No Comments

Seven CRE Investment Strategies For 2020

With the Thanksgiving holiday weekend behind, it is not too soon to look at what will be the top investment strategies for next year.

Seven top CRE investment strategies for 2020 include:

1. Sell Overpriced Industrial Assets

The industrial market has been booming for the last few years and is the favored asset class among institutional investors. The market is “hot” because of the strong economy, increased demand for warehouse and distribution space due to rising Internet sales and last-mile same- day delivery of online goods. Cap rates for industrial properties have compressed 1.5% to 2.0% during the last 18 months and we would be net sellers of industrial assets in this market.

2. Acquire Beaten Up Retail Assets

Many shopping center and mall real estate assets are selling at 7.0% to 10.0%+ cap rates and some of these assets should be bought. Retail assets have been out of favor for the last few years and although there are tenant risks, with bankruptcies and store closures, they can still provide a higher risk-adjusted return than other CRE assets. A number of the public retail malls are also selling at deep 50%+ discounts to net asset value and are also ripe for a buyout or being taken private. These distressed retail deals are opportunistic investments and need significant renovation and releasing.

3. Invest In Data Analytics Companies

One of the key growth areas of CRE is in data analytics. Data analytics encompasses all aspects of big data for CRE including; demographics, ownership data, property data, historical value information, sales/lease data and financial analysis. The data analytics space is very fragmented with a few large companies like CoStar, RealPage, REIS (a unit of Moody’s) and many local and start-up companies. These larger firms have been acquiring smaller competitors to expand their service offerings and customer base. Recently, CoStar acquired Smith Travel Research, the leading hotel/lodging consulting firm, for $450 million and RealPage acquired Buildium, a property management software firm, for $580 million. As the industry grows, there will be more consolidation and an opportunity to acquire these smaller private firms and even establish a platform to consolidate these entities.

4. Sell Overpriced Core Assets and Reinvest In Opportunistic Assets

The risk and return for various CRE investment strategies range from the lowest risk, core investments, which are typically fully leased, institutional quality, Class A properties with little or no leverage, to value-added strategies which are higher risk strategies that involve some property redevelopment, tenant adjustment or leasing or with operational problems to opportunistic strategies, which are the highest risk category that involve a high degree of redevelopment, leasing, tenant relocation or change or may be in financial distress. Many core properties are still trading at 3.0% to 4.5% cap rates and should be sold. The proceeds should be reinvested in higher return opportunistic strategies, as discussed in #2 above, buying beaten up retail assets.

5. Provide Participating Mezzanine Loans

Even though there is a lot of capital sloshing around chasing deals, there is a dearth of debt/equity capital for the portion of the capital stack above the first mortgage at about 65%-70% and below the minimum owners’ equity investment of 10.0%. This slice of 20% of the capital stack is ideal for a participating mezzanine loan. The participating mezzanine loan may have terms as follow; interest rate at LIBOR plus 4.0%+, loan fees of 1.0%-3.0%+ and 20.0% to 30.0%+ ownership of the deal. The mezzanine lender will typically not be secured by a second lien on the property but by an ownership guarantee and assignment of the owner’s interest in the property. The lender is entitled to the equity kicker because it is taking some of the equity risk of the project. Internal rates of return of 12.0%-15.0%+ can be delivered with this strategy, which is very attractive for a fixed income investment.

6. Perform A Systematic Review and Analysis Of The 15 CRE Risks

As we have discussed before, there are 15 risks inherent in CRE investment as follows:

  • Cash Flow Risk-volatility in the property’s net operating income or cash flow.
  • Property Value Risk-a reduction in a property’s value.
  • Tenant Risk-loss or bankruptcy of a major tenant.
  • Market Risk-negative changes in the local real estate market or metropolitan statistical area.
  • Economic Risk-negative changes in the macroeconomy.
  • Interest Rate Risk-an increase in interest rates.
  • Inflation Risk-an increase in inflation.
  • Leasing Risk-inability to lease vacant space or a drop in lease rates.
  • Management Risk-poor management policy and operations.
  • Ownership Risk-loss of critical personnel of owner or sponsor.
  • Legal, Title, Tax and Political Risk-averse legal, tax and political issues and claims on title.
  • Construction Risk-development delays, cessation of construction, financial distress of general contractor or sub-contractors and payment defaults.
  • Entitlement Risk-inability or delay in obtaining project entitlements.
  • Liquidity Risk-inability to sell the property or convert equity value into cash.
  • Refinancing Risk-inability to refinance the property.

All investors that own CRE should perform a detailed and systematic review of the above risks and their potential effect on an asset or portfolio.

7. Acquire Small Capitalization Public And Private REITs

There are more than 30 public REITs with market capitalizations less than $1 billion that are trading at or less than their net asset value. These REITs are ripe to be acquired or taken private by other REITs, real estate private equity firms or other institutional investors. It also may be possible to get control of the board of directors of some of these REITs via a proxy contest.

Any acquisition or merger opportunity will have to comply with the REIT tax rules including, the 5 or 50 rule which states that 5 or fewer individuals cannot own more than 50% of the value of a REIT during the last half of the year. Also, more than two-thirds of REITs are incorporated in the state of Maryland which has broader liability protection, more flexible voting provisions for stockholders, easier Bylaw amendment provisions, better protection against hostile takeovers and easier stock issuance procedures. Notwithstanding a Maryland incorporation, there are still opportunities via a friendly acquisition or proxy contest.

 

Source: GlobeSt.

No Comments

Healthcare Real Estate Gains Steam As Possible Downturn Nears

Professionals involved in owning, developing, leasing or financing medical office buildings (MOBs) often point to the Great Recession as an instigator for new investors to become interested in the property type.

To be sure, the healthcare real estate (HRE) space and MOB development and investment certainly suffered during the big downturn of 2007-09. However, thanks to other, unrelated circumstances, existing properties performed well, retaining their physician and health system tenants and, as a result, maintaining their values.

With many economic and business pundits predicting that the country’s economy is once again heading toward a  downturn – albeit not as severe as the last one – the recession-resistant qualities of MOBs are once again piquing the interest of a wide range of would-be investors as well as providing a sense of comfort for those already involved.

A panel of well-known, experienced HRE professionals recently explored this topic, as well as a host of others, while discussing the short- and long-term outlook for the sector during a panel session at the recent InterFace Healthcare Real Estate Conference in Dallas. The panel, titled “What is the Short- and Long-Term Outlook for Healthcare Real Estate?” was moderated by Murray W. Wolf, publisher of Healthcare Real Estate Insights.

The panelists comprised: Lee Asher, vice chairman of the U.S. Healthcare Capital Markets team with CBRE Group Inc.John Pollock, CEO of San Ramon, Calif.-based MeridianGordon Soderlund, executive VP, strategic relationships with Charlotte, N.C.-based Flagship Healthcare PropertiesJonathan L. “John” Winer, senior managing director and chief investment officer with White Plains, N.Y.-based Seavest Healthcare Properties; and Erik Tellefson, managing director with Capital One Healthcare Financial Services.

As the session kicked off the conference on Sept. 17, one of the panelists, Mr. Winer of Seavest, said that during “recessions, healthcare facilities, in particular those with the characteristics that we all know about, do just fine.” But he added that if there is a caveat to that perspective. If a recession is indeed eminent, he cautioned, investors should make sure not to acquire assets with only short-term prospects for success, be they aging buildings and/or those that will not provide flexibility as the healthcare delivery model changes in the future.

“The assets most of us are going to be looking for are newer assets that we’re very comfortable with as a long-term hold; we’re not looking for short-term turnaround plays,” Mr. Winer said. “But otherwise, I think we’re in good shape and I think businesses (in this sector) are in good shape, whether a downturn occurs or not.”

Other Panelists Agreed

“We operate a private REIT (real estate investment trust),” said Mr. Soderlund of Flagship, “and so we have a very long-term view of holding assets, and we are becoming more aggressive, reasonably aggressive in pursuing acquisitions. We want to build our portfolio and we … figure out what we should (hold on to and) not hold on to. We’ve been through that process. There’s a continuing imbalance of supply and demand, and until that changes, and until interest rates maybe go in a different direction, we’re all in a relatively safe place right now.”

Mr. Pollock of Meridian, which often redevelops value-add medical facilities, noted that during a recent meeting with investors from various sectors of commercial real estate, he was “peppered” with questions about HRE.

When he told that group that the tenant retention rate in medical facilities is often in the 85 percent to 90 percent range, “they were like, ‘You’re kidding!’” Mr. Pollock said.

“In general office, it’s 70 percent across the board,” Pollack said. “I think what we’re all seeing is that investors who are in industrial, multifamily and office are now asking more about healthcare. So we’re seeing pension funds that haven’t been in the sector, institutional investors who haven’t been allocating to the space with the theme being that medical office assets are performing better and they’re readying, maybe not for an economic downtown, but toward diversifying their investor base,”

 

Source: HREI

© 2024 FIP Commercial. All rights reserved. | Site Designed by CRE-sources, Inc.