Striking a balance between conserving cash and being prepared for when opportunity knocks sparked a thoughtful and spirited conversation between Caliber CEO Chris Loeffler and director of corporate development Travis Okamoto during July’s CEO Call with investors last week.
Loeffler returned this month after passing the reins to company execs Tom Bade and George Pace for the June update. He and Okamoto immediately dove into the current business environment and the challenges COVID-19 have created after 12 years of exponential growth for the company.
“With your conservative hat on, the approach is let’s protect the business and make sure that we can survive anything,” Loeffler opened, “but to also keep your ears open because there are opportunities out there right now, and we have the team, the know-how and the experience to execute on those. It’s kind of a two-pronged approach.” Okamoto likened the tact to “dancing in the rain,” “weathering the storm” and avoiding getting soaked.
Loeffler explained the need early on during the outbreak in March and April to refinance certain projects and move funds into particular projects that required extra cash, and to tighten up expenses at the corporate level. “We just try to remain flexible in this climate,” Loeffler says. “We’re starting to see investors come back and we’re starting to see projects that are attractive coming to us at a discount.”
The two agree that the coronavirus has forced Caliber to rethink how it communicates internally and externally with customers, investors and employees, with one of “the saddest casualties” being unable to host the company’s Annual Summit, Okamoto says, due to social distancing constraints.
The situation has created the need to innovate to stay connected by hosting more online talks and seminars to discuss strategies and various projects, such as the recent partnership announcement with coworking leader Launch Pad to occupy a Caliber Opportunity Zone property in Mesa. Loeffler, Okamoto, Caliber director of acquisitions Rodney Riley, Sen. Martha McSally, Mesa Mayor John Giles and the founders of Launch Pad Anne Driscoll and Chris Schultz hosted an online conversation regarding Opportunity Zones and the need for collaborative projects and partnerships. Hundreds of investors, media members and other VIP listened in while remaining safe and socially distant.
The coronavirus outbreak also affords the opportunity to show investors “how our business model is structured in a formulaic way, where we can see our revenues and our fee structures in advance,” Loeffler says.
Generating Revenue, Understanding the Market
Using the Opportunity Zone Fund as an example, Loeffler says the company earns revenue from forming capital, and an annual asset management fee, which grows over time and is used for forecasting. “We can say, ‘OK, let’s make sure that our asset management team, which is supported by that fee, doesn’t exceed the income that we’re earning over that period of time,” he says. “We are then going to take the capital and deploy it. We’re going to buy assets. We know that we’re going to earn income from brokerage fees when we buy those assets. So, we can see, not only the first purchase, but in five years down the road, and we can sell those assets.”
Loeffler used private equity investment firm Blackstone as an illustration of his formulaic approach, where in 2006 Blackstone purchased Hilton Hotels at historically high levels just before the 2008 crash. Because Blackstone is privately held and not forced to sell assets, the company was able to engage and work through Hilton’s issues, ultimately selling the company 10 years later for a record profit.
“People are not going to build new hotels for the next couple of years,” Loeffler says. “Some are going to buy hotels, us included. Some are going to convert to apartments which will take supply out of the inventory. So as long as you have staying power, a good quality management team and strategy, you can come through this type of the downturn and still sell at a really great price.”
Other July CEO Call Highlights:
- Caliber’s hotel management partner Highgate has reported week-over-week improvement in occupancy rates during the past two months.
- The company is exploring distressed hotel sales and converting to apartment and micro-dwellings.
- Large communities with single-family homes operated as apartment complexes is a growing trend and one that Caliber is exploring at The Ridge in Colorado.
- Time is running out to move 2019 capital gains into the Caliber Tax Advantaged Fund LP.
- The Caliber Fixed Income Fund III LP was restructured to allow a preferred rate of return, currently between 8.25% and 9.25% if locked in for a year or more.
- Opportunity may be found in converting downtown high-rise office buildings into multi-family.
- Caliber’s new pre-IPO stock option recently topped $2.2 million.