[00:00:03] I want to talk today a little bit about asymmetrical risk reward; and I love talking about this, because I was recently reading a memo written by Howard Marks, he's the founder of Oaktree Capital, and really widely respected as a legendary investor in the institutional investment world. He wrote something in that memo that struck a chord with me, and what he said is, "Asymmetry..." (this Howard speaking) "...is my word for the essence of investment excellence, and is the standard against which investors should be measured". And what Howard is saying here is that investment excellence lies in the asymmetry between the results of an investment in good times, and how it performs in bad times. When it comes to real estate investment, I think that Paladin has a pretty good perspective on what works in good times and bad times: we've invested in over $7 Billion of real estate across the past three decades in eight different countries - nearly $1 billion of that track record was in value-added apartment investments here in the US, and half of those investments were in Southern California. And that particular subset of our portfolio - workforce rental housing in Southern California, has proven to be among our most consistently profitable and cycle resilient strategies. What do I mean by that? What I mean is that in good times we can earn outsized value-added returns, almost the same level of returns that you would get on a new development project, but with far less risk. But more importantly, during recessions and market downturns, it means our equity is relatively safe and our occupancies are relatively stable, and therefore we have durable growing cash flows.

[00:02:02] So, in short, our SoCal strategy historically for the last 30 years has delivered exactly the kind of asymmetrical risk reward that Howard Marks was talking about, and let's talk about why that's the case. There are several factors: first, the abundance of value-added opportunities that exist in the Southern California apartment market. And we've talked about this topic at length in other videos, but in a nutshell, there are very few institutional players like Paladin competing for deals in this market, because the typical asset size is very small - 50 units or less. It's just too management intensive for most institutional investors. So this means we avoid the kind of costly auctions that typify most other US markets, because we're buying from a less sophisticated, large fragmented pool of "mom and pop" sellers. And because of the lack of institutional ownership in this market, the properties that we target have huge value-added potential. They're poorly managed, they're rundown, current rents are typically 20% to 30% below market (that's what we call the lost lease). And in a low cap rate market like Los Angeles, the upside potential of capturing that 20% to 30% loss to lease can be enormous. I'll give you an example of that: for every $1.00 of increase in cash flow that you're able to generate in a value-added business plan, in a market like Los Angeles, where cap rates have been in the 4% or 5% range, that produces $20 to $25 of appreciation in market value for every $1.00 of cash flow.

[00:03:49] The upside potential is enormous in this marketplace. So, we captured that one half of the asymmetry, now let's look at the other half - the downside protection. And that's really where the true asymmetry lies. The older Class B, Class C assets that we buy, they are truly irreplaceable, low density assets in one of the most supply-constrained markets in the country, with the highest barriers to entry of virtually any market that I've seen. So, we end up having a huge cost advantage relative to new construction, typically a 50% or more discount to replacement cost. You can't find that cost advantage in any other US market where ownership is dominated by sophisticated institutional investors, and where auctions are the norm. Further, because we're in one of the most supply constrained markets in the US, we're targeting a different kind of renter than you find in many other markets - it's a renter by necessity. It's really a permanent renter class here in Los Angeles. They don't have any affordable housing options other than our type of properties, without facing very long commutes. And what we're providing is an essential need. It's really the only affordable housing that's of any type of quality that is infill and close to the jobs. So, the demand for our properties is resilient. Class B, Class C apartment properties have historically stayed filled during recessions. The last two recessions, occupancy was 95% to 98%.

[00:05:36] But lastly, because we're targeting this permanent renter class, and because we have this huge loss to lease, where market rents are here and current rents are here, the assets that we target have pricing power that you don't normally have when you own real estate in a recession. We actually have the ability to raise rents in our property, even if market rents dip. So, if we've got a 30% difference between market and current rents, and market rents go down by 10%, and a tenant moves out, we can raise rents by up to 20%, if rent control will allow us to do that. So, it's a pricing power, frankly, that we've never had in any other market, and it's one of the reasons that we're really focused here on Southern California. So, we completely agree with Howard, that investment excellence really lies in strategies that offer asymmetry of returns - that do well in good times, but more importantly, protect invested equity during bad times. And if you look at our US apartment strategy over the last 30 years, it's delivered exactly that type of asymmetrical return to our investors across multiple cycles of good times and bad times. We've sold - of the 90 investments that we've done, nearly $1 billion across this strategy over the last 30 years - we've sold 83 to date for mid 20% IRRs to our investors. Half of these assets were in SoCal, and the SoCal investments were among the best performing, for all the reasons I just described.