From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for the ‘Uncategorized’ Category

Trophy Property

with one comment

As you all know, earlier this year I put the finishing touches on Real Estate Valuation and Strategy, published by McGraw Hill. (The link to the right takes you to the Amazon.Com page, but it is also available thru Barnes & Noble, Books-a-Million, and other regular business book retailers.) While finalizing this, I was simultaneously outlining my next two, one tentatively titled Stigma: Revisited Again and one on Trophy Property Valuation. The former is still in the outline stage, but the Trophy Property book is coming along nicely. Of course, dealing with Covid and assorted ramifications has slowed down a lot of things on my agenda, but hopefully I can move forward this winter.

The genesis of the trophy property book came from the work I did in the valuation of historic property, architecturally valuable property, and historic districts, mainly back in the 1990’s. I actually started writing Trophy Property with an eye to just those narrow niches, but came to realize that there is more of a need for a broader book, examining “preseravable” properties in the context of top-tier, collectable real estate.

My former business partner, and good friend Dr. Bill Mundy, wrote a series of articles for The Appraisal Journal some years ago on this very topic. At the time, his focus was mainly on collectable ranch lands and western “open space”, but the general paradigm holds for all manner of high-end, collectable “trophy” real estate. His definition of trophy property, broadly speaking, was the top 2.5% of any property in any given sector. Thus, one could have trophy residences, trophy forests, and even trophy commercial property. This last category is particularly fascinating — consider the top-tier office building or buildings in any major city. For example, consider Rockefeller Center or the Empire State Building or the Chrysler Building in New York City. Each of these, and many more like them, are owned not just for the direct income but also for the “halo effect” that owning such a building can have on a portfolio. Of course, the owners of such buildings expect top-tier rents and returns over time, consistent with the reputation of such properties.

Right after the 9/11 attacks, I was called in by some real estate investors to discuss the very special security needs — and thus valuation implications — of “trophy” office properties. While every major office building in the world faces heightened security today, as compared to 20 years ago, it almost goes without saying that high-amenity “trophy” buildings can be of particular concern.

Valuation of such properties is a challenge, and requires a significant level of experience, expertise, analysis, and often unusual data. Several years ago, I was asked to value an island off the coast of New Zealand. While such islands trade hands regularly, this particular island had been developed as a trophy “get-away” by a Forbes-400 family. Normal valuation metrics hardly applied, and the value of the island had to take into account the global market for such complex properties.

With that in mind, there are some generalities that transcend all sectors of trophy property investing, valuing, and curating:

  1. The market for a trophy property is often global, not just local. Valuation of any asset usually requires consideration of recent sales of comparable properties. However, what is comparable? For that matter, what is the market?
  2. Trophy properties often require care and maintenance above and beyond the norm for non-trophy properties. Again, consider just the security concerns. Consider also that “trophy” properties often have life-spans well beyond the economic norm. One great example are homes of ex-Presidents of the U.S. or other famous individuals, which are carefully maintained, at great expense, even though they are usually well beyond their economic or structural lives.
  3. Income producing trophy properties, such as offices or high-end retail establishments (think “Tiffany’s”) have very different capitalization metrics. Much like distressed properties have higher equity ROI expectations, trophy property may have much lower or even non-existent equity dividend rates, because…
  4. Value expectations are either in very-long-term growth prospects, subjective benefits, or halo effects. As a result simplistically determined market values may be very far different from more complex investment values. Indeed, more often than not, trophy properties sell at investment values rather than a more quantitatively determined market value. This point confounds professionals in the valuation field. If trophy properties trade at investment (rather than “market”) values, the don’t these investment values BECOME the market value? Indeed, this is a troublesome question, of no small concern when considering point 5…
  5. The tax implications for trophy property can be enormous. Many trophy holdings are curated to provide tax credits, and thus come burdened with easements with implications for down-stream owners. However, determinations of the bases for such credits requires a stylized measure of “market value” and defending this can be a challenge when similar properties are sold for complex purposes.

Point 5 gets even more complicated when dealing with a pure tax credit as opposed to a sale (or swap) of property to the Federal government. As it turns out, different valuation rules apply, and so even “market value” may be two different numbers, depending on the intended users of the valuation.

I know this is a scattershot of information about trophy property holdings, the implications for valuation, and the potential benefits. Acquisition, management, and value optimization are all dynamic elements. Real Estate Valuation and Strategy dealt with these topics in the context of overall real estate investment, and hopefully I’ll have the chance to drill down on these issues more closely in the next book. In the meantime, and as always, if you have any questions, I invite you to reach out.

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com

Written by johnkilpatrick

October 26, 2020 at 10:30 am

Posted in Uncategorized

ACCRE: REIT Investing and Mid-Month Report

leave a comment »

This is normally the point in the month when I provide the portfolio stats for ACCRE, specifically the Sharpe Ratio and the correlations with the S&P. I’ll do that at the end. First, though, some questions I’ve received over the past month lead me to provide a primer — perhaps more of an abstract of a primer — on REIT investing in general. Note that during troubling economic times, investors regularly look to real estate as a safe haven. REITs can provide that pathway, but only if investors understand a few of the basics.

What is a REIT? — The modern-day Real Estate Investment Trust (“REIT”) is a creature of the Tax Code, and specifically (and I still find this humorous), an amendment to the 1960 Cigar Excise Tax. Without boring you too much, if a real estate trust is structured in a certain way, then the income from that trust can be passed thru to the investors without paying corporate taxes. Now-a-days there are a lot of ways of accomplishing this tax feat, but w-a-a-a-a-y back in 1960, only REITs were a viable solution to this problem. Remember that the maximum tax on unearned income back then was 70% and in some cases 90%. Figuring out a way to make this income a pass-thru without double-taxation was (and still is) a big deal.

In the early days, REITs were mostly “captive” of big corporations or other entities. A retail business might move all of their real estate (and mortgage debt) into a REIT just to get it off the books and thus make the returns look better. The REIT existed only to hold all that paper. Nothing really changed. However, over the years, REITs began spring up as for-profit entities on their own, to specialize in certain property types, and to get listed on the New York Stock Exchange (or later NASDAQ). In many ways, the mid-1990’s was saw a real shift in REIT management style, and the modern day REITs are now largely stand-alone investments. (There are some exceptions, but they are rare.)

REITs and Liquidity — REITs basically fall into two categories: Public and Private. Private REITs are fairly similar to private equity funds or hedge funds, and provide very little in the way of liquidity. There are a lot of reasons to organize a private REIT, but trade-offs require a high degree of investor sophistication. Conversely, public REITs trade just like stocks. They are liquid, marginable, and often can be “shorted” or have options just like stocks. Specialists or NASDAQ firms make a ready market, and they often trade in the after market. Settlement terms are the same as for any other stock.

REITs Specialization — Long ago, a particular REIT may own a smorgasbord of assorted property. There are still a few that do that (“diversified” REITs). However, today, REITs largely specialize into several sectors:

  • Industrial
  • Office
  • Retail
  • Lodging
  • Residential
  • Timberland
  • Health Care
  • Self Storage
  • Infrastructure
  • Data Center
  • Diversified
  • Specialty
  • Mortgage

Within these sectors, individual REITs tend to focus on specific areas. For example, Regency Centers (REG) is a Retail REIT focused primarily on grocery-anchored centers, usually thought of as “neighborhood shopping”. Tanger Factory Outlet Centers (SKT) is also a Retail REIT, but, as the name indicates, invests in outlet centers (currently 39 of them in 20 states and Canada).

REIT Information — The National Association of Real Estate Investment Trusts (NAREIT) maintains a wealth of info on 195 publicly traded REITs. Note that there is also some data there on a limited number of private, and “public but non-listed” REITs. Further, your favorite data sources, such as your trading platform or Yahoo Finance will also be great sources of free information.

Unfortunately, real estate in general is not well understood by financial advisors, and REITs are simply a highly liquid way of investing in real estate. Thus, an advisor may know a lot about, say, pharma or tech, (or both, for that matter) but ask him or her about the retail sector or housing or even something as tech-related as data center warehouses, and you will all-too-often get a blank stare.

As always, if we can answer any questions, either on big stuff or small stuff, let us know. We’re here to help.

And now on to our mid-month report. September, as you know, was not a great month for the market in general. The S&P 500 pulled back over 6% last month, and has only recovered a bit of that so-far this month. Generally, we aim for ACCRE to be only partially coincidental with the S&P 500, thus providing some attenuation during down periods. However, for reason’s I’m still exploring, ACCRE fell much closer to lock-step with the broader market downturn in September.

S&P 500:
Average Daily Excess Return0.0327%
Standard Deviation1.3451%
Sharpe Ratio2.4315%
ACCRE Fund:
Average Daily Excess Return0.0455%
Standard Deviation1.1540%
Sharpe Ratio3.9436%
Correlation (overall)56.4666%
Correlation (monthly)73.4120%
ACCRE Metrics as of September 30, 2020

Notably, the previous monthly correlation was only about 52%. That’s a point of some interest, and we’ll want to get the correlation, on a month to month basis, back to that level.

Well, that’s about it for this week. Please note that any mention of any particular investment or investment sector is not to be interpreted as a recommendation. Greenfield Advisors, ACCRE, our team members, or our clients may or may not currently have investments which are consistent with or adverse to those mentioned herein. As always, any specific investment should only be made upon consultation with your advisors. Stay safe, and stay in touch!

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com

Written by johnkilpatrick

October 19, 2020 at 11:21 am

Posted in Uncategorized

Distressed Real Estate

leave a comment »

In 2021, and perhaps beyond, the market is going to be flooded with distressed real estate. On the residential side, we learned a lot of lessons about collateral and loan underwriting in the 2008/10 debacle, but nonetheless, a lot of homeowners will fall into trouble by the sheer length and depth of this recession. As of this writing, this recession is only about a half year old, but most analysts forecast continued economic doldrums for at least a year or more to come, even if we get some immediate COVID cure. Generally, it takes months for residential foreclosures to begin hitting the market. With that, one can readily see a significant number of foreclosures, short-sales, REOs, and distressed listings on the market for many months to come. In some sectors, such as hospitality, full recovery (however one defines that) may not happen for several years.

On the commercial property side, business failures — particularly in retail — are already being documented. A recent report by the accounting/consulting firm BDO documents 29 major retail chain bankruptcies thru the end of August, spanning 5,998 individual stores. In addition, 18 major “healthy” chains, such as Starbucks, AT&T, and Office Depot announced 4,228 closures in the first half of 2020. Add to that the untold number of small chains and individual “Mom&Pops” that are going under and we can readily see a lot of commercial landlords with problems on their hands. One estimate, from Yelp, put the current business closures (both temporary and permanent) at 132,580, and those are just the ones that are tracked by Yelp. In June, the proportion of these which will be “permanent” passed the 50% mark.

Graphic Courtesy YELP Economic Report, 2Q, 2020

Of course, the Yelp report focuses on consumer oriented businesses, such as restaurants, shopping & retail, beauty & spa, bars & nightlife, and fitness centers. As everyone knows, office work has shifted significantly to “on-line” and home-based work. Technology such as Zoom, Go-To-Meeting, and Webex have been a God-send, but from a commercial real estate perspective, this creates a significant level of distressed property.

At Greenfield, we’ve worked on a myriad of distressed property situations over the years, including contaminated property litigation, business failures, brownfield redevelopment, and natural disasters. We’ve made a few observations that may prove handy as our clients and friends tackle these problems going forward.

  1. The Highest and Best Use of a property may significantly change. I was interviewed recently for a magazine article on adaptive re-use of retail property for low-end housing. This can be a distinct possibility in some situations, but this use change will have a major impact on value, and even on the mechanism for determining value. In the case of adaptive re-use, the cost of adaptation may exceed the post-change value. Hence, while the change may be desirable, and perhaps even necessary, the financial feasibility of this re-used is under water.
  2. Markets are slow to re-absorb properties after a severe disruption. If one house goes into distress, I might be able to buy it and turn it into a rental. However, if 25% of the houses in a market go into distress, the absorption period can be enormous. Many investors, even sophisticated ones, fail to take this into account.
  3. A really pretty hotel may turn into a very ugly condominium. In 2006, the famed Watergate Hotel in DC was converted into condos, and at the time the value-add was enormous. However, the cost was nothing to sneeze at, either. I once looked at a hotel that had, in its life, been an assisted living facility, an off-campus student housing apartment, and an extended stay hotel. Each of these uses required different amenities, services, and upgrades. By the end, this hotel was a maintenance nightmare, as different systems never fully integrated with each other.
  4. Physical adaptability may hinge on minor flaws. Consider parking, for example. Downtown CBD offices may require little parking, particularly if most of the workers commute by mass transit. However, conversion of that building to condos, apartments, or a hotel may be a completely different problem, and rendered infeasible by the cost of a simple parking problem.
  5. Environmental issues can be a snag. Some uses (offices, for example) may have a different environmental concern or impact than, say, housing. City governments which counted on high-tax paying commercial properties, demanding little in the way of consumer services, may balk at a conversion to a use with a different array of environmental impacts.

This list goes on, and can be very specific to the property in question. Often, the impacted landlord simply does not have the resources to study or enact a conversion, and so has to sell. However, property sales incur a dead-weight cost on top of the already realized loss in value. Transactional attorneys, brokers, appraisers, and others will need a new level of creativity to deal with this mess. Even if we get Covid under control soon, and we all hope that we do, the real estate disruption will linger for years to come.

Written by johnkilpatrick

October 9, 2020 at 1:36 pm

Posted in Uncategorized

ACCRE, September 2020

leave a comment »

Best of months… worst of months… Most months — indeed, nearly all months — ACCRE’s goal is to attenuate the downturns (thus providing important diversification in the portfolio) and fully enjoy the “bull markets”. Most of the time this works just fine. However, the double whammy of an overall down market, coupled with continued concern in the real estate sector, put us in a bear squeeze in September.

We’ve been in business for 42 months, and and a dollar invested at the inception would be worth $1.63 today, or an annualized ROI of right at 14%. That’s not bad, but certainly could be better. By comparison, if that same dollar had been invested in the S&P, it would be worth $1.42 today, for an annualized return of about 10%. We’re certainly doing well, but the negative currents in real estate have made 2020 a tough year indeed. By comparison, had that same dollar been invested in the S&P Global Property Index, it would only be worth $1.06 today.

I’m sure we’ll revisit our portfolio makeup this month, and as usual, our premium subscribers will receive notification as soon as any such trades are made. In the meantime, if you have any questions about this or any other real estate related matter, please let me know.

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com

Written by johnkilpatrick

October 2, 2020 at 10:53 am

Posted in Uncategorized

Seven Biggest Real Estate Mistakes — Part 7

leave a comment »

When I first published Real Estate Valuation and Strategy, one of our marketing plans was a series of small-group talks, mainly for clients of bank wealth management advisors. As I noted in the book — indeed, it’s one of the running themes of the book — most wealthy families, and those who want to become wealthy, either directly or indirectly (through business investments) have substantial real estate holdings. Unfortunately, investment advisors rarely have the tools or techniques to aid in managing that portion of the portfolio or integrating it into the rest of the portfolio. Nor do they want to — it’s just not part of what they do. That’s my job.

Nearly 90% of all millionaires became so through owning real estate — Andrew Carnegie

So, my “seven biggest mistakes” was just one of the planned themes for nice cocktail hour conversations with folks who need some guidance in starting, managing, or optimizing their real estate investments. Sadly, Covid-19 got in the way, so now I have a nice series of blog posts.

Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world. — Franklin Roosevelt

Mistake #7 — Not having a strategy

Wow, this sounds so simple. Time and time again, though, I see folks who don’t know how to get started in real estate investing, who have made terrific mistakes with their investments, or who don’t know how to get out of an investment rut. Regularly, these investments turn out to have been made opportunistically, out of emotion, or often as adjuncts to business acquisitions. This latter category is one of my favorites — a business gets sold, but the original investors keep the real estate. Suddenly, the real estate has no value absent the business, and the investors find that a disproportionate chunk of what used to be their wealth is tied up in something the don’t really know what to do with.

Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy. — Marshall Field

One investor I met decided to dabble in rental property in his post-retirement years. (I say “one” but this story has been replicated time and time again.) Now, “dabbling in rental property” can be a good thing. However, what is your strategy for this? Do you want capital preservation? capital gains? Pure income? A hobby to keep yourself busy? What this investor ended up with was a smorgasbord of disparate properties, none of which really tied into each other. Every time he had to make a decision about one or the other property, it was like re-inventing the wheel. Eventually, he got sick and tired of the mess, and dumped the entire portfolio at fire-sale prices. (That, by the way, is how I met him!)

Landlords grow rich in their sleep. — John Stuart Mill

I knew one lady who owned a profitable business in a growing part of town. She saw that rents were going up steadily, year after year, and so decided to buy the building in which her business was located as a hedge against such rent increases. That was such an immediately good idea that she started buying surrounding buildings and enjoyed both the rent income as well as the capital appreciation. Since she was located in that part of town, she could carefully monitor the local economics, and a couple of decades later, when she saw the market turning, she was shrewd enough to roll out of these investments near the top of that market.

The major fortunes made in America have been made in real estate. — John D. Rockefeller

The specifics of a given strategy have to be tailored to the investor. Nonetheless, there are some key, crucial questions every investor at every stage of their investing life should ask:

  1. What’s your “end game”? Where do I want to end up with this? Just saying “rich” isn’t enough. You should have a fairly specific set of goals which may include ongoing income thru retirement, capital preservation or gains (to sell and re-invest at a later date), passing on a portfolio via a trust to your heirs, supporting a family-owned business, or perhaps just pure recreation. The list of possibilities goes on, but if you can’t write these goals down, you can’t manage them.
  2. How much do you know about real estate? The corollary to this is, how well advised are you? I can recommend a couple of great books (well, one in particular…) but seriously, this is an area in which specialized knowledge is more than just a bit helpful. By the way, good, solid research goes hand in hand with this.
  3. How active do you want to be? I’ll give you a hint — there can be some very real tax advantages here, if you’re careful. This is a discussion you and your tax advisors should have sooner rather than later. On the other hand, successful people, at the peaks of their careers, often have little or no time to devote to active management. This is a critical decision you need to make early in your investment strategy. Note that real estate can be MUCH more time consuming than a mutual fund, but considerably more profitable!
  4. Are there synergies between your real estate investments and your business?
  5. Conversely, does real estate help you diversify a portfolio that is heavily weighted toward your business assets?
  6. Timing… timing… timing…
  7. And yes (as trite as it is…) location… location… location…

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. — Warren Buffett

Successful real estate investing requires a very long-run. Whenever the market is hot, the televisions are replete with “fix and flip” shows. In the Seattle market, where I spend much of my time, I’ve occasionally gone to real estate auctions at the courthouse. At one time, you could easily spot the “Tech Millionaires” who had watched too many of those shows, and suddenly considered themselves to be real estate “flip” experts. They’d buy some dog of a property, head down to the lumber store, figure out which end of a hammer should hit the nails, and spend the next 27 weekends learning to be flippers. After selling, some of these math wizzes would divide their profit total by the number of hours they’d spent hitting their thumbs with the afore-mentioned hammers, and figure out that they’d been working for minimum wage. Sadly, of course, there were plenty of real estate strategies that would have left them with plenty of time for golf and tennis, plus actual long-term-capital gains.

Before you start trying to work out which direction the property market is headed, you should be aware that there are markets within markets. — Paul Clitheroe

So, where does that leave us? Consider your long-term end game, develop a strategy that fits you and your situation, and stick to that strategy. Avoid fads, don’t get trapped in schemes, and be sure that your real estate strategy is congruent with the rest of your investment strategies.

Now, before I go, here is a link to the other six articles. I hope you enjoy!

Mistake #6 — Getting Emotionally Involved

Mistake #5 — Right Property, Wrong Location

Mistake #4 — Trying to Catch a Falling Knife

Mistake #3 — Not Realizing You Own Real Estate

Mistake #2 — Overpaying

Mistake #1 — Misuse of Leverage

Stay safe everyone, and I’ll see you again next week!

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com

Written by johnkilpatrick

September 25, 2020 at 1:49 pm

Posted in Uncategorized

ACCRE Mid-Month Report, September, 2020

leave a comment »

The mid-month report always deals with diversification and the Sharpe Ratio (the risk-adjusted abnormal returns). Every month, month after month, we exceed the S&P and show solid diversification. August was no exception.

However, we talk about diversification as a given, without ever really justifying why it’s a good thing. Indeed, when we teach investments in college (and I just finished team-teaching investments at WSU in the Spring Semester), we accept that everyone buys into diversification as a predicate to discussing the topic.

A diversified portfolio allocates investments in a way that reduces exposure to the volatility of any one asset. However, by itself, that’s not enough. The goal is to have a portfolio with less variance than the weighted average of all of the variances of the constituents, and in fact a well-diversified portfolio should have less overall variance than even the lowest individual security in the portfolio. In the figure following, assume you own just one asset, “Security A”. Its general trend over time is upward, but at any given point in time it may actually have declined in value, by cycling around the trend line. Now you add “Security B” to the portfolio. It is nearly perfectly counter-cyclical to A, and so the overall price trend is still solidly upward but with almost no volatility.

Of course, in a perfect world, such absolute diversifications doesn’t exist. However, as we’ve shown, ACCRE does a great job at attenuating a typical securities fund (i.e. — an index of the S&P 500), without giving up liquidity.

Now, on to ACCRE. It was another solid month for both ACCRE and the S&P, as demonstrated below:

S&P 500:
Average Daily Excess Return0.0379%
Standard Deviation1.3401%
Sharpe Ratio2.8271%
ACCRE Fund:
Average Daily Excess Return0.0532%
Standard Deviation1.1379%
Sharpe Ratio4.6796%
Correlation (overall)55.8098%
Correlation (monthly)51.6244%
ACCRE Metrics as of August 31, 2020

Note that ACCRE has a better Sharpe ratio on two counts. First, the absolute value of the average daily returns is higher. Second, ACCRE has a substantially lower level of volatility, measured by the standard deviation over time. Finally, while pointed in the same direction as the S&P (positive correlation), the correlation is well less than 100%, showing a high degree of attenuation in the portfolio.

Well, that’s about it for this month. Stay safe, and we hope to see you all again soon.

John A. Kilpatrick, Ph.D., john@greenfieldadvisors.com

Written by johnkilpatrick

September 18, 2020 at 3:21 pm

Posted in Uncategorized

Stigma revisited, yet again…

leave a comment »

In 2018, I presented a paper at the American Real Estate Society titled “Stigma Revisited, Again…” It was a play on a seminal piece published by Peter Patchin in the Appraisal Journal some 30 years ago about environmental stigma and real estate value implications. Much was written on this topic over the ensuing decades, and I thought it was time to perhaps bring the literature up to date. As it happens, I and some fellow researchers found that the breadth and depth of the literature is too broad for just one paper. Instead, I’m aiming for a series of essays I’ll collect in a new book in early 2021.

In the meantime, it’s helpful to take a very brief glance at where we stand today. Fundamentally, stigma is the label we put on the loss in market value of an impaired property over and above any cost to remediate. My former business partner, Dr. Bill Mundy, is credited with introducing the term stigma into the appraisal lexicon with “Stigma and Value”, also published in the Appraisal Journal, in 1992. The scholarship in this field has been robust, with intertwined writings on the fundamental psycology of stigma, legal implications, methods, and valuation standards.

Stigma can arise from a property being directly contaminated, contaminated and then remediated, being adjacent to a contaminated (or remediated) brownfield, or even being proximate (that is, in the same neighborhood) as such a property. Kevin Haniger of the USEPA, Lala Ma of the U. Kentucky, and , and Christopher Timmons of Duke, writing in the Journal of the Association of Environmental and Resource Economists in 2016, documented the impact that a brownfield can have on residences within 5 kilometers of a brownfield, in the context of how remediation of that brownfield can impact the values of those surrounding houses. Zie Zhuang of Michigan State, along with a host of co-authors, wrote a piece in the American Behavioral Scientist, also in 2016, acknowledging that the behaviors of market participants, when faced with a contamination problem, were frequently at odds with the facts and even their understanding of the facts. Indeed, this is consistent with a stream of behavioral finance literature calling into question the rational expectations model.

Courts generally understand how stigma works. For example, In Re Bilmar Team Cleaners (Sup Ct of Vermont, 2015 WL 1186157) the Court acknowledged that a property could be stigmatized to the extent of future estimated remediation and other costs. In Harley-Davidson Motor Co. V. Springettsbury Township (Sup Ct of Penn, 2015 WL 5691056), the Court acknowledged that potential for future environmental claims constituted a stigma impact on the property’s value.

I’ll keep you posted as this next book progresses. Wish me luck!

Written by johnkilpatrick

September 11, 2020 at 2:19 pm

Posted in Uncategorized

ACCRE LLC, August, 2020

leave a comment »

A well curated real estate fund should enjoy both above-average returns AND some attenuation of the risk in a securities portfolio. As noted a couple of weeks ago, ACCRE has about a 56% correlation with the S&P, which means that when the rest of the market is charging ahead, we’re tagging along, albeit at a slower pace. However, when the rest of the market falls out of bed, we don’t do so badly.

Case in point was the month of August, contrasted with the first few days of September. August was a gang-busters month for the S&P, and real estate in general did OK as well. ACCRE overall returns continue to be well above the S&P, but it is a horse race! A dollar invested in ACCRE at the inception (April 1, 2017) would be worth $1.73 on August 31, compared to that same dollar in the S&P only worth $1.48. Of course, the overall S&P Real Estate index fell apart after the onset of the recession, and is only partially back in the black today.

All that said, as every investor knows, this week has been painful for the broader market, with the S&P down about 4% since Wednesday’s close (as of this writing, mid-day Friday). ACCRE is also down, but only by about half as much. We’re still fully invested, but of course watching our positions carefully.

I would note that our strategy has been selective both on a macro and micro level. We’re looking for real estate sectors which we believe will do well in this economy, then within those sectors, we look for both the best and worst players. Yes, this is a fundamentalist strategy, but we also pay close attention to what the market is telling us. After all, REITs tend to be a sophisticated investment, and we gain a lot of insight by seeing how other investors interpret the tea leaves.

Best wishes to you all! As always, if you have any questions on real estate finance, economics, valuation, and such, please do not hesitate to drop me a line.

John A. Kilpatrick, Ph.D., MAI — john@greenfieldadvisors.com

Written by johnkilpatrick

September 4, 2020 at 11:16 am

Posted in Uncategorized

Hospitality and Covid 19

leave a comment »

Probably no real estate sector has been hit as hard as hospitality, which of course includes restaurants, hotels, and the whole travel and leisure field. It’s a big field, employing lots of folks, and occupying lots of space.

McKinsey and Company, a widely respected research and consulting firm, released a study in June on U.S. hotels. It’s already a bit dated, but contains some great insights into how business leaders are thinking about this, and the ramifications of various public policy decisions.

First, McKinsey constructed a common 3 X 3 matrix of low, medium, and high outcomes for Covid containment and economic impacts.

Graphic Courtesy McKinsey, See end for credits

They then surveyed a large number of business leaders — which one of these do you think will be the most likely outcome? In their April survey, 31% opted for A1 (right in the middle) while 16% opted for A2 (broad success on the epidemiological front, but muted outcomes on the economics). By May, these percentages had risen to 36% and 17%, respectively. Thus, a small majority of business leaders do not believe in an economic miracle. By the way, fully 31% in May opted for B1, B2, and B3 combined, with ineffective economic results. Only 10% of respondents thought that economic interventions would be “highly effective”.

Graphic Courtesy McKinsey. See end for credits.

So, what does all this mean for the hotel industry? McKinsey gamed this out, and under both Scenario A1 and A3, hotel revenues are down to between 35% and 45% of 2019’s totals. They then tracked likely outcomes out to 2023, and their model suggests that under A1, hotel revenues are still down by 20% compared to 2019. Scenario A3 is much better, with a near full recovery in 2022, and revenues actually up by 2% in 2023.

Scenario A3 assumed that travel restrictions were lifted for most U.S. domestic travel by June of this year, which was only partially true, and lifted for some international travel by July, which is a mixed bag. A3 assumes that after travel restrictions are fully lifted, buying behavior will be based on economic rather than health related factors, and that there is an effective, scaled-up treatment or vaccination. Of course, neither of these has come true yet. However, there is some hope that the outcomes they had looked for in mid-year may come to pass in early 2021, and so these forecasts can be shoved down the road 6 months to a year.

By the way, not all hotels are affected the same. Luxury properties and “upper upscale” saw revenue per available room (RevPAR) fall by nearly 90% by mid-2020, and these sectors will probably only recover to the 80% point by 2024 (again, given McKinsey’s scenarios). Conversely, economy chains fell by about 40%, and should recover to the 90% point by mid-2024. What’s worse, McKinsey points out that to cover costs, luxury hotels need occupancy rates 1.5X those of economy hotels. Many luxury hotels require a minimum of 100 employees just to open the doors. Economy hotels have much more flexibility in their cost structure.

McKinsey’s white paper is titled Hospitality and Covid-19: How long until “no vacancy” for US Hotels. The authors were Vik Krishnan, Ryan Mann, Nathan Seitzman, and Nina Wittkamp. Click on the title for a link to the paper itself. It’s somewhat aspirational now, but gives a great template for thinking about these issues.

Written by johnkilpatrick

August 28, 2020 at 2:12 pm

Posted in Uncategorized

Brief thought on a Wed afternoon

leave a comment »

For the quarter ending June 30, McDonalds (yes, the hamburger people) reported gross revenues of $3.76 Billion. Let that sink in.

Of that, only $1.59 Billion was from company owned restaurants. The rest, $2.09 Billion was fees from franchisees. (There was also some minor misc revenue, but not much.) So, of the $2.09 Billion from franchisees, $1.31 Billion was from “rents”. That’s slightly over 1/3 of their entire top line, and it pretty much all flows to the net income line. You see, McDonalds owns boatloads of real estate. They own the dirt under the franchisees locations, and rents that dirt (we call those “net ground leases”) back to the franchisees, as a way of controlling the locations.

I point this out to remind you that yes, McDonalds is in the hamburger biz, but they are much, much, more in the real estate biz. For that matter, so is every business, they often just don’t realize it.

Oh, and I’ll do the quick math for you. That means McDonalds will collect approximately $5.2 Billion in rents this year. Let that sink in, too.

Written by johnkilpatrick

August 26, 2020 at 5:01 pm

Posted in Uncategorized

%d bloggers like this: