2023 CWS Annual Partners Meeting – “Patience in Action”
Thank you to all those who attended our CWS Annual Partners Meeting held at the Irvine Marriott Hotel on May 10, 2023. For those who were not able to attend, a recording of the event can be viewed by clicking on the following link: https://youtube.com/playlist?list=PLnJeiv88L37yE45xy_DhJV2InFYYyPv9o
This was our first in-person meeting since our 50th partners meeting held in 2019. The meeting commenced with a warm welcome from Partners Gary Carmell, Mike Engels, and Steve Sherwood. The company started the night with a special recognition to its longtime legal counsel, Aaftab Esmail from Bocarsly Emden Cowan Esmail & Arndt LLP, who has represented CWS for over 35 years.
Mike Engels began the presentations describing how the Federal Reserve’s actions have impacted CWS’ portfolio from a debt service perspective and an overall performance and valuation perspective. Mike communicated the status of the current interest rate tightening cycle and stated the average amount of time from when the Fed had paused rate hikes to when it began reducing, going back to the 1950s. The firm believes its portfolio is well positioned by having variable-rate loans, conservative leverage, strong working capital balances, and reinvested back into our assets to compete effectively in this challenging environment. Mike concluded that CWS values overall have held up quite well, recent distribution reductions are tied more so to cash flow issues rather than valuation, and NOI growth has partially offset the expansion of cap rates due to the rise in interest rates. He also indicated that higher rates have resulted in a reduction of future competing supply, doubling of the premium to buy versus rent, and the potential for compelling investment opportunities.
Next, Gary Carmell spoke about CWS’ variable-rate strategy and how it has historically provided a lower cost of funds compared to the fixed rate alternative in addition to a much lower perceived risk based on yield curve dynamics. The variable-rate loan strategy has provided CWS with more loan flexibility by allowing it to sell properties free and clear to maximize value and to refinance properties to extend maturities, improve spreads, extend interest-only periods, and return capital. This has afforded CWS the ability to prepay nearly 100 variable-rate loans of approximately $2.7 billion—saving an estimated total penalty amount of over $100 million. This strategy did not come without its regrets, which included not purchasing a 36-month cap or longer that could have provided additional rate protection. Gary provided details on why CWS did not go with fixed-rate loans. CWS’ strategy was right over the long run with the variable strategy but was very wrong in 2023. While some loans may be fixed going forward, that is not our base case thinking. Fixed rate decisions for individual properties will depend on the current cost of interest rate cap renewal, how high its spread is, and if its loan is maturing.
Steve Sherwood expressed how valuable and gratifying it is to be gathering together as it has been four years since the last CWS in-person meeting. Steve described the theme of CWS’s strategic approach, which is Patience in Action. He then referenced the 2022 annual report front cover and listed the many challenges that are present today. During this chaotic time, CWS’ approach to acquiring new assets is having “patience in action,” which is indicative of the way the company platform and structure is built. The fund structure does not have pressure to do deals and can go as fast as appropriate to grow or as slow as necessary. Patience is important by allowing CWS to make prudent investment decisions when the time is right, for the right assets, and at the right price. CWS has a track record of performing well during uncertain times and looks forward to working its way through 2023.
Concluding the presentation was Co-Founder and Advisory Board Member Bill Williams. He reminisced about how the company began in 1969 with a 15-unit apartment building in Huntington Beach. Today, the company has 105 properties, over 29,000 units, and asset locations in eight states. As always, Bill acknowledged CWS’s many loyal investors and expressed his gratitude for your trusted partnership.
CWS thanks you for your trust over the past 54 years by allowing CWS to represent you in owning, managing, and building apartments. We feel a great sense of honor and responsibility to preserve your hard-earned capital, to provide timely and relevant communications, and to deliver exceptional returns.