My 90-year-old grandmother called me at 11:06 PM on a Thursday night in early March. She followed up the 60 second voicemail with a text at 11:08 PM. It read, “The stock market crash has destroyed my account. Hope you aren’t hit like that.” The COVID-19 virus, panic, and economic pain are sweeping across the world.
Grandma wanted to know how my RV parks are doing. The resort she has lived in for many years is not doing very well, so she was concerned about my investments. I told her the truth, which is that I know that my investments will be affected, but I am well positioned to endure the circumstances. I am not fearful, but optimistic about my opportunities to buy more parks cheaply.
The debt across all my RV parks is about 25% loan-to-value. Debt service is very manageable and even non-existent at some properties. Each property has steadily covered expenses and distributed cash flow. Cash reserves are high. The RV parks are located in places where we are not dependent upon a single industry such as oil, tourism, or passing travelers. We typically have strong demand for long-term sites which provides some stability to the income. Each of these characteristics are in place by design.
Optimism about my RV parks is not the same in all my other investments. I have had several business tenants fail over the years and it seems likely to happen again in the coming months. Many of my industrial, retail, and office tenants are in businesses that are being especially hard hit by the virus (i.e. restaurants) and economic downturn (i.e. oil services). I already heard from one tenant who will request rent abatement. Although pain seems inevitable, I have excellent cost basis, low debt levels, adequate cash reserves at this moment, and diversified tenants and properties.
I do not own any apartment buildings, but I’m thinking about many who are in that business. In my opinion, many sponsors, especially young and flashy ones, have overbought apartments in recent years. Debt for apartments has been ultra-favorable and I’ve seen many pro formas try to prove that trees grow to the sky. For the last couple years, my view has been that mutlifamily sponsors are buying overpriced assets with high leverage and dependence on significant rent growth. I chose another path when too many others turned aggressive in their buying.
I chose RV parks as my niche for several reasons, one of which is stability in recessions relative to my industrial, office, and retail investments. I have been careful to buy RV parks where numerous industries exist and people vacation affordably. I have jobs and tourism surrounding all my parks. I waited patiently and passed on many deals by demanding obviously low purchase prices in a time when few assets have been underpriced. I opted for ultra low leverage and sacrificed cash-on-cash yield in the process. I stress-tested my investments and carefully considered how I would do in a recession or price battle with competitors. I managed risk in anticipation of an inevitable recession.
This virus seems to be a black swan event and I may experience a change of confidence. However, as I assess things today, I think I have positioned myself and my investors well to capitalize on a recessionary environment. I told my grandma that I plan to buy. She didn’t expect that reply.
