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Bringing more transparency to commercial real estate investing

Transparency. Accountability. Accessibility. These are all traits commercial real estate investors want, and they are qualities the best sponsors consistently display.

When investors and sponsors don’t see eye-to-eye on these crucial elements, it can lead to trouble. That lesson has come front-and-center here in North Carolina.

Pittenger Land Investments, the land investment firm founded by U.S. Congressman Robert Pittenger (R-N.C.), recently was the subject of a Charlotte Observer article that questioned whether his family’s company properly disclosed markups on land it purchased and then sold to investors who hoped to eventually flip the assets to developers. Some investors told the paper they didn’t know Pittenger sold them stakes at marked-up prices. The FBI is reportedly investigating the firm, though there have been no official allegations of any wrongdoing.

Pittenger Land Investments told the newspaper it has always fully complied with all rules and regulations. It also appears the firm disclosed the necessary information in documents sent to investors.

Why then are some investors still unhappy? I believe technology has changed our expectations. Investors now demand more information, with more context and at a faster pace than ever before. Conducting investor relations the same way it has always been done is no longer enough.

Granted, dust-ups such as the Pittenger dispute boil down to how much information was disclosed properly and how much relevant information was not shared. In Pittenger’s defense, many investors only hear (or read) what they want to hear. However, the debate serves as an important reminder that exceeding expectations with investor communications is paramount.

At our portfolio company Investor Management Services, we’re seeing more and more how important this issue can be. Our clients have told us the most valuable items we can provide are the tools to attract, engage and manage their investors in the 21st century.

Years ago, receiving a paper credit card statement in the mail was an appropriate and acceptable method of staying up-to-date on account balances. Keeping an investment prospectus in a filing cabinet for future reference was standard practice.

Today, any card issuer that only communicates with paper mailings won’t stand a chance in the marketplace. Very few people believe paper filings in a storage room are the best way to access investment records.

Customers now expect and demand real-time updates on their mobile phones. Transactions are documented instantaneously. Legal disclosures and investment details should be available from almost anywhere with a user name and password.

For commercial real estate professionals, this is a game changer, and frankly, we have been slow to adapt. Too often, paper statements with arcane language are mailed to investors with little other communication. That doesn’t cut it anymore. Investors want their real estate holdings and relationships to be as accessible and transparent as their online banking and brokerage accounts. They want all the available information at their fingertips, not just the required minimum mailed periodically in a legal document.

This shift is driving growth at our company. We have added new clients weekly, even in the traditionally slow summer months, and we’re investing in technology updates to deliver the tools sponsors need to provide a top-shelf experience for their investors.

IMS clients are sharing documents and disclosures with online investor portals, granting their investors access anytime and anywhere. Investors are monitoring investment dashboards to track performance. All parties can process transactions with the click of a mouse or the tap of a touchscreen.

In the modern economy, “We didn’t know,” is no longer a good excuse. The tools to manage investor-sponsor relationships are delivering transparency, accountability and accessibility we all should enjoy.


Robert J. Finlay is CEO of QuietStream Financial.

By Robert J. Finlay | Chief Executive Officer | QuietStream Financial

 

Bankruptcies, weak sales not slowing retailer growth

The retail industry may be tussling with some high-profile bankruptcies and weak sales growth, but demand for retail properties remains strong, according to a recent report from RBC Capital Markets.

Analyst Rich Moore’s research shows retailers have increased plans to expand and open new stores over the next 24 months compared to the outlook earlier this year. Planned store openings over the next 24 months have increased by 3.8 percent year-to-date, based on RBC’s retailer database of nearly 80,000 retailers. Those growth plans are in spite of sales growth that checked in at a meager 0.6 percent for the month of June.

“Media headlines have recently painted a difficult picture for the retail sector amid a backdrop of sputtering retail sales growth, struggling retailers, and high-profile bankruptcies. Despite the apparent headwinds, bad debt expense at the REITs remains below the historical norms, and strong retailer demand continues to drive occupancy and rental gains,” Moore says in his National Retail Demand Monthly report.

The “increasingly competitive” retail environment as shoppers have more choices that ever, including online stores, is expected to fuel more bankruptcies in the months ahead, RBC says.

In July, Anna’s Linens, a specialty houseware retailer, and A&P, the supermarket chain, filed for protection. RBC says retailers operate a combined 564 stores nationwide with 268 Anna’s Linens locations and 296 A&P locations.

“We expect that the increasingly competitive retail environment will lead to further bankruptcies which is likely to push bad debt expense back to historical norms,” Moore writes in his report. “Although bankruptcies may be disruptive in the short run, high quality retail space is limited, and retailer demand for vacancies due to bankruptcy appears solid as evidenced by the climbing number of planned store openings.”

Retailers in the crafts and supplies category, activewear, childcare, and salons showed the largest positive changes in planned store openings year-to-date through the first half of the year. Meanwhile, toys and hobby stores, laundromats, bookstores, and car care service centers slowed their growth plans the most, RBC says.


Top 30 Retailers 24-Month Growth Projections (as percentage of existing stores)

  1. Children’s Orchard (200 stores, 200% growth rate)
  2. Five Guys Famous Burgers and Fries (1,200, 160%)
  3. Penn Station – East Coast Subs (300 stores, 146%)
  4. Bed Bath & Beyond (140, 140%)
  5. Smashburger (200, 133%)
  6. Complete Nutrition (200, 129%)
  7. Subway (5,000, 122%)
  8. Quality Oil Company (145, 121%)
  9. Fresh and Easy (200, 114%)
  10. Aveda (200, 100%)
  11. Urban Outfitters (120, 100%)
  12. Menchie’s Frozen Yogurt (450, 90%)
  13. Robeks Fruit Smoothies & Healthy Eats (100, 83%)
  14. Golden Krust Caribbean Bakery & Grill (100, 83%)
  15. Villari’s Family Centers (400, 80%)
  16. Famous Famiglia (100, 80%)
  17. Sandella’s Flatbread Café (100, 80%)
  18. Crazy8 (160, 73%)
  19. Wing Zone (70, 70%)
  20. Mini Melts (200, 67%)
  21. Dunkin’ Brands Combo Stores (200, 64%)
  22. Torrid (90, 62%)
  23. Lee Nails & Spa (90, 60%)
  24. Charming Charlie (120, 60%)
  25. Red Mango (120, 57%)
  26. Kool Smiles (60, 57%)
  27. Five Below (110, 57%)
  28. lululemon athletica (80, 56%)
  29. Crocs (100, 55%)
  30. Francesca’s Collections (152, 54%)

Source: RBC Capital Markets July 2015 National Retailer Demand Monthly


Adam O'DanielBy Adam O’Daniel | Editor | QuietStream Insights

 

4 Intriguing Ways Drones Will Remodel Commercial Real Estate

Aerial drones are replacing boots on the ground with technology in the air. Will commercial real estate see the same transformation?

The trend of accomplishing more and more with unmanned aerial vehicles presents both challenges and opportunities for owners and investors in commercial real estate.

While military applications have led the way so far, the drone explosion has prompted both large corporations and startups to venture into the private drone business. The use of drones for commercial purposes is expected to expand at a 19 percent compounded annual growth rate between now and 2020. Meanwhile, the Federal Aviation Administration is sorting through a host of issues sure to arise.

A drone flies near an office property.

A drone flies near an office property.

Already, drones have begun to change how commercial real estate owners and investors make decisions. Whether you’re an early adopter or fast follower, now is the time to understand what’s taking off. Here are four areas to watch:

Marketing: Interactive photo galleries and 360-degree virtual tours are old hat. The next trend in marketing properties is to hire a commercial drone to showcase from above. The idea is already catching on in Southern California, where high-end residential Realtors have used drone video to market estates. Expect striking commercial properties to be marketed in similar fashion.

Due Diligence: Inspecting a piece of property curbside gives investors one perspective. Viewing an asset from 100 feet in the sky is another. An investor conducting due diligence on a property hundreds of miles away can now hire a drone to survey the area. Could drone-conducted due diligence someday replace traditional site tours?

“Look at what Google Maps did to help people understand the location of a property. Drones present another clever new tool for analyzing real estate,” QuietStream Financial Chief Executive Robert Finlay says. “However, nothing replaces boots on the ground for due diligence. I’d much rather walk the property than see a drone video.”

Security: Drone surveillance? Not in my backyard. As drones proliferate, security will become a greater issue for commercial real estate operators — on both sides of the issue. Many large office properties use private security officers and video surveillance to monitor a property on the ground. In the future, it may prove cost effective to also secure an asset with an aerial presence. Likewise, property owners are sure to invest in systems designed to keep outsiders from peeping. If property lines are vertical, some owners will do their best to enforce those lines into the air.

Logistics: Amazon founder Jeff Bezos raised eyebrows when he claimed plans to one day deliver packages with drones. Today, the idea is nearing reality as small providers are already experimenting with drone deliveries. Commercial property developers and operators will need to consider how to accommodate commercial drones arriving with packages. Could we one day soon see commercial properties with reserved space for drone landings and drop-offs?

Are you paying a ‘Liquidity Premium’?

Two investments with the same credit risk profile, potential for upside performance, tax treatment and expected investment period should have the same expected return.

Right?

Not in the real world. We know two very similar investment profiles can be priced very different. Why is that? For many deals, it boils down to liquidity.

Pricing differences in two seemingly similar investment options are often due to the investor’s ability to easily buy and sell the investment — the measure of how “liquid” it is.

Liquidity has been a hot topic lately.  Investors typically pay a significant premium to be in liquid investments such as blue chip stocks and U.S. Treasurys. Is it worth it?

Sure, investors can easily sell a liquid investment. However, on days when the market plummets, many investors lack the stomach to sell. Others sell in fear, regretting their quick exit later. On those days, the premium paid for a liquid investment may not feel like it paid off.

A recent article pointed out that sovereign wealth funds and other large institutional pools focused on long-term wealth creation have seen their allocations to illiquid alternative assets perform better over the long-term investment horizon, compared to more liquid holdings, according to research by Patrick Thomson, global head of Sovereigns at JPMorgan Asset Management.

Thompson says investing with a long-term view of alternative assets can help investors exploit tactical opportunities created by short-term investors forced to liquidate holdings, benefit from mispricing and valuation errors, and take advantage of their capacity to absorb additional risk.

“These advantages have rarely mattered more than now in a capital market environment of low yields, mounting volatility, unexciting global economic growth and subpar investment returns — nor have they contrasted more sharply with the prevailing transaction-oriented mentality,” Thompson writes in FTSE Global Markets.

“Yet today, as much as ever, long-term investors can (and should) access the full range of long-term non-public assets — value-added real estate, infrastructure, private equity and private debt — to diversify their holdings, mute the volatility of the public markets and earn steady and favorable risk-adjusted returns.”

The emergence of real estate investment offerings via online investment platforms makes this method of investing more accessible than ever. The average accredited investor can now follow similar strategies as those sovereign wealth funds.

On days when the public markets are fluctuating (or halting altogether), that a feels like good place to be.


Nikki Baldonieri

By Nikki Vasco | Chief Investment Officer | FullCapitalStack

FullCapitalStack Launches Groundbreaking $1.7 Million Offering for Charlotte Townhomes

FullCapitalStack, a QuietStream Financial portfolio company, has launched a $1.7 million preferred equity offering for the construction of 27 luxury townhomes in Charlotte’s upscale SouthPark neighborhood.

An artist's rendering of the SouthPark City Homes project.

An artist’s rendering of the SouthPark City Homes project.

The offering is one of the first Charlotte real estate projects to tap equity crowdfunding as part of its capital structure. FullCapitalStack’s online investment platform will make the offering accessible to all accredited investors in the U.S. Accredited investors are individuals with more than $200,000 in annual income or a net worth in excess of $1 million.

Charlotte-based developer Saratoga Asset Management (“Saratoga”) will sponsor the project, partnering with Charlotte-based homebuilder Alan Simonini Homes as the lead builder. Saratoga has contracts in place on four residential lots totaling 2.62 acres along Fairview Road in the SouthPark area. The upscale development, to be called SouthPark City Homes, will be constructed and sold over an estimated 28-month period concluding in late 2017.

“We are excited to launch this offering in our hometown to help local accredited investors access equity in a first-class Charlotte development,” FullCapitalStack Chief Investment Officer Nikki Baldonieri says. “Historically, real estate owners have been limited to raising equity capital from friends and existing contacts. Our online platform removes barriers and leverages technology so accredited investors can easily access, research and execute direct investments in real estate projects.”

The SouthPark City Homes development will consist of six separate buildings of either four or five units for a total of 27 luxury townhome units. Each three-story townhome will be approximately 2,761 square feet, with four bedrooms, 3.5 bathrooms, and a two-car garage. Amenities and features will include stainless steel appliances, hardwood and ceramic tile flooring, garden bathtubs, walk‐in closets, granite counter tops, fireplace, optional elevator and more.

“Working with FullCapitalStack allows us to broaden our relationships and present this project to the entire community of eligible investors, rather than just the partners in our existing circle,” Saratoga Asset Management Managing Partner Raymond Wetherington says. “This will be a development the SouthPark community can be proud of, and now it is a project neighbors can own a portion of as well.”

The SouthPark City Homes offering will begin accepting investments on July 15. Accredited investors can learn more, download complete investment details and read all disclosures at investments.fullcapitalstack.com.

About FullCapitalStack
FullCapitalStack, part of the QuietStream Financial portfolio, is an online investment portal for institutional and accredited investors seeking to invest in commercial real estate. FullCapitalStack provides investors unparalleled access to direct investments in office, multi-family, retail and other commercial real estate projects. In addition to its own exclusive listings, FullCapitalStack showcases investment offerings via partnership with Investor Management Services, a leading provider of online fundraising platforms for commercial real estate sponsors across the U.S. Visit FullCapitalStack at http://www.FullCapitalStack.com.

About QuietStream Financial
QuietStream Financial is an innovative portfolio of businesses serving commercial real estate owners, investors, borrowers and related professionals. Founded by CEO Robert J. Finlay, the company operates a portfolio of subsidiary businesses that provide a host of services, including investor management, fundraising, CMBS research and underwriting, defeasance, crowdfunding, marketing and other alternative asset management services. QuietStream Financial has more than $10 billion in assets under management and 100 employees. The firm is based in Charlotte, N.C. To learn more visit http://www.quietstreamfinancial.com.

Massive tech disruption aims at commercial real estate

There can be no more excuses for falling behind the curve in adopting technology in commercial real estate. Ready or not, a major disruption is unfolding in our industry.

It’s no secret CRE professionals have been lukewarm to new technologies. Meanwhile, the rest of the world is accelerating adoption quickly, which is why CRE is now playing catch-up.

Tenants expect high-tech workspaces. Clients and prospects operate in a mobile-connected business environment. Even commercial real estate investors are being drawn to online investment portals and the insights provided by big data and analytics.

Now, new technology is enhancing how agents showcase yet-to-be-completed construction projects. A recent Wall Street Journal article explains how leasing agents for a Madison Avenue property are using virtual reality to showcase the end results of a $60 million renovation still underway.

“Agents for the 40-story office tower take visitors on a tour beneath custom-built canopies, where they can take in the lush greenery of trees and ornamental grasses and check out the outdoor conference area and wet bar. They can even peer over the glass-and-metal railing and catch a dizzying glimpse of the street below and a view of St. Patrick’s Cathedral across the way,” the article describes.

“Actually, the $6 million ‘Sky Lounge’ won’t be finished until next year, but Sage Realty Corp. isn’t letting construction hinder renting space in the 850,000-square-foot building. The leasing agents are simply giving virtual-reality tours: Each visitor sits in the marketing office, outfitted with headgear that is coupled with interactive 3-D modeling software.”

It’s one more example of customer desires to be ahead of the technology curve influencing a migration to new tools by real estate pros. It’s also opening the door wider for vendors to help solve the commercial real estate industry’s challenges. The technology referenced by the newspaper is offered by Floored Inc., a virtual-reality software and 3-D modeling firm.

“I think the truth is people recognize the speed of technological advancement is increasing,” David Eisenberg, chief executive and co-founder of Floored Inc., told the Journal. “A few years ago, if you only had 10 to 15 years left in your [real-estate] career you could ignore some of that stuff. Now people realize they are going to have to be practitioners of the technology.”

Disruption is already happening in several areas. Social media is changing how CRE firms market themselves. Cloud computing has helped numerous firms scale faster and become more efficient. Advanced analytics are making data more accessible and instructing professionals how to leverage it for growth.

“Inevitably, technology is going to change how we all do business,” QuietStream Financial CEO Robert Finlay says. “Virtual technology is just one more example of the disruption coming to commercial real estate.”

A 2015 study from Deloitte lists technology and automation among the most influential forces in the industry. Mobility, smart building technology, data and analytics and related technologies are all forcing major shifts.

Deloitte’s 2015 Commercial Real Estate Outlook polled 1,100 commercial real estate professionals and found 69 percent believe technology will transform their business this year or next.

“Adopting more advanced technology is rapidly becoming an imperative in CRE,” says the Deloitte study. “Ultimately, CRE companies need to be progressively aware of new advancements in technology, and anticipate and step up adoption on a regular basis.”

Will peer-to-peer lending predict what happens next with real estate crowdfunding?

Peer-to-peer lending is about to get real — and commercial real estate crowdfunding won’t be far behind.

This week, we learned details of how Goldman Sachs will begin offering consumer loans via online platform. With plans to launch in 2016, there is little doubt the innovators who devised P2P lending will feel the heat.

As commercial real estate investment professionals, we need to pay close attention or risk being left in the dust. Technology is creating new opportunities for institutional investors and owners who are willing to adapt.

Innovators such as LendingClub and Prosper used financial technology (FinTech) to capitalize on a gap in the consumer and small-business lending markets after the Great Recession’s credit crunch. Seeing traditional banks and related lenders withdrawing, these platforms created a market for individuals to borrow small amounts from pools of cash supposedly invested by other individuals looking for new investment opportunities. The result has been billions of dollars in credit extended for debt consolidation, home improvements and other projects.

The concept is based on the idea that individual investors can now buy fractions of their peers’ debts — “peer-to-peer lending.” However, who really is the “peer” on the backside of this $15 billion to $30 billion market? It’s not savvy individuals making smart decisions for direct investing. Banks, institutional funds, and money managers looking for yield have powered the growth rate, funded the loans and have started to package the debt into securities. They are at times assisted by “first look” offers from the originators, and proprietary risk models to analyze the loans.

Most of the “peers” who own these loans are actually institutions, such as hedge funds and other investment pools. The borrower’s true peers likely end up only owning a piece of these loans through shares in a fund placed in their 401k, packaged and sourced by sophisticated institutions.

The standardization of consumer risk scores and credit profiling has propelled this new asset class into the securitization market, which has attracted new and additional capital. In turn, this will likely convert into more products at better rates for consumers.

What is the lesson here for commercial real estate investors? Our industry is on course to create the same type of standardization needed for institutional capital and lending efficiencies. These three factors are shaping the trend:

  • Crowdfunding has given real estate owners the ability to market their performance. Soon investors will be able to compare sponsor performance in standardized models.
  • FinTech is giving real estate owners the ability easily manage their investor base and post new, accessible offerings.
  • Real estate owners can now spend less time sourcing investors and more time managing their portfolios.

Although crowdfunding for real estate is in its infancy, there is already buzz about institutions and banks partnering with platforms to source product. Just like P2P lending, investors will soon find the ability to hold shares of a REIT in their 401Ks that primarily owns “crowdfunded” participations of equity in real estate.


Nikki BaldonieriBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

QuietStream Financial’s Nikki Vasco to speak at SCI’s Marketplace Lending Securitization Seminar

QuietStream Financial executive Nikki Vasco will be a featured panelist at Structured Credit Investor’s Marketplace Lending Securitization Seminar. Vasco is a QuietStream managing director and the Chief Investment Officer of FullCapitalStack, QuietStream’s commercial real estate crowdfunding platform for institutional and accredited investors.

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