Q3 2019 NEWSLETTER
The Rent is Too Damn High
A few weeks ago, I was driving down to my local Rite Aid to pick up some antibiotics for my sick kid. It was early evening, windows down, listening to a little Led Zeppelin (natch) and out of the corner of my eye I caught sight of an older man who was clearly homeless. His only two possessions were a beat up acoustic guitar and a cane. The red and white kind. He was blind, stumbling his way alone up toward Sunset, and looked like he could use a hand. I parked, hopped out, and approached him. As I put my hand on his should, I simply said, “Hey. You look like you could use some help.” He asked if I would help him cross the intersection – he was trying to get to the Coffee Bean to get something to eat. Dancer (that was his name) was in his mid-sixties, completely blind in his right eye and partially blind in his left. He had rented a room earlier that week from someone who tried to sexually abuse him and who pawned his guitar - his only means of making money - while he slept. Fortunately, he got his guitar back, but the entire event left him traumatized. Dancer also struggled with mental illness. We talked about how he wound up with rudimentary stars tattooed across his forehead. He cried a lot. He had no family. No friends. We talked for a while. I bought him some food, water, yogurt, etc. and gave him enough money to buy a couple meals the next day. When it was time to part ways, I gave him a hug and he told me that he loved me for stopping to spend a few minutes with him and said I was “family” to him. That rocked me to my core because I think he really meant it. It had been so long since anyone had stopped to just look him in the eye and treat him like a human that even my tiny gesture was a monumental event to him. Those of us who live in Los Angeles are painfully aware of the growing problem of homelessness. In LA, the homelessness rate jumped 12% last year alone with a total homeless population of over 58,000 despite the passage of Measure H, a sales tax add on, that generated over $355m of aid. Alameda County which includes San Francisco, Berkeley, and Oakland has seen homelessness rates jump 43% over the past two years. Orange County is just on its heels at 42%. So what’s fueling this huge uptick in homelessness? Homelessness is an incredibly complex issue with myriad variety of causes including market forces, government policy decisions, zoning codes, and demographic changes. But largely, it’s being driven by our overall housing shortage, which in turn has
been driving up housing prices and rents faster than incomes. Nationally, there’s an estimated 7 million unit shortfall in the affordable housing market with 125,000 additional units lost each year to obsolescence. We’re adding 105,000 units annually, but that only stems the bleeding and affordable housing is both difficult and expensive to build. The “simple” solution is to increase supply of housing. But we can’t just increase the supply of high end and luxury apartments. We need to protect and revitalize more units that qualify as affordable and workforce housing. Because as Jimmy McMillan famously put it – the rent is too damn high.
How can we use our money to combat homelessness? Regatta IMPACT is working to combat the affordable housing crisis in a few ways. A number of the funds we use including CMM’s Liquid Alternative fund in our SRI model portfolio have a specific focus on addressing the affordable housing crisis. Most recently, we’ve joined forces with CommonGood to invest in direct multi-family real estate through Alliant Strategic’s Preservation Fund. The benefits of investing in multi-family real estate include lower volatility, asset growth combined with consistent tax-managed income, and low/no correlation to the overall stock market. Multi-family real estate also tends to weather recessions better than other real estate assets and can provide premium returns. The downside to owning multi-family real estate is that investors have to be comfortable giving up liquidity as these investments are intended to be held for 5 – 7 years. The Preservation Fund owns a number of affordable housing properties across the country with the express intent of ensuring that the properties remain affordable for low income and workforce families. We see this multi-family real estate investment as a win/win as it provides for the acquired properties to get a much needed makeover while ensuring that rents remain consistent with restrictions on how much they can be increased. The Preservation Fund is an illiquid investment available to Accredited investors. It is expected to provide annual income in the range of 4%-6% and has a target return of 14% per year. We still have a little room before this fund closes in late September so for anyone who wants to learn more, feel free to reach out.
MARKET COMMENTARY
What’s Doing Well in the Markets and Why?
August was a rocky month in the markets with the S&P dropping roughly 3% and the Dow down 5% off late July highs. Ongoing trade tensions have generated higher volatility in lieu of the market’s inability to decipher what’s going to happen between the US and China in the on-again / off-again news cycle. The trade war has particularly affected chipmakers like AMD and Nvidia as well as retailers such as Apple. Trade negotiations are expected to resume in September.
The dreaded yield curve also inverted last month which made plenty of headlines. The yield curve inverts when the yield on the 10-year treasury bill falls below the rate for 2-year treasury. The reason why this is wonky is because theoretically, you should get a better rate of return if you’re willing to tie your money up for a longer period of time. So when the yield curve inverts, it’s the bond market’s way of saying that investors are expecting a slow down in the economy, which in turn produces increased demand for long term bonds. And when long term bond prices increase, their corresponding yields decrease. Further, the 10/2 inverted yield curve has been seen as an historically accurate predictor of a recession. That doesn’t mean that a recession is imminent and a potential recession could still be several years away. As the trade war continues to play out, we’re expecting continued volatility and an escalation in the chances of a recession over the next 24 – 36 months. On the bright side, closed-end municipal bonds have been on fire. If you’re like most people, you’re probably asking yourself, “What the heck is a muni bond and why do I care?” Municipal bond funds invest in individual municipal bonds which are bonds issued by a state, municipality, county, or special purpose district (such as a school district or airport) to finance capital expenditures such as roads, schools, water and sewage line improvements, etc. All through 2018 and into 2019, closed-end muni bonds were trading at deep discounts mostly on fears of rising interest rates. So as we’ve shifted from a rising interest rate environment to a falling interest rate environment, these funds have appreciated significantly. That growth has been magnified by the fact that closed-end muni’s don’t issue new shares and therefore trade more like a stock than like a mutual fund (which is considered an open-end fund and continually offers additional shares). On top of that, closed-end muni’s use leverage (i.e. they buy $1000 of bonds using $350 of borrowed debt) which further amplifies both the ups and the downs. Another benefit of muni bonds is that they provide federally (and in some cases state) tax free income, which becomes more valuable for individuals with high marginal tax rates.
SRI PORTFOLIO
Performance Update as of August 31, 2019
Our most aggressive model, SRIV6, has returned 12.46% year-to-date. Similarly, more conservative SRIV5 and SRIV4 have returned 10.51% YTD and 9.9% YTD. On the taxable side, our tax-managed SRI portfolio has returned 10.85% YTD.
GOOD READS
Articles
Barrons – Companies that Embrace Sustainable Investing See there Sales – and Stocks - Rise Curbed – The Affordable Housing Crisis, Explained Forbes – America’s Affordable Housing Crisis Only Getting Worse The Atlantic – How Can the U.S. End Homelessness Investor’s Business Daily – Affordable Housing Crisis: What You Must Know About the Housing Bubble The Inertia – Impact Investing 101: How Your Money Can Have a Positive Impact on the Environment by Lee Clay
As always, we love digging into your ideas as well so please feel free to reach out with questions, comments, thoughts, ideas, or concerns. We’re all in this together. LC
Lee Clay, CSRIC™ Financial Advisor, ESG & Impact Investing Specialist REGATTA CAPITAL GROUP, LLC 880 Apollo St., Ste. 129 El Segundo, CA 90245 Phone: 310-220-9158 Fax: 310-725-9158 Cell: 310-429-1131 Lee@regattainvest.com www.regattainvest.com
The intent of this newsletter is to inform, inspire, and incite conversation around all things ESG (Environment, Social, and Governance) as it relates to investments and how we can use our money to generate financial returns alongside positive social and environmental returns.