Peter Wilson, president of PTLA Real Estate Group, joins us this week to share his experience on how PTLA is managing its diversified portfolio of smaller assets, including student housing properties, in California, Washington and Oregon. Peter and Justin discuss the impact of COVID on smaller assets around the East Bay area, how to navigate the market during these uncertain times and how to use data and technology to make the best decisions for your portfolio.

In this episode, we discuss:

  • How to overcome the challenges of owning small apartment buildings. (3:25)
  • Expanding your portfolio into student housing. (7:36)
  • How to successfully find and close an off market deal. (11:50)
  • How PTLA uses the Tenancy In Common (TIC) structure for clients to have ownership in larger assets, while minimizing their risk and responsibilities. (14:40)
  • How to satisfy the requirements of a 1031 exchange through a TIC agreement. (16:30)
  • Potential complications when entering a TIC agreement. (18:15)
  • Gaining insights into the market through technology and data-driven decision-making. (22:08)
  • Providing transparency and real time updates to clients through open API software. (25:15)
  • The challenges and risks of owning student housing units. (27:01)
  • Key market factors to take into account when assessing student housing markets. (30:35)
  • Student housing leasing activity during COVID. (33:04)
  • Metrics to watch for in the CRE market during and after COVID. (38:37)
  • How East Bay smaller assets are performing during COVID. (44:12)


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(1:49) Justin Alanís: Peter Wilson. Welcome to the podcast.

(1:51) Peter Wilson: Hey, Justin. Thanks. Appreciate it. Thanks for having me.

(1:53) Justin Alanís: Yeah. Excited to chat with you about PTLA and about your role at PTLA. So I know that PTLA, you guys are based in California in the East Bay of San Francisco, in the Walnut Creek area. And you buy and operate and you're amanagement company, and you have somewhere around 3700 units on the west coast. Talk to me a little bit about your portfolio. What's the average size of the building that you guys have, both under management? And what are the types of buildings that you guys like to go out and buy?

(2:21) Peter Wilson: Yeah. That's great question. Appreciate that. So currently, across those roughly 3700 units, that's about 400 buildings, and 200 of those are single family. So if you just strip those away, so we're just really going over multifamily, you're talking about 18 units per building on average. So our portfolios much smaller. And that's something we've been focused on, certainly over the last 10 years, because what we're seeing is that it's a niche that is often not represented well. I think most larger groups are trying to scale and by doing that they want to buy or manage buildings with 100 units or larger. And so we're really targeting more mom and pop sellers and/or owners, where we can either buy buildings from them or manage for them.

(3:10) Justin Alanís: Yeah. That's pretty unique, as you noted, and definitely based on my background, most institutional investors focus on the institutional asset over 100 units. Sometimes over 2, 3 hundred units, because there's economies of scale associated with the management and operations of those buildings. So how do you guys make deals work? Is it because you also manage these buildings that you're able to create some economies of scale, or how does it all work in your mind? How do you make the numbers work?

(3:36) Peter Wilson: Right. So when we wanted to kind of take a step back in the Great Recession, we said, okay, what were we buying before? What do we want to be buying now, to reevaluate our strategy? We saw a huge opportunity buying these smaller buildings, but were faced with the challenge you just brought up, which is how do we actually make money at it? How do we grow? How do we scale? How to we be efficient in our business? And we realized what we'd have to do is really micro focus on certain areas in terms of the market that want to invest. So we said, let's start with the East Bay, and then specifically Walnut Creek and then in Walnut Creek, what streets do we like? Where are their 20 to 30 small buildings under 100 units where we think we can pick off several and then basically operate it like a 100 unit building. So that's exactly what we did for the first 5 years. I think 2014 was the first acquisition. Then 2014, 2015, we bought 13 under 50 unit buildings in Walnut Creek, Pleasant Hill. And were able to combine those, and then manage those effectively, efficiently and with normal scale that you would expect from a 100 unit building. So we essentially operate it like in a more institutional size property because they're so close to each other. And we can manage it right out of our office. And from there, we were able to see that other owners, they were not getting the attention from some of the bigger management companies, because there were smaller. And so we started embarking on a strategy of purchasing property management companies that had these more fragmented portfolios, smaller buildings, in the markets that we specifically wanted to invest in, so that we could then run it like a more institutional size portfolio. And so that's exactly what we've done. Both in the Bay Area and in the Northwest. We're heavily concentrated in just a few specific markets, where we can really run these small buildings as if they were larger properties and portfolios.

(5:37) Justin Alanís: Makes total sense. So you guys get density in the market, and then you establish a centralized team. So you have a centralized property manager that you assign to, let's call it 10 to 15 buildings. And then do you guys also have centralized leasing teams as well?

(5:51) Peter Wilson: We do. Exactly. Yeah. So we have a managing director for an office that oversees 3 or 4 portfolio managers who will then oversee 2 or 3 leasing people. Depends on whether or not you're in California because of different requirements with on-site management. In California as an example, you have to have managers over 16 units, so when that happens, then we're getting more support from on-site managers. But that's essentially how we manage it. So from our office, from our hub, we can then go out and drive, manage, lease as if we had an on-site leasing office, which obviously most of our properties do not.

(6:31) Justin Alanís: Makes total sense. And then you guys have started to expand a little bit in terms of your footprint, and you're starting to move up to Oregon and Washington. Started in the East Bay in Walnut Creek. What drove that decision to start moving outside of California to those markets?

(6:46) Peter Wilson: Yeah. That's a great question. So the company is I think going to be 50 years old next year, and has done a lot of different types of real estate. And again, coming out of this last major recession, we wanted to make sure we were investing in our backyard. We were buying these smaller buildings. And with that, as you can imagine buying California real estate, it's not a super high yield play. You can't just go buy something in our experience and get a 7, 8, 9 percent yield out of the gate when you're buying downtown Walnut Creek assets. It was hard to achieve. Unless you're just doing something we've never seen before, which you might be able to do. And so we wanted to find a different asset class that we felt had different qualities. It was driven by different factors than just jobs. And so we started investing in student housing. And so, student housing is what has led us to the northwest, Oregon and Washington. And so most of our units there are student, and along the same thing though, it's still with smaller mom and pop operators. So still smaller buildings, just students. So we're not managing, institutional level, purpose built student housing. It's still garden style, two-story walk up, 50 unit product across the street from some schools.

(8:12) Justin Alanís: And so that's something that we've talked a lot about internally as well. The difference between high appreciation areas where you have lower cap rates, and lower yield initially, like Walnut Creek probably represents that. Although not to the same extent that maybe somewhere like San Francisco does. But then you go to these outlying areas like Eugene or Corvallis, Oregon, where you have higher cap rates and higher yields right off the bat. But maybe you also have less appreciation over time because they're not as in demand, and you don't have the immigration patterns that maybe you have in Walnut Creek. But to your point, you guys are focusing on student housing. Does that also have the same level of appreciation that maybe you'd find in Walnut Creek? And how do you guys underwrite those deals versus something like Walnut Creek?

(8:56) Peter Wilson: I'll start with, if you're a typical client, you're going to like the Bay Area. You're probably in and around Northern California. That's where most of our high net worth clients come from. And so it's easy to invest in those buildings, but again those returns are probably post rehab, 6 to 7 percent cash-on-cash. And that takes, maybe 2 years to start hitting those. For the buildings that we bought since 2014, I mean, several of those have doubled in value or more. A lot of that was, cap rate compression, so we can't claim all of that ourselves but it's a huge degree of appreciation. We've obviously all seen that over time. On the flip side, in our student housing properties, we're buying at a 7 cap with a 4.2 percent interest rate, so the spread is so much more significant right out the gate. And for our clients, that's made them comfortable. Then we've had to walk them through this. Okay, you're buying Bay Area real estate. You're going to, let's say, get a 6, and maybe it's going to double or triple over 10 years. Well, on the student side, you're going to probably start a leveraged yield. depending on whether or not you're doing IO with your debt, 8 percent or higher. And so like our student housing properties pre COVID, were paying over 10 percent annually while our Bay Area portfolio was probably paying an average 6.5 to 7. Our clients liked that diversification and were okay with the trade off, because we have certainly not seen that appreciation in student housing. It's held up fine, but I think as we've seen with COVID, will people's demand for student housing change in terms of investor appetite, I'm pretty confident we're gonna be able to sell and move in and out of our Bay Area holdings. It will over the next 5 years some for student housing assets, that could be a challenge. I mean, we're going to have to get some investors comfortable with those markets, what they're saying with the newspaper headlines. So for that reason right there, that's why you're getting those higher cash returns or you should have been. If you weren't, you could be in a big disadvantage right now.

(10:56) Justin Alanís: Yeah. It's very similar to the stock market in the way that people want to think about it from a mental model perspective, where you have these high growth stocks. Where you maybe don't have as many dividends or annual yield associated with those stocks, but you're really relying on on the growth of those stocks. Versus a bond structure or a dividend yielding stock where you maybe don't have as much appreciation, but you're gonna have that annual cash flow. And ultimately, just like a stock portfolio, diversification is really important for real estate companies as well. And so it seems like you guys are hitting that. You talked a little bit about your buybox criteria. So smaller building footprints, high appreciation, the Bay Area, but then diversification across state lines. How do you find these deals typically, right now? Are you working through the broker ecosystem? Are you guys sourcing these deals yourself directly from these, we'll call it small and independent landlords who own these buildings?

(11:48) Peter Wilson: Right. So when we started trying to buy the smaller buildings, we worked through brokers exclusively. But we would do a lot of the heavy lifting. So, we have analysts in our offices and so we would pull the addresses. We would try to get an idea of the unit count. We would pre-underwrite them. We would prepare offers and cover letters, and then we'd give them to a broker. Because what we found was, people respond to a broker with an offer better than just me sending a letter saying, hey, let's talk, I want to buy your building. And so we were really successful in getting deals done off market, even though there was a broker involved. So almost everything we've purchased in the Bay Area is off market, but through a broker. Because we have written a direct offer, and started a conversation that way. Out of state, most of the student deals were broker driven. Aome were marketed. But right now what we're seeing is because we are so heavily invested in these really specific areas, we are now getting leads through our existing management clients. And we're seeing other deals come up and around us that we have access to that we may be able to do directly with the owners.

(13:01) Justin Alanís: Got it. So you then get into the market through the broker ecosystem, and you're able to then establish relationships and also establish a management presence in that market. And that enables you to start building a bit of a flywheel effect with these owners. Both from existing owners who you're managing for who may want to sell their building, and you guys might want to own it. And you guys are able to do that through a pretty unique structure called the Tenancy In Common or the TIC. And you guys have utilized this structure, not as a core part of your business and you certainly don't market it, but you do have this as an offering to your clients. Do you mind walking me through a little bit about how you guys do that and create this TIC structure with your clients?

(13:42) Peter Wilson: Absolutely, yeah. I think one of the benefits of working for a roughly 50 year old company is all the different ways of doing deals that I've seen. What the company's done, where we can leverage their experience. And, as you said, one of those is through a TIC, or Tenancy In Common. And so we have, really, if we look at clients, in terms of investment side is, you can be one of three people. You could either be coming to us and saying, hey, I want to invest in your partnership and putting together on the limited partner. And I'm an investor minimum, let's say it's 100,000 dollars. And you're not going to be underwritten by the bank. You're not going to sign anything other than the partnership agreement. You're going to have to be accredited. And you're going to follow the rules and you're going to own let's say, 1 or 2 percent of this partnership. We're going to go buy a piece of real estate. But you're not going to own a direct piece of real estate. You're gonna own a piece of a partnership. With a Tenancy In Common you're actually going to directly own the real estate. And so the other way is for a client to come to us and they own real estate themselves, whether it's a vacation home or another apartment complex. And they want to do a 1031 exchange. And instead of those clients going their own route, which is one of the three options and buying their own piece of real estate where, let's say they're selling their vacation home in Tahoe and they want to buy a fourplex, they can do that. They're going to be signing on the loan docs. They're going to be underwritten by the bank. They're going to have a pretty small portfolio because that vacation homes not going to buy them a lot of units when they do that 1031. But they are going to get the tax advantages of doing that, so again that's one of the options. Or the third option is, they can come to us and say, I'm selling this home. I have, let's say 500,000 in equity. If I cash out and go into your partnership, I'm going to pay tax. I don't want to do that, so what do I do? And what the Tenancy In Common allows them to do is move their current ownership entity, along with our partnership, and go buy a piece of real estate directly, where they will actually own a piece of that real estate. They'll be assigned a piece of the debt. And so that allows them to gain access to a lot more units. So typically, they'll come to us and say, again, I'm selling this home in Tahoe. I have half a million in equity. I'd like to be in 100 unit building. I don't want to pay tax. So we'll say well sit tight. Let's coordinate this transaction, which takes a significant amount of work. And we're going to be looking for this 100 unit building over the next 12 months. So when we think we find one, we're going to call you back. We're going to walk you through how you need to sale your property. We're going to walk you through your timeline, because we need these things to align. Because we all have to close within obviously a certain time period to make this happen. And then we will underwrite the property. We'll get the loan. As a Tenant In Common, they still have to sign on the loan. But typically, the bigger owner will sign for the carve outs. So that's a way for this client to reduce their exposure and their risk, while still directly owning the real estate. So it's nice because they get to, again, be a part of a bigger building, while still remaining in their current ownership structure and directly owning real estate while deferring the taxes.

(16:59) Justin Alanís: Yeah. It's a super interesting structure. We actually had a guest on the podcast last week, who is an expert on 1031 exchanges. And we talked a little bit about the TIC structure and also the DST structure. And so this is different than the DST structure, where they are not investing in a fractional share of a much larger asset but instead they're a joint tenant on this, and they have to sign on the loan docs. And so partnership from this perspective is really important, right? They have to trust you. You have to trust them. How does voting work in situations like this? How are decisions made?

(17:38) Peter Wilson: So, that can be pretty complicated. The way that it works to satisfy a true 1031 exchange in a Tenancy In Common agreement is essentially, they're their own owner. So, we come to this agreement, arms linked, and at the end of the year you get a Tenancy In Common tax return. Essentially your share, your 10 percent share of revenues, expenses, everything else. Then you have to do a return for your entity. Pay whatever taxes you have to on that, which is rare because of depreciation, but that's up to you. You still have to pay registration for your LLC. You have your own attorney. You have your own accountant. So you still have to do that. In terms of voting, the way it really works is you both have to be in agreement to sell. So you could even be a 10 percent owner, but you still have to both agree to sell. You can assign the property management rights to one of the members, not one of the members, to one of the other owners. And they can make certain decisions about it. But when it comes time to sell, that's where it can be tricky. Because if you're going into this with someone you don't really know or trust, and someone wants to sell, someone could hold out. And let's say you have to make a refi decision because both of these parties are going to have to sign the loan docs and if someone doesn't want to do it, it can get tricky. So we've seen where that has been a sticking point historically. It can be tough. And we've had clients come from these bundlers, where they're in an investment with like 50 other TIC's. Now that's frowned upon now, and most banks won't let you do more than maybe 3 or 4 TICs, Tenants In Common, in a single transaction. But that's something that can be pretty complicated.

(19:27) Justin Alanís: Yeah. It sounds complicated, but it sounds like partnership is a really important element. And having a company like PTLA, who is running the deal and helping advise and being a trusted adviser to these Tenants In Common is probably really important, right? They probably trust your voice when you guys say, hey, we think it's time to sell. You guys are the experts here and so they tend to trust you with that. The tax benefits, I think it's important to note just to reinforce to the audience here that the tax benefits in a TIC do translate. So the 1031 exchange, you don't have to pay capital gains taxes so long as you do the timing correctly. And then also the depreciation as well as the the interest that you pay on your loan can be deducted from your regular taxes. Is that correct?

(20:10) Peter Wilson: Exactly, correct. If your equity investment through the building you sold on what you buy, your percent of ownership, that's going to apply to your write off. Depreciation and everything. So you'll get that statement end of year from us. And it's just like you owned it yourself, except you have other tenants with you. So there's a lot of benefits. The most complicated part of doing a Tenancy In Common transaction is just getting everything to line up. You've got multiple people selling and buying at the same time and you have to coordinate that. And that's where we come in and provide a lot of support for our clients as we gone through it. We help them on their side. We can provide attorneys and tax accountants to help them think through everything.

(20:56) Justin Alanís: Yeah. It's important for that stuff. And then you have management agreements. Then do you take an acquisition fee and an asset management fee and a property management fee then through the TIC structure?

(21:07) Peter Wilson: So our fee structure regardless of whether or not it's a TIC structure, we will charge an acquisition fee which can range from 1 to 3 percent, depending on the size of the deal. The 3 percent would be high in the normal world, but sometimes we're buying 12 unit buildings together. They're pretty small. We do not charge asset management fees. We did a while back, but what we wanted to do is be further aligned with our clients. So, we take a share of cash flow above the preferred return, but that's it. So if the deal is supposed to pay 6 percent annually, and that's the preferred return and we're paid back 5, the only thing we're making annually is the property management fee. We also do the property management. We feel that we can really drive value better when we have our people in the office, watching over it from an asset management standpoint, and then also  boots on the ground telling us what's going on. Where leasing, what they can see. We can react so much faster than calling the third party management company.

(22:05) Justin Alanís: Absolutely. And also, you guys have the data internally to be able to understand the flow of the market, right? If something's happening across your portfolio, where you have, all of a sudden a surge of new notices, or you notice that market rents are going down or asking rents are going down in the market or you have large concessions happening, you guys are able to stay abreast of that. And not have any of these big hiccups that maybe are sometimes common of these small and independent landlords because the tools for them to be able to see these things are not quite there yet for this segment of the market.

(22:36) Peter Wilson: I 100 percent agree. I think they are very disadvantaged if you just own a 10 unit building, I think you're, for the most part, you're flying blind. Aside from the money we're able to make buying these management companies which we have, I think most owners are flying blind, if they have 10 units. They're not seeing a lot of data. It'd be very difficult to make decisions. Unless they're really getting a lot of data from the property management company, then it'd be very difficult. And I think that's one of the benefits, aside from just making money when we bought these property management companies, which we are. They're really profitable. The access to the data, seeing how this asset class has been moving, which these are mostly smaller assets, B and C buildings, older vintage, we had never really had a look into that before. And since we're also buying the kind of product it's been extremely valuable to see ahead of when a normal report would come out with what's happening. That's really helped us and then in turn, we're able to turn that around and share that with our client.

(23:43) Justin Alanís: Yeah. That's really big. And I know you guys use a lot of technology internally in order to help your internal efforts. And you expose a lot of that to your clients as well, both business intelligence and investor management software, as well as pretty sophisticated property management software. And that's another advantage that a large company like yours can have over the small and independent landlords, is that you can afford to invest in technology that helps you manage assets better.

(24:09) Peter Wilson: 100 percent. I think most of these owners are using AppFolio or they're doing it themselves. If they're doing it themselves, using Excel. But if you're on AppFolio, which is fine, not to knock AppFolio, they don't really integrate with other systems. They don't have an open API, so you're limited to what they can deliver. And even their accounting system is from the mindset of an individual owner, which is how much money did I make this month. Which if that's all you're focused on, it's fine if you just have one building. But there's a lot more you can be delving into to make real time decisions and that system doesn't really provide the tools to analyze that.

(24:49) Justin Alanís: Yeah. And so you guys use Entrata, which is a bit more institutional focused, even though you're applying it to smaller footprint buildings. For the most part, what we'd consider small and independent landlord type buildings. And that's been able to gain you guys a significant amount of benefit and also, it does have open API's. So you guys can pull data in and out and do interesting things with it and pull it into, for example, your Salesforce database and use it for investor reporting.

(25:14) Peter Wilson: Exactly. Yeah. I think we've been able to make, as you mentioned, an investment in our systems. That's really set us above what other local property management companies can provide. And then our owners, certainly our investors, are thrilled because they went from 10 years ago getting paper checks and a quarterly report in the mail to they can log into their Salesforce portal through our site. And they can see history of their distributions. They can see the charts of the graph of their returns. There's a place where they can store investment documents. So instead of waiting for us to send this out, now we can send it to them faster. And as we can continue to integrate live data through Entrata and open API systems, we can just push that right into portals. And so we don't even have to prepare reports in the future. It's something we're working on now, where it's just live data for our clients. And that just makes it more transparent and I think it gives them more confidence in how we're managing.

(26:13) Justin Alanís: Yeah. That's a theme that we've seen throughout this podcast and throughout my career, is that when I was running Rentlytics, the one thing I noticed is that the number one proxy for successful management companies and ownership groups is their ability to use technology well. And their willingness to adopt and try out new technology as well. So, I've seen it firsthand that you guys do a phenomenal job of that. I want to dive into going back a little bit to the student housing. So, we've talked a lot about the smaller footprint East Bay assets. Let's move into the student housing segment. You talked about the higher yield that you're getting, but maybe not as much appreciation on those assets. But it also represents a different management challenge. So how have you guys had to adjust? Well, first of all, what are the management challenges that you do have to adjust to and have had to adjust to, and how have you guys gone through that adjustment?

(27:01) Peter Wilson: Yeah. I think the biggest thing with student housing, anyone listening to this will agree with if they're in student housing, is the lease up. So almost all of our leases expire in a 1 month period, maybe 2, depending on how we're trying to flush it out over the school year. So, as you can imagine most school years start in September, and so we're trying to have leases end before then. But then we're trying to get people moved out. We're trying to turn the units and then we're trying to get everybody move back in with little downtime so that we're not losing income. And so it's all in one shot. And then once you get leased or you don't get leased, that's for the most part where you're going to be for the next 12 months. So if you end September and you're 50 percent leased, like that's it. You might get 2 more leases, but you're 50 percent occupied for the next 12 months. That's rough. With traditional multifamily, like our East Bay market, leases come up all the time. Probably a couple percentage points of the building turn every month, and so we have a couple of leases coming due, depending on the size of the property. It's just normal. And then we lease some, and so you get to kind of avoid this mad dash and this missed opportunity if you're not doing the right thing. So, we have to start our lease up in January and we're trying to get renewals and then we're trying to market to students to obviously get them to sign leases. And get our percentage as high as we can as early as we can, depending on our comfort level and how easy we want to sleep at night.

(28:30) Justin Alanís: Yeah. Do you think the yield is higher, and the cap rates higher as a result of how these properties operate? Or is that a result of the market that you're going after up there? Like would a student housing deal in Berkeley represent a higher cap rate? So is it a function of the property or the location, or both?

(28:48) Peter Wilson: I think it's somewhat both but more the location of the property. For sure. If I could have bought a 7 cap student housing deal on Berkeley, I would have. I've never seen that. In some cases, maybe even the cap rates for student in Berkeley are lower specifically because you're going to have a guaranteed turn, which is something in a rent controlled market you may want.

(29:13) Justin Alanís: That's right.

(29:14) Peter Wilson: I think it's more a function of the marketplace because pre-COVID, some of the questions are what happens if the school gets shuts down? Okay, it's unlikely but some of these are farm towns, or at least most of these towns are really driven by the school. There's other things going on, but that's a huge component of the economy, and maybe why that town was even there in the first place. So, because of that, if something happens to the school, I can't go lease 3,000 units to the market. Because there's not that many people that need apartments in Ellensburg, Washington. It's a farm town.

(29:52) Justin Alanís: Yeah. So when you underwrite these deals in a normal situation, you look at underwriting to the market and to the asset. So in a market situation, you'd be saying, what does the growth look like in this market? What's the demand for this market? And with COVID right now we're seeing an exodus from the city of San Francisco out to the outlying suburbs, for example. We're seeing that trend happen, and you can monitor that activity and then you look at the reverse side and you look at the supply. And you look at how much inventory is coming on and maybe to a certain extent how much shadow inventory is out there through the single family rental market. And then you look at risk associated with the market. Things like crime rates and various other factors that might impact your ability to lease and why you might have risk associated with the asset. In a student housing market, though, you might be looking at the market completely differently. You might not even look at the dynamics of the market in general, you're looking instead and almost underwriting to the school to a certain extent. Are you looking at population growth within the school and how many students they're adding? And then obviously, looking the supply side as well?

(30:49) Peter Wilson: Exactly. Yeah. And on the supply ship side in these markets, a 200 unit building can be a significant shock and it can impact your lease up, whereas in the Bay Area, you may not even feel it at all. So, again, there is still a supply risk. They're not job driven markets. So historically, what we've seen is job driven markets in the Bay Area, which has done well. Times of recession, you still see some flattening rent growth and increasing vacancies, because it's based on people's jobs and income. Student markets, during the recessions, at least the markets we've invested in, they've done quite well. Because people have gone back to school and at a minimum, they continue going to school. And so again, our investors like that as a hedge, if you will, for those same reasons. But you're right. The key is to focus on the school. You have to look at enrollment trends. You have to look at their endownment. You have to look at freshman enrollment. You have to look at graduation rates relative to the rest of the state. Tuition costs. The nice thing with student housing is all that information is there. The universities provide that. They're required to, and so that data is much more easy to obtain than in the East Bay if I wanted to get access to other economic data. I have to pay for it. That's one thing that is nice about student housing, but again, unless you have a team of analysts like we do that are digging through all that and trying to format it and put a story behind it, that's really hard to even get that. Unless you're just looking at enrollment, which is not always going to tell the whole story.

(32:15) Justin Alanís: Totally. And especially right now through COVID. So I'd love to switch gears and talk about COVID real quick. So, let's talk about it first in the context of student housing because that's where we are in our conversation, and then we'll pivot to talk a little bit more about what you guys are seeing and doing in the East Bay. So student housing right now, Pac-12, Big Ten just announced football season is done, right? For fall at least. I saw 20 percent of Harvard freshmen have deferred their enrollment because of COVID. And some schools are even saying we're not going to do in-person classes in the fall. So what are you guys seeing right now in terms of lease up? When is that big lease up window? It's happening probably right now, isn't it? And so what are you guys seeing?

(32:59) Peter Wilson: We're right in the middle. Yeah. That's a great question. I would say, when this started we were extremely concerned, as you can imagine. What happens when these schools say they're not going to come back in session in-person? Why would someone go to campus? Why would the parents want to guarantee rent? There's so much uncertainty. Man, these markets are just going to collapse. And that could still be the case, but I'll tell you what we're seeing, which is surprising. The collection rates for student housing through the summer, so most of our student leases just ended in July, we were roughly 98 percent collected, which is higher than our Bay Area, which is about 96 percent collected. Still really strong in both cases, but to see the our student housing perform that well is a testament, at least so far, I think to the markets we're in and in our management strategy. But for our lease up, again, another thing that has just completely surprised me is we are basically on par with where we were last year pre-COVID. So our Pac-12 schools, so we we own properties in Pac-12 markets. We are roughly 96 percent leased in Pac-12 markets for next school year with parental guarantees. And this is after, we continued leasing after some of these more recent announcements were made, so I was pretty shocked even in our more or less, let's call them tertiary schools. Our directional schools, Western, Eastern, Central's. Not the Pac-12 schools. Those are also still leasing and actually, at a higher velocity over the past few weeks as students decide what they want to do. So our worst building is probably 70 percent pre leased, and we still have about a month and a half to wrap that up. That's slightly behind where that building was last year, but that ended up being around 97 percent leased. So I think that one, some of our buildings may not hit as high as it did last year, but just to know that you're even in the 80s or 90s, during a pandemic, during a recession when the students don't need to be there is very surprising.

(35:10) Justin Alanís: Yeah. It shows that there's some resiliency in this student housing market, despite a pretty existential shock to the system of the market. And a potential situation where the students may not even go to school. And so, do you guys typically do the type of student housing where you have roommate situations ,where it's maybe a 3 or 4 bed type of unit situation, where each student pays on a per bed basis? That's how it works, right?

(35:34) Peter Wilson: So most of our housing is per unit. We only have one building that we own that is a by-the-bed leasing. A more traditional purpose built student housing. That was our strategy when we started investing into student housing in 2013. We wanted to manage as we had been. We wanted to buy in markets with 12 month leases. There are markets in California that only do 9 month leases. And then during the summer, they try to fill in other ways, and that's just because they're more competitive. So, our strategy was to buy in markets where we could be within a block or two from campus. And that's where most of our portfolio is located. So far, I think that has helped that we're not doing by the bed leasing. I think right now, that would be very challenging to own a 5 bedroom unit with 5 individual leases. Because when you do that, often, the students won't be able to find 4 roommates. So there'll be roommate matching, and I think given everything going on right now, I'd be much more concerned as a parent that my student was going to live in a 5 bedroom unit with 3 friends. And then they were going to pop in some random person who you're not sure of their lifestyle or how seriously they may be taking this. And that could present a COVID risk to your child.

(36:53) Justin Alanís: They get to control their own destiny and create their own bubble. so to speak. In this situation they get a group together, they rent an entire unit at once and they split up the rent themselves, rather than each individual tenant paying you guys by the bed.

(37:06) Peter Wilson: And that's what we're seeing.

(37:08) Justin Alanís: Yeah. Seems to be an advantage to you guys during this time for sure. On the acquisition side, on the investment side, what are you guys seeing right now? How's the flow of money happening right now? I've talked to other people on this podcast and they've talked about the bid-ask spread being, now this was a month or 2 ago, but the bid-ask spread being sellers wanting a 2 to 3 percent discount and buyers wanted a 20 percent discount. Yet we're seeing interest rates at near all time lows, so it seems like a pretty good time to buy and the fundamentals of the market are holding up pretty well. Though it seems like the fundamentals in the market of where you guys are in the small and independent landlord segment is not quite holding up as well as maybe the institutional segment. So how are you guys thinking about your acquisition activity right now? What are you guys seeing in the market?

(37:51) Peter Wilson: Yeah. I would say generally in our market, so East Bay, Northern California, it's much more difficult to get deals done. Right now, we're not seeing as many. I think a lot of our supply, the buildings we would be buying, they're usually 1960's, 1970's buildings and have been owned for a long time. And so if they have been, they typically have a much lower leverage. They may not need to sell. They usually don't transact as often. So it is, I think it's going to slow down for us. And we need to see and wait and watch and see what happens with legislation and what happens with payment plans and if those get extended. So I think for us right now, it's just kind of hold. I do agree some other people that have done this podcast. I think a lot of buyers wanted an initial discount. I don't even know if it was justified. They just felt like they wanted it because of uncertainty. And sellers were saying, well, actually, we're still collecting rents and interest rates are low, so I'm not going to give you any discount. And for that reason, I think you've seen transaction volume decline. And how would it sound as a general partner, I go to my clients, and I say, hey guys, I know there's all this uncertainty when you read the news, but we're going to buy this deal at a 4 and a half cap or 3. I mean, our clients would say, why do you need to do that right now? What's gonna happen in 6 months? And we said, we're just not quite sure. Yeah. So I think it's a challenging time for those that are trying to raise new capital. I think if you have a bucket of money that you've been holding for a while, you'll start seeing opportunities. But for us, it's about creating that story again and the strategy of why we should be buying, at least in the Bay Area and Northern California area. For student, we're seeing a lot of worried owners. We really are. I think that there's going to be a significant opportunity in the student sector. Either it's going to pan out, and we're going to get through the next 12 months of the school year, and student housing is going to be really attractive in certain markets and perform better than we really anticipated. And for that reason, we'll want to continue investing in student, or it's going to be really bad. And despite being pre-leased, and this could happen to us, in October, people could change their mind and say, I know I wanted to come back but I got sick or it just isn't working. I'm going to go home and I'm going to try to get out of my lease. And you could see a lot of people trying to get out of their leases and you could see lease defaults. So again, we're not out of the woods, even though we've had success with our leases and collections in student housing. So if that happens, obviously you're gonna see a lot of distressed assets in the student sector that we would consider waiting and watching to try to go purchase. However, either way, because we're in these markets, as we've described earlier, we are starting to see owners who, even though they're performing well, they leased up well, they want out because they just don't want the stress of the lease up. Yep. And they're just tired of the uncertainty. So I think there we are starting to see discounts, so if we're seeing discounts anywhere right now, it's student.

(40:52) Justin Alanís: Yeah. And also even core markets that you're in, in the Bay Area and other similar places, especially in the target market that you're in in the small independent landlord segment, there is death, divorce, dissolution, that causes the need to sell. Also, tax benefits that are expiring that kind of force folks to need to sell, because they're not getting as much maybe cash flow on their asset or other things are happening in their life. And so that's a very real need and especially during a pandemic, I'm of the opinion that more of those types of events are going to happen. And maybe we haven't seen them all yet, but I think we're still in maybe the first couple innings of what may happen as a result of this pandemic, both economically and from a public health standpoint. And so certainly taking a wait and see approach right now and learning about the market and seeing where it's going seems to be a pretty wise decision right now on your guys' behalf.

(41:50) Peter Wilson: Yeah. We hope so. I mean, we don't sit on a 100 million dollar fund that we have to place every year. It's really when we think there's good opportunities. And what we've signaled to our clients is let's just wait. Because, like you said, this is going to change and impact people's lives and there's going to be deals that need to be sold, whether distressed or not. And just the fact that there will be buying opportunities, I think over the next 12 to 14 months is exciting. Because over the last 12 months pre-COVID it was basically, okay, that's a reasonable cap rate and it's reasonably in the market. Let's buy it. There was not a whole lot of story to it other than maybe a light value add and you're just competing with everyone else. So I think this will kind of restart the market again.

(42:33) Justin Alanís: Yeah. And when you can underwrite 3 percent growth every every year in perpetuity, all sof udden underwriting and ability to acquire becomes fairly easy. But when all of a sudden you have to underwrite negative rent growth or 1 percent rent growth, it becomes a little tougher, right? And that's where the disconnect obviously happens, as well as also interest rate spreads are widening a little bit because of the risk and shock to the market. And so, when those things happen, it freezes up the whole market. But there is some positive data coming out, especially in markets that you guys are in. Places like Walnut Creek. You look at what's happening in the home buying industry, which actually has more data right now that is really, really positive and more people are leaving places like San Francisco core markets and there's an exodus to these outlying suburbs like Walnut Creek. And so, does that factor into your decision to maybe start buying at all if you start seeing Walnut Creek prices and rents start ticking up instead of going down during the pandemic?

(43:26) Peter Wilson: Yes. So right now rents are flat across our whole Bay Area portfolio. We're not seeing rent increases. However, our occupancies are holding pretty close to where they were back in March. So I think... I'm looking at a whole portfolio. March we were 91 percent when it first started impacting and as of August we're 92 percent occupied. Collections pre -COVID were 97, 98 percent. August we were 90, so far in August we're 92, but it'll take us most of the month to get the rest in there. It's just taking us longer to collect, but again, by the end of the month of June and July, we were 96 to 98 percent collected respectively for our Bay Area portfolio. So far, again, you're right. I think it's been fairly strong, I think until we see what's going to happen with payment plans and the ability to enforce leases, we'll want to wait. But ultimately, at some point, I would not be surprised if rents start ticking up again. Because right now it's not really impacting our occupancy at all.

(44:38) Justin Alanís: Yep. Yeah, that's great to hear. And this is a wonderful conversation. I want to thank you so much for shedding light on the TIC structure, and how you guys manage small assets and build a portfolio in certain markets, walking us through student housing and how that differs from some of your other assets in the East Bay. And then obviously, reciting and talking about the facts of how you guys are doing through COVID. Super helpful conversation. I think this will be really relevant to a lot of the small and independent and even bigger landlords that listen to this podcast. So Peter, thank you so much for joining me today. I think this was wonderful. Thank you so much.

(45:12) Peter Wilson: That's great. Yeah. Thank you, Justin. Appreciate it.

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