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crowdfunding

Episode #35: Real Estate Crowdfunding with Mitch Rosen of Yieldstreet

In this episode, Deidre Woollard chats with Mitch Rosen, Senior Director of Real Estate at Yieldstreet about real estate crowdfunding, investing in a post-COVID-19 world, and more.

Yieldstreet is a unique crowdfunded lending platform. While it offers shorter-term loans secured by commercial and multifamily real estate, it has expanded its offerings significantly in recent years to include real estate equity and investments backed by art, aviation, legal, and marine assets. That enables investors on its platform to potentially earn passive income backed by a variety of alternative asset classes, allowing them to diversify their portfolio and reduce its correlation to the volatile stock market.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Prism Fund before investing. The prospectus for the Yieldstreet Prism Fund contains this and other information about the Fund and can be obtained by emailing investments@yieldstreetprismfund.com or by referring to www.yieldstreetprismfund.com. The prospectus should be read carefully before investing in the Fund.

Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

The securities described in the prospectus are not offered for sale in the states of Nebraska or North Dakota or to persons residing or located in such states. No subscription for the sale of Fund shares will be accepted from any person residing or located in Nebraska or North Dakota.

Timestamps

0:00 Introduction

2:30 Areas Yieldstreet focuses on

3:34 The opportunities in real estate right now 

6:05 The single family build to rent trend

8:05 Will rent to own be part of the future? 

10:12 The current state of migration 

14:25 What is happening in the CMBS market?

18:10 The return of deal flow 

21:05 Reopening stocks and real estate

25:25 Yieldstreet's Prism Fund 

27:20 Mitch's career in investing

30:13 Mitch on opportunity zones 

31:28 Mitch as the deal killer

33:48 How Yieldstreet makes its money

34:40 Golf communities as an asset class 

37:00 The future of senior housing

38:16 Yieldstreet holding times 

41:15 Thoughts on interest rates

Transcript:

Deidre Woollard: Hello, I'm Deidre Woollard, an Editor at Millionacres. Thank you so much for tuning in to the Millionacres podcast. One aspect of real estate, I'm particularly interested in is real estate crowdfunding. I just feel like this is one of the most important innovations in real estate investing that we've ever seen. I think of it in terms of the creation of REITs in the 1960s as just being this massive change, allowing really a lot of investors to have access to things they wouldn't have had access to before. Here with me today is Mitch Rosen, Senior Director of Real Estate at YieldStreet. We reviewed YieldStreet at millionacres.com before, and one of the things that I'm really intrigued about with YieldStreet, is they don't just do real estate, they offer crowdfunding for a variety of really fascinating assets from art to loans. Mitch, welcome. Thank you for joining me.

Mitch Rosen: Deidre, thanks for having me. I appreciate being here. Thank you.

Deidre Woollard: Let's talk a little bit about the kinds of opportunities that YieldStreet offers because it is a lot more than real estate, even though real estate is your particular focus.

Mitch Rosen: That's correct. That's right. YieldStreet is really one of the only platforms out there that we know of, that really provide a broad swath of asset classes available vis-a-vis crowdfunding. When you think about YieldStreet versus other competitors of ours, some of them are very specific to real estate or other asset classes like secondary shares or non-traded REITs. However, we provide our investors access to products like you mentioned, art finance, art loans, litigation finance, private business credit, single-family rental products, commercial real estate, as well as marine finance. We are unique in that, we do provide a broad swath of products and asset types that others really don't traffic in.

Deidre Woollard: Is the consideration then on a sector-by-sector basis or a deal-by-deal basis in terms of what YieldStreet looks at? Are you open to anything, or are there only these specific sectors that you want to focus in?

Mitch Rosen: Within the sectors I highlighted, we have very specific skillsets. For example, I've been in real estate for 20 years. We have a team of folks who are on a private business credit platform. Our verticals have been in business for over 20 years themselves. The view here is that we really try to incubate an asset class to see if it fits within the premise of our investor base, on a duration basis, on a yield basis, and the ability to source product. When in fact we have that comfort, we'll go out and hire an expert within that field to help facilitate and grow that business. That's inherently how the business historically has grown from different verticals. When it started originally in 2015, the original asset class was actually litigation finance. Then over time, we've added different expertise and business lines to the platform, to help facilitate additional product.

Deidre Woollard: Interesting. Then you came in as an expert in real estate. Obviously, real estate is going through quite a lot of change lately. What are you seeing as opportunities?

Mitch Rosen: You're right, real estate is going through a fairly interesting period of time, on the back of a lot of different factors. I'd say one, obviously, COVID being a very hot topic, if you will, no pun intended, in the sense of just its impact on virtually every piece of commercial real estate, from retail, hotel, back to work hybrid office. I'd say the two biggest beneficiaries have clearly been industrial being one, logistics, e-commerce, last-mile. Then the second one, I would say is an ancillary class, like self-storage has been a big boon. But the other main asset classes, retail particular, I mentioned hospitality, office, multifamilies also been on the tear. The low rates for as long as they have been, have made affordability for single-family homes quite difficult for a lot of folks. Particularly if they've lost their jobs and they've changed in income position. Multifamily has been continued to be a very strong asset class with strong growth in rents, strong occupancy, and just a continued chase for yield and stability, which multifamily historically has provided. We don't really see that abating anytime soon, particularly with rates being as low as they have and the lack of available housing, particularly affordable housing for home buyers. I would just add one last point, single-family rental product, which really is an asset class that's not more than 10-12 years old, having started post the Great Recession of '08, has really established itself as a legitimate, large, institutionally backed asset class. I'd say, for the last few months, you've had a large institutional investor come into the space and really plant the flag to grow that business, and even partner with huge homebuilders like guys like Lennar, who'd recently announced a partnership with another private equity firm to grow the SFR business. That I would almost categorize within the multi-family bucket, but a subset of that bucket.

Deidre Woollard: Yeah. That's true. I've been fascinated by the growth in single-family build-to-rent, and it's interesting to me, especially because in the great financial crisis, obviously we saw the rise of things like Invitation Homes and companies like that, snapping up those foreclosed homes and building rental properties that way. This time we've got this whole other thing going on. You mentioned Lennar, I believe they're spinning off that into a whole separate business. There's really a lot happening in that space, is that something that YieldStreet is looking at in terms of multifamily? I know at Millionacres and at mogul at something we've looked at is different communities that are being built strictly for build-to-rent.

Mitch Rosen: Yeah. The answer is, that's correct. There is this belief, and I think it's a legitimate one, that the demand for rental product, particularly with people migrating out of urban cores, and this is really a COVID specific acceleration of that trend. I couldn't sit here today and argue that, had COVID not happened, that you would've seen a migration to single-family rentals outside urban markets as quickly as it's been adopted. The question becomes, do those folks who have moved out of the cities into homes with more space, with a yard, better schools maybe, do they stay there? Do they migrate back to what they have experienced historically, which is tighter, cramped cores, but all the amenities that a city environment provides. I think it's very too soon to say which direction that goes, but the clear demand drivers right now are outside of core urban markets. Suburban, ex-urban, where you are having home-builders who may have built-to-sell homes, now saying, "You know what, I can create a stable cash flow stream." Build maybe at a slightly lower costs with less optimal finishes, maybe not marble, maybe Formica countertops as an example, and make a really attractive return that provides me with consistent cash flows that can smoothen my revenue streams. We're looking at a transaction where in fact, we would be providing capital for an SFR community outside Chicago potentially. The builder of those homes would be a national home-builder who actually is already building homes in that community for sale. They would be an owner in the community itself, but they would have the skillset and the team on-site to facilitate the construction of those homes. I do think that this is not going away, I think it's a trend that will continue to build institutional capital behind, and that people will choose to rent maybe in different ways than they've done historically.

Deidre Woollard: Interesting. I'm wondering if one of the evolutions of this trend that we obviously seem to be in the midst of, will then translate to either a rent-to-own or a homebuying scenario because right now the prices are at historic highs. There's no inventory for existing homes. Homebuilders are trying to keep up. There's just a lot of pressure right now that's keeping people who maybe would buy out of the market, and I'm wondering if eventually some of these single-family rentals become available for purchase.

Mitch Rosen: The data is there that suggests that pre '08, there had been a huge speculation of homebuilding, price appreciation, demand, and they were going further and further out to find cheaper land, just to make them somewhat affordable. Then you had this hill massive reset appraising from, I'd say 2009 through probably 2015.

Deidre Woollard: Right.

Mitch Rosen: When you keep rates as low as they have for so long, you inherently inflate asset value. You can borrow a 2, 3 percent to buy a home, versus maybe borrow a 5, 6 or 7 percent like you did in 2007, your ability to buy a larger or more expensive home becomes palatable, and so you did not have the same risk tolerance in the homebuilders. You didn't see the inventory go up like you would have expected it to for a long period of time, and now you're playing catch-up with this huge influx of demand that can't be met by the existing supply. I think the answer is that they're going to try to play catch-up, but I think there's a long lead time for that, and so I don't think there's an easy solution. There had been a tremendous amount of multi-family units constructed in the last 5,10 years. In markets in a smile States, Arizona, New Mexico, Southern California, through Texas and Florida and up the Eastern Coast, but the single-family home specific product, people are staying renters for longer. That really is a tailwind for rental communities and probably creates another tailwind for the homebuilders, but the supply clearly is not meeting demand right now and it's probably going to stay that for some time.

Deidre Woollard: Absolutely. The other thing that I'm seeing too, that makes me a little bit worried from the great financial crisis is that move to the exurbs, really getting further and further out from main cities. That was part of what's happening, partly from COVID and people being able to remote work, partly from just people looking for cheaper homes. You've been looking at real estate a long time, I've been looking at real estate a long time, everything cycles. Do you think eventually we're going to see more movement away from those suburbs again?

Mitch Rosen: There are so many pundits who have different opinions on this and I don't purport to be an expert by any means. I do think that things tend to revert back to the mean overtime, and that there's a shock to the system that cause people to act and act in ways that may be they think maybe too short term and not on a longer term. My inherent response would be that, if you're 50 miles outside a city, in my mind that's an excerpt, you're a good hour drive at minimum.

Deidre Woollard: Right.

Mitch Rosen: There may not be public transportation, maybe trains or bussing to urban core markets. I think the more relevant question is, what do we think stays as permanent regards to the work environment going forward? Every day there's a new article out. I saw an article yesterday about Jefferies, for example, an investment bank in New York has moved in a hoteling model. There are hot desks. You're required to come in one to three days per week per your job, but you will have an office anymore or a dedicated desk. Citigroup came out, announced yesterday there's a new CEO, a woman CEO there. They announced that they are going to be requiring no more than three days of work in the office. Then there's other banks like, I believe JP or others really want a back to five day a week in the office environment. It will be a continued migration and discovery process as to how what tact companies take, how it looks. I think it'd be hard to argue that hybrid is not going to be here for some long period of time, call it 2-5 years. Just based on the experience that the companies have had the last 12 months. I think that will be a better informed predictor of if the exurbs are reasonable to be living in full-time or whether or not that fad goes away. If you can work outside from home for three days a week, I think commuting two days a week for an hour and half each way is very palatable. If you told that same person you're commuting four or five days a week, I think that becomes a very difficult daily existent if you're on a train or commuting for three to three-and-a-half hours a day, and it just becomes difficult. My take is that I think it'll be employer and employee specific, but I would imagine that if you can work more and more remote, those exurbs become far more valuable. I'd also add that suburban office outside the quarters also create additional value. There has been discussions at other companies where I have friends who work, where they may create satellite offices, one in Connecticut, one in Long Island, maybe one in Jersey, so not all come into the central core. Everybody commuting 20 minutes, and there's a smaller team there once or twice a week. I think they're all thinking through all these questions and what works best for their employee base.

Deidre Woollard: Yeah, I think that's absolutely true. That's one thing I'm seeing, is that what they call that 3-2-2 work week where you're in the office three days. I think part of that is just that we all realized how awful our commutes were during this time period when we didn't have them and how much time we got back. I think that's really important, that idea of having that time available for work, and for family, and for everything else.

Mitch Rosen: Yes. I think it's a trade-off that comes with that. You lose the camaraderie, you lose the culture a bit of the office space. The question I always say, and I frame it this way, what is the incremental benefit of that additional day? I think it's very easy to argue that, or I would argue, excuse me, that maybe there's not that incremental value go from four days to five days. But certainly an incremental value if you go from 2-3, maybe even 3-4. Every company will find out what their preferred path is. But I think as a general statement, here's the original question, the exurbs do have a reason for being and very well could have a tailwind for some time as people maybe work from home three days a week and go in twice a week.

Deidre Woollard: Absolutely. I want to talk a little bit about your background in CMBS loans because I think right now I'm seeing a lot of distress asset funds come up looking for, certainly CMBS loans for hospitality and for retail seem to be at a higher risk of default right now. What do you thinking about that, and what is happening on the CMBS loan front right now?

Mitch Rosen: For folks who may not be aware of what CMBS is, CMBS stands for commercial mortgage-backed securities. To explain that in very simple ways, a bank, an originator originates 100 loans at a dollar each. They package those loans into a pool and they syndicate and sell off the liabilities against those assets. Insurance companies, money managers, hedge funds, high net worth individuals, buy those liabilities, those bonds that pays them a fixed coupon that is coterminous with the underlying assets. They primarily are 10-year fixed rate loans, and they often are comprised primarily, I'd say about 30 percent office, 20 percent retail, 15 percent hospitality, probably 20 percent multifamily and then the balance is other, maybe special. Self-storage, maybe healthcare, maybe some other cash-flowing assets. Inherently, what happens with CMBS is that you're not directly facing a direct lender. If you go to an insurance company or a bank today and get a home mortgage, you have a contact there. They balance your loan. They hold the loan. You've got an agent that you talked to or a salesperson or someone who put you in that loan that you can call and say, "Hey, I need help making this payment this month or I have a problem that's arisen, I need some help or facilitating a solution." With CMBS, they're governed by very different rules. There's a whole series of steps that has to happen if a problem does arise, again, that problem resolved. What may take you one or two months if a lender of mine calls me and says, "Hey, listen, a tenant vacated, I would prefer to use that reserve to pay the interest this month," I could say yes or no. With a CMBS loan, it's a 3-6 month process to get an answer on things. Inherently, loans that probably could be resolved in short order, take longer to resolve. The average default period for a loan from default to a foreclosure or REO could take as much as two years or more. I think the point I'm highlighting is that it's a great way for a borrower to finance very attractively priced loans and get debt. But it comes with some complexities and some restrictions that I think people don't appreciate. Right now, if you think about hotels and retail particularly, those are two asset classes that are tremendously suffering during COVID. Particularly malls, that's a big buzzword, malls, and the destruction of the value in malls. Malls historically has been a very attractive asset class for CMBS. Its long-term leases, they have large, strong anchors historically that anchor the property. They have large institutional owners like Washington Prime, like PERI, like Simon, like Brookfield, like Macerich, like Taubman, large multi-cap public companies. The fact is that those are all suffering in many different ways right now. As a result, those loans are going into defaults or those loans are having problems meeting debt service. The investors in those pools are going to see losses be taken. That's really, I think where people are trying to figure out, okay, what pool do I like? What assets do I want to avoid and which assets do I want to make a bet on? I think that will take some time to shake out, but I think that's what investors are focusing on in CMBS.

Deidre Woollard: Interesting. I think the other factor too that I've watched in commercial real estate over the past year, is that everything is really slowed down so hard during COVID. Now it seems like there may be some confusion about pricing. There doesn't seem to be any really deep discounts in pricing, even though there are some vacancies and some distress in the market, is that something that you're taking a look at as well?

Mitch Rosen: It's a great point because it's actually very accurate. There was a whole host of capital raise, I would say from June of 2020 through probably Jan of '21. Maybe even to this day where there had been some expectation or some hope of wholesale liquidations of loan portfolios or properties that were in distress and the reality is that very little of any meaningful volume came out of that. The reason is two-fold. One is that if you're a lender and you have a problem with a loan, effectively your means of resolving that loan vis-a-vis courts or foreclosure were really close to you. So you really had only one option and that was work with your borrowers best you can and find a solution. I know at YieldStreet we did that with almost all of our borrowers, as long as they were commercial and reasonable, we tried to work with them. From the standpoint of the banks, the Fed, and the OCC and all the regulatory authorities really provided the banks with a tremendous runway to facilitate workouts or kicking the can down the road, as the say. They don't want to take losses in the worst time to take a loan sale and so you've had some positive event in the last three or four months. I would advocate that if we continue on this trajectory of recovery, I would not be surprised if the whole deluge of defaults and distressed opportunities maybe don't come to fruition the way people expected. So I am of the belief that particularly for hotels, I'm quite bullish on hotels, I think people will dramatically seek to travel and reengage in their lives whether it'd be business and/or pleasure, leisure travel, I should say. I do think that industrial continued to outperform and I think neighborhood retail will continue to perform very strongly. Thinking about a neighborhood shopping center, grocery-anchored, nail salon, hair salon, travel agency, a restaurant or two, maybe there's a Five Below or a Best Buy. Whatever it may be, I think those aren't going anywhere. I think the acute pain is really around retail and particularly apparel, right? Like how many stores you need selling clothes in a mall? You don't need 50 of them. So I think that really differentiate between like services retail versus material consumer retail, there's a difference. Office is part of the biggest wildcard, I would say. That's really where it's the hardest to value, but you're right. There have not been a lot of prints or numbers to look at what's something's trading for to get a sense of where the market is. It's very opaque.

Deidre Woollard: It makes me think about what we've seen in the stock market, right? We've seen in the beginning during COVID, there was this interest in anything that was related to work from home. The same thing happened in real estate; industrial, datacenters, things like that, self-storage to some extent. Now we've got, on the stock market side, we've got an interest in reopening stocks and this is also translated over to hotels and retail. So in my opinion, that seems to be playing out in real estate too, and it may lift up hospitality. I just think the more I look at the amount of CMBS loans in the hospitality sector, it does seem like some of that is going to end up being distressed.

Mitch Rosen: Well, we already have seen keys being given back or hotels shut in New York City as an example, right? Some very large hotels in fact, right? So you can't repurpose every hotel as multi-family. It just doesn't work. Some will and some won't, so maybe office, but that process will take years to play out. But I agree with you that those hotel loans probably will not be able to come back quick enough to satisfy a repayment of that maturity date or cover debt service in any meaningful short-time. If the borrowers have the capital to support it, it's going to be hard to envision a scenario where a lender does not get paid and just waits. So that would be my take on that particular segment. Again, you have to differentiate different kinds of hotels like convention center hotels like in Vegas, and other large hotels or large meeting spaces. That will probably the last to recover, in my opinion, because there's inherently going to be a component of the population that maybe doesn't want to travel to a large gathering with thousands of people in a closed room despite vaccinations and other protections. Whereas if I was going to visit some clients in LA, I may be happy to stay in a hotel, have my own room, not being in a confined room with thousands of people, maybe one-on-one meetings, coffee, drinks, whatever it maybe. So that's how I think about it. I wonder how pervasive that view is. But I certainly think about going to a convention these days and probably saying, "You know what? I'll probably wait a little bit."

Deidre Woollard: [laughs] I think that's really smart. I think a lot of us are having that feeling, that a little bit of anxiety about being with a large group of people right now. Well, let's take a quick break right here.

Deidre Woollard: I'm back with Mitch Rosen of YieldStreet. YieldStreet launched something called the Prism Fund. I thought that was a pretty interesting concept. Can you explain a little bit about that? It's not strictly real estate, right?

Mitch Rosen: That's correct. One restriction that people have to acknowledge when they invest with YieldStreet today is what kind of accreditation they have to meet. There's a terminology called accredited investor which maybe you are familiar with and your investors are. But it has certain thresholds of income and network that people have to meet to enable them to invest in certain of our offerings. We wanted to create a product that really meets the mission of the business which is really providing access to all investors regardless of where their income level stand. The way to do that today is vis-a-vis the Prism Fund which has basically a availability to all investors regardless of income and a very low minimum entry point. The goal of that fund was basically to provide two things. One is access or breadth of all the asset classes we participate in. An ARC loan maybe in there, a real estate loan maybe in there, a private business credit, Marines. It has a diversified pool across all the asset classes. But secondly, a really easy entry point, $1,000. Regardless of your income level, to some degree, if people are investing, let's say, $1,000 in the IRA or their 401(1) or stocks, we are saying that this shouldn't replace that per se but could be a compliment to that. That's been really a big driver of our new user then is people trying the Prism as an entry product for us, experiencing it, seeing how you update them, and then get a couple of it and hopefully migrating to individual offerings or other funds that we offer. That's the primary driver of what that fund is and what it does.

Deidre Woollard: Interesting. Can you hold that fund in an SDIRA or retirement account?

Mitch Rosen: I believe you can. I don't want to speak out of turn. I believe you can, but I will get you to answer for that question.

Deidre Woollard: I want to know a little bit about your personal journey, how you became interested in real estate and what led you to YieldStreet?

Mitch Rosen: I've been in real estate for about 20 years, most of my career. When I graduated college in 2000, I'd gone to the investment banking world out of college for about a year. I came out in the euphoria of the dot-com world but also went to the dot-com crash which as a first-year analyst, I learned is not a great spot to be in. I left JPMorgan where I was at the time. I effectively looked at the landscape and said, "What is something that's tangible that interests me and that's still has an investing aspect to it?" Excuse me. Real estate really [inaudible 00:28:11] those boxes off. I want to go work for, at the time, a public mortgage we called Capital Trust as a junior analyst, a year out of college, and I really learned the business from my mentors there. How to underwrite real estate, how to value real estate, how to structure real estate, how to think about risks, how to mitigate those risks, what kind of borrowers you want to invest with and lend to versus the ones you may want to avoid for whole host of reasons. Not just because of their cap, their cash in their pocket, but the problems that may arise or the way in fact they treat their partners. Great learning experience. I then went to another fund called Marathon Asset Management and another called Brigade Capital, trading, investing, CMBS, as you mentioned, bridge lending. I met with Michael and Milind in the summer of 2018 after having left my prior employer. They were really trying to provide a vision for how I could see the real estate business growing here and the demand and the opportunity set that really was available to retail, particularly with the JOBS Act of 2012, and all of the impacts that that had on particularly, crowdfunding and particularly, even more so, real estate. Real estate has a really unique niche within these rules that provided an ease of access that other asset classes do not. That's probably why there's probably more crowdfunding sites that are dedicated to CRE than any other asset class. There's inherently advantages in CRE in our tax code, whether it'd be 1031 exchange. If you're in the CRE business or real estate business, you can take depreciation against your income. It's a whole host of ways in which REIT status. You can distribute income tax-free if you meet the REIT status rule. For me, that opportunity set was quite attractive and to grow a business and lead that effort was really attractive to me at YieldStreet, and that's why I joined over now, two-and-a-half years ago.

Deidre Woollard: I love that. You mentioned the tax cuts in JOBS Act. That leads me to have to ask you about opportunity zones. What you're thinking about those? How they have evolved? If that's something that you look at when you're looking at real estate investments for YieldStreet?

Mitch Rosen: I'm not a big fan of opportunity zone investments, personally, they have a very long time horizon to take the full benefit of those tax benefits. You have to also have capital gains to roll into the deal so you're inherently selling some of that may have made money to avoid some taxes. My sense, and I'm speaking in very general terms here, is that people are maybe utilizing the structure as a tax avoidance and to mitigate their taxes upfront with the hope that these projects pan out. I would argue that some the deals that I've seen in OC zones are maybe driven as much by the tax benefit as are with underlying property or income generating potential of the asset. I would think if you asked 10 people in CRE, I would say, most, I would say that the OC Pro has been a little bit underwhelming in terms of how much capital was raised and how much has been done. But that's again, my personal opinion. I think it's great from a standpoint of really trying to get capital to those parts of the cities that really need it and incentivize them. I hope it solves for part of the solutions they're trying to seek answers to. I don't think we'll know for five or 10 years where it shakes out.

Deidre Woollard: That's a really good perspective. Thank you. That makes me wonder a bit about your underwriting process in general, what you're looking for? Also, how many of the deals that passed by your desk end up going on the platform?

Mitch Rosen: Good question. My nickname here is The Terminator.

Deidre Woollard: [laughs] I love it.

Mitch Rosen: They say I kill 98 percent of the deals that come across our desk. When I think about my role here at YieldStreet, particularly with the real estate platform is, my job is to ensure that our investors have their principal protected and get the coupon that they're signing up for. We never want to take a property back if you don't have to, we want to make that loan or that investment earn our return of our capital and pay our investors back their money. I answer that in that way to say that when we do these investments, I really put myself at our investor's shoes. I think about, "Okay, I look at the market, I look at the borrower's capacity. Is this something they've done before? If so, why did they do it? How experienced are they? How does their balance sheet look? Any litigation? Any fights with other partners? Any criminal issues? Is their credit score good or bad? I can't tell you how many people show $100 million net worth on their statement, but have a 540 credit score. That, to me, doesn't come quite compute. Those are things that we all look at. In terms of underwriting, I was trained in a very detailed underwriting shop coming into the business. So we view everything, we do a full deep-dive, we look at appraisal phase 1, probably be the [inaudible 00:33:03] report. We order a survey, we hire our own legal counsel to represent YieldStreet's interests. We do full Bauer background checks, or structure KYC. We underwrite the market, underwrite the property, we underwrite the sales comps, leasing comps. We do a full deep dive to ensure that we're checking the boxes and ensuring that we are lending on the value that we think we are lending against. There are certain ways that you can structure around certain risks. For example, you're doing a condo deal, you want to incentivize that borrower to sell units to pay you down. You may create incentive to sell down sooner than rather later so your basis has reduced quicker. There are structural nuances that one can utilize to try to align the interest with the borrower that may not be so optically clear but get you to the safe spot as where you want to be.

Deidre Woollard: Excellent. Thank you. I have to ask, how YieldStreet makes its money? Because one of the things that when we talk about crowdfunding, I always want people to be aware of what the fees are. Different companies operate in different ways. What does that look like for YieldStreet?

Mitch Rosen: Right. We're an SEC registered investment advisor. We are paid as a manager of these various offerings, a management fee. It could be as low as one percent, as much as two percent, depending on the offering specifically that we're providing. In addition to that, with our ancillary fees on a deal level that we do earn that are all disclosed in our offering pages, in our documents, it could be an origination fee, it could be an exit fee, maybe an extension fee. That is also part of our general compensation for managing the investment source in the investments, working with the borrower, working with our partners, and ensuring the repayment of that loan.

Deidre Woollard: Excellent. Thank you. In recent episode of the YieldStreet podcast which is the yield to give it a shout out, you mentioned golf as an investment. I think that's really fascinating because before the pandemic, I heard all this talk about golf communities in Florida, etc. They're over, nobody wants to golf. Then all of a sudden, golf turns out to be a really great social distancing activity. Now, I feel like there's a little bit more interest in golf house. Do you think investors should be thinking about golf communities in the short-term and also in the long term?

Mitch Rosen: We had a partner on that call named Jerry Sager of First National. Jerry Sager in First National is probably the largest golf lender investor in the US last 15 or so years. I historically not thought of as golf as a real estate asset class. But in many ways, it is. There's a land component, there's a alternative use component, there's an income component from the hospitality as a playing around the golf. He has on a data around which golf courses succeed and why? Which ones fail and why? It's often demographically based, it's often concentration based. What we learned is that you're right, golf is a very ideal socially distance activity. It's outdoors, it's enjoyable for most people. It's something they can pick up and play with their friends and be safe doing so. Jerry has made a tremendous amount of money for him and his investors by investing in loans and/or equity in golf courses, private and public. I really want to highlight that for our investors that in fact, it is an asset class that you can consider commercial real estate while it's esoteric asset class, it does exist and how it continues to grow in many ways. I agree with your point, though, that five or six years ago, there's probably, by far, an oversupply of golf courses, [inaudible 00:36:33] of golfers we had in this country. Many of those have closed. Actually, a lot of them with golf courses in the US have closed, year-over-year in the last five years. I can't speak to whether that continues or not, but if you pick the right courses to back, there is good money to be made as a lender and/or owner. I think Jerry's proven that.

Deidre Woollard: Yeah. I think it's really fascinating. I think that's one of the things that has been most interesting about this pandemic is the difference between figuring out what seems to be a COVID trend and what seems to be a longer-term, long tailed trend. One of those things has been like senior housing, obviously bad year for that, but long-term demographics seem to indicate that we're going to need more of it.

Mitch Rosen: Yeah. I completely concur with you. I'm not as experienced, frankly, in lending on the skilled nursing memory care or independent living side, but it's undoubtedly the fact that the government has a vested interest in seeing those businesses succeed and be around. That's why you've seen through the various stimulus bills, huge swathes of capital being deployed into those operators to ensure that they're around and they're viable, because there's nowhere else to put these folks. That's the sad part. There's nowhere else for them to go. I think certainly 2020 was a very tough year for them and getting people comfortable to be in those facilities was hard. There will be a adjusted period post COVID as you will get more comfortable and what steps are taken to ensure what happened in 2020 does not happen again to these residents. That's going to be a very big focal point for the operators. But undeniably, the number of people turning 70 every day continues to grow exponentially probably for the next 10-15 years and so these asset classes have a need to exist, a reason to exist and there's not enough of it.

Deidre Woollard: Yeah. That's very true. One thing about YieldStreet I've have noticed is your whole periods are a little shorter than some of the other crowdfunding platforms. Is that a deliberate choice? What does that give you in terms of optionality?

Mitch Rosen: It's a good question. When you think about the yield that we're targeting, ideally eight percent net to our investors and higher right now. It's hard to achieve that yield on a longer duration loan. We're really targeting bridge loans. These are loans that have some component of change occurring. It could be a hotel converted to a multifamily, it could be multi-family value add, it could be a land play with a construction loan takeout. Few people want to borrow at the rates that we charge for long periods of time. Because the inherent cash flow these properties generate on a longer period of time probably can't sustain it on a viable basis. We're really trying to effectuate a specific business plan with our loan, with our borrower, with the eventual goal of either cash flow going up and a permanent loan of replacing our loan, or a takeout loan of some sort after some business plan has been completed. It could be the re-tenanting of a retail center that had lost some tenants and they want to backfill that space. It could be a multifamily property that's well below market on market rents. It needs some TLC, some CapEx to improve the units. They raise rents and they refinance out Franny or Freddie. Those are some examples of the loans we've done before. Now we will continue to do going forward. I would love to be in a position here today to say I could do five percent loans at five-year term. The demand is not really there yet across, I would say alternatives and particularly retail. The goal with YieldStreet and with the CRE business in particular is to get to that point, so we could offer the breadth of duration and yield to all of our investors. That's the ultimate goal.

Deidre Woollard: Interesting, does that shorter time period also eliminate the need for something like a capital call or a need for more infusion of cash into a project?

Mitch Rosen: The answer is, yes. We've never really called capital to date on any of our debt investments. We have funded some capital to protect the investors in limited circumstances to ensure that, like for example, if there was leverage on underlying loan that we're protecting our investors so that they were not going to be losing their collateral position. We've done it in very limited examples, but it was successful. But in most cases we are not calling capital investors because it's a loan, it should perform hopefully as it's expected to and underwritten and it's repaying at the time we expect. On the equity side, it's a little bit different. If you're equity, you are inheriting the first loss. If the event that there is capital needed, there is this expectation that investors may have to come out of pocket to fund, let's say, a working capital reserve or a capital call for some CapEx or debt service. We've not gone through that process yet. But it is some of that all equity investors in general are aware of when you invest as the first loss piece.

Deidre Woollard: Exactly. How worried are you about interest rates going up in the short-term or medium-term?

Mitch Rosen: I learned earlier on on my career that we can underwrite rents, we can underwrite vacancy. You can't really underwrite two things. I'd say environmental risk and rates, it is a CRE investor. I really try to be agnostic to rates and ensure that I'm protected, meaning if I have a floating-rate liability, maybe a loan-on-loan, I better should be sure I've a floating rate underlying asset, so I'm not mismatched. Higher rates in general are not great for CRE. CRE acts somewhat like a fixed income instrument. You have, in most cases, longer-term fixed rate leases. However, your expenses can obviously modulate, your debt-service can modulate if you were floating rate loan. Your risk-free rate, if it goes up, you're going to probably want to receive a higher rate of return as a buyer of equity. Even though in 2007 when LIBOR was over five percent, cap rates were still below LIBOR rate. Because you were betting on that future growth, that future rent growth. In that case, if it comes to fruition, I think people are much more conservative and thoughtful as to how they're going to invest their money. But I'd argue it's hard to say that if rates don't move higher, investors would not expect to receive a higher rate of return. I think that's likely going to happen. It should either hold valuations flat or in some cases maybe potentially reduce them.

Deidre Woollard: Thank you so much. Just to wrap up, how do you personally invest in real estate, are you a real estate investor on your own? Are you investing in YieldStreet deals? What is your real estate investment portfolio looks like right now?

Mitch Rosen: I'm primarily invested in stocks and bonds. I'm also an investor in the YieldStreet Prism Fund, personally. I put money in there to get a broad swathe of the products that we offer our investors. The view is that when you're so ingrained in the individual deals that one is doing, providing a broader investment product where I'm getting a breadth of all the asset classes, really provide some diversification. On my own, personally outside of YieldStreet, I don't really buy SPAC houses. I'm not buying a Roofstock share or anything like that. I'm basically focusing on what I could control and not control and that's basically how I think about it.

Deidre Woollard: Awesome, great. Well, Mitch, thank you so much for your time today and reminder to listeners, you can learn more at yieldstreet.com. Stay well and stay invested

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