Weldon Evans is the National Sales Director of ExchangeRight, a real estate investment company that provides REIT, fund and 1031 DST portfolios that target secure capital, stable income and strategic exits for their clients.
In this episode of Power Your Advice, Doug Heikkinen and Weldon discuss how ExchangeRight manages real estate investments in order to faithfully steward wealth.
- The importance of capital preservation and how ExchangeRight plans for it
- Challenges ExchangeRight faced in the pandemic and the lessons they learned
- Why an exit strategy is important and how ExchangeRight creates them
- ExchangeRight’s passion for empowering people to be secure, free and generous
REIT, investors, offering, exchange, capital, pandemic, assets, leased, exchange rate, portfolio, net lease, advisors, cash flow, clients, businesses, increased, tenants, important, alternative investments, property, dst, ExchangeRight
Weldon Evans, Douglas Heikkinen
Douglas Heikkinen 00:01
Hello and welcome to the power your advice podcast. . .
Weldon Evans 00:40
Well, thank you, Doug. Glad to be here.
Douglas Heikkinen 00:43
So ExchangeRight says that they source syndicate and strategically manage real estate investments in order to faithfully steward wealth. What type of assets does exchange rate focus on? And what's the strategy behind it?
Weldon Evans 00:58
Well, Doug, we were focused on what is now become essential businesses, long before that was a buzzword. We call it necessity retail. Essential businesses have always been exchange REITs primary focus strategically, but our acquisition strategy goes well beyond the asset class. The assets we target have long term leases and lease guarantees, backed primarily by large national corporations whose credit has been rated as investment grade or who exhibit you know, an investment grade metrics are tentative had strong balance sheets, a legacy of consistent quarterly increases in sales and revenue, and locations in strong infield population centers, where the positive growth trends and low crime rates. Their leases require them to pay and reimburse our investors for the property taxes, insurance, operating expenses, and much of the related property maintenance cost. As a result of our faithfulness to this strategy, we remain 100% leased, and we've collected 100% of our rents across 794. net leased properties. With over 93% of the total net operating income or assets under management generated by tenants that are deemed essential. All of our central tenants remained open and operating throughout the pandemic. While many other businesses were forcibly closed by government mandate, all of our current and past offerings have met or exceeded targeted monthly cash flow distributions to our investors since our founding,
Douglas Heikkinen 02:38
You say that ExchangeRight offers read font read fund and DST portfolios that aim to provide three things secure capital, stable income and strategic exits, how exactly does ExchangeRight go about designing offerings to provide secure capital? secure capital is obviously important. But what specifically do you have in mind when you talk about the importance of capital preservation, and how do you achieve that?
Weldon Evans 03:06
Well, is extremely difficult to recover from a capital loss. For example, imagine you were to lose 20% of your principal of your clients $100,000 investment after placing it in an underperforming offering, leaving them with just $80,000. Now, if you're able to grow that $80,000 by 20%, you still only leave your client with $96,000. For your client to truly recover their original capital, you'd have to manage to a 25% gain to make them whole again. Now on top of that, consider the cash flow is ultimately based on the capital invested a 5% cash on cash return on $80,000 $2,000. A 5%, return on 100,000 is 5000. That's a 25% higher cash flow. If we consider that some of the cash flow may be reinvested in differences, then it starts to compound. We're convinced that the long term erosion of capital is extremely high. And this convinces us that when it comes to strategically growing wealth, preserving the capital is number one priority. So capital preservation to us is extremely important. The first way that we're striving to develop offerings that can successfully protect investors capital is through tax deferral. We carefully designed our net lease DST portfolios to comply with the 1031 exchange requirements, and we carefully designed our replatform to be accessible the 721 exchange in this way exchange rate is able to offer investors the ability to put every dollar to work for them right from the start, including capital that would have otherwise been lost to taxes to seek protection of the investor capital. Throughout the whole period for each offering, we place special emphasis on strategic diversification. So that the safety of our investors capital is not only dependent on any one property, tenant market, industry, geographical region or lease, we have a broad diversification across the scope, we typically bring an offering to market with 10 to 20 properties in that portfolio in order to achieve this diversification. In this way exchange rate investors avoid the binary risk of inherent to investors that invest in individual properties. Lastly, to protect the investors capital, we stick to our discipline, exchange right won't chase the market just to turn over more product. We don't care about the asset classes that are hot now, we care about the what asset classes are most likely to be dependable, regardless of where they are in the market cycle. NET lease happens to be pretty hot right now. But that's not why we continue to focus on it. It's hot because the industry started to take notice that net lease investments performed stabling even through adverse economic conditions, as vividly illustrated during the pandemic.
Douglas Heikkinen 06:39
Well, the pandemic has created challenges for everyone. What are some of the challenges that exchange right encountered? And what are some of the lessons that you've learned?
Weldon Evans 06:48
Well, we learned a lot of lessons during the pandemic. One of them is that our property choices and our strategic decisions, which are aimed at the goal of providing recession resilient offerings, also achieved the goal of creating pandemic resilient offerings. We collected 100% of our rent owed to our investors throughout the economic turmoil of the pandemic. And we remained in 100% rent collection across all our net lease DST portfolios. We did not have to enter into a forbearance agreements over any of the year, and we did not have to reduce or delay any distribution payments to our investors. And all the offerings performed as or better than projected. In fact, several of our end tenants actually enjoyed increases in their credit ratings. We also had to learn that being affected in this market means that you have to be flexible over a year ago in April of 2020. ExchangeRight, prepared to bring out an offering $120 million when we heard from the banks that they were all closing down their lending programs at the outset of the COVID-19 crisis. So in response, our team worked together to make that 100 and $20 million offering and create two smaller all cash offerings, working with the regional leaders to bring out offerings that continued to meet the leverage needs of the market, while larger banks got online. Finally, the cmbs lending hand open up their programs again, and we were able back producing portfolios in the 100 million dollar plus range as the demand of the offering surge. We put out a levering portfolios since the pandemic began, and the reservations for a product remained overwhelmingly high demand, the competition for Acquisition targets is also significantly increased. So we've had to work harder and smarter to keep our normal pace, while not all sacrificing the quality of the portfolio's we produce. It frankly, has been a challenging, challenging time. But we're glad that we're facing these kind of challenges, rather than having issues with our rent collections, investor distribution cuts and other performance difficulties.
Douglas Heikkinen 09:07
With more investors turning to alternative and alternative investments, what are the most important things an advisor should know?
Weldon Evans 09:17
alternative investments offer a distinctive diversification advantage that investors should be aware of. The advisors should know that the alternative investments are generally built to provide substantial and ongoing income with cash flows that typically range from four and a half to six and a half percent on the equity investment. income streams can increase or decrease based on the performance of the assets. The pandemic has shown us. What types of investments perform well regardless of the economic volatility. pricing for alternatives is often not correlated to the stock or to the bond market. Rather, the value is tied to the underlying real estate asset and their value. And often their cash flows and their noi. And unlike fixed annuities, properly structured and managed, also not pay distributions from investors principle, but instead the cash flow is generated by operating income from the assets themselves. And that vein when selecting from among different offices, it's important to pay attention to what's called the FF o coverage. And that's how much of the dividend is covered by funds from operations. If you're placing your clients capital into a DST or into a read, that is, the dividend is less than 100% covered that offering, maybe returning your clients own principal is cash flow, or that offering maybe using financing, it may come back to bite your clients with long term erosion of their equity value. So you'll want to pay attention to the FF co coverage of alternatives that you look at to ensure that your client is getting return on their investment and not a return of their investment.
Douglas Heikkinen 11:06
Everyone says it's important to have an exit strategy. But ExchangeRight seems to be the seems to place special emphasis on that. Why is this so important for advisors, and what's exchange REITs specific exit strategy,
Weldon Evans 11:21
ExchangeRight grew out of the wealth management business. And we clearly carry that client centered focus with us in every decision we make. As part of that mindset, we don't just care about preserving investors, capital and income through the whole period of a particular often, we care about preserving the capital, through the end and into the future, we want to put the investors in a position to know that they will eventually achieve liquidity, we want to provide them with the flexible exit option, so that they can make the best decision for their particular financial situation. And we want to give them the peace of mind that they will receive a favorable total return that can carry them forward. In exchange, right, we value beginning with the end in mind. So we're quite clear sighted about what our long term aggregation and exit strategy is, as individual net leased offerings from our total assets under management go full cycle, we intend to continue to aggregate those assets into our replatform. So for net leased offerings that have done this already, each time we've given investors flexible options 100% of the capital and modest appreciation, investors have had the option to cash out to perform another 1031 exchange or to perform a tax deferred 721 exchange into the acquiring aggregate offering. Part of our overall aggregation strategy is that our investors who take the 721 option, or gain increased liquidity, value and security by investing in aggressively more diversified portfolio, we're well on the way in executing the strategy building from our current au M. assets under management of over $3.5 billion. We're continuing to add to our total assets under management by about $600 million per year. Once our total aggregated reef portfolio reaches a competitive size, approximately four to 5 billion. Our intention is to take the reef to the public markets where we'll either a direct a public listing, and IPO a sale or a merger is we're working toward the aggregated portfolio, we have the opportunity to create value for the current shareholders both in our 1031 in and our rIq platforms that optimize optimize tax deferral, total returns and investment options at exit. Given our research into the market, we believe that this aggregated offering is going to be very attractive. Once it's time to go public. We're constantly tracking the performance and metrics of publicly traded net lease rates, those most similar to the exchange rate replatform to ensure that our portfolio and our offering construction are on track to exit and liquidate the strategy. When you look at those public traded net lease reads, their historical dividends are in the range of three to 5%. Whereas the average dividend yield on an exchange right asset under management is over 6.8%. The noi from our net leased assets is generated from primarily investment grade credit tenants operating essential businesses in comparison to the publicly traded net lease rates with 50 to 75% from non credit or franchise tenant during the COVID-19 pay endemic on average publicly traded net leased reads, we're only collecting around 80 to 90% of their rents given to the exposure to discretionary retail assets, exchange REITs. Discipline acquisition focused led to 100% rent collections during the same period due to the financial strength and the simple essential operations of our tenants. So we're optimistic that when we go public, we will have a product that will be attractive in its own right, and again, provide more stability relative to the competition in the public markets, allowing us to provide more opportunities and advantages to our investors. Of course, past performance does not guarantee future results, correct.
Douglas Heikkinen 15:48
ExchangeRight's passion to empower people to be secure, free, and generous. Why is that so important?
Weldon Evans 15:58
Well, we are faithfully committed to achieve the best outcome for those for whom we serve. Having a heart this servant oriented, allows us to serve our clients, our team, our community, with humility and generosity. We invest in underserved communities throughout the world, we invest alongside with our clients. We take the long view to protect our investors, employees and industry partners, so that we can compound trust to grow our businesses and impact ever since our founding, advisors and other industry partners have helped us empower charities so that we believe we are among the best at addressing the needs for those who are most vulnerable. We conduct due diligence for each charity focused on we look at their financials, their operation, their governance, their infrastructure, key leadership, and results by supporting these organizations with donations and matching contributions from the industry. And with the help from our advisors, investors and representatives, exchange rates been able to donate over $40 million to charitable aid.
Douglas Heikkinen 17:16
That's great. Well done. That was awesome. Thanks so much for joining us today.
Weldon Evans 17:20
Well, it's been a real pleasure, Doug, thanks again. And if anyone has any questions, feel free to reach out to us at ExchangeRight and we'd be glad to have a personal conversation with them. All right, again,
Douglas Heikkinen 17:31
That's exchange right dot comm. For everybody and Advisorpedia our producer Jakie Beard and the Power Your Advice podcast team. This is Doug Heikkinen