How to Invest in The Trump Economy

All right, I see— I think we're in, dude. We're testing out a new, uh, a new software here. So if you can see us, show us some love in the chat. Make sure we got some eyeballs on this. We're not— Ben and I just talking to ourselves today. We're going live across a couple different platforms, so let us know where you're streaming in from. Welcome in everyone to this live educational webinar with myself, Ellis Hammond. I'm the Vice President of Capital here at Aspen Funds, and the man, the myth, the legend, Mr. Ben Fraser.

Hello, hello! It's gonna be fun.

Uh, this is gonna be a pretty interesting, uh, uh, webinar. We're really excited to talk about how to invest in the new Trump economy, and clearly he's made a lot of noise last couple weeks. I mean, really, his, his, you know, whole campaign about the economy. And I think a lot of people— I would say that's probably a lot of the reason why people voted for Trump. Would you agree? Is because of his different stances on the economy versus the other administration?

Yeah.

And so I think a lot of people are interested right now, what the heck should I do as an investor now that Trump has officially, uh, won the, the presidency? So welcome in everyone. Uh, let's see, I can see your comments on the screen here, so let us know where you're streaming in from. And if you're in StreamYard, if you're on a different platform, we are also streaming on YouTube and LinkedIn as well. So hello everybody! See some folks from Boise, East Coast, Missouri—

always gotta shout it out—

St. Louis, Seattle. Awesome, great to see everybody. Well, yeah, well, let's get going, shall we?

We got limited time here. To your point, it's an interesting time because both candidacies for president were at very different plans for the economy. And it's really important to understand what are going to be the driving forces of Trump's new presidency. Obviously, we got a taste of what he did in 2016. And I think we can use that as a benchmark for a lot of the policies he'll enact this time. But we're in a very different place, um, as from an economy standpoint, but also from a real estate standpoint. And as commercial real estate investors, you know, everyone's kind of just been holding on for the past few years, hoping to kind of come out of it on the other side. Hey, we didn't have a recession, we had a soft landing. And so the question is, are we going to get some reprieve? I think that's what everyone's asking. We're going to get the reprieve we all want. And I'm going to lay out a case for— I don't think it's going to come as quick as everyone wants, unfortunately, and I'll explain why. And then I'm going to explain how we're investing in the new Trump economy into commercial real estate. So let's get rolling. Let's get those slides pulled up here, and, uh, it's going to be fun. This is recorded. I hope it's being recorded right.

It's recording.

Yeah, send this out later. Um, so new Trump economy, what it means for multifamily real estate. This is a series of our educational webinars for our Aspen Private Credit Fund, which is investing in commercial real estate, um, in preferred positions of the capital stack. Uh, because we are going to make some, uh, discussions about our fund and projections, got to give the disclaimer that this is not an offer to sell securities, this is for educational purposes only. Any forward-looking statements are not guarantees of returns. And past performance is not necessarily indicative of future performance. For those of you that may not be familiar with the Aspen Funds team, I'm going to give just 3 minutes on our background. We're going to dive right into the meat here. But our two co-founders, Bob Fraser, Jim Maffuccio, they started Aspen over 11 years ago and really saw a unique opportunity in the investing landscape coming out of the Great Financial Crisis in residential mortgages, buying distressed debt. At very, very low, uh, discounts relative to what the borrowers owed. And from there, um, uh, that point is going to be a friends and family one-and-done fund, but started to see bigger opportunity and were able to scale and grow over the past 10 years. And we've now have assets in at least 7 different verticals. We manage and control over $600 million of assets across multiple verticals. We've raised over a quarter of a billion dollars of equity, mostly from investors. And we're just getting started, so we've got a lot of things, um, in front of us. Dan Schulte and myself were the other two partners of Aspen Funds. Dan is our chief operating officer. He's an attorney and a CPA and formerly general counsel of a large money manager in Kansas City here. And my background is in commercial banking. Um, before Aspen, spent most of my career in the commercial banking space as an underwriter, as a lender. So a lot of stuff we're going to talk about today are things that relate directly to what I've seen over the past 10 years, um, in my career in banking and real estate. So real quick, just so you might not be familiar with how Aspen Funds work, what we do is different than most operators when we're looking for opportunities for investment. Most operators are kind of bottom-up where they have a hammer and everything is a nail. So I'm a multifamily value-add syndicator, That's all I do. Well, the challenge is there's, there's good times and there's not as good times to be doing that one strategy, right? So if you're beholden to that one strategy because of your infrastructure, right, you got your, your fixed cost of labor, of employees and property management, construction, etc., you're going to be challenged and limited to how you can go and be agile to other verticals. And so what we've done is created kind of a flipped version of that where we look first the top-down economic trends that we believe are going to be in play for a long period of time and then build our strategies around that. And so that's really why we want to spend so much time, like on today's webinar, talking about the economy. Where are things going? Not just where are we at right now, but skating to the puck, right? As Wayne Gretzky famously said, it's how do you skate to the puck? Where is it going to be going forward? And how do we position ourselves as investors by skating to the puck of the economy and investing, uh, in in the right places. Like I said, our track record, um, let's get through that. And then, hey, this is a little free, free promo for our podcast. We've been doing this now for several years, uh, you know, top 1.5% of all podcasts in the world, um, Invest Like a Billionaire. Uh, we're actually taking a pause right now, uh, but we're going to be relaunching in the new year. It is going to be awesome. We've got a lot of things.

It's gonna be sick for it, so be sure to subscribe.

Um, and be, be aware of the things we're going to be launching next year.

I can't wait.

Okay, all right, lots of words to get to the meat here. Uh, Trump economy, so what is it going to mean? Well, let's dive in. So this is a snippet of the 10-year Treasury yield right after Trump won the election. Well, why, why does this matter? Why does the 10-year rate matter? Well, this is such a critical uh, point of vindication for what the future expectations of the economy is going to be, right? For a long time, for the past several years in fact, we've had an inverted yield curve. What that basically means is that short-term rates have been higher than long-term rates. And why that matters is short-term rates, they're dictated by the Fed, right? They're set by the Fed, the Federal Reserve. But the long-term rates are dictated by the market, right? And so when long-term rates are lower, the expectation is that future growth will be lower, and thereby the borrowing costs will be lower to support, uh, or just to, uh, stymie the, the growth of the economy. But in the inverse, when the long-term interest rates are higher, there's an expectation for future growth. So what happened is when Trump won the election, the market basically made the bet that, hey, the economy is going to grow again. And so that long-term rate is very, very indicative of what the market expects to happen, um, with the new presidency. And that's what we saw in the last presidency, right? So it's no surprise that the market is kind of baking in long-term growth. But let's look a little bit more of how that kind of breaks down and what that ultimately means for real estate, which we'll get into. But We've been saying for a long time, if you've been following us for any length of time, really from the beginning of, um, uh, the spike of inflation and interest rates as they started to accelerate, uh, high, we've been saying it's going to be higher for longer, higher for longer, both from interest rate standpoint and inflation standpoint. So the way that obviously the Fed controls inflation, or tries to control inflation, is through interest rates. So if you increase borrowing costs, that will slow down the economy and hopefully slow down inflation. But if you see here, this is a chart that shows the spread between regular Treasury securities and then inflation-indexed Treasury securities. What that means is there's an index you can buy that's TIPS, is inflation-protected Treasuries, and that will basically bake in what the market expects inflation to be relative to the non-inflation index. So you can look at the spread here, and it's another indicator of what the market expects inflation to look like going into the future. And so we saw kind of a spike here, and it's been increasing, um, uh, over the past few years toward the expectations that inflation is going to be higher for longer.

Yeah, I mean, I don't think that chart is great. You can also just look at the price of Bitcoin, right, and know that I think people are hedging against inflation. And that's one of the reasons— I mean, that's another great example of like big investors, sophisticated investors, institutions agree with this chart you're showing that inflation is going to be higher for, for longer than, than what most people— maybe the, the, the less sophisticated market.

Maybe.

Yeah, yeah. Or what they're hearing on the news.

Totally.

Yeah.

So I'm going to break down 5 reasons. I think I have 5 reasons, at least 4 reasons. We'll see how they get into the presentation, how to put it in here. But why inflation will likely be higher with Trump's policies, and we'll, we'll make the point down the road why that's important for real estate investors. And some level of inflation is good for the economy, but obviously when we saw really high inflation, that's not good. That debases the value of the currency too fast, and there's some negative impacts of that, obviously, with the requirement of interest rates to be higher, which has hurt a lot of valuations of assets. Okay, so the first reason is tariffs, right? And Trump talks a big game on tariffs. He enacted tariffs in 2016, and they weren't that inflationary. Um, but what he's proposing now is not nearly as expansive as what he did in his last presidency. He's saying right now he is expecting to do 60% tariff on China and 10 to 20% on everyone else. So we'll see if this actually happens. I think he's probably talking a bigger game, especially on China, than, um, uh, than others, because he really wants to use that as a negotiating power with them. But regardless, there's going to be increased tariffs, and if passed, even at the lower levels, this would be the highest tariffs we've seen since 1930. And so it remains to be seen what gets passed, but tariffs are inherently inflationary, right? Because what you're doing is you're, you're, you're creating a penalty on anyone that's importing goods, and you're incentivizing development into the US, and so that creates excess demand into the US, which is inflationary. Kind of the second part of this is America First. So Trump's always been big on America First, right? And he's clearly stated his position for manufacturing. He's also expected to enhance tax breaks and subsidies to boost US manufacturing. This again would increase the demand for skilled labor, for manufacturing equipment, infrastructure, All these things are inflationary, right? When you have a, um, a fixed amount of, uh, of supply, um, for all these things and you have an increase in demand, that raises prices. That's inflationary. Um, as an aside, this is why we're very bullish on industrial real estate, uh, which is kind of—

I mean, for clear, what you're saying here is— I mean, I guess describe a little bit more why supply wouldn't increase though. I mean, you're saying it's inflationary because demand's going to grow and supply is stay the same. That's essentially what you're saying, right?

Yeah, yeah.

But why would supply stay the same here in this case?

In the short term, it's going to stay the same, right? You can't automatically just create a whole lot more skilled labor out of thin air, right? There's a fixed amount of labor right now in the U.S., and if there's more demand for that labor, it's going to increase wages, which increases inflation. Now, over time, if there's a long-term trend, which we believe it is, that's going to be— the market will correct and it will kind of balance out. But in the short term, these are, these are things that take a long time to increase. Makes sense. Okay. The third is tax cuts, right? And tax cuts are considered inflationary, right, which just seems somewhat counterintuitive. Um, but the reason is because they, they increase consumer demand, right? If a consumer has more money in their pocket, they're going to go spend more. And consumer spending is the, the largest component, the largest driver of our GDP, of gross domestic product, which is The rate of that increase is the measurement of inflation, and the, uh, makes about 70% of total GDP. So if you're, if you're increasing tax cuts, you're putting more money into the pockets of consumers. That is going to increase overall demand, which is generally considered inflationary. So some of his proposals— and so this is, uh, all new proposals on top of some of his legacy policies that are still in place, right? So we have a lot of legacy Trump policies that As real estate investors, we love— hey, bonus depreciation, um, all that kind of stuff. It's phasing out. This is all new stuff. This isn't even including the legacy. Um, he's talking about lower corporate tax rates, significant cuts there, uh, exempting tips and overtime pay, um, a lot of other things he's kind of put into this proposal. Um, in— by most estimates, um, it could add about $4 trillion to the deficit over 10 years according to one of the large committees that looks at all the budgets here. So we already have a deficit, right? I'm gonna get into this in a sec, but with the tax cuts, you're actually putting us further into the hole, right? Because you're, you're decreasing the revenue from a tax standpoint. From the government standpoint, taxes are revenue. You're decreasing revenue, which is increasing your deficit. And I'm gonna get here to a minute why that's Uh, an inflationary thing. Let's talk about the budget, right? It's becoming a bigger, bigger hot button, a bigger issue. We're already right now running at a $1.8 trillion annual deficit as of September 30th. And like I said, he's likely going to be expanding this deficit in the short term with tax cuts. He's gonna have a hard time finding the shortfall, right? So, so deficits are funded by Treasury auctions. And so the government will issue bonds, issue Treasuries to go and fund the deficit and their promise to pay an interest rate to the market. But the problem is, as you increase the deficit, you have to inherently increase the interest rate that you're paying those bondholders or those Treasury holders to compensate them for the additional risk that they're taking. So increasing deficits actually increase the amount of interest that we have to pay, not only on an absolute basis, but also on an incremental basis. And so there's two ways to reduce deficit, right? Simple, simple math. Either increase revenues, which is taxes, or you decrease spending. So the estimates for the tariff revenue, which is probably the biggest, the biggest way that he's planning on increasing covering you know, the deficit, it's not, not even close to, uh, the, the, the, the tax cuts that he's planning on. So there's going to be a pretty big discrepancy. His hope is that he can grow out of it. So economic growth, you increase GDP, overall tax base increases, which will make up for it. But that's a long-term bet, right? And also very inflationary because you're growing again. Um, well, the other piece of that, like I just said, is you cut spending. Right? Well, here's why that's going to be a very, very difficult task. So he's got Elon, the Doge committee, maybe, you know, he got, got the—

I'm a Doge believer. Come on, you tell me Doge is not, you know, they're not, they're not going to have a huge impact. Talk to me.

I'm, I'm not very hopeful, as much as I want to be. I'm a huge Elon fan, I'll just come out and say it. I'm a huge Elon fan. But, um, I mean, they're gonna have, they're gonna have their work cut out for them because look, look at this. So this is all the spending of the government on annual basis. This is from a Wall Street Journal article, um, really great representation here visually. If you look at— it says mandatory and discretionary. Mandatory spending, that's the purple. They can't cut that. That's baked in. You're not going to be able to cut that. Um, you have Medicare, Medicaid, you have your interest payments, right? You got— you got to pay, uh, those that are holding, right, the securities to fund your deficit. Social Security, you can't cut that. And then there's tons of other lumps of mandatory spending that they don't break out in this chart. And then you have your discretionary, which is categorized into the defense and non-defense. Most, most people don't want to cut our defense budget, um, so you're really left with the non-defense budget. Problem is, of our $6.75 trillion annual budget, that only makes up less than a billion, which is about 14%. So that's kind of really the only bucket they have to play with. And we just talked about the budget's already at about $2 trillion deficit, and we're gonna be potentially expanding it by $4 trillion over the next 10 years. Here's what that further breakdown of the discretionary non-defense budget looks like.

You said a billion, it's really, you said really $100 billion. I mean, $1,000 billion. You know how you— So yes, please, thanks for the fact check.

$1,000, I don't even know how you say that.

$1,000 billion.

It's almost a trillion. So it is a big number for sure, but it's not, it's not, uh, gonna right-size us just from there. Because look at some of these things, right? There's veterans benefits. You know, who wants to go cut veteran benefits? Um, who wants to, uh, decrease our health spending, right? With, uh, what's his name, RFK Jr., I think that's probably going to increase, right? Um, uh, transportation, all these other things, education. These are going to be hard things for them to, to really meaningfully cut, right, with bipartisan—

from a percentage standpoint, I mean, there's probably billions that could be cut.

But to your point, how big a deal is that going to make on the, uh, yeah, you could cut $100 billion of spending, which sounds like a big number, but that's a drop in the bucket to what our deficit actually is.

Yeah, I mean, I think that's one thing, like $100 billion could be significant in terms of the impact on people, but from an inflationary standpoint, I think that's really what we're talking about, right, how to invest into this economy. And so Uh, yeah, I think that's a really interesting chart here.

So I think the big question— this is live right now, we're here on December 10th— next Wednesday the Fed is going to be announcing whether they're cutting rates again. Uh, the market is pricing in that they will. Um, but look at this quote from the Fed Chair Jerome Powell just the other day. He said the labor market is better than they expected. He means the downside risks appear to be less than they thought. Uh, growth is definitely stronger than we thought, and inflation is coming out a little higher. So the good news is that we can afford a little more cautious as we try to find neutral. So obviously the Fed is trying to, to balance out these, these competing forces. Obviously want to have a soft landing, um, but they're finding that, you know, the labor market is very, very strong, uh, growth is coming in stronger than expected. And again, all these things that are not even baked into the economy yet are going to continue to be inflationary. So what are the bottom line, uh, Trump's policies? They're expected to be inflationary, right? We talked about tariffs, we talked about incentives for U.S. manufacturing, we've talked about tax cuts. All three of those things are inflationary and trying to increase growth. Uh, the other, budget deficit, right? This is a huge issue, it's becoming a bigger and bigger issue. They're likely going to expand the deficit through the tax cuts. It's going to again put upward pressure on interest rates to be able to sell those securities into the market, the auction. And the Federal Reserve will continue to be limited in their options if inflation remains stubbornly higher, right? So right now, if inflation has been coming down and they've been able to drop rates, and it's probably another quarter, quarter point cut next week. But we really need— from— I'm talking with most, you know, brokers out of the market, they're saying we really need a whole point plus to even get the market back to, you know, the normal transaction volume. And, and even still, you're going to be probably selling at discounts to what the values were a couple years ago. So the big question is, what does that mean for commercial real estate? So let's dive into some updates here on commercial real estate. And these are some things we've been talking about for a little while, but I wanted to, to add some color with kind of what's happening behind the scenes with the new Trump economy. Um, so first of all, the tighter credit is creating gaps. There's, there's a big gap in the market right now. Traditional lenders have been pulling back on leverage ratios. It's created a negative, cautious sentiment from all lenders, right? Values have come down. Interest rates have really impacted the values of commercial real estate. And then here's the real big, uh, 800-pound gorilla issue that, um, is, is being talked about, but I don't think the, uh, the level of, of impact is going to create in the market is, is really not being shown. Um, this is the percentage of maturing loans that aren't hitting cash flow covenants, right? So this is, um, on, uh, banks' balance sheets in billions of dollars, broken down by asset type. You can see apartment, industrial, office, and retail. And this by year. So there's a huge amount of maturing loans. And what we've seen so far, the ones that happen in 2023 and '24, these are being— continue to be pushed out. They're extending the maturities because there is no way to get out of them right now. So what's happening is they're continuing to push out these maturities, but you can only hold on for so long because the expectation is if we can push out a little bit longer, long-term rates will come down and we can refinance into—

I got a lot of multifamily, I know exactly what the expectation is. They promised survive till '25, so, you know, we're, we're 3 weeks out, so we've almost, we've almost survived it, you know.

Yeah, I think that's going to be survive through '25 and maybe even '27.

Oh, okay.

So the issue is, you know, from a multitude of angles, but one is there's a a lot of maturing loans that banks are having to deal with, and they— no one wants to go and take a foreclosure, though we are starting to see that. So the easiest thing is to kind of kick the can down the road, um, and hoping that the, the values will recover, interest rates will come down. But as we talked about before, there's gonna be a lot of challenges for interest rates to come down even further. There really needs to be a substantial drop in interest rates, again, probably 100 basis points from, uh, —where they're at right now—lower for that to really start to be meaningful for certain of these deals to refinance out. And the other issue is this creating a lack of payoffs and restricted availability of new capital to lend. So even if the rates do come down, there's just less lenders out there that are willing and able to lend because they're all working through their, their own balance sheet issues, which are not having payoffs, right? I think from a bank standpoint, they lend out their capital, they expect to get those payoffs from those loans down the road. They can lend out as new loans, but they're not getting the payoffs, right? They don't have the capital to go lend. So what's happening, what I've been seeing a lot of in the market, is a lot of borrowers are having to go to private markets, private debt funds, and they're very expensive. And, and right now the spreads over SOFR are 4 and 5% over. Right? And so they're, they're able to charge a premium. So even if you can, if the rates do come down another whole percentage point but the banks can't lend because they're still working through their balance sheet, rates are still going to be in the, you know, 7, 8 plus percent range from a debt fund. Um, and that's if everything's looking good, which is going to continue to create challenges for those payoffs. Um, further restrictions from on banks from new, uh, rules being brought down from the Basel III Accord, going to create increased stress in compliance, other things for small lenders. So it's going to continue to create consolidation in the, in the traditional banking system, which is creating more, more credit gaps. And here's the other thing that was kind of an interesting component over the last few years that we're just starting to see happen is bridge loans were the primary source for a lot of especially multifamily debt in 2021 and 2022. And the challenge with those loans is they were generally at floating interest rates and very high leverage points, and they had 3-year maturities, right? So really a not great recipe when you have rates, you know, increase by 400 to 500 basis points in a short period of time. And operationally, a lot of these properties are struggling. So this is a little chart showing the increase in distress rates from CRE CLOs, which is predominantly bridge loans. So we're seeing a very big tick up in distress signals from the bridge loan market. So that's the capital market side. On the other side of it, we still have operating costs for these operators have increased up to 75% for some. Sorry, debt costs are 75%, operating costs are 8.3%. And a lot of that is property taxes. You know, the biggest one is insurance. Uh, labor is very difficult, so property management's gotten more expensive. Utilities, all these things are—

we've seen that across all of our properties. Our insurance went up, we had to quote 45% in the DFW market. Yeah, this year on one of our assets, just year over year.

Yeah. And it's— if you can even get in the Florida markets and other, you know—

yeah, yeah, there was no one else to quote. Like, there was no one else to quote. Like, it was like, what do you mean? Is that insane?

Yeah, yeah. So on top of that, you have vacancies that, that are up, right? So overall multifamily vacancies are increasing, so there's more vacancy market. Rent growth is down. So from your top line, you have less people renting and they're renting at lower rates. So rent growth— actually negative rent growth in some markets. Um, you have higher operating costs, you have Both of those things decrease your net operating income, which is generally how you're qualifying for a new mortgage. And the real big challenge on this, on the supply side or the, the rent side, is the new deliveries. So we've seen a, a massive amount of, of new construction starts a couple years ago that are now being delivered into the market. And so you can see here, this is broken out by new supply by some of the larger markets And, uh, this is, I believe, number of units. Yeah, number of units, uh, over the next several years. And it's, it's still a very big pipeline, right? So the construction starts, meaning new projects that are being started right now are going down, but that doesn't really impact the market for about at least 2 to 3 years, right? Because what's happening, what all the new apartments that are being delivered to the market right now were started 2 to 3 years ago. And we've seen the largest increase of new deliveries over the past 2 years of any time period of recent history, up, I think, 50% over the next highest amount of new deliveries. So again, a lot of pressure on these multifamily properties. But the silver lining, which is why everyone got into multifamily real estate originally, is there's still an underinvestment in housing on a long-term trajectory. So in the short term, we're seeing a huge amount of, of new supply coming to the market. Um, but if you extrapolate out that population growth, um, and the new, the new supplies can be hitting, we are going to be back to an imbalance where we are going to have a shortage. And a shortage is good for, for rent growth. That creates higher absorption, creates the ability to increase rent, uh, growth. We're also seeing a shrinking single-family buyer pool. So we're seeing the amount of people that can to qualify, um, and actually purchase homes right now, um, if they can even find one, is, is shrinking as we've seen household formation kind of get pushed out. And just lifestyle too is causing a lot of people want to stay in the rental market. So both of those things are, from my perspective, long-term boons to support multifamily over the long haul, but in the short term it's going to be challenging. Again, renting is cheaper than owning, so that's usually a big, big indicator. It helps create the demand. Right now we've seen one of the biggest gaps between the average cost of rental and the average cost of a mortgage. It's, it's pretty, pretty wide. So that generally pushes a lot more people towards, towards renting for longer. So the bottom line, and kind of sum it all up for the, the multi-family side is, you know, we saw record low cap rates where a lot of these deals were purchased, um, with short-term bridge debt in 2021, 2022. Uh, that debt is coming due, and many of those properties are struggling for reasons we just said, you know, rent deceleration in the high supply markets, lower absorption from record level of deliveries of new units, and higher operating expenses. So those are all driving down the income that these properties are generating. Um, so my, my opinion is the short term, which I've defined as 1 to 3 years, will continue to be very choppy waters, um, as much of this works through the system. So yeah, we've heard the idiom survive to '25. Unfortunately, I think it's going to be survive through '25 and beyond. Choppy for existing investors. Existing, yes.

And meaning if you own multifamily assets today and you're looking for a reprieve in the first part, or even middle, or heck, maybe all through '25, it may not be as sunny as we all hoped it could be.

Now, all that to say, it's, it's very deal-specific. It's what the price was. I mean, I was looking at a deal the other day, and they purchased it in 2021, but they've also grown NOI by 50%, right? So in that scenario where they actually were able to drive real, yeah, economic growth property level, they are in a better position, they have options, but they're still pretty limited. And they're hoping they're going to push out another year and see if they can sell. So that continues to be the story, and that's on a really good performing property. So existing investments, existing multifamily, going to be very challenged. But the long-term fundamentals of multifamily are still very strong. And so our position in what we're doing in this credit fund is investing in multifamily assets that we believe are well positioned, that are performing very well, and generally all new purchases, so kind of at reset values, at lower basis than they were a couple years ago. And they were investing lower in the capital stack because from my perspective, there's still a lot of extraneous risks in the market that we don't know exactly where interest rates are going to be a year or two from now. Now, I think— I, I bet that they're going to be higher than the market is thinking. If you look at the 10-year and the yield curve right now, the market's starting to think that more than they were before. Cap rates, I think they're, you know, obviously much higher than they were a couple years ago. A lot of people are hoping they come back down. I think we're going to see some continued pressure, upward pressure on cap rates, which decreases valuations. And again, a lot of this kind of distress or stress through the system is going to create a lot of kind of other opportunities throughout the economy. Throughout, throughout the multifamily market. So what we're doing is investing in lower in the capital stack. I'm going to just spend a couple minutes talking about kind of our strategy, and then we'll go to Q&A.

Yeah, well, I mean, I think just for you, jump into some context, you know, I mean, we're, um, we're, you know, the, the question then is, how do you, how do you, how do you invest into this market? How do you invest into this, you might call it distress or opportunity. Um, you know, I was thinking about that the other day, uh, is the difference between a consumer and investor is one complains, oh man, my mortgage is too high, uh, inflation is too high, uh, you know, and the investor says, well, how do I get— it's still— I'm still living in the same world you do. My groceries are high too, right? My mortgage is still higher. My rent is high. My, my car payment is high, but how do I get on the other side of that and actually benefit, right? And that's how you get ahead. And I think that's a, that's a big deal. So yeah, let's talk about what we're doing.

Yeah, because I think you're exactly right, where if you— it's on your time period, right? I think in the next, you know, 1 to 3 years, it's gonna be choppy water. It doesn't mean it's a bad time to invest. And actually, I think it's a great time to invest because there's a lot of opportunity because of all the reasons I shared earlier. There's a huge gap of available capital. So you can come in and, and command pretty incredible rates of return for pretty minimal risk that you're taking, lowering the capital stack. And so what we're doing is investing in preferred equity, mezzanine debt, bridge loans into predominantly multifamily properties. And we're generally capping out at 75% all-in loan-to-value, and many times below that. Um, and so what happens is we're earning a really nice rate of return, we're getting current cash flow And we're also limiting our downside risk because if cap rates do go up anymore, if interest rates do stay higher for longer and a lot of these values don't recover the way everyone expects it to, we're still in a great position because we have priority over common equity. And so what we're doing here is investing in lower in the capital stack. You may have seen a chart like this before. Um, but it's really helpful to think about, right? You, you, in any, any, any asset you have, the other side of it is how is it capitalized, how is it purchased, and with what means. In most cases with multifamily, you have senior debt, so that's your senior mortgage lender. And then, uh, you generally always have common equity, um, in most deals. That's what most investors invest in is common equity, um, which has some, some clear benefits. And then in a lot of deals, you have this kind of middle of the capital stack, which is preferred equity and mezzanine debt. And the benefits there are lower on the capital stack, meaning you get priority of repayment, you get priority of cash flow. So before you would lose a dime of your last dollar in, all the common equity has to lose 100% of their capital before you would lose any, right? So you have priority, you have reduced risk, And then we also have the ability generally to take over a deal and fire the manager and take— step in as a manager of that deal if they don't perform well, and/or force a sale if they're not meeting expectations, where we can basically force them to sell the market. It would likely wipe out all their equity. We'd be in a— we'd be in a good position. Um, and so what I think a lot of people don't, don't think about, or at least they're thinking about it probably more now, over the past few years, most investors invested in common equity, right? Which is great because you get great tax benefits, you get all, you get all the upside. And that's what historically, when people were selling all their deals in 2021, 2022, when they're getting, you know, 40% IRRs, well, that's the market rewarding, you know, the time of the sale. But you also take— you're the last dollar to get paid, so you also take the most risk. And from my perspective, it's important when you're investing as a portfolio perspective, where you're, you're not only thinking about, you know, what types of asset classes am I investing in, but where am I investing in the capital stack, right? I want to have a larger portion of my investment portfolio in lower-risk, cash-flow-focused opportunities to kind of create a bedrock of stability while I'm also taking some extra risk on the equity side to get some tax benefits and more the upside. This is a chart showing expectations over kind of direct lending and kind of preferred equity bridge loans, etc., over the next 5+ years from Blackstone. It's the number one asset class that they're expecting from a risk-adjusted return standpoint. Sorry, BlackRock. So I'm going to kind of pause there. Do you think we should go to Q&A? Yeah, let's—

there's— well, yeah, I think it's a good point. I think Just to summarize what I'm hearing you say is, and this is the, you know, if you're new to Aspen, uh, I love what Bob Fraser says, the, the waves, you know, from an investment standpoint, you think about you're standing at the, at the ocean, there's, there's waves and there's tides, and the waves can be big and they can be small and they kind of come and go, where the tides are things you can plan on, like We know when the tide is coming in and we know when the tide is going out because it is a long— yep, it's a, it's a, it's a long thing where a wave, depending on low tide or high tide, it, it's big, it's small, it's big and small, and it's rapid. And I think that's what we're seeing here. What we're talking about here today is the, the tide of multifamily, we believe, is a strong tide. Like, it's, it's going to grow because of the shortage in supply over the last decade and a half, really, right? We've underbuilt. I mean, we, you know, Kamala thought she was gonna go fix that somehow in the next 4 years by giving everybody, you know, a 25% discount on their mortgage or something. I mean, honestly, how— or rent control, or rent control— like, how— I don't know if you call it arrogant or ignorant, I don't know, but clearly that was not gonna necessarily make a big dent. But my point is, I think what you're saying is we are finding ways, and I think you as an investor be thinking Okay, I see the tide. Yeah. And the tide is multifamily growth over the long time. But it's also like, how do you know? So how do we, how do we get a part of that tide? And it's not just, as we've seen, just go invest in multifamily, right? Because we've both done that and trying to, you know, trying to kind of punch our way out of things. And so I think that's, that's where I love private credit because we're investing into a strong tide, but we're doing it in a way where we protect our downside and we're able to profit today and not 15 years from now. Maybe when we see— probably not 15 years, but maybe, yes, to your point, 3 to 4 years, we really start to see some cap rate reduction, some interest rate reduction in a big way. We can invest in multifamily today because it is a good asset, and we can also benefit today as well. 100% private credit.

I think to sum it up really succinctly, Trump is likely going to be inflationary, right? Higher inflation means higher growth, which he loves, um, and is going to support that. But that creates a lot of upper pressure on interest rates. So interest rates are likely going to be higher for longer. And the same time, we're seeing, um, you know, some challenges in multifamily that likely aren't going to be solved by substantial decreases in interest rates. But the positive, to your point, is long-term multifamily is in a shortage and it's very inflation protective, right? On a long enough time horizon, uh, residential real estate, whether that's single-family or multi-family, has the tightest correlation to inflation of any asset class that we've been able to find, uh, because it tracks, um, the— because the leases are 12 months generally, and it can track and increase the supply and demand relative to each market. So if you're investing in at a good basis now, you have the right time horizon, the right position in the capital stack, you're going to benefit from a tide of higher inflation, which does benefit multifamily in the long run. It's just the interest rates will likely also be higher. So the goal is to increase NOI. Hey, so we're live here.

So like wherever you're streaming from, YouTube, and we can see everything. Okay, so, um, Sam, if you would highlight some of these questions on the screen for us. Actually, Sam's in this too, Mike, so Sam can give us some of these. So question from Terry here. Can you see these? You want to answer these?

Yeah, I can see this. This is a great, great question. You're exactly right. So tariffs should encourage foreign investment in U.S. business, correct? And you're exactly right, right? Because you're basically creating a penalty if you don't do that. If you don't invest in the U.S., you're having a penalty. So it is going to incentivize that The, the challenge of the point I was making is that is necessarily inflationary because again, you're creating more demand for a fixed amount of current supply of the things we talked about, which are in the manufacturing market. You have your equipment, your labor, your real estate, infrastructure, etc. All those things is a fixed amount that can only be, you know, purchased by so many people, um, or employed by so many businesses. So I, I agree with you. I also think that's why we're again very, very bullish on industrial real estate, and that's a whole other conversation, but that's an area and a vertical that we're really leaning into because of, uh, the trend actually, you know, preceded all these new policies coming in is the, the reshoring, uh, the deglobalization and bringing U.S. manufacturing back, um, has already been happening for the past few years. I think it's going to accelerate it in a greater way.

Yeah. Hey, real quick, I This is not necessarily meant to be a, like a— it doesn't matter. This is that we can pitch when we want. If you're not part of our investor club, and we've talked about a lot of deals today, most of you have got the invite because you're just, uh, you signed up for just like our Aspen Private Credit Fund. But if you want first access to all the deals that we're doing, we have industrial deals coming in the pipeline. We just actually completed a refinance, uh, for our, our current industrial deal. We just sent tax-free distributions back to our investors. We're about to send that money this week. Um, so we have an investor club uh, which is— doesn't cost you anything. You do have to get on a phone call with one of our investor relations experts, uh, but, uh, Sam, if you'll drop the— I think that's aspenfunds.us forward slash— what is it? It's in the chat. Okay, great. Uh, oh, it's on the screen. There it is right there. Investor-Club-Invitation. Uh, so perfect. I would encourage you to go sign up for our Investor Club and you'll get priority access to all of our deals, um, especially even though, you know, we have a lot of deals that are— that oversubscribe before we even open it up to funding, and our investor club gets priority access. So I just want to make note of that, um, and we can move on. Let's get some more questions.

Yeah, I guess there's some questions in the, in the chat, in the comment section. I know we got some more, a few more minutes. I saw one from, uh, yeah, that's it.

Let's keep going. That's not really a question.

Another good question. Um, so yeah, this could encourage large growth in business tax revenue, right? So yeah, so All these things, um, again, are to incentivize long-term growth. And that is, you know, one of Trump's main goals. And that's how he ultimately believes he can dig himself out of, um, the hole of the deficit, right? Because you got to either increase revenue, you decrease expenses. Decreasing expenses can be hard. Tariffs are not going to make a huge dent in the tax cuts that he's giving. But the goal is you increase incentives enough in and decrease taxes enough where businesses start to invest in growth. Uh, but it's long-term, right? It takes time for that to really materialize into the economy. And so the point is, in the short term, it's very inflationary, and there's not a lot of ways to fund that deficit. But long-term, the goal and the hope is that GDP grows enough to where—

I mean, it's the promise of capitalism, right? It is the promise of capitalism. You incentivize growth, then overall, like, that's what drives revenue.

I mean, that is the the hope and promise of capitalism.

That's what Trump believes, and probably we would, you know, agree as well, uh, is there— is the right move. But to your point of this webinar is, well, what do we do in the next 3 to 4 to 5 years, as that's also not going to be, uh, you know, there's some major issues to fix in our system, and that's going to come with inflation, uh, that's going to come with inflation and different things. Good stuff, Terry. Great questions, man. Good, good. Um, can you explain cost segregation studies for depreciation on multifamily units? Uh, yeah, I mean, our fund right now actually is, uh, because we have equity positions, even though we're lending, it's a private credit fund, because there's some of our assets that were preferred equity, uh, some of these depreciation benefits, uh, are passing through to our fund. So if you are looking for tax benefits, uh, tax losses in 2024, make sure you get in touch with us here in the next couple weeks. But, uh, yeah, I mean, essentially the way I think about it, if you You know, the IRS allows us to depreciate assets on a typical schedule, right? That can be, uh, 15, 30, 45 years depending on what it is. And the way that I like to describe it, if you took an asset and you flipped it upside down, everything that would fall from the ground can depreciate on a faster schedule. And so what we would do when you go buy a commercial asset is you hire an engineer and they go and, um, make note of everything that would fall from the ceiling. And you can depreciate those things on a faster basis, on a faster schedule. And the IRS and what Trump enacted was bonus depreciation. Everything that, you know, you have kind of 1-year, 5-year, and what, 15-year buckets, or maybe it's 10-year buckets. The nice thing, accelerated depreciation, we can take all of those 1, 3, 5-year buckets and dump them into year 1, and then we can accelerate all of those losses into the first year, which is why a lot of folks would do cost segregation, because now we can take those depreciation losses, write them off in the year that we acquired the asset, and we can carry those forward through the life of the project. So it's a significant benefit to multifamily investors and multifamily assets, not just multifamily. This is true on, uh, on, you know, any commercial asset that you do a cost segregation. But because there's so many things, and this is my simple way of explaining it and understanding it, if you turn over an industrial complex, if it's an empty building, not much falls, right? Where a multi-family community, you have all kind of things, right? You have, uh, there's so many things. I mean, I think of— give me some examples. There's laundry units, there's carports, there's all the fixtures, right? There's a lot of stuff that would come loose if you turn the asset upside down. So those are the things that we can appreciate on a faster schedule, and those are the benefits from an investor. So again, if you, if you're looking for losses in 2024, get in touch with us. It's not a major benefit of the private credit fund, but it does offer some benefits for investors looking to, um, use, you know, use losses to shelter other passive income.

Yeah, another great question here: How does Aspen both find and choose assets to invest in the credit fund? Um, you know, the great thing is because we've been in this space for a long time, we have a great network of both brokers of other sponsors and, um, and then referrals that people have done deals with. So we have no shortage of deals, um, and deals from great sources. Right now we're, you know, we're only funding less than 10% of all the deals that we see, and probably closer to 5% or under, um, just because we're looking very specifically for certain types of deals that we believe are the strongest risk-adjusted return. So we want something that we believe is a very safe business plan, very safe position in the capital stack, but also can achieve a really nice rate of return that's really above market that we can charge a premium on because of a relationship that we have, of our ability to have speed, and then also create really flexible product structures in the market that currently don't really exist because of where our fund is structured allows us to do that. So, um, Yeah, we have a whole breakdown if you're interested in our data room of every single asset that's in the fund right now. We have 6 assets, about to close our 7th here in a few weeks. You can see the breakdown of all the underwriting and exactly what's in the fund right now and kind of how we look at the world from that standpoint. What else? Any other questions here? Anything on YouTube or—

No, I think we're seeing all. Guys, now's your chance. How does the energy market look under these circumstances? That's a great question. It's another area of a focus for us is the energy market and investing in energy.

Yeah, great, great question. And, uh, it's a perfect segue actually because we're going to be doing another educational webinar in January, uh, next month about the energy market and really how, uh, the, the new administration is going to impact that. At a high level, you know, Trump's policies are generally more favorable for fossil fuel developers and operators than the prior administration and will likely create additional incentives for new development. Now, still, there's a lot of capital missing from the market just because of the ESG initiatives and a lot of these green energy standards that are kind of being forced on these, these large capital allocators that are limited from investing in fossil fuels. There's still a great value to be, to be purchased in the market, but the, the drilling we expect to increase next year as the incentives are kind of rolled out and more activity is kind of, uh, we're gonna get Aspen hats that say drill baby drill. So baby drill, it's a great thing. We need a lot more fossil fuels, so we're very supportive of that. But yeah, we have a whole new webinar just on that topic. We're going to spend a whole hour on that here coming up in a few weeks, so stay tuned. We'll get all the, the deep details that you'll want to know. Um, so appreciate that question.

Yeah, great, great question. Um, yeah, we have our 7th energy fund likely coming out in, uh, into January, uh, for folks interested in investing in that as well. So again, let's pull up that, um, Investor Club link one more time, if you would highlight that for folks that, uh, might be interested in that. So yeah, I just go to AspenFunds.us. It should be in the top right corner, um, is probably another easy way. But we would love to chat with you directly for accredited investors, um. And so anyways, we— this is really fun for us, guys. Uh, if you're not following us on YouTube, go ahead and do that. I mean, we probably do 2 or 3 webinars a month right now between our live deal webinars and education webinars. And so if you're not following us on YouTube, I would encourage you to, uh, to make sure you do that so you don't, you don't miss any of our educational stuff. And, uh, you know, if you have specific questions about investments or allocations, uh, for 2025, it's never too early to start planning that. Uh, just go and schedule a call with us on our website, and we would love, uh, to sit down with you and really map out, you know, what you're looking to do and what we have coming down the pipeline. 2025. I think the great thing about our business model is we're, we're not, um, we're not multifamily operators, uh, for better or for worse, meaning we have the ability to pivot. And that's why we, we can offer things like private credit. Uh, it's, it's the strength of Aspen Funds is being able to kind of find the, uh, the tides and invest in those tides. And so, uh, definitely, uh, get in touch with us.

Anything else? I think, I think that's it. Great questions, guys. Appreciate you all joining us live. This will be recorded. We'll send out the recording, and a lot of people were able to make it live, so feel free to share that, uh, and, uh, sign up for the Investor Club like Alice mentioned, and we'd love to chat with you. Thanks everybody.

Have a great Tuesday. See ya.