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Landmark Links May 13th – Shutdown

One Big Thing

One of the most obvious spots for distressed real estate opportunities in the coming months is the hospitality sector, which is getting battered for a protracted period of time when occupancy rates have dropped to near zero.  The problem is that its a highly specialized market segment and not every real estate investor has the financial backing or operating knowledge to own and operate a hospitality property.  That being said, there is a way to play hospitality distress without ever owning a hotel.  How?  By purchasing houses from Airbnb landlords in vacation markets who became overextended and need liquidity.  The exchange below is from a MarkWatch interview with RedFin CEO Glenn Kelman (emphasis added):

MW: What’s your take on the state of secondary markets and vacation markets right now?

Kelman: Toast. Those are going to be in tough shape. There’s a whole economy that was built around the liquidity there that Airbnb provided. You could get pretty deep into debt and still have somebody pay your mortgage every month because Airbnb and other travel websites were so good at finding someone to rent it out. And I don’t think many of those folks have the reserves that Marriott US:MAR or that Hilton US:HLT does.

Investors who own Airbnb properties are looking for immediate liquidity. At some level it’s Redfin, Zillow US:Z and Opendoor picking up where Airbnb left off. If they can’t get cash flow through one website, they’ve got to sell it through the other.

This has been a fairly regular topic of conversation on our team’s virtual message board for a couple of weeks now.  Airbnb was a godsend to small real estate investors in vacation markets because it created a relatively efficient market where one didn’t previously exist.  As the economy boomed for a decade, business was great.  The problem is that a substantial number of these owners experienced enough success that they were emboldened to purchase multiple properties, often using relatively high leverage.  That worked great until the pandemic hit.  Now they are sitting on a small portfolio of leveraged real estate that has become un-leasable for an extended period of time.  These are typically your classic mom and pop operators that typically do not have substantial reserves to fall back on.

On a larger scale, I recall looking at a package several years back on a subdivision project that a developer was doing near Orlando.  Every unit in the subdivision was going to be sold to investors to rent on a short term basis to tourists visiting Disney World.  At the time, demand for this type of project was incredibly strong – from both investors and tenants.  Now there is none.  I have to suspect that this will be a mess that will also result in some compelling opportunities for those with the stomach for it.

What I’m Reading

Takeover: Amazon is circling AMC Theatres, the troubled owner of Odeon Cinemas.

Hide the Weenie: Ratings firms are predicting that more companies are likely to start pursuing distressed debt exchanges, in which they try to overcome liquidity problems by swapping debt or buying it back at steep discounts as a way to hide defaults from the general public.

Reverse Course: Apartment units have been getting smaller for years.  However, if remote work continues to gain traction in the post virus world, that trend will likely need to reverse and could result in major repositioning opportunities.

Collateral Damage: The pandemic is going to hurt emerging markets’ ability to service their debt.

Off a Cliff: Freight volume has hit an all-time low as coronavirus crushes the transportation industry.

Game of Chicken: Beef and pork have been pricey and, at times, scarce in the U.S. this spring amid outbreaks of the corona­virus at slaughterhouses around the country. Chicken has remained widely available and cheap.  The reason why?  A higher degree of automation at processing plants.

Chart of the Day

Low wage industries are taking the brunt of the layoffs.

Source: Morgan Stanley Research

WTF

Bout to Make It Rain: A U.S. judge ruled on Monday that strip clubs cannot be blocked from obtaining emergency federal loans during the coronavirus pandemic.

Covidiots of the Day: Thieves broke into mortuary to steal ‘exhumation liquids’ to get drunk on during South Africa’s coronavirus booze ban.  This is why you make booze (and pot, for that matter) essential.

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