[00:00:02] 2022. What a year for investors of any asset class. A lot of uncertainty and anxiety has come into the landscape this year. You've got inflation near 40 year highs. You've got a war raging for the first time since World War II, in Europe. You have interest rates that have gone up from close to zero by nearly four percentage points, with more rate hikes to come. Stock markets down nearly 20%. The housing market is doing an about face. Cryptocurrencies are going through a true meltdown right now. And so, it's understandable why a lot of the discussion on the financial media channels has been on defensive strategies. It's on every investor's mind. Investors are focusing on how their investments will perform in a potential downturn. So I want to spend a few minutes talking about our US apartment strategy and how we believe it's positioned to weather economic downturns and how it's performed, frankly, over the last 30 years. As you may recall from some of the other videos that we've produced, our US strategy focuses on really one asset class value-added investments in older Class B and Class C rental apartment buildings with a particular focus on the Southern California market. And unlike other markets, our SoCal strategy has never really been dependent on market timing. But there are four reasons why our strategy has historically provided strong downside protection no matter what the market cycle might be. First of all, we buy existing assets. We don't develop new housing here in the United States. We do in Latin America, but not here in the United States. We buy existing assets that are already generating cash.
[00:02:06] So, a stark contrast to any investment opportunity in a new development where you're making a bet on where the market will be 2 to 3 years from now. We've never really been comfortable with that risk in the apartment space. Plenty of players active in that space if you're interested in it, but not now. Second, we've always been conservative in our use of debt. Most of the assets that we acquire are only about 40% to 50% leveraged with fixed rate debt. We try to take any risk on the right side of the balance sheet off the table when we make investments. We try to avoid having any refinancing scenario during our holding periods in any kind of interest rate risk. Third, our assets generate cash flow day one, as I said, but they stay occupied. They tend to stay occupied during economic downturns. Why is this? It's because of the type of renter that we target. And we've talked about this in other videos. We are investing in one of the most chronically supply constrained markets in the country and we're targeting a renter by necessity. It's really a permanent renter class here in Los Angeles who has been priced out of homeownership even before interest rates spiked this year. Even more priced out today because interest rates are twice what they were at the beginning of the year. And they really have no other affordable housing choices other than the properties that we invest in without facing very long commute times in Los Angeles. And so what our our portfolio does is it provides an essential need to this permanent renter class workforce housing, we call it.
[00:03:56] And as a result, the demand for our units, the tenant demand, is resilient regardless of the economic conditions. In fact, we see often during downturns, we see occupancies in the class B/C space go up and occupancies in the class A space which is typically rents that are twice our rents go down because folks are seeking value, which are properties provide. If you look at the last two major economic downturns, we have the 2008/2009 global financial crisis and more recently the 2020/2021 pandemic, occupancy in Class B and C apartments in Los Angeles was consistently in the 95% to 98% range. So that durability of occupancy is a very important provider of downside protection, provides consistent cash flow. And lastly, and this is perhaps the most important, we have the pricing power to actually raise rents at our properties, even if the rental market market rate rents dip. And we've talked about why this is the case in more detail in other videos, but in short, the assets that we buy are at a huge cost advantage relative to new construction, relative to the class A space. Typically 50% or higher discount to replacement cost, even if you factor in all of our renovation costs. So our rents are about half of the class A rents. So that's why I said previously, during downturns you see a lot of Class A renters, which are renters by choice, suddenly become - they can't afford the class A space anymore. They become renters by necessity and move into our properties. That cost advantage, by the way, that disparity - that 50% disparity is unique to the SoCal market.
[00:05:58] You can't find those kinds of discounts to replacement costs in other US markets where the ownership is dominated by more sophisticated institutional owners and where auctions are the norm. So that's a very unique advantage to the SoCal market. And because we target properties - worn down, mismanaged assets that are underperforming in the market. It means that market rents are here, current rents are typically 20% to 30% below that and that differential is called the loss to lease. We've talked about that before. We have the pricing power to actually raise rents in a recession even if market rents come down. So if we're at a 30% loss to lease and market rents come down 10% as they did in 2020, during the COVID pandemic and as they did during the global financial crisis, we could still raise rents because we've got a 20% loss to lease. So if a unit happens to vacate, that's a good thing for us in a downturn because we can raise rents up to market. So these four attributes of our SoCal strategy, I think, position it relatively well compared to other markets, compared to other asset classes. We're buying existing assets that already cash flow. We capitalize that with conservative amounts of debt to avoid refinancing interest rate risk. We have resilient occupancies because we provide an essential need to a large permanent renter class. And if units do turnover, we have the pricing power to raise rents and even increase cash flow, even if the market rents decline by 10%.