Transcription:

Keeley Webster (00:03):
Hello, and welcome to a different version of The Bond Purchaser podcast. I am Keeley Webster, and my visitor as we speak is Bryant Jenkins, a managing principal at Sperry Capital. I invited Bryant right here as we speak to speak about among the pressures dealing with mass transit within the submit pandemic period, and notably Bay Space Speedy Transit, a mass transit system that serves the San Francisco Bay space. Bryant has labored as a municipal advisor for BART for greater than a decade. Bryant, you have been telling me concerning the historical past of working with BART yesterday and the way you began out working with them on and off a contract foundation earlier than turning into their official exterior fa, are you able to share that story with our listeners? 

Bryant Jenkins (00:42):
Oh, actually. Actually Keeley. As Keeley talked about, I work at a boutique monetary advisory agency positioned right here in California referred to as Sperry Capital. And the primary time I began working for BART, I used to be residing within the BART district, which formally is Alameda Contra Costa and San Francisco counties right here in California, and it was 2012. They have been seeking to do refinancings on a few of their excellent gross sales tax debt in addition to the completion financing for the Oakland Airport connector undertaking, which it was new for BART as a result of it was truly a public personal partnership the place the contractor designed to construct, function, preserve this cable automotive, which is completely different from the remainder of BART. However then BART was going to make use of grants and finally gross sales tax income bonds to cowl the financing. And after I labored with them in 2012, they have been nonetheless engaged on a per transaction foundation. So the following outing, and I believe the following yr, they have been seeking to situation some normal obligation bonds. That they had an earthquake security measure that had handed in 2004 and so they have been seeking to do one other transaction with that. And I did not get the job, which was disappointing, however I assumed it was a fantastic funding and though I wasn’t their fa, I went and acquired among the bonds and every thing simply saved on shifting ahead and I used to be truly getting cash on the bonds. 

(02:24)
After which that they had one other procurement. They have been seeking to do additional refundings on their normal obligation bond credit score in addition to on their gross sales tax in 2015. And we utilized and we have been lucky sufficient to win. After which the one crappy half was I needed to go and promote this bond. 

Keeley Webster (02:43):
So it would not be a battle of curiosity? 

Bryant Jenkins (02:45):
Right, appropriate. So then we began doing work each, we completed that transaction, which went fairly nicely. After which I did one or two small tasks for the controller treasurer at the moment, a woman by the identify of Rose Poi. And there is a level the place she mentioned, you already know what? I do know we have been hiring FAS on a per transaction foundation, however I believe it is higher for us to have somebody concerned from a long-term perspective. And after they issued an RFP for that in 2016, we have been lucky sufficient to win. After which we proceed to assist them mainly refine what later turned Measure RR, which is a 3 and a half billion {dollars} limitless, limitless, a valorem property tax measure that went earlier than voters within the three BART counties in 2016, which handed by over 70% of the vote like in California in an effort to a minimum of at present you want a minimum of two thirds tremendous majority to cross. And it exceeded that, which was very nice. After which after all the following half is like, Hey, you have bought three and a half billion {dollars}, how shortly are you planning to spend this down? And so from that time on, we have been serving to them each with the completion of the measure aa, earthquake security geo bonds, the measure RR system system stability bonds, in addition to on their gross sales tax. We have additionally helped them each with Refinancings and so they financed an administrative headquarters just a few years again. 

Keeley Webster (04:33):
So quite a lot of the discuss why BART isn’t doing in addition to say Metro is that it is extra farebox dependent quite than having a property tax to attract on. So are you able to clarify, you simply ticked off three completely different areas that that they had financing by property tax or gross sales tax. Was it simply did they expire or have been they only type of like one-off for tasks or? 

Bryant Jenkins (05:01):
No, I believe it is useful simply to get somewhat little bit of context. I believe one is Bart had earlier than the pandemic, BART was one of many highest farebox ratio transit businesses within the nation. Their farebox ratio was nearing 70%, I believe Caltrain, which is the native commuter rail that goes in San Francisco, San Mateo and Santa Clara counties mainly up the backbone of the peninsula as much as San Francisco. That was the one main transit company that had a better farebox income ratio. And what I imply by that’s the proportion of farebox revenues as a proportion of their working bills for BART, mainly 60%, 65% of their working bills have been lined by their farebox revenues, which meant that they had sufficient cash coming in from their gross sales tax income, gross sales tax revenues and different sources. They have been in a position to make allocations to cowl different main upkeep tasks or different capital tasks. And so they did this beautiful persistently again within the late 2010s when the pandemic hit. I believe you alluded to this earlier than, Keely BART is located to be a commuter rail to get folks out and in of San Francisco. The San Francisco has not returned to work the best way different metropolitan areas across the nation have. I believe Fortress Programs does a return to work indicator, and I believe most locations across the nation are most likely above or at 50% by way of on each day occupancy and San Francisco’s nonetheless on the mid forties. We have type of plateaued. 

Keeley Webster (06:58):
I need to dive into that with you somewhat bit deeper, simply how San Francisco’s doing by way of workplace occupancy somewhat bit later. However I had a follow-up query once you have been speaking concerning the honest field ratio, and I believe you mentioned BART was 60 to 70%, are there different, I imply it looks as if that is at all times been excessive in comparison with different mass transit businesses within the nation. Are there others throughout the nation which might be skilled the identical stage of ache that BART is true now?

Bryant Jenkins (07:27):
It Is. I imply that that is very correct. I imply, I believe those who have been depending on farebox revenues given the change from the pandemic, from the truth that I believe hybrid work and distant work are right here to remain, that is actually affected quite a lot of these transit businesses. It is affected their funding mannequin, their enterprise mannequin. And I believe firstly of the pandemic, I believe for everyone’s sake, folks thought, okay, this isn’t one thing that’s going to transform life. We’ll get again to what we thought was the brand new regular or get again to 2019 way of life inside just a few weeks. And keep in mind it saved on going just a few weeks, just a few weeks, after which swiftly it is like finish of 20, 20, 20 21. It is like, nicely, we’re nonetheless very productive as a rustic, as society and folks get pleasure from not commuting folks and persons are permitting their workers to not essentially go into work. 

(08:26)
I believe now the folks aren’t essentially going to full distant, however hybrid work, and once I say hybrid work, I imply mainly folks working from residence on for example two days per week, normally Mondays or Fridays, after which going to the workplace, some mixture like two or three days per week. And that is one thing that I believe it is nonetheless evolving actually, however that is happening. And that severely affected Bart to the purpose the place I believe proper now they’re at about 30, 40% of what they have been pre pandemic on weekdays. Nevertheless it’s type of attention-grabbing that their weekend, their selection prospects, persons are taking that about 70% of what pre pandemic ranges have been. And simply to present folks somewhat little bit of context, the Bay Space’s bought seven and a half million folks and pre pandemic Bart on common carried about 420,000 folks on a given day. And now BART is carrying, I believe 160,000 folks, 170,000 

Keeley Webster (09:35):
Produce other comparable mass transit techniques throughout the nation, skilled it. It looks as if, my understanding is that for no matter motive, perhaps as a result of Northern California has at all times been so type of tech pleasant, it looks as if persons are going again to the workplace at a better price than they’re in San Francisco. I imply, is that your comprehension of it? 

Bryant Jenkins (09:56):
That is true. I imply, it’s being felt in numerous methods as a result of for instance, LA Metro, which is a county transportation company that operates a lot of the transit in Los Angeles County, which has 10 million folks, they’ve seen a better proportion of their pre pandemic ridership come again. Once more, that is a predominantly bus company, which is doing quite a lot of rail enlargement now, however they’re at like 60, 70% of their pre pandemic ridership for his or her general system. However you additionally should put in context, they’ve a roughly 8 billion price range and solely 300 million is generated by farebox revenues and their farebox income earlier than the pandemic was type of trending within the barely double digits, like 10%, 11%. 

Keeley Webster (10:52):
So mainly Metro, they don’t seem to be that depending on farebox anyway, so having their numbers come again wasn’t as important for them as it’s for BART. 

Bryant Jenkins (11:03):
Right, appropriate. I believe for BART, I believe one of many points is transitioning their funding mannequin, which as you possibly can think about, it is troublesome for, if BART was a ten individual enterprise, that may be troublesome. Nonetheless, an enterprise that companies and is basically crucial not solely within the three bar counties, nevertheless it additionally operates in San Mateo County and Santa Clara County right here within the Bay Space. It covers nearly all of that seven and a half inhabitants, seven and a half million inhabitants within the Bay Space. So it is actually essential and but it has to vary on the fly. 

Keeley Webster (11:47):
I’ve heard issues about there’ve been quite a lot of issues about safety and crime and homeless folks hopping over the honest field and never paying and writing, and there is simply been quite a lot of concern about issues of safety round BART. I imply, do you’re feeling like they’re fixing these issues or do you’re feeling like they actually need to place extra vitality into that to get folks again? 

Bryant Jenkins (12:15):
I believe that they are actually making strikes in that route, and definitely ridership actually appreciates that. I believe they’re on the lookout for extra law enforcement officials for BART PD in addition to they’ve unarmed ambassadors, which is a program that mainly helps information folks each inside stations and likewise on the trains and seeks to mainly curtail sure incidents on the trains. I imply, look, one of many points right here, and I believe that is being felt by any main city transit company is homelessness has been, I believe it has been rather more seen given the shortage of parents going downtowns, whether or not it is San Francisco or elsewhere within the nation. One of many points is, I imply for BART, BART is a transit company. It will get folks from level A to level B, it isn’t a housing company. And positively when you think about the context of the area, BART operates like many different essential entities right here within the Bay Space in a number of counties. 

(13:28)
And the problem with homelessness, it does not start and finish at anybody county’s border, if you already know what I imply. So I believe one of many issues that is actually, I believe, optimistic for BART is that they have moved ahead with a brand new contract for Honest Gates to mainly make it somewhat bit harder for folk to evade the turnstile and soar the turnstile. I believe these honest gates are going to look extra much like, I believe LA Metro has a few of these and a few of their stations and some folks do. I imply, it is actually troublesome to leap by. That has been an issue, or a minimum of it is actually been recognized as an issue. And I believe one of many different points has been what they name station hardening, which they’ve tried to do with their Measure RR GO bond program, mainly making it in order that these stations, when after the BART system closes at midnight, they’re in a position to shut and never have folks sleeping inside. 

Keeley Webster (14:31):
So now we’ll pause for a business break and we’re again. So Brian, one of many issues I might wished to ask you and I wished to get into was simply what has been taking place with all of the tech layoffs in San Francisco. There’s been rather a lot dialogue about whether or not or not San Francisco will return to its former glory, and also you and I had talked somewhat bit about how there’s at all times been quite a lot of volatility. So what are your ideas on that and the way does that play out for BART? 

Bryant Jenkins (15:08):
I believe I am cautiously optimistic most likely as a result of not solely has traditionally San Francisco been a increase bust metropolis, I imply going again all the best way to the Gold Rush, however once I first got here to San Francisco within the late Nineties, we’re within the midst of the primary.com increase, and I noticed what modified within the area, however then I’ve additionally been right here as a part of the second and third.com booms. And I believe actually from my perspective, it feels that we’re nonetheless, fortunately within the Bay Space, we’re nonetheless such a crucial community of movers and shakers in expertise, within the innovation house in biotech that persons are nonetheless attracted to come back right here. Now, having mentioned that, you even have to point, look, now we have actual points in downtown San Francisco that should be fastened. We’ve important points with value of residing within the area that make it prohibitive for lots of people who simply come out of college or need to come and transfer right here. And people issues aren’t going to be solved in a single day. 

Keeley Webster (16:17):
Have you ever heard any dialogue from among the workplace homeowners speaking about perhaps the options, what occurred in downtown Los Angeles, a minimum of within the arts district? Nicely, truly throughout downtown Los Angeles, they’d had some vacant workplace buildings, and it was truly earlier than the crash, they transformed them to Loft to loft house. And has there been any discuss that or is all people extra betting on folks coming again to the workplace and in that workplace house, simply staying workplace? 

Bryant Jenkins (16:56):
I believe persons are actually pursuing just a few workplace to residential conversions, however I believe that is type of on the margin. I do not assume that is going to occur for many workplace buildings for a wide range of causes. I imply, probably simply the excessive value. I imply, I believe a part of it’s, and fortunately I believe the politicians within the area, actually in San Francisco are starting to know that beforehand they might cost enterprise taxes, license charges for companies to be in San Francisco and downtown San Francisco that have been most likely multiples of anyplace else within the area. And doubtless in comparison with downtown San Jose, which mine you, is a bigger metropolis than San Francisco, I believe it was about 9 or 10 occasions the price which they have been in a position to accomplish as a result of the demand was such that individuals wished to be positioned in downtown San Francisco. That is fully modified, and I believe they’re undoubtedly beginning to adapt to that, which they should. However the situation for BART and different mass transit businesses like BART right here in Northern California like SF Muni, is that that change is not taking place as shortly as they want. And due to that, they want successfully cease hole funding so that they are in a position to change their enterprise mannequin, hopefully cut back working bills in addition to I do know quite a lot of transit businesses and operators right here within the Bay Space want to regional potential regional transportation measure in 2026. 

Keeley Webster (18:29):
What are your ideas on the, I believe it was $5.1 billion in transportation funding for operations that was authorised by state lawmakers. Do you assume it is sufficient? 

Bryant Jenkins (18:43):
No, no. Imply, my ideas are virtually irrelevant, nevertheless it’s extra of the $5.1 billion. It was actually, there was 4 billion of a capital program, the transit and inside metropolis, any type of rail capital program and operators are in a position to flex these funds for operations. The issue is a lot of the tasks that these funds are on, just like the BART Silicon Valley extension, which truly is constructed by Santa Clara VTA, and it is going to be operated by BART when it goes on, nevertheless it’s nonetheless underneath building, in the event that they take away these funds, then they’re lacking native match funds, which suggests they can not transfer ahead as a result of they don’t seem to be going to be eligible for the federal funds. So it will get to be a Catch 22 the place you possibly can transfer ahead and use these funds. However there’ve been no matter tasks you are engaged on, these are successfully useless or a minimum of useless for some time. 

(19:51)
After which the remaining 1.1 billion is being distributed through inhabitants. And one factor for, I believe your listeners is California’s bought about 40 million folks, and Jim Martin, certainly one of my colleagues at Sperry at all times tells me that half of our state lives south of Wilshire Boulevard in Los Angeles. So out of that 1.1 billion over 4 years, the northern California will get about 400 million over 4 years. So for those who assume that is 100 million {dollars} a yr, and Bart, for instance, is saying that in fiscal yr 25, they’re taking a look at a $93 million shortfall. That is not sufficient. It would not be, it will barely be sufficient for simply Bart, a lot much less BART, San Francisco Muni, AC Transit, and a complete slew of different operators right here in Northern California. Does that make sense? 

Keeley Webster (20:43):
Sure, sure, it does. I suppose additionally, so that you talked about that, so what retains Spark going if that is not sufficient cash, and as a substitute of BART simply going out and going to voters, they’re speaking about working with different businesses to do type of a joint proposition that may profit all of them, nevertheless it looks as if that pushes it out even additional, and it normally takes, I ought to ask you, I imply, you are a monetary advisor and you have labored on quite a lot of these measures. How lengthy does it normally take from the primary thought of let’s exit for a bond measure to the actual fact to when it is truly earlier than voters? I imply, there’s polling and 

Bryant Jenkins (21:30):
Yeah, one factor that is useful simply to know is for a lot of presidential election years, like 2024, folks have already recognized it for for example, excessive profile income measures, whether or not it is on the state, aspect, regional aspect, you identify it. For instance, right here within the Bay Space, we have been, I believe the oldsters within the Bay Space, just like the Bay Space Council, which is consultant of quite a lot of companies, metropolitan Transportation Fee, which is the Metropolitan Planning Group within the 9 County Bay space. They’re trying ahead to a inexpensive housing measure in 2024, actually to assist spur and facilitate quite a lot of inexpensive housing growth that want. It is not, once more, that is a type of issues the place we have important wants in Northern California and all through California, and a type of is having inexpensive housing, having workforce housing, as a result of more and more, and I see virtually each different day, I believe yesterday the article was that there is a cadre of people that work within the San Francisco Police Division who dwell not simply in surrounding counties, however who dwell in North Carolina, Texas, Arizona, and it is cheaper for them to commute through hand around in the station home for per week, after which after they get their week or just a few days off, return, fly again, which is, I imply, that is nuts. 

(23:00)
That is insane. 

Keeley Webster (23:01):
That is actually unhealthy for the atmosphere too. 

Bryant Jenkins (23:03):
Yeah. Yeah. So I believe, nicely, that is simply the purpose I need to make on income measures is it takes some time, particularly when you think about that the voting threshold is 2 thirds for many particular taxes, taxes that persons are on the legislature, I believe seeking to cut back that, whether or not to 55% or make the most of what they name a residents initiative solely requires 50%. However going again to the problem with BART.

Keeley Webster (23:32):
Wait a minute. So I assumed if the state legislature desires to place one thing on the poll, they should have a two third approval. However by way of as soon as it goes on the poll, I imply, a few of them have a majority vote and a few of them are two thirds is the one which BART’s taking a look at, would that be a two thirds majority? Is that what you are saying? 

Bryant Jenkins (23:53):
Yeah, it will be a particular tax. I imply, mainly every thing in California for taxes and costs is dictated by Prop two 18, prop 13, Prop 26. So 

Keeley Webster (24:04):
Yeah, I do know it is fairly sophisticated, 

Bryant Jenkins (24:07):
However simply going again to BART, everybody realizes that quantity that was supplied within the transportation price range trailer invoice is not sufficient, and that is why Sen. Scott Wiener put forth SSB 5 32 to mainly put an extra greenback 50 on the tolls of the seven state owned bridges right here within the Bay Space for a short lived time period for 5 years. And clearly that has potential implication. 

Keeley Webster (24:36):
How does that assist Bart although 

Bryant Jenkins (24:37):
That sum of money can be sufficient to most likely take BART and different transit operators a minimum of by 2026, mainly, 

Keeley Webster (24:46):
So that cash does not simply go to BART, it should be break up between all people? 

Bryant Jenkins (24:51):
Sure. 

Keeley Webster (24:52):
Oh, okay. Yeah. Okay. 

Bryant Jenkins (24:54):
So I believe for everyone within the area, it is mainly sufficient cash the place for those who do your operational expense reductions, you ought to be a minimum of in place the place if the income measure in 26 is profitable for the area, that that may then have the ability to permit folks to pivot and alter their enterprise mannequin. 

Keeley Webster (25:14):
So that you’d talked about that s and p had modified its standards just a few years again, which affected Bart’s ranking and that the company and that BART had determined to not go together with s and p on bond gross sales going ahead. Are you able to focus on the pondering round that and simply what is the distinction, what’s completely different about how Moody’s and Fitch price BART versus S&P? 

Bryant Jenkins (25:35):
Yeah, and I suppose only for context, just a few years in the past, SS and P got here out with a brand new ranking methodology for what they name not-for-profit transportation infrastructure enterprises, or they name it the tie methodology. And the best way that methodology, the intent was to be extra holistic and to contemplate not simply the credit score to the credit score worthiness of the income pledge, but additionally the operations of the entity. And positively once we preface this earlier, BART is certainly struggling proper now simply by way of how many individuals they’re serving to, they’re transporting every day. However that being mentioned, the precise credit score is a limitless advalorum property tax normal obligation bond. And so in August of 2020, for instance, BART issued $700 million of normal obligation bonds and S&P and Moody’s on the time each gave BART a AAA ranking when bought debt in November of 2020. 

(26:51)
S&P modified their methodology, and a part of their methodology mainly went for this extra holistic method. Nicely, the affect of that was successfully to present BART and different entities that depend on property taxes a downgrade. It was not considered as positively as different income streams. And I do not understand how a lot of that’s from the problems that occurred with Detroit in chapter again within the early 2010s, nevertheless it sounded type of tone deaf for me as a result of the credit score itself is similar credit score as limitless valor property tax that the three BART counties provide, which is rated AAA by S&P. So there was this type of cognitive dissonance of the bonds getting rated aa, and extra just lately S&P had an additional downgrade to a plus. And I believe the problem is once you look and see what the market has carried out, what buyers commerce BART’s GOs, that has not modified in any respect. And likewise in response after that change in methodology, the district determined to not use s and p on their 2022 a debt issuance of $700 million, and so they used Fitch and Moody’s, and so they bought AAAs from each. And so they’re nonetheless rated AAA at each of these. 

Keeley Webster (28:26):
However S&P, though s and p’s underlying ranking for the GOs is a plus, I imply it does price BART AA-plus on it gross sales tax bonds. 

Bryant Jenkins (28:37):
Right. Nicely, that is a special methodology although. Keely, that is the precedence lean methodology, which includes it is somewhat bit extra favorable to BART, and BART nonetheless makes use of that S&P ranking, nevertheless it’s simply, I believe a part of the problem for us is it feels not simply feels it, it’s inconsistent. And once you take a look at how BART and different property tax transportation enterprises like Port of Seattle have been handled in that methodology revision, it does not make sense as a result of at some stage, if the BART credit score, which encompasses three counties is rated at a plus and every particular person county is AAA, however the credit score’s the identical, BART does not contact the GO funds that come from San Francisco County and Contra Costa County in any respect. It does not make quite a lot of sense. 

Keeley Webster (29:36):
I believe you described it as type of like a lockbox system by way of the is available in and it instantly goes to pay the bonds. Is that proper? 

Bryant Jenkins (29:47):
Per state of California legislation, it will possibly solely be used to pay debt service. So it is an attention-grabbing place from S&P, and I imply, I type of view it as I perceive from the angle of they should price a complete class or whole sector, nevertheless it does really feel that for transportation entities which have non-operating associated income streams, on this case, an a valorem property tax that is limitless. It doesn’t make sense. 

Keeley Webster (30:23):
Do you assume the funds, BART’s bond funds are in danger given its present struggles? 

Bryant Jenkins (30:29):
No. No, in no way. Tax. The geo tax price will get calculated by BART. They supply these tax charges to the three counties, Contra Costa, Alameda and San Francisco. These similar to each different advert valorum property tax, whether or not for the smallest faculty district or the county, it will get placed on the property tax invoice. And the delinquency price proper now could be under 1% within the district. And I do not actually see a difficulty. And there is a motive why Fitch and Moody’s have AAAs with BART’s GOs. 

Keeley Webster (31:04):
What does Barts, what do you assume Bart does by way of operations? What do you assume must be carried out? I imply, do you assume it must be proper sized? Do you assume we’re simply actually not going to see site visitors come again to former ranges as a result of all people likes working at residence? Or do you assume San Francisco comes again and there is type of betting on the workplace house will get transformed to residential and folks work from there, however that is probably not going to assist bart. So what do you assume occurs over the following couple of years, each, I suppose financially and what BART must do on the operations aspect in an effort to stick with it and proceed ahead? 

Bryant Jenkins (31:49):
I believe, I suppose it is type of twofold. One factor is, and it does go in with I believe among the efforts to each present extra funds for transit. One factor that individuals within the Bay Space need is extra dependable transit, extra frequent service, and now we have 27 completely different transit businesses right here within the Bay Space. It’s higher for us to be extra built-in collectively. And which means honest integration. Meaning wayfinding is, it is extra coordinated. It most likely signifies that some businesses ought to most likely think about consolidation simply within the grand scheme of all people wants to take a look at each proper sizing for submit pandemic in addition to how can we finest ship the companies that we have to present the commuters right here within the Bay Space with our restricted sources. And it is actually troublesome. As I mentioned earlier than, altering what you are promoting mannequin on the fly is hard. However I imply, that is undoubtedly what I believe Bart must do. And I believe simply from my perspective, I am nonetheless, I dwell right here within the Bay space, I believe like all people right here who lives right here and loves it right here, I am counting. I am betting on downtown San Francisco to enhance. I am betting on the opposite downtown cores, whether or not it is Oakland, Berkeley, heck, even San Jose, to return to their previous brilliance. And I imply, the query for each Bart and I believe different entities is what can we do to make that higher? 

Keeley Webster (33:25):
In order that’s on a regular basis that now we have for as we speak. Thanks for becoming a member of us, Brian. And particular due to Kevin Parise who did the audio manufacturing for this episode. And remember to price us, overview us and subscribe at www.bondbuyer.com/subscribe. For the Bond Purchaser, I am Keeley Webster. Thanks for listening.