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Resource Alts: Investing in a Broadly Diversified Portfolio Will Not Get You the Same Results as It Used To

Gene Nusinzon, portfolio manager with Resource Alts, says the performance of different property sectors is no longer aligned, as it used to be in past cycles.

Resource Alts, a wholly-owned subsidiary of C-III Capital Partners, is an asset management company that specializes in real estate and credit investments. The company sponsors a range of investment vehicles, including limited partnerships, joint ventures, publicly-traded and non-traded REITs and interval funds. We talked with Gene Nusinzon, a portfolio manager at Resource Alts, who is steering the strategy on the Resource Real Estate Diversified Income Fund, an interval fund that invests in public and private real estate debt and equity.

This Q&A has been edited for length, style and clarity.

NREI: Tell us a bit about what the Resource Real Estate Diversified Fund is investing in these days.

Gene Nusinzon: The fund invests in public and private real estate, and both equity and credit securities with the objective of generating an attractive income stream with low volatility and moderate capital appreciation. Its ability to invest in equity and credit, as well as some less liquid investments, enables it to have lower volatility and to generate higher income for investors willing to give up daily liquidity. The fund invests in everything from movie theaters to charter schools to medical cannabis-growing facilities. It also invests in office buildings, retail, apartments, student housing and manufactured housing, which are all domestic.

NREI: Which property types are attracting Resource Alts’ attention on as we get late into the real estate cycle, and why?

Gene Nusinzon: The two recessions prior to the 2008 Great Recession did not result in losses in building values like our most recent recession. With that in mind, we are cautious. Overall, we think there will be a drop in demand when a recession comes. For that reason, we are balanced between equity and credit. On the credit side, we are defensive. We like transitional loan investments with 60 to 70 percent loan-to-value (LTVs) that can generate attractive income, but have principal protection if building values decline. We don’t know if we are timing the cycle perfectly, so we also want some offense on the equity side. We are positioning our equity investments in multifamily, industrial and healthcare sectors. In healthcare, we like the senior housing sector because housing values are still healthy, which means that baby boomers can easily sell their homes and have capital to cover rent at senior housing facilities in what we expect to be a protracted process as the population ages.

NREI: How did your investments perform in the first quarter? Any surprises? Any changes expected in the second quarter and beyond?

Gene Nusinzon: We saw phenomenal performance out of the industrial sector, primarily because more companies are competing for the incremental dollar spent online, and e-commerce is the way for retailers to survive. Macy’s just announced very good earnings, but most of that was driven by e-commerce. Walmart is now very deep into e-commerce and just announced one-day delivery, similar to what Amazon just announced. Industrial facilities generated about a 20 percent return in the first quarter and that was the best-performing sector for us. We also saw very strong performance in the net lease sector, which is mostly tied to long-term leases. We particularly like to invest in the specialty real estate space that is consumer oriented—things such as movie theaters, charter schools, Top Golf facilities, etc. These specialty real estate investments generated about a 15 percent return. We saw close to a 15 percent return from apartments and a low-teen return from healthcare.

NREI: The tariffs and trade war with China—the tit-for-tat—is back in the news. Is that going to spook real estate investors? What could that mean for the REIT sector?

Gene Nusinzon: We think there is significant risk in the potential trade war that is unfolding for industrial facilities and for retail, including strip centers and shopping malls. There will be compressing margins and some will be passed on to consumers, but most expenses will be eaten by the businesses because it’s a very competitive landscape right now and gaining market share is more important than generating profitability as it’s a fight for survival and dominance. Once the big players establish their footing, the geopolitical risk of a trade war will become a bigger factor in the valuation of industrial facilities. That might be a tail risk that’s going to come to fruition at some point, but it’s very hard to predict when that geopolitical risk is going to be factored into the calculus of the values of the buildings themselves. If we take industrial and retail out of the equation, the rest of commercial real estate is immune to tariffs and the trade war, other than through weakening demand in the form of lower GDP growth.

NREI: What obstacles do you see for the remainder of 2019 in terms of REIT investing and performance?

Gene Nusinzon: The obstacles are primarily tied to interest rates. The biggest threat in our view right now in the REIT sector is from interest rates going up. That could be a result of the Fed making a decision that the economy is better than expected and that inflation is actually coming back. We think that is a lower probability. A higher probability that would affect interest rates is if China uses its $1-trillion-dollar war chest of U.S. Treasurys and sells those Treasurys as a retaliation for tariffs. Flooding the market with U.S. Treasury paper would effectively increase yields, which would have a negative effect on the commercial real estate market. There are pros and cons from China’s perspective. The pro is it’s one way they can fight tariffs. The con is they would essentially be cannibalizing the value of their own balance sheet by reducing the value of the U.S. Treasurys they continue to hold.

NREI: What do you see in terms of opportunities for investors for the remainder of 2019?

Gene Nusinzon: The senior housing sector, which has recently seen a ton of new supply, has had a headwind on valuations due to supply outstripping demand, but we think a rebound in valuations is on the horizon. We can’t predict if it will be in one, two or three quarters. But we think that catalyst is on the horizon because the single-family housing market is still pretty healthy, so seniors can sell their homes to cover rent at senior housing facilities. Their children are continuing to maintain their jobs and make higher wages that can help sustain the rent coverage that their parents would need for senior housing. This combination translates into a future pick-up in demand for senior housing, which in turn will increase the values of senior housing facilities. We think this is the best opportunity for investors that has been somewhat overlooked over the last couple of quarters.

NREI: What type of risks do you see on the horizon for property values at this stage of the cycle?

Gene Nusinzon: We just don’t see the same type of risks to commercial real estate property values that were present during the last recession. We think it’s important to be defensive, but we don’t necessarily think you need to do a late-cycle 180 on the commercial real estate sector because it’s a very attractive area for income generation and you can avoid some of the noise coming from Washington.

NREI: What’s different about this late stage cycle compared to others?

Gene Nusinzon: Historically, commercial real estate has gone through the same cycles. If apartment buildings were losing value, then retail buildings were losing value and industrial was also losing value because everything was interconnected, and was driven by heavy supply in the face of moderating inflation, population growth and demand. Now, there is divergence among the sectors. Industrial currently has very strong demand, while malls are dying, and bricks-and-mortar retail is going through its own recession and re-pricing. The new normal is a massive divergence among property sectors. Investing in a broad portfolio of real estate will not get you the same type of returns or the same type of risk that it used to.

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