Webcast transcript
Question: With a big infusion of cash into the economy and slowing economic output, what are your thoughts about stagflation?
Sri: I don’t believe stagflation is going to happen. Stagflation refers to the economic phenomena that we last saw between 1973 and 1975 when we had a severe recession during the Nixon and Ford era. We had inflation pick up because oil prices tripled during the fall of 1973 and we were ill equipped to deal with the substitute for oil and there was nothing for that time. We are in a different situation and oil is not as important as it was during the 1970s. There are other substitutes for oil. The difference today is that we are in a very different situation. If the recession is being accompanied by a slower price change and an older world population, stagflation seems to be much less of a likely thing.
Question: What happens in the fall if students are not going back to school?
Willy: As of right now, leasing opportunity is very strong. So, when I came to them [owners and operators of commercial real estate] with the idea of turning student housing into makeshift hospital beds, I was expecting a number of them to say count me in or sign me up but to the contrary I received the responses: A) we still have students preoccupying our buildings and B) our preleasing for the fall is still very good. Obviously, the big unknown is how long does this crisis last? The problem is that it is a binary event if the school system is operating or not operating. It is our clear hope that everything is up and running by this coming September.
Question: How’s our loan portfolio and how is it performing?
Willy: Fortunately, it is performing exceptionally well, but we’re also very, very early in all of this. The great financial crisis lasted for 42 months and multifamily held up exceedingly well during that crisis. It had by far the lowest default rates of any commercial real estate class. We are now into week three of this crisis. There are clearly different differentiators between the two. The entire economy seems to be grinding down. During the great financial crisis, the entire economy did not grind down. Waiters and waitresses were still making tips, flight attendants were still getting on airplanes even on a less frequent basis as they are today.
40% of the American public, if faced with a $400 or more unplanned event cannot pay for it. So, if all of a sudden, the waiter or waitress that was making a couple hundred bucks a month on tips, loses that income than he or she is incapable of dealing with unexpected expense. We are dealing in uncharted territory here. So far, from W&D’s perspective, rent rolls are still performing well. We have no risk on any retail assets, any office asset, any industrial asset or any hospitality asset. All of our risk is in multifamily. So, we are very distinct from many banks and many competitors as it comes from our risk portfolio.
Question: What will be the signal for markets to return to stability ? Will it be the decline in coronavirus spread or do you think society will decide that the economic cost is too great a burden to bear and insist on a more normalization of society regardless to the human cost?
Sri: I think in terms of normalcy coming, it happens in two stages. The first stage, coronavirus will increase at an increasing rate for six weeks. We are currently in week two. The first thing that investors need to watch is when the crest peaks and then flattens out. That will continue until July or August. During that time, August, going into the 3rd quarter, we will see the extent of economic decline and how much stock market havoc has been caused. The second stage are the economic indicators. Then you will see indicators of people going back to work, people going out to eat more eagerly and that would suggest to you a bottom. Then you will see that all of them come closer to year end.
Question: Where is capital coming from and is anyone still bidding on assets?
Willy: I put the bidding world in three buckets. Bucket one is friends, family and country club capital that Walker & Dunlop has successfully used. Capital is dried up there. That group of investors is on the sidelines today. Generally speaking, they are game off. The second is the big institution, the PE firms, they are sitting on huge amounts of capital. We saw in the investment sales space that many were falling away from larger assets. I would put forth that those investors who have plenty of capital are mostly in a wait and see mode and they will step in and be aggressive when the time is right. The third are opportunity funds. They are getting very active and are trying to figure out if there are buckets to invest in. They are underwriting deals to the amount that they can. That is a broad generalization of how that capital is behaving today.
Question: What’s your thought as it comes to oil rebounding? How long does it stay under $30 a barrel and what impact is that going to have if this thing carries on for much longer?
Sri: It’s a timely question. There are three factors to look at when answering this question. One on the supply side, the impact of the fight between Saudi Arabia and Russia, both of whom want to control the oil market. Russia has fewer reserves than Saudi Arabia. Saudi Arabia wants the reserves to last a lot longer time, but the Russians have essentially separated from the COPA agreement. That is causing a glut in the overall market. How much is the glut? Previously, there were two million barrels a day and I estimate that it will grow to seven million barrels a day. Seven million of excess supply is going to have a negative impact on the oil market. The coronavirus will put downward pressure on the demand of oil. The global economy has been slowing down from 2018 – 2019 and it has been slowing down remarkably in 2020 before the crisis was taking place. That was the reason why there was a fight to produce more oil. Excess production, coronavirus, and the slowing down of the global economy will all have a negative impact on the price of oil. I see another six – eight months for the oil to stay under pressure. We will probably see a further decrease to $20 on crude oil.
Question: The world is not ending, there is going to be pain between here and there, if people are looking for opportunities and happen to have money to put to work, where are there opportunities today?
Sri: Overall, I think risk assets are going to be under pressure, high yield bonds will be under pressure, energy related efforts will be under pressure, I look again for risk free assets, more defensive people going into gold, and also on the defensive side looking at utilities. They will give you a cash income. I would also invest in other risk opportunities if you have a good manager and can sleep tight for the next 5 – 7 years. Those investments will continue to grow.
Willy: Extremely optimistic about developing a drug by early summer. Back during the great financial crisis, my friend Kevin talked about going to Bernanke. He said, “we are going to try things every day and one day something is going to stick.” On this one we know there is light at the end of the tunnel.
Liquidity is going to be king over the next couple of weeks. I spoke to the Chief Operating Officer at one of the big five banks this morning [March 18, 2020] and he said, “everything is great, but we have real damage in our consumer sector, and we’ve got real damage in our small business sector.” They are doing everything from forbearance to working with their clients to help with liquidity. I then spoke to him about a deal Walker & Dunlop is working on that is going to need significant capital and he in no way blinked and said, “Great! we have plenty of capital for you.” Back up to 2008, that same bank shut off all its funding to every lender other than Walker & Dunlop. We are in much better shape for today then we were back then.
