remember the ’80s or the ’70s, it was just too far back, ‘O8’s too soon. I mean, we just had it. Does a capital say, “You know what, I’ve been burned, I don’t want to get burned again. I’m going to stay away from that space.” A lot of that’s MLP dollars that were raised to go into these deals and look at these MLPs. I mean, I’m in some of them and I look at them and their performance is dismal.
Speaker 1: No, there’s definitely some head-scratching going on in people’s energy portfolios right now trying to make sense of what’s happening. And we’ve talked a lot oil and gas CEOs recently. Too many people have oil wells today and so this could be a structural problem that may lead to like you said, capital flows in the future.
Darryl Robinson: Well, what did they say to you about production? I mean, I would just be curious to hear what you’re hearing towards production balancing out of our glut that we currently, we overhang.
Speaker 1: Yeah, I think it’s what you said. I think oil and gas companies are starting to shut things down if they can, if they don’t like off-take agreements or minimum capacities because they diversified their risk by dividing the midstream risk to a different company now they’ve got off-take agreements, they have to honor at certain prices. And so there are certain winners and losers like Pemex in Mexico is hedged fully. So they’re actually killing it right now, Pemex has got Wall Street by the tail and they had a nice hedge in place. So they’re still pumping oil out as fast as they can get it because at $60 a barrel whereas some of these guys who were unhedged, I mean, they’re losing money every dollar they put into the ground.
So it depends on where their hedging program is and how vertically integrated they were. It’s going to depend, so there’s a whole range of outcomes but if people can shut down production, they will. Natural gas is actually kind of on the inflection point of being interesting. And it’s bizarre, we’re an energy export today. American energy independence has been achieved and the implications of what that does geopolitically is pretty interesting. I mean, so you’re seeing Russia and the Middle East really go at each other’s jugular for we’ll call it European and Chinese demand.
And the Saudis are giving oil away like $2 to $3 a barrel just to just put their finger in Putin’s eye. We have a call later today with a guy from Russia to talk about the oil and gas sector. So I’ll get more of that input. And we have somebody calling in from Saudi Arabia next weekend. And I’ve talked to a few folks on the show from the Middle East and their heads are spinning, they’re trying to figure out what the heck is going on. So I think there’s an acceleration going on, just chaos in the energy markets that it’s still early innings to play out.
Darryl Robinson: I’ll tell you there’s some major concerns geopolitically with some of these oil-producing countries and the impact, obviously with their dependence on oil and what some crazy person might consider doing, which could definitely impact the market. There’s a big concern for that.
Speaker 1: So I think in the future looking at five years, oil and energy either we’re going go through a period of slow disinflation with hyperinflation or it’s going to just below input costs, which is not a bad thing for an economic recovery. But in your view, what are some of the silver linings that exist right now in the marketplace? Things that you think are going to be longterm positives for the economy that you’ve been seeing sprout up through this virus?
Darryl Robinson: Well, I think that construction stats will be down. So I think at the end of the day, holding a good, hard asset, a piece of real estate over a period of time, I think you’re going to do well. I think there’s going to be opportunity obviously in the debt market. I know there’s a lot of money that has been raised over the last five, six years, that’s gone into private lending. I think there’s going to be some of those lenders that are going to be really just kind of licking their wounds right now, trying to get that debt off their balance sheet. I think there’s going to be opportunity for new capital that comes in and purchases its debt.
There’s just a flood of money that’s been raised for this downturn or this opportunity. And I think that money is going to be deployed. And I think it’s we’re survivors as a country. So I’m hedging my position on a hard asset buy. And I want to look at the good opportunities that I know that I’m not quick spore, but I’m looking that I can to be very nimble, I can put low leverage on. And I think if you take that approach, and you have a really good sponsor that you’re investing behind and particularly with your team of investors. I think with patience and somebody that you trust in a great segment of the marketplace, I think you’re going do very well, I really do.
Speaker 1: Well, final question, what are you reading or what podcast are you listening to or what are you doing to kind of educate yourself in this new normal that we’re going into?
Darryl Robinson: So a lot of my time has been spent mentoring. And so, I currently serve on my college’s board particularly on the business school board and the entrepreneurial program. So I’ve been spending a lot of time Zooming with young entrepreneurs, helping them kind of think how they’re going to take their business to the next level, that’s one. And second, from an enjoyable read, I’m reading a book and it’s my second time reading it, I read it about 10 years ago, it’s a book called Wild Bill Donovan. And it’s a great book if you love history and if you love history around kind of intelligence around, in this case, he created the OSS which is the office of strategic services, which was really the first office of intelligence, I should say, for the United States. So it’s an enjoyable read that’s one.
And then two is, I have a couple podcasts I listened to. I have a very good friend of mine who’s president of the world’s largest independent broker insurance company. And he does a podcast and he interviews CEOs and COOs of companies and how they’re responding to this COVID as well as pre and post. And so I enjoy listening to him and I listen to him every week. And then I’m just doing things for myself. I want to spiritually just take this time that I have because in ‘O8, I was paralyzed and I allowed myself to be paralyzed and there’s nothing you can do to change things. I mean, things are going to happen and they’re going to happen at their own pace and you can’t force something.
So working 18 hours a day and not having any results but frustrated that you’re going to have to work harder that’s not the answer. And so I kind of went into this kind of saying, you know what, I’m going to get in touch more spiritually with my faith. Second, is that I was going to work on my health, make sure that I exercised every day. And then I took some time to really kind of meditate and journal and read things that I’ve never had an opportunity to read before because I just never had the time. And so that’s been my focus.
Speaker 1: Those are all great comments at the end there. Well, Darryl, I really appreciate you joining us today, we’d love to have you back in the weeks and months ahead and just to kind of retouch on some of the topics that we discussed today and we really appreciate your time this morning to educate our viewers on what you’re seeing.
Darryl Robinson: Absolutely, and I’ll put some stuff together that may be helpful that you can share with what’s going on in the tenant world as it relates to retail, I’m happy to do that. And thank you for having me on this.
Speaker 1: Great, thanks a lot Darryl, have a great day. Thank you for watching Non-Beta Alpha. And before we go, please remember to subscribe and leave us a review on our Apple podcasts and YouTube channels. This is Non-Beta Alpha, now you know.
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