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The importance of life science research during the COVID-19 pandemic has underscored the growing need for more high caliber laboratory space, especially in the San Francisco Bay area, one of the largest science industry clusters in the United States.

In 2016, Kilroy Realty Corporation (NYSE: KRC), an industry leader of work environments to the tech industry, significantly expanded its life science portfolio to reflect the demands in the market for laboratory and life science offices that support cutting edge research.

"We've taken the same philosophy that has been successful in our tech developments," says John Kilroy, chairman and CEO of Kilroy Realty. "We provide work environments that really ignite innovation and help companies to retain their most important asset— their people."

In June, REIT broke ground on phase two of its 3 million-square foot, 12-building, 50-acre waterfront life science campus, Kilroy Oyster Point in South San Francisco. The latest phase will include three buildings, roughly 900,000 square feet of space and new amenities that support wellness, connection, and productivity.

The ongoing development of Oyster Point marks the evolution of South San Francisco as a life science hub and will bring local conveniences like an urban village that includes an outdoor amphitheater, outdoor meeting spaces, a state-of-the-art conference center, and a full service restaurant to the newly enhanced waterfront site.

"The buildings are beautiful and will bring new, clean, high-paying jobs here and bolster our local economy," says Mike Futrell, city manager for the city of South San Francisco. Plans for KOP look to incorporate community access to the natural resources and waterfront setting along the San Francisco Bay while catalyzing far-reaching scientific research and development.

"Oyster Point will have tangible benefits for the city of South San Francisco, but it really goes beyond that to a higher purpose," Futrell says. "Since COVID-19, there has been a lot of emphasis on life science research and our capacity as a country to respond to pandemics and variants. Kilroy is delivering something special that will benefit this industry for a long time to come," he adds.

Sharing a Vision

The area that would become Kilroy Oyster Point was previously a landfill closed in the 1970s and capped for safety. "We were looking for a partner who had a vision of taking an ugly duckling and turning it into a beautiful swan," Futrell says, in reference to the Oyster Point area prior to development. "The area was environmentally contained, but we knew it could be so much more being that it's San Francisco Bay," he adds.

It would take several years and key transactions to bring this dream to fruition. Historically overlooked by developers and travelers favoring its namesake just 10 miles to the north, South San Francisco has gradually evolved into an up-and-coming technology and life science arena that offers much of the same natural allure without the hefty price tag of San Francisco.

"In the last few years, we've seen the South San Francisco area start to grow and evolve, so our hope was that our waterfront on San Francisco Bay would be redeveloped in a way that was special and unique, something that we can be proud of," Futrell says.

Kilroy Realty had a similar vision, and the timing was right. "We saw a massive potential for the site," Kilroy says, "not only to create a world class life science destination but to activate the entire Oyster Point area, which is a large section of the city of South San Francisco." The REIT purchased the fully-entitled land site through an off market transaction in 2018 from a group of five China-based companies that lacked a unified vision for the redevelopment of the site, the company says.

"From our first meeting with Kilroy, we knew we shared a common vision for South San Francisco," says Futrell, who describes the city's collaboration with the REIT as a "partnership in every aspect." Together, the city and Kilroy Realty's team have collaborated on architecture, infrastructure for parks, and approaches to longterm maintenance.

Unlike the greater Bay area's notoriously fraught development reputation, Kilroy Realty found an accommodating and straightforward path to developing Oyster Point. "South San Francisco is very good to work with— they are expedient and responsive. They've embraced our vision and we've embraced theirs, so it's a virtuous cycle that also allows us to increase neighborhood access to these amenities," Kilroy says.

Preparing for Rising Sea Levels

The fruits of this collaboration include creating a commercial hub with dining and outdoor amenities, new ferry terminals for waterway access on the Bay, a boutique hotel, and playing fields that appeal to tenants and locals alike. "We've worked with Kilroy on not just what would be built, but how we would share the responsibilities for these amenities in the future," Futrell says. The benefits to the community will be tangible and long term, he adds. Oyster Point includes a series of parks and trails along the waterfront, a marina, as well as a public park with a revitalized sandy beach with dedicated dropoffs, parking, picnic tables, and restrooms.

The plans for Oyster Point also take into account the broader Bay area's natural resources. Oyster Point's shoreline will connect with the San Francisco Bay Trail, a planned 500-mile walking and cycling path around the entire San Francisco Bay running through all nine Bay Area counties, 47 cities, and seven toll bridges.

With more than 350 miles already in place, Kilroy Oyster Point will further connect communities to forms of alternative commuter transit. "Our team has worked closely with the San Francisco Bay Conservation and Development Commission (BCDC), which manages the preservation and conservation of the San Francisco Bay, in order to provide a terrific public experience for those utilizing the Bay trail," says Matt Griffin, senior vice president, Northern California, at Kilroy Realty.

Ferries will improve local and commuter access. "We're very excited about implementing a water transit strategy, which will not only benefit the tenant partners but the greater community of individuals that commute and residents," Kilroy says. "The Bay is a great way to get around because you don't have all of the fixed infrastructure requirements and the same public domain issues that you have on the roads," he adds.

Kilroy's planning for Oyster Point also factors in climate change. "One of the long-term benefits is that they are preparing us for sea level rise," Futrell notes. "Oyster Point will raise that portion of the land to account for the studies that show how the sea level will rise in the next 50 to 100 years. Kilroy is fortifying this area of the city against this rise," he says.

Incubating Ideas

Futrell and the city of South San Francisco are not alone in their enthusiasm for being a part of global medical and life science research initiatives. Kilroy Realty also sees the potential benefits of Oyster Point reaching far beyond South San Francisco as an investment in critical life science research infrastructure.

The San Francisco Bay area is widely considered to be one of the top two largest life science clusters in the U.S., along with Boston-Cambridge, Massachusetts. South San Francisco, meanwhile, is home to the largest biotech cluster in the world with more than 200 biotech companies, according to the city. Life science leasing activity "hasn't skipped a beat" during the pandemic, according to Griffin. "The very nature of the life science industry is fighting disease. The industry is crucial to the pandemic response," he says.

There's also an organic synergy with the market. According to the Kilroy Realty team, a third of all the companies working directly on the COVID- 19 response have a presence in the Bay Area, occupying more than 10 million square feet of leasing space. "Our region is a major component in the life science ecosystem on a national and international scale," Griffin says.

Life science research also requires laboratory usage, which means work-from-home arrangements are less plausible than in the tech market. "If you consider a lack of work-from-home dynamic, along with a record amount of [venture capital] funding pouring into the life science industry, which is exploring everything from oncology research to fighting infectious diseases, there's a huge amount of demand for lab space in the Bay Area," Griffin adds.

This market demand also aligns with the REIT's larger goals."Our vision is to continue to grow our portfolio in the best clusters with best-in-class products that deliver products that are sustainable, scalable, flexible, and amenity-driven," Kilroy says. In addition to Oyster Point, Kilroy Realty has invested in several properties in San Diego, as well as in Mission Bay, San Francisco.

'Next-Level' Impact

The response from biopharmaceutical and tech industries to Kilroy Oyster Point's offerings and groundbreaking has been immediate and enthusiastic. Within seven months of starting construction on phase one in early 2019, the REIT had entirely leased more than 650,000 square feet as the headquarters for two companies—Cytokinetics, a biopharmaceutical company and Stripe, a popular tech company behind payment processing software used for websites and mobile applications.

According to Griffin, phase two is expected to see shell completion in the early first quarter of 2024. Phases three and four are ready to begin, pending market conditions-which currently look strong-and would take 30 months to construct post-groundbreaking.

The size of the 50-acre campus and various outdoor amenities have only made Kilroy Oyster Point all the more attractive during the ongoing pandemic social distancing limitations. "We've enhanced certain aspects like filtration systems and building ventilation capabilities to address pandemic needs and we've incorporated touchless technology on the campus," Griffin says. A variety of outdoor meeting spaces and amenities allow for stronger collaboration opportunities.

Kilroy credits the combined architectural, consulting, and internal teams for coming up with "next-level" designs that attract such top-level talent. "Next-level is basically what nobody's done before—it's creating buildings with dual purposes that can last lifetimes," he says.

Next-level design also aligns with Kilroy Realty's documented commitment to sustainability and connecting their tenants with the environment. "Work is such a big part of your life. It should be exciting, and it should connect you to nature where it can," Kilroy says.

With Kilroy Oyster Point, both incoming tenants and residents of South San Francisco will have access to the Bay like never before. "Our hope was for a redevelopment of this entire waterfront to make it a destination, both for people that work in the buildings, and also for residents and visitors to the city. That is what is being delivered," Futrell says.

Tamara Fischer
President and CEO
National Storage Affiliates

"As an industry, I believe we benefited across the board from increased demand for self-storage driven by remote work and remote learning dynamics. As a company with a focus on secondary and tertiary markets, NSA clearly benefited from the in-migration from the top MSAs to markets where we have geographic concentration. Operationally, the pandemic allowed us to accelerate the rollout of a handful of enhancements and provided an opportunity to realize additional efficiencies and cost savings. The ability to pivot quickly from an in-person work environment to a remote work environment, essentially without missing a beat, gives us even greater confidence in the quality of our team and support systems. The resulting flexible work schedules will provide lasting benefits in terms of reduced travel and enhanced employee satisfaction."

Jonathan Stanner
President and CEO
Summit Hotel Properties, Inc.

"While the pandemic has created historic societal disruption, and its enduring effects have been particularly acute for lodging REITs, it has also presented myriad opportunities for adaptation and future growth. COVID-related restrictions have forced hotel owners to re-examine existing business models and to work proactively and collaboratively with our brand and management company partners to restructure our operating model. Revised operating procedures and brand standards have been implemented to ensure a safer and improved guest experience, promote a healthier environment and facilitate a more profitable operating model for hotel owners. In addition, our dedicated employee base has proven we can manage our business through a historically challenging period in a predominately remote work environment. We are formalizing a hybrid work model for our corporate employees designed to promote the health and well-being of our team. Our goal is to continue to foster a culture of connectedness, while promoting a level of flexibility that encourages an appropriate work-life balance."

Julian (Jay) Whitehurst
President and CEO
National Retail Properties, Inc.

"With respect to many REIT employees, one silver lining is enhanced flexibility in work location and work hours. Our office fully reopened in July 2021, and we believe there is great value in having us all together again, but we did institute a new flexible work policy that has been well received by our associates. With regard to REITs generally, a silver lining was the recognition of just how durable the rental income stream is for many of us. In the case of National Retail Properties, throughout the pandemic our occupancy remained high and our rent collections quickly returned to pre-pandemic levels. Hopefully, investors will recognize and value the consistency and durability of the cash flows from REITs like National Retail Properties when the next "stress test" arrives."

Agree Realty Corp. (NYSE: ADC) announced that Michael Judlowe joined the company's board of directors. Judlowe spent the last 10 years at Jefferies Group, where he helped establish the Real Estate Equity Capital Markets practice. In addition, David Darling agreed to join the company as vice president of real estate. Additionally, Nicole Witteveen has been promoted to EVP, people & culture, and chief of staff.

Crown Castle International Corp. (NYSE: CCI) announced that Catherine Piche was appointed to succeed Robert Ackerman as EVP and COO–towers. Ackerman is retiring following a 50-year career that included 23 years in various senior leadership roles at Crown Castle, and he has agreed to remain with the company in an advisory capacity until February, 2022. Piche joined Crown Castle in 2011 and has served in a variety of leadership roles, including most recently as SVP–project delivery, design & construction for Crown Castle's fiber business.

Hudson Pacific Properties, Inc. (NYSE: HPP) appointed Brent Obleton as vice president of diversity and inclusion. Obleton previously served as the senior diversity and inclusion business partner within Genentech's chief diversity office.

Sherry Rexroad will assume the position of CFO at STORE Capital Corp. (NYSE: STOR) on Nov. 8, in connection with the planned retirement of Catherine Long. Rexroad was most recently the managing director and global head of business development at BlackRock Global Real Asset Securities. She was also the first investor to be elected to the Nareit Advisory Board of Governors. Rexroad currently serves as a co-chair of Nareit's Dividends Through Diversity, Equity & Inclusion Initiative Steering Committee.

Sunstone Hotel Investors, Inc. (NYSE: SHO), announced the appointment of Douglas Pasquale, current chairman of the Sunstone board, as the company's interim CEO. The appointment follows a mutual agreement to separate between the board and John Arabia, who has left his role as president & CEO and resigned as a director. Pasquale currently serves as CEO of Capstone Enterprises, an investment and consulting firm he founded in January 2012.

UMH Properties, Inc. (NYSE: UMH) announced that its board of directors approved an increase in the size of the board from 11 to 12 directors and appointed Angela Pruitt as a class II director for the term expiring in 2023. Pruitt is a global communications expert with more than 20 years of experience, including 16 years at the Wall Street Journal/Dow Jones.

Western Asset Mortgage Capital Corp. (NYSE: WMC) said Jennifer Murphy has resigned from her positions as president, CEO, and board member, to pursue a new venture. To replace her, the board has appointed Bonnie Wongtrakool as CEO, and Lisa Meyer as president. Wongtrakool will also be appointed to the board. Meyer will continue to serve as CFO. Both Wongtrakool and Meyer will work closely with Murphy, who will remain with the company as a senior advisor through the end of the year. Wongtrakool joined Western Asset in 2003. She will continue to serve in her current roles as global head of ESG investments and portfolio manager of Western Asset Management Company, LLC, the company's manager.

W. P. Carey, Inc. (NYSE: WPC) added a new investment officer to its North American team—Jason Patterson. He will serve as vice president and is responsible for sourcing, underwriting, and executing net lease investments throughout the U.S., Canada, and Mexico. Prior to joining W. P. Carey, he worked at CS Capital Advisors within their Real Estate Advisory & Asset Management team.

With a focus on value-add properties in secondary and tertiary markets, Global Self Storage, Inc. (Nasdaq: SELF) is securing a niche foothold in the self-storage sector, backed by a balance sheet designed to support its long-term strategic growth.

The Millbrook, New York-based company has operated as a self-storage REIT since 2013 and listed on Nasdaq in 2016.

Mark Winmill, CEO and president of Global Self Storage, says the REIT continues to focus on secondary and tertiary markets primarily in the Northeast, mid-Atlantic, Midwest, and South-Central regions of the United States.

The company considers itself a "classic REIT growth story," the CEO says, in that it constantly manages the debt and equity of its balance sheet to fuel the company's disciplined growth and expansion.

Winmill says the REIT's professional and innovative management practices, combined with state-of-the-art technology, will continue to enable Global Self Storage to consider acquisitions of underperforming properties that others may overlook.

"For these underperforming properties, our proven ability to increase occupancy and create pricing power results in growing revenues and net operating income," Winmill says. Key to this strategy is focusing on tenant quality. "We believe our average tenant duration of three years speaks to our tenants' satisfaction with their storage experience with Global Self Storage," he adds.

An Evolution

Global Self Storage's growth through wholly-owned acquisitions and third-party management and joint venture initiatives has come about by carefully allocating its capital resources in markets that the company believes offer the best risk versus reward over the long term.

Winmill notes that as the development cycle began during 2013-14, new supply in various markets became the single biggest risk to financial performance of pre-existing properties.

"In all the storage markets—with and without such new supply pressures—storage demand has always relied on various demand drivers that have evolved over time," Winmill says. In 2020, the COVID-19 pandemic presented unexpected challenges to the company's overall business, tenants, employees, and the communities in which it operates. However, it demonstrated its resiliency.

"Through innovation, we were able to provide multiple contactless rental and payment options to help ensure safe, convenient, and timely service," Winmill says. He notes that the REIT has long provided online leasing and payment options, as well as on-site contactless solutions using kiosks that can facilitate rentals and automatically dispense locks.

These effective online and digital marketing initiatives that were already successfully in place have also proven to be integral to Global Self Storage's continued positive performance.

"We have long focused on attracting high-quality, longterm tenants," Winmill says. "We are also focused on our referral marketing program through which our tenants recommend Global Self Storage to their family, friends, and colleagues."

Meanwhile, in early 2019 the company launched its third-party management platform, Global MaxManagement℠, aimed at property developers and single-property/small-portfolio operators looking to enhance the performance of their self-storage properties.

The platform provides an additional revenue stream through management fees and tenant insurance premiums, Winmill says. "We continue to believe this offering will help foster brand awareness, create a captive acquisition pipeline, and contribute more meaningfully to revenues over time."

A Solid Portfolio

Global Self Storage's owned and managed portfolio, which includes 13 facilities with 6,970 units and nearly 1 million square feet of leasable space, saw its same-store occupancy climb to 96.3% in the second quarter of 2021.

"We have a good mix across properties with 60% traditional drive-up storage, 32% climate-controlled storage, and 8% outdoor storage boats/ cars/RVs," Winmill says. The company continues to explore potential acquisition and/or joint venture targets where its professional management and industry experience could add significant value, he notes.

According to the 2021 Self-Storage Almanac, mom and pop operators account for 71% of U.S. self-storage properties. This shows the high fragmentation in the market, which the company believes represents significant acquisition and third-party management opportunities.

The focus remains on the secondary and tertiary markets where the REIT is already active. "These locales are outside the top 25 metropolitan statistical areas, yet demonstrate strong demographic and market fundamentals, as well as constrained and slower supply growth," Winmill says.

A slew of recent transactions highlights Global Self Storage's strategy in action. In February 2020, Global Self Storage completed expansion of its Millbrook, New York store. A tailored lease-up program increased occupancy from 45.5% at completion to 95.4% in the second quarter of 2021.

In November 2019, the company acquired a recently developed property located in West Henrietta, New York. Amid the pandemic, the company undertook a store expansion project at this facility and occupancy increased from 77.9% at completion in August 2020 to 89.1% in the second quarter of 2021.

Meanwhile, in June 2020 the REIT completed the conversion of commercially leased space to climate-controlled self-storage units at its McCordsville, Indiana location. Occupancy increased from 79.1% at completion to 94.7% in the second quarter.

Sound Strategy

By focusing on secondary and tertiary markets, Global Self Storage has seen a strong performance in same store revenue and net operating income (NOI) growth for the past few years.

Brian Hollenden, managing director of Aegis Capital, notes self-storage performs well in both up and down economic cycles and over the past year and a half, COVID-19 has caused a lot of movement, as people have moved out of bigger cities, or are working from home and need extra space in their home for an office. The self-storage sector has benefited tremendously from this movement. That demand has resulted in occupancy reaching the highest level in the second quarter that Global Self Storage has ever recorded.

With the average length of stay extending to 3.1 years, the move-in rates the company has been able to charge are 10-20% higher than current in-place rents, Hollenden says. "As such, this trend bodes very well for larger rate increases for in-place tenants, in our view."

The key for Global Self Storage's continued success, Hollenden notes, will be its ability to source and buy more value-add storage facilities. "When the company applies its management systems and know-how to a property and maximizes revenue and NOI, it can add tremendous value over time," he says. "This is a very repeatable process for a strong operator such as Global Self Storage."

Future View

Global Self Storage recently expanded its revolving credit facility and completed an equity offering, which has increased the company's capital resources to approximately $21 million.

"A strengthened balance sheet and greater liquidity enables us to accelerate our growth organically through acquisitions and property expansions," Winmill says.

While the company continues to evaluate organic growth opportunities, such as existing facility expansion, it anticipates growth will largely stem from strategic acquisitions and/or joint ventures.

"We believe the experienced management and self-storage management technology we have in place will facilitate easy integration and scale up of any potential acquisitions or joint ventures—helping to drive our future growth," Winmill says.

After spending more than 20 years at the U.S. Securities and Exchange Commission (SEC) focused primarily on public company disclosures, and particularly REIT disclosures, Karen Garnett joined Proskauer Rose LLP's corporate department as a partner and member of its capital markets group in 2018.

The natural overlap between disclosure and governance, especially when it comes to a company's annual proxy statement—typically involving governance-related disclosure matters like electing directors—is just one reason why Garnett's tenure at the SEC has set her up to be a leading corporate governance expert in the REIT industry today.

In the wake of the 2008 financial crisis, Garnett says the SEC expanded some of its disclosure rules relating to corporate governance to require companies to provide more information about compensation and how it is tied to risk, information about how diversity is considered in nominating members to the board, and the board's role in risk oversight, among other things.

"Those are disclosure requirements, but they're really clearly rooted in principles around corporate governance," Garnett says. Since moving to private practice about three years ago, she has had more opportunities to work directly with companies on their governance and disclosure issues.

Garnett, who is on Nareit's Best Financial Practices Council and Accounting Committee, recently sat down with REIT magazine to discuss governance issues.

Governance Fundamentals

Beginning with the most foundational areas, Garnett says a REIT board should always be focused on financial and reputational risks, and generally overseeing a company's risk management function.

"Financial reporting would be top of the list: Ensuring that the company has strong and accurate financial reporting [and] has good internal controls over that process," Garnett says. "Financial reporting is essential to how a company communicates with the market and its investors."

Executive compensation, too, will always be a key corporate governance responsibility for boards in overseeing risk management, and a top issue for investors as well.

Boards should also be focused on making sure the company has a governance structure that meets its current needs. If a company doesn't revisit its committee charters after going public, for example, that could present a problem as the company's business strategy evolves or as economic conditions change. Garnett recommends a continual evaluation of the governance structure of the board. Within that same context, looking at the responsibilities of each board committee is key, and particularly making sure the audit committee is not overburdened.

Key Focuses for 2022

Environmental, social, and governance (ESG) issues are at the forefront for every board of every public company in the year ahead, Garnett says. Boards should examine how ESG presents both opportunities and risks to the company, its assets, and its financial performance.

"Certainly ESG means different things for different companies, but whatever ESG is appropriate for your company, that is going to be an area of focus for REITs and for their boards in 2022," she says. This can be anything from the physical or transitional risks from climate change to factors related to human capital, Garnett says.

There is clearly growing investor demand for more information about ESG, Garnett adds, noting that there is some sense that investors also want more comparability in the ESG data being reported. New mandatory disclosure requirements for ESG metrics by the SEC may be on the horizon as well, with an SEC proposal expected in early 2022. ESG metrics in general though, including the level of assurance REIT boards will need to be comfortable with those disclosures, are certainly set to be a key issue in front of audit committees, and likely the full board, in the coming year.

Additionally, it's important that companies have the right kinds of controls over their disclosure process and the information available to the board so that ESG information is being communicated appropriately to the board, and then disclosed appropriately as well. "For example, is the board hearing from the right people? Traditionally, an HR or a diversity, equity, and inclusion (DEI) officer might not get time on the board's agenda, but now that's going to be more common," Garnett says.

Board diversity is also a growing area of focus, and Garnett says nominating committees will play a crucial role in identifying diverse candidates that are best suited to serve on the board. REIT boards should start by identifying the company's diversity goals for the board, including where they are seeking to add new board members with certain qualifications and how they are going to identify those candidates for nomination to the board.

"Even in executive compensation, companies are beginning to consider whether there should be some compensation metrics tied to meeting a certain sustainability goal of the company, or maybe a DEI goal of the company," Garnett notes.

Governance and the Pandemic

The SEC began requiring human capital disclosures in late 2020, and compounded by the pandemic, Garnett says companies began reexamining their outlook on human capital. She notes that, in fact, some industry experts are beginning to redefine ESG as EESG, or environmental, employee, social, and governance issues.

"Health and safety measures that are intended to protect the workforce are tied back to human capital, [including] how the company is managing return to office policies and workplace flexibility," Garnett says. "Those all are highly relevant to employee retention, which obviously can be very critical to a company's performance."

In terms of risk, boards need to understand how these pandemic factors are affecting the business and oversee how the company leadership is managing that risk. A heightened cybersecurity risk also comes into play, Garnett says, with remote work raising new cybersecurity concerns. "Boards need to have current information on those risks and on management's response to those risks," Garnett adds.

Certainly in today's fast-moving business environment, REIT boards have a lot on their plates. But Garnett says the goal should be to search out opportunities when evaluating a company's business strategy, talk to management about that strategy, and constantly think in terms of ESG.

"That could be the upside of all of this: Boards working with management to understand where there are new opportunities arising out of ESG considerations, whether it's climate or DEI or something else, and overseeing that shift in company strategy as well," Garnett says.

ACRES Commercial Realty Corp. (NYSE: ACR) is laying the groundwork to be a dominant force in the fragmented middle market lending space, President and CEO Mark Fogel says.

Fogel says the mREIT has achieved much in the past year. "We've really set ourselves up to go forward, so the best is yet to come in my view. We really just laid the foundation in 2020 and 2021."

Through June 30, ACRES Commercial Realty (ACR) originated $660 million of loans. During the past year the mREIT also executed on a collateral loan obligation (CLO) and raised about $111 million of preferred equity.

ACR was formerly known as Exantas Capital Corp. ACRES Capital Corp., a private commercial real estate lender, acquired the Exantas management contract in August 2020, and a name change followed. ACR is externally managed by a subsidiary of ACRES Capital.

The concept behind acquiring the Exantas management contract was to create a "one-stop shop" in the $10 million to $75 million loan space, Fogel says. "We've tried to create a very seamless platform where, when brokers or developers come to us for a loan, they're really just talking to the same people across the board."

Last summer, when ACRES Capital acquired the management contract, lenders were struggling and the main goal was to ensure that the portfolio was healthy before restarting originations, Fogel explains. That restart occurred in the fourth quarter of 2020. Because of the slowdown, there is now pent-up demand for refinancing and acquisitions, he adds. "It's bounced back quite well, especially on the multifamily side." Stephen Laws, a director at Raymond James, wrote after the release of strong second-quarter results that he expects ACR shares to outperform based on "the attractive risk-reward dynamic given the improving portfolio performance and outlook for new investments."

Future Goals

With a successful first year behind it, ACR has set key goals for the future, including creating a permanent financing vehicle so borrowers can access capital at any phase of an asset's life cycle, Fogel says. ACR is also looking to improve its cost of capital by continuing to issue CLOs.

Fogel says ACR also wants to focus on some of the underserved asset classes. Many of the commercial mREITs that ACR competes with are "hyper-focused on multifamily these days, which is a good portion of our balance sheet too," he adds. However, Fogel sees some "really strong" opportunities in retail, hospitality, self-storage, and in particular student housing. Fogel describes the latter as a "very underserved asset class that has performed quite well despite the fact that people thought it would suffer badly through the pandemic."

According to Fogel, student housing for tier two and tier three colleges and universities is being ignored by the lending market. "There's a tremendous opportunity to get into that space on both a bridge and a permanent basis because people are wary of it. But if you look at the fundamentals in some of those locations, there hasn't been a lot of new housing built and wherever it does get built it leases up very quickly and usually performs extremely well," he says.

Another area of focus for ACR is enhancing technology within its own platform. Fogel describes the middle market lending space as "very fragmented," and says providing ease of use for borrowers will result in more deals for the company.

Changing Views

As for the state of market fundamentals, Fogel says the pandemic has changed the way ACR looks at certain asset classes.

Multifamily is still a "hot area" to be in, Fogel says, as people will always need a place to live. "But now, when you think about office say, or hospitality, you have to think about it a little bit differently," he adds.

"We're not so sure what the future of office leasing is going to look like and how that affects us as a lender is obviously important. We need to think about where the value of these properties is going to be once we get in, and at maturity," Fogel says.

While the hospitality sector has seen its share of challenges during the pandemic, ACR recently originated a nearly $86 million loan to refinance The Ray Hotel Delray Beach, a Hilton-branded hotel in Delray Beach, Florida. "We look for good, strong local sponsors who really understand their marketplace and understand why there's demand for their hotel in that market," Fogel says.

The mREIT is trying to shy away from downtown convention center locations for now, Fogel explains, but that doesn't mean that ACR won't look at them in the future. "We also try to stick with flagged hotels, with Hilton, Hyatt, or Marriott. Those seem to be the brands that always trade well and provide a lot of liquidity in the marketplace."

Open to Opportunities

Adaptive reuse is another area of potential promise for ACR. Fogel notes that the private capital side of the ACRES group focuses on interesting opportunities on the adaptive reuse side, which could in time benefit ACR. "Eventually those properties will get redeveloped or built up and we're prepared to migrate those loans into our mREIT through a stabilizing bridge loan," he says.

Indeed, Fogel says he's always been a proponent of looking at out-of-favor retail properties "because retail properties are usually sitting in some of the best locations in their marketplaces."

This mindset, Fogel believes, is "what really separates us from a lot of the commercial mREITs out there—we do have that type of capital available to us to allow us to take some chances in those asset classes that most commercial mREITs would not touch."

And when it comes to geographic markets, Fogel says he has always been a big believer in gateway cities and their recent challenges have not dissuaded him.

"Those markets had gotten a little bit overheated, and the pandemic has really reset everything to much lower values. I'm pretty bullish on making loans into situations where valuations have come down considerably," he says. ACR is keeping its eyes open in those markets because, in the office and hospitality and even multifamily sectors, "there are some really good opportunities."

As for non-gateway markets, Fogel says that's where ACR is putting a lot of its energy right now, especially in locations where people are migrating to. However, he says he's wary of following trends.

"I don't think that people are going to certain markets longterm, but there are markets where I believe there are good long-term fundamentals—like Dallas, Phoenix, Charlotte, and Nashville. Those markets are here to stay because a lot of companies are moving to those areas. That's what supports multifamily and all those other asset classes in which we're involved," Fogel says.