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Investment Managers Launch Coronavirus Fund To Buy Low On Hospitality Stocks

The coronavirus pandemic sweeping the world has caused seismic drops in the stock market, especially for some commercial real estate sectors, and a group of investment managers sees that as an opportunity. 

Compound Asset Management's Janine Yorio, TJ Kawamura, Manish Shah, Jesse Stein.
Compound Asset Management's Janine Yorio, TJ Kawamura, Manish Shah, Jesse Stein.

New York City-based Compound Asset Management announced this week its principals are raising money for a new fund aimed at buying shares in real estate companies hit hard by the stock market rout that they expect will recover. 

The fund, called the Compound Recovery Opportunity Fund, will focus on real estate businesses in the hospitality and leisure sectors. It is being managed by Compound principals Janine Yorio, Manish Shah and Jesse Stein.

Compound, founded in late 2017, pools money from retail investors to buy residential properties in fast-growing cities. Yorio said the idea for the fund came to them in the office as they were watching the stock market plummet and realized they needed to change their investment strategy. 

"The chatter in the office became so skewed toward 'Oh my god, this stock is taking a nosedive, oh my god the markets are a bloodbath,' and it was really just impossible to ignore," said Yorio, adding that it reminded her of other market downturns of the last three decades, including the dot-com bust, the 9/11 attacks and the 2008 financial crisis. 

"There are unique windows of opportunity to actually start investing because the market behaves irrationally and these corrections are usually finite," she said. "I felt there was an opportunity to start looking at investments, and to start aggregating dry powder so we would be able to invest in the inevitable recovery that's likely to ensue."

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Yorio said her background in owning and managing hotels gives her an expert perspective on where to find opportunity in the hospitality sector. Between 1999 and 2007, she worked as a hospitality portfolio manager for NorthStar Realty Finance Corp., and for the next two years she served as senior vice president of real estate acquisitions and development for The Standard Hotels. 

In October 2017, she co-founded Compound and became its CEO. Stein, Compound's co-founder and chief operating officer, has a background in the finance and technology industries, working for United Realty Advisors, ETRE Financial and Advanced Fundamentals. While Stein said he has less of a specific background in hospitality, he has analyzed REITs and knows an opportunity when he sees one.

"We felt we had the background that could really take advantage of movements and be able to analyze which companies are going to be affected, and which companies are going to be able to rebound and create an investment thesis," Stein said. "It's really based on the fact that hospitality is getting destroyed right now, sector-wide. There are certainly going to be some companies that don't survive this downturn that will go out of business and there will be other companies that will survive and will rebound and prosper."

Publicly traded hospitality companies have been among the hardest hit stocks over the last month, with hotel brand giants, REITs and resort companies all feeling the pain. As of Tuesday's market close, Marriott International was trading at $67.15/share, down from its 52-week high of $153.39/share. Hospitality REIT Host Hotels & Resorts closed Tuesday at $9.31/share, down from its 52-week high of $19.99/share. MGM Resorts International closed Tuesday at $9/share, down from a 52-week high of $34.64/share.

Georgetown University professor Jonathan Morris, a 29-year commercial real estate industry veteran who teaches a course on REITs, said he has seen funds form during past downturns that invested in undervalued assets, and he thinks the strategy of investing in struggling hospitality stocks makes sense. 

"I think we are at or near what sort of could be considered the bottom,” Morris said. “What companies are being priced at is where earnings are at this moment, plus there’s this massive shock effect, which is totally understandable, but it’s very possible that it’s overdone. There are a lot of companies out there that have a lot of well-located, well-managed assets that when we get back to normal — and we will — they’ll have a lot more value than they do at this moment.”

The fund's launch comes as the coronavirus has spread across the country to more than 5,800 people in every state and D.C., including at least 107 U.S. deaths, the New York Times reports. The pandemic has caused major disruptions in Americans' daily lives, from event cancellations to restaurant closings and mass layoffs in the hospitality and food industries. 

Yorio said she expects there will be some backlash to Compound's strategy of taking advantage of low-priced stocks as many are dealing with the negative effects of the pandemic. But she compared it to the Great Recession, when private equity giants like Blackstone invested in distressed assets, such as foreclosed homes whose owners were evicted because they were experiencing financial hardship. Yorio said Compound's platform will provide more opportunity for average investors. 

"The way I see this situation is we're investing on behalf of retail investors who are otherwise shut out from these opportunities," Yorio said. "We're betting on the resilience and the ingenuity of humankind because we know that inevitably the markets will come back, there will be a cure or a vaccine, and our population will develop immunities to the coronavirus, and we will emerge stronger than ever."

Because of Securities and Exchange Commission regulations, Yorio said the fund can only accept money from accredited investors and has a minimum investment amount of $100K. 

"While it's not an amount a lot of people have access to, it's more people than a $10M check or a $100M check that you'd need to get into a private equity firm," she said. "While I can understand how we will need to defend our moral compass, I think there is a redeeming side to what we're doing because we believe that long-term, fundamentally humans are resilient and that these industries are being beaten down well beyond the point of reason."