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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

 

Market Report: ‘Falling knife’ or ‘buy on fear’?

It’s hard to even look at the numbers right now. 

After a sharp slide to end last week, investors woke to more disturbing news Monday as international market declines sent the Dow Jones Industrials into a 1,000-point tailspin to start the day. Even a big late morning rebound eventually gave way to a sell-off later in the day.

So, let’s stay away from the absolute and instead, focus on the differential. Despite the massive rally in the Treasury market, refinance rates moved about 10 basis points lower. In other words, spread widening significantly muted the Treasury run. Typically in a bearish environment, credit becomes tight and financing more difficult. However, the numbers are showing a bottom to the correction.

Although credit products blew through support levels, the quick bounce on Monday indicates a probably near term correction and potentially continued strength in the CRE market.


NikkiBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

Guess Who Just Plowed $3 Billion Into Farmland?

While retail investors hold their hats watching markets swing back and forth this summer, the world’s deepest pockets are seeding a new fund that will buy stakes in a rather boring asset-class: Farmland.

TIAA-CREF, a multibillion-dollar investment manager, this week announced it has exceeded its $2.5 billion goal and raised $3 billion for a new agriculture fund. TIAA-CREF Global Agriculture II LLC is the asset manager’s second global agriculture investment partnership. The first fund, closed in 2012, raised about $2 billion.

The new fund will invest in “high-quality farmland assets across numerous geographies spanning North America, South America and Australia,” TIAA-CREF says. The pool has capital commitments from U.S. and international institutional investors, with numerous return commitments from the firm’s first farmland investment. TCGA II has 20 investors, including AP2, Cummins UK Pension Plan Trustee Ltd., Environment Agency Pension Fund, Greater Manchester Pension Fund, New Mexico State Investment Council and the TIAA general account.

“With its low correlation to traditional asset classes like stocks and bonds, farmland offers excellent portfolio diversification benefits for investors and a hedge against inflation,” says Jose Minaya, senior managing director and Head of Private Markets Asset Management at TIAA-CREF Asset Management.

“The macroeconomic fundamentals for investing in farmland are very positive and we view the launch of this new strategy as a testament to the ongoing potential and attractiveness of this asset class.”

The oversubscribed fund underscores a trend that has become clear in recent months. Wealthy investors are looking for more alternative assets to offset the volatility of the stock and bond markets.

“Smart money is investing in hard assets,” FullCapitalStack Chief Investment Officer Nikki Vasco says. “Whether its farmland or another form of real estate, many investors are looking for asset classes that can hedge against inflation and shield some of the market volatility we see today.”

TIAA-CREF, which has $500 billion in assets under management from top institutional investors worldwide, currently manages approximately $8 billion in farmland assets and commitments around the world. It has been investing in agriculture since 2007.

A recent Wall Street Journal report on farmland investing pointed to hopes among investors — both institutional and individuals — that the asset class will gain value as food consumption increases amid rising global populations. In addition, farmland often generates income from rent paid by farmers.

Several firms have also recently created REITs for retail investors to own pieces of farmland investments, including Farmland Partners, which went public last year.

It is obvious that some institutional investors believe the benefits of owning hard assets outweighs the risks, despite the recent appreciation and lack of liquidity.

“Farmland is the tortoise in a tortoise and hare race,” Paul Pittman, chief executive of Farmland Partners, told the Wall Street Journal.


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

 

Market Report: Volatility Is Here To Stay

How many hits does it take to become unaffected by the blow? 

The global markets calmed a bit last week. However, that didn’t continue as this week opened with the Greek stock market plunging after five weeks of being closed. Additionally, commodities were hit again after China announced a slide in manufacturing. 

And, of course, U.S. equities opened lower on global concerns despite the strength in personal spending.

This week is sure to be a repeat of the roller coaster ride with everyone waiting for the latest jobs numbers due to be released on Tuesday.

So, to address my initial question: Can we absorb so many hits that we become unaffected by the blow? Never.  But an investing world dominated by the global economy, real-time information and electronic transactions is here to stay.  Volatility is becoming the norm.

Take a picture of rates and the current lending environment. Tomorrow will be different.


Nikki VascoBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

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

Interest rates: How many increases are on the way?

Yes, investors, interest rates will go up this year.

Here’s the question we really want answered: Will two rate hikes happen before Christmas?

Historically, multiple successive rate hikes have followed a period of prolonged low interest rates. This was the case at the conclusion of the low-rate periods of the early 1990s and mid 2000’s.

“When rates go up, they usually keep going up,” says Nikki Vasco, chief investment officer at FullCapitalStack. “There’s a good chance that the Fed could raise rates this fall, and then again before the end of the year.”


source: tradingeconomics.com

Of course, this most recent period of low interest rates has set new historical standards. With federal funds rates at or near zero since 2009, the Fed is preparing to increase rates from unprecedented territory. Raising interest rates from this point forward will be new frontier.

In a speech in Chicago on Friday, Federal Reserve Chairwoman Janet Yellen remained steadfast in her expectation that the central bank’s Federal Open Market Committee will enact the initial rate increase before the end of the year.

“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy,” Yellen told the audience at the Chicago City Club. “But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”

Yellen’s comments were closely followed by U.S. investors, who thought her outlook might change in response to the turmoil in Greece. She mentioned Greece just once in her speech, saying, “Although the economic recovery in the euro area appears to have gained a firmer footing, the situation in Greece remains unresolved.”

The Fed chair said she expects the U.S. employment market to keep improving, with inflation moving closer to its 2 percent target rate. Those expectations are coloring her plans to increase interest rates. She also indicated the Federal Reserve will move slowly and gradually, shaping decisions based on economic realities.

“I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time,” she said. “But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.”

Reading tealeaves, the fate of rate hikes — and whether or not they’ll happen consistently, or in fits and starts — appears to depend Yellen’s view of economic growth. If U.S. economic growth is believed to be choppy, the rate increase schedule could reflect that. And if growth is steady? There’s a strong chance interest rates will follow suit.

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

Did Forbes swing and miss on investing like the uber-rich?

I have always been fascinated by how the world’s wealthiest individuals invest and what we can learn from them.

Recently, I flipped through some articles I’ve had filed away on the investing choices of the uber-wealthy. I found a Forbes story about how the richest people in the world have shifted their allocations. I read the piece again today. All I can say is this: Forbes missed one.

The advent of crowdfunding gives individual accredited investors access to deals once limited to the world's financial elite.

The advent of crowdfunding gives individual accredited investors access to deals once limited to the world’s financial elite.

It’s not a bad piece, or even inaccurate. It’s just missing a key piece of information about how we can invest like the wealthy.

It’s no secret the world’s elite invest differently than up-and-comers still working to get there. For starters (and I talk about this a lot), they invest much less in stocks and much more in hard assets like real estate and private equity. Forbes suggests that any investor looking to emulate the wealthy can shift more dollars to private equity, via stock in the largest PE firms, purchasing shares in a PE fund itself or working with an advisor who specializes in private investments.

Those three methods carry their own sets of challenges. For example, allocating more dollars to publicly traded private-equity stock doesn’t eliminate the volatility many wish to avoid in the market. As for investing directly in funds or with specialized advisors, those routes come with minimum investments that can price many investors out of the opportunity.

So what’s an accredited investor to do?

Here’s what Forbes missed: These changing allocations towards more exposure to private equity represent the wealthy making direct investments with partners they trust. The only secret sauce is that private equity offers exclusive, high-growth opportunities that are typically correlated with the success and failure of a business (ownership), and less dependent on the greater market performance.

Here’s why I get excited: Ten years ago those options available to the wealthy weren’t available to the rest of us. Even two or three years ago, most accredited investors didn’t have ready access to investments in hard assets through a relationship with a proven sponsor. Now they are accessible.

Crowdfunding and online solicitation changed the game. The investing world is becoming flat. Now, it’s possible for the average accredited investor to put their money into pools that support proven, trustworthy partners in real estate and operating companies. Allocations don’t have to be limited to a big publicly traded REIT or PE firm. Today, seasoned pros are putting technology to work and creating platforms that open trusted investing partnerships to a much wider segment.

Here’s where Forbes and I agree. The wealthiest investors in the world don’t allocate much to “buy, hope and pray mutual funds.” Instead, they pick investments with trusted partners that won’t be subject to stock market ups and down. For the first time in history, that advantage is now available to the rest of us.


Nikki VascoBy Nikki Vasco | Chief Investment Officer | FullCapitalStack