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REITs on solid ground|Morningstar

REITs on solid ground|Morningstar.

December 2017
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Private Equity, REITs, and Foreign Investment to Drive Turnaround in U.S. Commercial Real Estate Financing

http://www.prnewswire.com/news-releases/private-equity-reits-and-foreign-investment-to-drive-turnaround-in-us-commercial-real-estate-financing-117727653.html

Private Equity, REITs, and Foreign Investment to Drive Turnaround in U.S. Commercial Real Estate Financing.

Following the Spirit of Green Building Laws | Buildings | GreenBiz.com

Following the Spirit of Green Building Laws | Buildings | GreenBiz.com.

Solar Power: Brighter Long-Term Investment Outlook

Energy standards requiring U.S. utilities to use solar power could drive growth for companies ranging from inverter makers to installation financiers

Jones Lang LaSalle’s North America Office Outlook - Q2 2010

Jones Lang LaSalle’s Q2 2010 North America Office Outlook

According to Jones Lang LaSalle, the past several months, the U.S. office market has displayed stabilizing supply, demand and pricing fundamentals. However, beyond small pockets of new demand, growth remains limited. As such, an extended bottom to the office cycle in most markets is expected as the economy and job market struggle to shift into a higher growth gear.

Jones Lang LaSalle also suggested that various segments of the office market in Canada were fundamentally tight with vacancy declining and rents growing at mid-year. Speculating that the overall market remains a few quarters from absolute bottom due to ongoing development pipelines and slow demand in certain submarkets, as such, Jones Lang LaSalle concludes that these spots of softness have yielded still tenant-friendly conditions throughout most metros around the country.

 Click here to view the report

 

 

How to Succeed at M&A

How to Succeed at M&A

All too often, mergers and acquisitions fail dismally. That, says
Innosight’s Mark Johnson, is because executives don’t understand what
they’re really buying

http://www.businessweek.com/innovate/content/may2010/id20100525_156769.htm

Hit High-Fee Funds Where It Hurts

Hit High-Fee Funds Where It Hurts.

[New Project] New Canadian Equity and Social Values Fund

The current turbulent economic conditions is a great opportunity for opportunistic investments. History indicates that during economic downturns three main events occur:

1.  Increased educational attainment. Individuals seek to improve their skill sets through increased educational attainment (such as a post secondary degree or certification in another field) or certification to increase income potentials.

2.  Increased entrepreneurial activity. Individuals, who have lost their jobs or find a decrease in income, look to supplement income through additional employment or the creation of their own enterprise.  

3.  Depressed stock prices. Companies that are traditionally well capitalized and have strong fundamentals may see a dip in their market value due to market volatility. Investors tend to acquire equity stakes in these companies anticipating a “return to normal” level. This leads to investing opportunities.

My current project revolves around the latter two events. My team and I are contemplating the development of an investment fund dedicated to investing in public and private companies that have a potential for significant capital appreciation and fit the Fund’s concept of positive social values.

The investment objective of the Fund is to provide long-term capital appreciation by investing in a diversified portfolio of primarily Canadian companies that fit the Fund’s concept of positive social values. The positive social values include, but are not limited to eligible enterprises or assets (“EEAs”) that illustrate:

(i)     a positive stance on diversity as it applies to its hiring practices;

(ii)   a commitment to socio-economic development and community involvement in the region(s) it operates; and

(iii) a keen awareness of its global environmental impact.

The fund will invest in EEAs at any stage of development and offer investors capital appreciation and improved liquidity through existing public listings or near term liquidity events. The fund does not have target sector weightings; however, it does have sector limits and limits on investment amounts pursuant to standard risk management and operating policies. Therefore, in determining an appropriate sector mix, the fund will utilize a ”bottom-up” strategy.

The Fund will limit investing/funding amounts of its total assets to:

§  70% with medium or large capitalization publicly listed companies;

§  15% with private large businesses; and

§  15% with private small and medium businesses;

Notwithstanding the main investment criteria of the EEAs (strong stance on diversity, environmental awareness, and a commitment to socio-economic development), the general investment philosophy focuses on EEAs that typically possess:

i.       proven, able, active and experienced management;

ii.     proprietary or strategic advantages;

iii.   stable and/or growing demand for products and/or services of the underlying line of business;

iv.  appropriate capital management;

v.    financial strength including growth potential of earnings, cash flow, dividends, income or interest distributions over time; and

vi.  stability of underlying assets within an established business model.

Ok, I know what you are thinking…

Traditional investment analyses indicate that socially responsible investing (SRI) does not outperform traditional investing or well diversified portfolios. If that is true (which I do not believe), then for the simple fact that SRI funds increase the social benefits of the global community, investors should always choose to invest in SRI funds.

In an effort to understand why investing in SRI funds versus non SRI funds, one should develop a payoff matrix. The payoff should show that the optimal solution is to invest in SRI funds (ceteris paribus).

Nevertheless, my team and I are still evaluating the idea and speaking with various Canadian government and nongovernmental organizations. I will let you know how it goes.

**********Check out my blog on The Benefits of Diversity for more information on why this SRI fund is socially beneficial to Canada and the rest of the globe. (Hopefully I will write it soon!)**********

BEWARE – Is Your Private Equity Firm / Investment Banker Ethical?

How important are ethics in today's society?

Prior to the demise of Lehman Brothers and the selling off of Merrill Lynch to Bank of America, I was evaluating the level of transparency and ethics of some of the world’s most recognized private equity firms. My list included firms like Comerica, Wachovia, Wells Fargo, Bank of America, and many others. The idea was to determine how these firms go about identifying, selecting, and evaluating potential clients for their private equity/investment banking services division.

Typically, private equity firms have a standard due diligence policy when taking on new business. Unfortunately, some of these firms undertake unethical and illegal activities on the major shareholders of a potential client. Although majority shareholders have an expectation of privacy, private equity firms perform full background checks on the financials of these shareholders.

Private equity firms claim it is a risk management procedure in an effort to mitigate against potential risk exposures. I found out that this is not entirely true. Just like any business, private equity firms are in the business of making money. As such, they only take on business that they believe will have the highest return for the least amount of effort. 

This moral hazard is lead to the current financial mess in the United States. Private equity firms were taking on riskier business based solely on the “name” of the potential client. 

When it came to new business, evaluating a potential client’s current shareholders is not an adequate way to manage future expectations. Moreover, as we all know, past performance is not an indicator of future success. The reason we approach investment bankers and private equity firms is to tap their intellectual and capital raising resources is to move our organization to a “higher” level of performance. For example, due diligence on a company’s current shareholders/directors seeking to raise new debt/equity is simply a waste of time.

That brings up another point: the debt and equity deals undertaken by the firms. There are three players involved in the deal 1) the issuer, 2) the private equity firm’s shareholders (or other buyers) and 3) the private equity firm themselves (acting as an intermediary or placement agent). Private equity firms receive a commission from the issuers and in some cases the buyers as well. The private equity firms have an incentive to discount the actual cost of equity or debt because if the issuer does well, the debt or equity will be worth more. If the issuer does poorly, then the interests (debt or equity) is already at a discount and will be divided among the creditors when the issuers’ assets are liquidated. For quite some time now, academic circles have insisted that the investment banking/private equity industry is fundamentally flawed.

(Test – Ask yourself why the economy is doing so badly. Find the root of the problem, not the symptoms.)

For decades, private equity firms have availed themselves of operating in an unregulated market. Furthermore, according to Grant Thornton in August of 2007, less than 25% of private equity firms have a formal code of ethics. Grant Thornton’s survey also indicated that private equity firms believe they are in a better position to regulate their own behaviour. Clearly, private equity firms should be more transparent and disclose more about its activities.

So what can issuers do to protect themselves?

Work with private equity firms that have a code of ethics.

Here is what I suggest

1) Ask the firm to forward their code of ethics. Trustworthy private equity/investment banking firms will forward their code of ethics immediately or have it posted on their websites.

2) Ask questions. Get the private equity firm to explain in detail what their policies and procedures for establishing new clients. (Watch out for the “reversal”). Associates are trained to only provide certain information to clients. They are trained to reverse the situation and ask a lot of questions about your firm. Do not get intimated, give them the typical “you are browsing” rhetoric.   

3) Work with a firm that has a well known, recognized and fair operating policy. It is quite easy for clients to find out if private equity/investment banking firms are fair and respectable. The private equity industry works on a great deal word of mouth. Private equity firms that treat one client poorly may regret it in the future.

I restrict my blogging to no more than 10 minutes or I will be here all day! (Some of us are actual working)

Please feel free to login and comment on this blog.

I look forward to hearing from you!  

Challenging Market or Uniformed Players?

Over the last few months Eupex REIT has been having a difficult time engaging placement agents for the private placement of the REIT’s trust units. It is my belief that the difficulties associated with this capital raising endeavor stems from three areas: 1) poor understanding of the current commercial real estate market by gatekeepers (project evaluators), 2) lack of core real estate investors, and 3) unknown market expectations resulting in the “bandwagon” effect.

First we have to understand why the market is doing so poorly. As I limit myself to 7-10 minutes per blog entry, I will have to be somewhat general. I apologize for this in advance. The commercial real estate industry, just like any other industry, goes through cycles. Historically, the commercial real estate industry in the United States revolves around an 8 year cycle. That is 7 good years and one bad year. 2007 through the end of this year is our “bad year”. This bad year is somewhat extended and exacerbated due to the residential subprime mortgage loan fiasco, high oil prices and the overall economic slowdown.

Just prior to the start of this bad year, the public REIT market was plagued by speculators and what I designate as “non-core real estate investors” seeking to gain additional returns on an already overvalued market. As such, speculators and core real estate investors (the true market players) are currently in a “pullback” mode. This leaves limited players in the private equity market and limited access to equity funds for projects like that of Eupex REIT.  

As we opened discussions with various investment banks, it was clear that there were two issues a foot: 1) investment bankers were seeking returns unavailable (more like unattainable) with certain projects, and 2) had very little understanding of the real estate market. For example, one investment bank (which will remain nameless), requested an annual yield of at least 8.5%. Now, although we could obtain this yield with “serious” belt tightening, it was absurd to make such a statement.

In certain markets such as California and certain assets, let’s say premium class A enclosed shopping malls, a yield of 8.5% is quite difficult to obtain. This is why private equity firms like Lehman Brothers are under distress.

Core real estate investors understand that yields of 6.5-7.5% is typical in that sort of a market. This is a prime example of private equity gatekeepers not understanding the market.

Then we come to the second problem we are experiencing: the lack of core real estate investors. Due to the residential subprime mortgage loan fiasco, market uncertainties, investors are reluctant to place funds in the market or with new real estate investment trusts.

Speculators and core real estate investors are all on the sidelines waiting to see what happens next. Well, I am sure you know my feelings on that attitude. GET IN THE GAME! Real estate investors should continue to place funds in the private equity market. I do believe that the public REIT market is still overvalued by as much as 10%. However, new private REITs, such as Eupex REIT (shameless plug) are not affected by market volatility. Returns are based on operational efficiency and effectiveness.             

Finally, you have your “bandwagoners”. These are the individuals responsible for residential subprime crises. It is simple, leading investment banks that “propose” a certain type of investment are repeated by other investments banks. Alternatively, investment banks that refuse to participate in an investment may also be refused by the same tier bank. This bandwagon and “follow the leader” mentality has placed the economy in a severe economic slowdown.

Sometimes going against the grain will reap additional dividends.  

I am sure this topic will come up again in a couple of days. I restrict my blogging to no more than 7-10 minutes or I will be here all day!

Let me know what you think!

Cheers!