JF2563: Current Economic Health of Our Country with Mitchell Rosen
Investor, Senior Director, and Head of Real Estate Mitchell Rosen talks with us today about the economic health of our country and the benefits of partnering with Yieldstreet. Yieldstreet is an online digital wealth platform that provides commercial real estate resources to those investors who may not have access to them. We’re talking with Mitch about Yieldstreet’s ideal investor, which assets they’re currently searching for (and which ones they’re not), and future events that could possibly disrupt the market.
Mitchell Rosen Real Estate Background:
- Senior Director, Head of Real Estate at Yieldstreet
- 20+ years of CRE investing experience
- $465M in investments to date
- Based in New York, NY
- Say hi to him at: https://www.yieldstreet.com/
- Best Ever Book: Den of Thieves
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Ash Patel: Hello, Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Mitch Rosen. Mitch is joining us from New York City. He’s the senior director and head of real estate at YieldStreet. Mitch has over 20 years of commercial real estate investing experience and has $465 million in investments to date.
Mitch, thank you for joining us. How are you today?
Mitch Rosen: I’m fantastic. Thanks for having me. How are you doing?
Ash Patel: Wonderful. Before we get started, can you tell us a little bit more about your background and what you’re focused on now?
Mitch Rosen: Sure. I’ve been in the real estate investing space most of my 21-year career. I worked at an investment bank out of college for one year, I spent about two and a half years at a publicly-traded commercial mortgage REIT, focused on mezzanine and subordinate debt lending. I then joined a hedge fund called Marathon Asset Management in 2004, as they launched the bridge lending program, spent nine years there. Through the great financial crisis of 2008, then back-to-back downfall from the trading of various CMBS securities, which are bonds backed by commercial real estate loans, as well as private direct lending in the CRE space. I then went to go work for another alternative asset manager called Brigade Capital in 2013 to lead their effort into the investing of the CRE space.
I joined YieldStreet in October of 2018. It’s been a fantastic run, we’ve grown the team immensely. And we do focus here on all aspects of real estate, including senior bridge loans, mezzanine lending, preferred equity, as well as equity investments and direct real estate. And most recently, we just launched SFR/BFR strategy with a new hire… Coincidentally, a colleague of mine from Marathon back about 12 years ago.
Ash Patel: What is SFR and BFR?
Mitch Rosen: So SFR stands for Single Family Rental Product, and BFR, B as in boy, stands for Built-For-Rent. So building single-family homes for the intention of renting them, versus selling them as sale product.
Ash Patel: High level, what does YieldStreet do?
Mitch Rosen: YieldStreet is an online digital wealth platform with the mission and goal of providing access to the average retail investor to alternative products they otherwise would not have access to. When you think about most investors, investment funds or portfolio, it’s often heavily weighted towards stocks and bonds, mutual funds, ETFs, etc. And the fact is that—and you know this all too well, looking at your own background, you found the benefits of CRE in commercial real estate investing. And we’re trying to provide not just CRE, but other asset class investment opportunities for our users that they really can’t source and find anywhere else. And we’re doing that in a very technologically enabled transparent format, that is low on friction costs, low on time, and ease of use, and bring that to the masses.
Ash Patel: Who’s your target user?
Mitch Rosen: Our target investor is what we call the term HENRYs (High Earning Not Rich Yet). These are folks who have capital to deploy in a bucket of capital that is not as liquid as say stocks or bonds, but wants exposure to those asset classes. Our average investor has over $85,000 invested on our platform across the 5-6 different transactions. And so the view is that we want to get them into our ecosystem and show them the benefits of what we can offer them, and hopefully they grow with us.
Ash Patel: So there’s going to be a fair amount of education that you have to do to high net worth investors that are not currently exposed to real estate.
Mitch Rosen: That’s correct. It’s not just real estate, we also have a marine finance business, we have a litigation finance business, an art finance business and a private business credit vertical. The question is a very relevant one—education to this investor demographic is really key. Most investors that we interface with do not have the experience to decipher the risks and opportunities between say, a 7% first mortgage loan and a 10% mezzanine investment. And so what we try to do is to distill that information in a very digestible way, to best educate them as to what those risks are, what to be thinking about, and how to position this in a portfolio. We’re not giving investment advice, I want to be clear on that. We’re giving these investors the tools to make their own decisions, by providing that information in a very clear, concise manner.
Ash Patel: Let’s do a deep dive into some of the real estate investments; you have notes, you have different asset types… What kind of returns range are we looking at?
Mitch Rosen: Since inception, YieldStreet, in particular on the CRE side, has focused on the lending side of the business, primarily first mortgage bridge loans. Figure these were loans with coupons between 8% to 12%, terms under 2-3 years, secured by all types of assets – hotels, office, multifamily, industrial and retail. I would say that we still look at all those asset classes; we’ve done virtually nothing in the healthcare space, skilled nursing memory care, and we’ve done virtually nothing on the self-storage side. Those are both two asset classes that I don’t really know as well. And more importantly, I view them more as operating businesses than I do CRE. As time has evolved, and given my background in the more higher yielding structured lending space, we’ve also been investing in preferred equity investments, as well as mezzanine investments.
Ash Patel: Mitch, is there a minimum amount that an operator can come to you with looking for capital?
Mitch Rosen: Good question. Yes, so our model is a bit unique, in that of the, call it 400+ million of deals we’ve closed in the CRE vertical approximately in the last three years, I’d say 75% of that is originated with partners. So these are folks who have origination platforms and they have capital to invest alongside us. And so typically, the smallest check that we would do is probably about $3 million.
Ash Patel: So this would be more for syndicators that are already existing, to supplement their raise?
Mitch Rosen: Yes. But when you say syndicators — that’s a fair way to say it. Yes, our partners are established origination businesses, primarily on the lending side, who are looking to scale their businesses and find a programmatic partner. And oftentimes, that’s what we bring to the table, right? We know the space very well. We know how to structure our deals optimally, how to avoid risk and how to kind of optimize for risk and mitigate risk. So we bring something to the table as well in terms of maybe more robust documents, more robust covenants, things like that, that also provide value to our partners. But yes, we are an off take, if you will, alongside our partners as we originate new loans.
Ash Patel: And do you invest in any real estate yourself?
Mitch Rosen: Yes, I do. I’ve typically been investing at YeldStreet personally through our 40 Act Prism Fund, which is a diversified portfolio. Yes, I do it on my own, but I wouldn’t call that necessarily investing.
Ash Patel: If somebody gets onto YieldStreet, looking to deploy capital, where do they start?
Mitch Rosen: Great question. So yieldstreet.com is a great place to start, which is our website. If you go there, what you will see is a whole range of investment opportunities that one investor can, first, obviously, sign up for, meaning, just log into the website, create an account, it’s quite easy and quite efficient.
Now to invest in some of our products, you do need to be verified accredited, which is a process; it’s not that long a process, but it’s one that needs to be done proactively. The only product we offer to date that is available to any investor, regardless of accreditation, is our Yieldstreet Prism Fund, which is a 40 Act closed-end fund that we offer only on our website. And that product offers investors to get access to all the various verticals that we originate product for, which I mentioned earlier, in one single investment product
Ash Patel: Is there a minimum hold period for some of these?
Mitch Rosen: Of the single investment offerings in the CRE side, particular in others as well, these are single investment SPVs; so there is no liquidity to date in those investments. So if you bought in an investment for 24-month term, you are locked into that transaction until it repays or refinances or is sold. So there is no intermediate liquidity in our single investment offerings to date.
Ash Patel: On the CRE side, is it more focused on multifamily, retail, office, all the above?
Mitch Rosen: I’d say all the above; we definitely have a view on certain asset classes. We like grocery and shopping centers, we dislike malls and high-end retail. We like leisure hotels, we don’t like business-oriented hotels or Convention Center hotels. Multifamily is always a very attractive asset class; same with industrial. I would say we like land as well. For the right partner and the right basis, we like lending on land. In terms of office, I’d say, that’s definitely the hardest asset class right now to triangulate; a lot of moving pieces, a lot of uncertainty. So I think right now, that’s a hard asset class for us to get really comfortable with.
Ash Patel: You said that your partners bring you the deals. How do you become a partner with YieldStreet?
Mitch Rosen: We work with what we like to think of as best-in-class partners. These are originating platforms that have been originating real estate loans for multiple years, with a track record that’s demonstrable, that we could point to and look at and underwrite. We don’t just take anyone who wants to syndicate a piece of a loan they have. In fact, I would say we probably reject 95% of people who reach out to us to do so. But once they connect with us and we kind of vet who they are, what they’ve done and review their processes and their internal team structures, once we get that one deal done, it oftentimes results in multiple deals getting done in short order, because that comfort level, the documentation has been baked and prepared, right? So assuming you have a very similar view on the real estate, the documentation part, which is offered at a high friction point, has already been baked and done, and you can just scale the business that way.
Ash Patel: What’s your biggest bottleneck in your business right now?
Mitch Rosen: Wow, great question. I would say right now, decompression in yields across the markets, in lending in particular, has really made it hard for us to be competitive to source new business and source new deals. So it seems like it’s a race to the bottom in terms of removing yield maintenance parameters, removing typical covenants you’d want to see in a traditional lease that protects a lender… And a lot of capital chasing deals out there, and so that’s probably the biggest challenge that I would say we see today.
Ash Patel: And Mitch, prior to the pandemic, I’m assuming you had some exposure to class A office. How has that held up?
Mitch Rosen: It’s a great question. We actually didn’t have a ton of office exposure. And the reason being, I would say that we’ve typically focused on the higher yielding, higher leverage first mortgage product. We had definitely some hotel exposure and retail exposure, but minimal. But office was often a very unique circumstance. So for example, I’ll give you one specific example… We financed a suburban office property in Santa Fe, New Mexico. And you may say, “Well, why would you be in Santa Fe, New Mexico?” We had financed a borrower who secured a 20-year lease with the state. So they were looking for acquisition funds to acquire the property and to complete the build out, so this lease could commence. So our risk there was not really tenant-related, but more execution of closing on the property and delivering the space as the lease prescribed.
So that’s a deal where you may scratch your head and say, “Well, Santa Fe, suburban office… What’s the angle there?” And I’ll just highlight a few — what we looked for, what we liked about it. So would you call that class A office? I’d say probably not. I would say the tenant quality is Class A, and the return profile we got for that associated risk was quite attractive. So those things have worked out, actually; we’ve not had really any disruption in the office asset we had.
Ash Patel: Any exposure to the hotel industry?
Mitch Rosen: Yes, we have currently about two loans left, we had about five entering COVID. A bunch of those have paid off. The two we have left have both been extended and forbeared as is expected in this marketplace today. The key there is working with borrowers who are being constructive and working to solve problems. To the extent that they’re willing to do that, we’re willing to work with all of our borrowers. At the end of the day, my job and our job here at YieldStreet is to provide the return we prescribed to our investors in the timeframe we allot them. When stuff goes sideways, we need to pivot and be responsive, but we don’t want to own real estate; that’s not what we’re here to do. So if I have a borrower who’s willing to play ball and be constructive, we will always work with them.
Ash Patel: You mentioned some of these assets go into SPVs as single-asset funds.
Mitch Rosen: Yes.
Ash Patel: So in that case, those investors during forbearance do not get a return?
Mitch Rosen: It depends. Every deal has its own circumstances. Most forbearances in our case – there may have been some form of a default; it could be technical, it could be a maturity default… However, the borrower [00:14:39].19] pay interest, they are willing to enter into a modification of the agreement with us. That could be a combination of a principal payment, chewing up insurance reserve, chewing up a tax reserve, chewing up an insurance reserve. When they’re committing more capital to that deal, I have no problem forbearing a default to get to a place of getting us repaid.
Now, if a borrower calls us and said, “Listen, guys – tough luck. Give me a forbearance, I’m not putting any more money up. And I want a waiver.” That’s a hard conversation to have. So in the cases of our forbearances, we are earning, accruing an interest return of some prescribed amount. In many cases, it’s also being currently paid. In some cases, I will say, it has been more of a pick structure, right, where there’s an accruing balance of time that’s going to be paid upon resolution.
Ash Patel: Yes, a great example of having that conversation and creating a win-win.
Mitch Rosen: Yes.
Ash Patel: So in terms of yields right now, what are your thoughts on the future, 10 years or all over the board?
Mitch Rosen: I learned early in my career in real estate there’s two things you really can’t underwrite, maybe three things; the first is interest rates, and the second is environmental risk. So I’ve always tried to be thoughtful about what can I have a constructive view on, and what am I really just kind of guessing on?
So in terms of yields and where those are going, I have an opinion; I wouldn’t say it’s quite informed, it’s really more about just what I see in the marketplace. But the fact is that we’ve been in a very low rate environment for many, many years, since 2007, since 2008… And I think we’re almost addicted to that environment right now. I think any meaningful move higher and that’s going to really cause a disruption in the marketplace. And so I don’t really see a scenario where we move back to LIBOR at 550 or over, or 450 or over, like it was in June of 2007. So that often should lead one to invest in inflationary, gaining assets, like real estate, right? Rents are going up, the values are going up; either lending to those or investing in them as equity, you should benefit from that asset inflation.
The key though is ensuring that you’re protected on the downside, right? So we need to get out and you want to hit the exit button. If the marketplace is dramatically different from a yield perspective, you could get impacted. And so I think unfortunately, right now, if you look at the marketplace, a lot of optimism, a lot of betting on future rent growth, that may or may not come to fruition, and picking the right market, picking the right property is really key there. So I would say rates would be higher in 10 years out for sure; I can’t see it being this low for that long. I think the repercussions are quite dramatic. Where that would shake out – I don’t have a great answer for you. I think the 10-year shouldn’t be sub 1.5%, I’ll tell you that. I think it should be probably mid 2% to 3%.
Ash Patel: Yes, I keep getting surprised on that one.
Mitch Rosen: Yes.
Ash Patel: Any thoughts on the eviction moratoriums and the impact that will have on the real estate market?
Mitch Rosen: It’s a difficult question to answer, because I definitely empathize with people who have suffered immensely through COVID. People’s lives have been materially disrupted; their jobs, their livelihoods, their families. At the same time, to have the landlord’s bear that is also maybe not a fair way to treat it. Those same owners have lenders, they have taxes to be paid, utilities, expenses for people that work on the properties… I think there’s some people who may try to be very constructive in finding solutions there. At this point now, a year and a half in, there’s a meaningful burden being placed on real estate owners, especially on the multifamily side, that has really meaningful repercussions down the road; I don’t think are being really taken into account.
So ideally, what you’d want to see is a format where owners and renters find a common ground to work together, like I mentioned with the hotel deal I highlighted. [unintelligible [00:18:09].04] happening right now; I think the moratorium is effectively providing shielding for those homeowners, or those renters, I should say, to not be constructive in trying to find solutions. Now, [unintelligible [00:18:18].08] can pay or not pay, I don’t know the answer. The hope is that if they could pay, they would try to pay. If they can’t, they would raise their hand and say, “I need help,” and I hope that help could be there for them. But I do think it really creates additional complexity and trouble in the marketplace, that is hard to triangulate and think about.
Ash Patel: Mitch, how does YieldStreet attract the HENRYs, the high earners?
Mitch Rosen: So that’s the special sauce, right? How do you source those investors? How do you bring them into the ecosystem? And how do you keep them there?
We have a whole team dedicated on the marketing side of how do we message to the users? Where do we find them? What do we speak to in terms of their needs, their desires, their goals? A lot of it is social marketing, a lot of it is coming to market, a lot of it is referrals… People who have come to the platform had a great experience and refer their friends. A lot of it is doing podcasts like this and getting our message out.
We are, I would say, a very well-known platform out there across multiple asset classes. There’s some competitors of ours that are single asset only; we really provide a diversified opportunity set across multiple asset classes, including the most recently structured notes, which you really can’t find anywhere else for a retail user. So where you help to grow that user base and continue to expand it over time. But a lot of is kind of word of mouth and marketing.
Ash Patel: Are some of your partners big Wall Street banks when it comes to the CMBS loans?
Mitch Rosen: We don’t really play in that sector; that’s often a 10 year fixed-rate product on more stabilized assets. Right now, triple-A CMBS bonds are trading at about swaps plus 75 basis points. So you’re looking at all in on a 10-year loan, or a 10-year bond, I should say, under 2.5%. So that’s not really an avenue that we’re playing in. CMBS, this year, actually, the traditional product I’m highlighting, is actually — issuance is lower than the CRE CLO market in 2021. And that market’s more of the bridge balance sheet lenders who issue their own liabilities to finance their balance sheets. So it’s the first time that I can [unintelligible [00:23:09].12] ever, where you’re seeing conduit or fixed rate CMBS loan issuance is lower than a floating rate product. I can’t recall a time ever where that happened. So I think it speaks to the growth of the private lending market, the growth of insurance companies and the growth of alternative lending opportunities that may be more competitive and more attractive than traditional Wall Street bank CMBS lending.
Ash Patel: With the amount of money that’s on the sidelines, what possible event can negate that?
Mitch Rosen: Let me think about that for a second. [unintelligible [00:23:40].27] will not be the thing that actually triggers it, right? I think a common buzzer out there now is inflation. Another one is fear of another wave of COVID or some other fear of a dislocating event that you really can’t pinpoint or solve for quite easily. Inevitably something will arise. It could be something like the [unintelligible [00:23:58].09] default in Asia, but it’s on a bigger scale, or a specific sector of the marketplace that really implodes. I don’t know what it’s going to be, but I am confident that something will be happening that will cause people to reset expectations, to reprice risk, to think about risk in a different paradigm… And inevitably, it does come back. The question is, how quickly, and to what extent? But if you look at where we are today versus where we were in February of 2020, in the month before COVID really hit us, I would say we’re well through spreads, tighter spreads, high yield bonds are trading the lowest point relative to treasures in, I think, ever… So people are not pricing risk appropriately on a historical basis. So there’s a lot of susceptibility to a market movement or gyration that causes a lot of volatility and pain. I just don’t know what that’s going to be, I don’t have a view on that.
Ash Patel: Yes. And Mitch, this is probably a question you don’t get very often, but what is your best real estate investing advice ever?
Mitch Rosen: My best advice I would say is go with your gut and do what you know, versus don’t do things you don’t know. I find oftentimes that real estate investors tend to follow trends, rather than stick to their knitting. And when you try to be an expert in all, a master of none, you tend to stray from what made you successful in the first place.
So when I think about my own career, I’ve not been, for example, a balance sheet construction lender before, managing a construction project, stepping in when a problem inevitably happens, and budget overruns. I’d rather work with partners who have deep expertise and benches of experience to facilitate investing in that space, right? I know what I know, and I know what I don’t know. I say maybe that’s a better way to say it – know what you know, know what you don’t know, and invest accordingly.
Ash Patel: Yes. Mitch, are you ready for the Lightning Round?
Mitch Rosen: Let’s go. Let’s do it.
Ash Patel: Let’s do it. Mitch, what’s the best ever book you’ve recently read?
Mitch Rosen: The Den Of Thieves, which is a book taking place in the ’80s. Ivan Boesky and Martin Segal. I’m very nostalgic of the ’80s. I think of that time as a really, maybe even a corollary [unintelligible [00:25:54].02] ways to now. Wall Street and finance was booming, a lot of money to be made, a lot of people got over their skis and made some mistakes… The book reads like a fiction book, but in fact, it was real, which is the interesting part about it.
Ash Patel: What’s the best ever way you like to give back?
Mitch Rosen: I always support a lot of charities around the environment. I’m also on the board of my local synagogue, so I give back that way as well. But I really am a big believer in environmental impact and trying to protect our planet and think thoughtfully about water purity and air purity and animal preservation, and forestation, stuff like that.
Ash Patel: Mitch, how can the Best Ever listeners reach out to you?
Mitch Rosen: Great question, I would say come to the YieldStreet website and shoot us any questions you have. I’m responsive, I’m happy to kind of answer any questions people have and get them educated, get them in the ecosystem and get them involved.
Ash Patel: Well, Mitch, thank you for taking time out of your day today to share some of your thoughts on the overall economic health of our country right now, and teaching us a little bit more about what YieldStreet does. So we appreciate your time today.
Mitch Rosen: Ash, I want to say thank you on behalf of myself and the YieldStreet team. Thanks for having us today. We really appreciate it.
Ash Patel: Best Ever listeners, thanks for joining us, have a best ever day.
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