From a small northwestern observatory…

Finance and economics generally focused on real estate


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In the past I’ve maintained two separate “blogs” — this one and one for my private REIT Fund of Funds, ACCRE LLC.  This latter blog has become a problem on a technical level, and frankly a pain in the neck to separately maintain.  For that reason, I’m merging the two effective this month.  From now on, my twice-monthly ACCRE LLC updates will appear here, rather than there.

For the uninitiated, ACCRE is a traditional long-short hedged fund invested in publicly traded Real Estate Investment Trusts, or REITs for short.  Over the past three years, it has outperformed the S&P by about 3.5 to 1, and also significantly outperformed the S&P Global Property Index.  It also has less than a 50% correlation with the S&P, and so provides a great diversification benefit for a portfolio.  I publish the end-of-month results as near as I can after the month-end, and then about the middle of the month produce some updated diversification metrics (Sharpe’s Ratio, correlations, etc.)

So, with that in mind, those same technical difficulties prevented me from doing my regular end-of-month update for March.  Here tis’, folks…

ACCRE and the broader market for that matter had a terrible February and March.  That said, ACCRE seemed to level off a bit in March, relative to other investments, while the S&P continued to tank.  (I’ll give you a peak into the future — as of mid-April, ACCRE is almost back to break-even.)

March 2020

Again, for the uninitiated, the chart normalizes everything to a dollar invested.  Hence, a dollar invested in ACCRE at the inception, 3 years ago, is worth $1.62 today, for an annualized rate of return of about 17%, compounded.  That same dollar invested in the S&P 500 would be worth $1.18 today (about 5.7% annually), and if invested in the S&P Global Property Index would be worth only $0.93.

By the way, there is a second, private “newsletter” that goes out to subscribers announcing any trades I make as well as the percentage makeup of stocks in the portfolio.  If you are interested in that, please let me know.



Written by johnkilpatrick

April 13, 2020 at 9:36 am

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No two recessions are alike… but…

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OK, folks, we are most decidedly in a recession.  The initial jobless claims are like nothing we’ve ever seen before:

Initial Jobless Claims

Goldman Sachs is predicting a total GDP pull-back of 24% in the third quarter, which is unprecedented.  They further expect this to really tank in April, but the red ink should slowly abate after that.  Net for 2020 will be a negative 3.8% GDP.  The service industry will be hit the hardest, but there will also be a housing / construction slow-down, and of course manufacturing will be hit as well.  Since Europe and the US buy lots of stuff, expect the rest of the world to follow suit.

With this, you would expect the markets and real estate to tank, but just the opposite seems to be happening.  The broader indices, and my ACCRE real estate fund, are off their previous lows and trending nicely upward.  It would appear that markets discounted the worst, and are now favorably impressed with the Federal government’s ability to step up to the plate with both fiscal and monetary stimuli.  (Note that most other countries do not have this luxury — China has to sell U.S. bonds, of which they have about $1 Trillion, but can’t really issued bonds of their own to stimulate their economy.)

If Goldman Sachs is right, this will be nasty-bad for a few months, and then should abate by the end of the year.  The 1958 recession is worth studying — particularly as it impacted U.S. social programs, the economy, and the shift in the power structure.

Written by johnkilpatrick

March 26, 2020 at 10:28 am

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Real Estate and the Pandemic, part 2

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Week before last, I wrote about the performance of our REIT portfolio versus the S&P during this market crash.  I wanted to bring you up to date on that today, and I’ll continue to update you in the future.

First, as a reminder, I own and manage ACCRE, a private REIT fund made up entirely of real estate shares.  Over the past three years, we’ve out-performed the S&P about 2.5 times.  Further, because we’re only partially correlated with the S&P (about 45%), we get a high degree of diversification in volatile markets.  Real estate is generally considered to be a “safe harbor” in troubled times.  This is no exception.

I’ve tracked the S&P since the peak on February 19, and normalized both the S&P and ACCRE so they’ll fit on the same graph:

3 19 20

As you can see, from the peak, the S&P was down about 29.18% at the close yesterday.  (It is up 0.70% on the day as I write this).  ACCRE has tracked the S&P in parallel, but with a significantly lower down-trend.  Hence, we’re only down 13.47% since February 19.

Naturally, hindsight is 20-20, and the perfect spot would have been in cash on February 18.  That said, I’ve weathered more than a few bear markets in my several decades (see my post on March 11), and we seem to have come through all of them nicely.

Written by johnkilpatrick

March 19, 2020 at 8:21 am

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Welcome to the bear market, folks

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Please watch your step.  This will be a lot messier than you’ve seen for the past decade or so.  You’ll want to wear rugged clothes and comfortable work boots.  I’d wear a hard hat and goggles, too.

So apparently we’re in one.  The term can be confusing — an individual stock can be in a bear market, but right now, we’re talking about the whole shooting match — NASDAQ, Dow Jones, and S&P-500.  We call it a “bear market” when it drops 20% from its 52-week high.  Many of you have never seen one.  I’ve seen more than a few.

The average recorded bear market lasts 367 days, but some pundits unofficially say more like 18 months or so.  That’s from the beginning of the bear until the market returns to 20% above the eventual bear trough.  Between 1900 and 2008, we’ve had 32 recorded bear markets.  We were clearly overdue for one.  Bear markets are usually accompanied by recessions.  Hence, the hoarding of toilet paper.  There are generally two kinds of bear markets — cyclical and secular.  Secular bears last much longer.  Indeed, one could argue that the entirety of the 1970’s was one long secular bear market.  Cyclical bears tend to be deeper but shorter.  Hopefully, that’s what we’re in right now.

Prices can cycle up and down during a bear, but until we get 20% above a bottom, we’re still considered to be in a bear trough.  Here’s the good news — historically, once the market finds a bottom (and that may take time), the bull run can last quite a bit of time.  Consider the most recent cyclical bear, that happened in 2008.  The Dow closed at 6,544.44 on March 6, 2009, down 53.4% from its peak.  Of course, since that bottom, the Dow has risen almost 500%.

The most severe, sharp bears seem to be related to a world event.  In the prior example, which was the second worst on record, it was the real estate securities melt-down.  The third worst on record was the 1973 bear, which is generally attributed to President Nixon’s mishandling of the gold standard.  Of course, the worst bear in history was the 1929 crash, when the Dow fell 94%.  More typical bears are those which simply follow a long bull run.  For example, the 2000 bear began on January 14, 2000, and the Dow eventually fell 37.8%.  (Notably, that bear INCLUDED the 9/11 terrorist attacks, but was not precipitated by it).  The 1970 bear began at the end of 1968, and the Dow eventually fell 30%.

Just like everyone else, I’m watching my portfolio with more than a little trepidation.  However, my own investments were pretty well thought out during the bull run, and should serve me well as insulation from any bears.

I’ll keep you posted.

Written by johnkilpatrick

March 11, 2020 at 12:59 pm

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Health care, and health care finance

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OK, I’ll admit right up front that my areas of expertise do not span health care.  I’m an economist, with a focus on micro-analysis and real estate.  That said, the Venn diagram of the Democratic primary and the pandemic crisis is giving voice to the “Medicare for all” crowd — perhaps a much larger voice than they otherwise deserve.

With that, I’ll talk about car buying for a minute.  Lots of people buy cars — I own several.   At the top of the economic food chain, buyers just write a check.  Some have pre-arranged financing thru their bank.  Others get a loan at the dealership itself.  There is even a “buy here pay here” option in many places for car buyers with truly awful credit. (The imputed interest on those loans is usurious, but that’s for another day.). If you absolutely CANNOT afford a car, or don’t really want one or you’re too old to drive, there is mass transit, which may be subsidized by the local taxpayers, will usually cost a trifle to ride, and may be underwritten by employers for their staff (we do that at Greenfield as an employee benefit).

How about acquiring a place to live?  For about 60% of American households, that means an owner-occupied residence (mostly single family, but some co-ops and condos).  Mostly those are financed with mortgages.  The rest of us live in apartments or rental houses, and those residents are usually utterly clueless about how the building is financed.  Admittedly, there is a bottom rung of the ladder, and we struggle at the local level to provide shelter for all.  However, there is little evidence that public sector intervention solves that problem successfully without private sector partnership.

The point being, complex assets and services are generally provided in a manner agnostic to the financing of those assets and services.  I’ve heard all of the stories of how Canada and other countries have somewhat successfully implemented single-payer systems, but I’m still skeptical that a heterogenous nation like the U.S. could do that successfully.

That said, this pandemic has illustrated the problems of health care delivery versus health care finance.  The Feds are already stepping in with billions of dollars to ensure (not “insure”) appropriate epidemic control and emergency health care delivery to all who need it.  We can — and economically SHOULD — find a way to ensure that every American has access to health care.  However, the financing of said system can — and economically SHOULD — remain multi-tiered.  Health care DELIVERY and health care FINANCE are two different and separately complex issues.

If you are a union member, or an employee of a company with health care benefits, and happy with your system, you should be able to keep it.  If you can afford private health insurance, and prefer to go that route, so be it.  However, “Medicare for all” sounds a lot like “mass transit for all”.  I’m more than happy to see a portion of my tax dollars go to support a system whereby everyone has a ride to work, but I and my jeep will continue to enjoy the other lanes of the highway.

Written by johnkilpatrick

March 9, 2020 at 9:29 am

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Real Estate and the Pandemic

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I’ve been asked several times in the past few days to comment on the economy, the market, and particularly real estate during this current crisis.  By the way, as a general rule, real estate is a safe harbor during times of crisis, but that doesn’t give a very good answer to an immediate question.  Let’s look at it another way.

First, it appears that the stock market really started realizing that this was a problem in late February.  Indeed, the S&P 500 hit a peak of 3,386 on February 19.  That was an increase of almost 4% in less than two months.  Then the reality hit that this thing could have very real impacts on supply chains, spending and consumption behavior, corporate profits, and thus the economy as a whole.  As of the close yesterday, the S&P was down an astonishing 12.2% in only 12 trading days.

3 7 20 b

That’s a fairly short timeframe in which to measure real estate returns.  However, I have a couple of good proxies for that.  As you know, I manage a small, private REIT hedge fund called ACCRE.  This is a carefully curated fund, and has out-performed the S&P by about 2.5X since I started it in 2017.  (For more about ACCRE, please visit the web site,  I also track the S&P Global Property Index, which is a daily traded index of securitized real estate.  While neither of these is a perfect measure of how all real estate is doing in this crisis, these do give some measures of how well real estate can attenuate the volatility in a portfolio, and whether or not well-chosen real estate investments can really be safe harbors.

To make a comparison, I “normalized” all three indices to = 100 on January 2, 2020.  That way, all three indices will fit on the same graph:

3 7 20

The Global Property Index, unfortunately, tracks the S&P 500 fairly well, although with a bit less volatility.  It is a weighted index, but not a managed one.  Hence, a broad random investment in real estate may have performed better the past few weeks, but not by much.  ACCRE, on the other hand, is a carefully managed portfolio, and has actually performed quite well this year.

3 7 20 c

Volatility is simply the standard deviation of the indices since January 2.  As you can see, the S&P has not faired well, but the Global Property Index has done a bit better, albeit with much lower volatility.  The managed (I would use the word “curated”) real estate portfolio is actually still up on the year, and with the lowest volatility of the three.

I’m asked almost every day, “when is it a good time to buy real estate?”  A surprising number of investors expect a recession, and want to wait until the depths of the recession to move money from stocks in to real estate.  Clearly that’s counter productive.  The time to buy carefully selected real estate was three weeks ago.  However, it may not be too late.

Written by johnkilpatrick

March 7, 2020 at 8:03 am

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Seven Biggest Real Estate Mistakes — Part 3

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Regular readers know that I inaugurated this series last month, linked in no small part to my forthcoming book, Real Estate Valuation and Strategy.  (Click on the icon to the lower right for more info.). By the way, the electronic version of the book is already available from both Barnes and Noble (nook book) and Amazon (kindle).  The hard copies should be available next month.

Mistake #3 — Not realizing you own real estate

OK, I’ll admit it, that sounds awful, but it’s all too commonly true.  I had a client a number of years ago — a very smart guy, by the way — who bought a manufacturing business that, from all indications, was a real steal.  (Corollary to Mistake 3:  If it sounds too good to be true…) Anyway, the manufacturing firm sale included the real estate, and (have you heard this story before) the deal was so good that the investor skimmed over the environmental audit.  I’ll cut to the punch line — the environmental remediation costs far exceeded any benefits and profits they every got from the business itself.

Just in case you think this is an isolated incident, I helped another family in an estate issue — they’d owned a manufacturing firm for decades.  They sold the BUSINESS side of this, but (sigh…. ) kept the real estate.  Of course, the real estate was dirty as could be, and for the rest of their lives (I’m not making this up) they had to deal with the dirty real estate.  I have lost track of the families I’ve worked with over the years in identically that same situation.

Of course, some investors “get it”.  One of the wealthiest families in the world are the Waltons, thanks in no small part to the Walmart chain.  However, the Walton family long ago bifurcated the business into a publicly traded corporation (owned by millions of folks, including them) and a private Real Estate Investment Trust (owned by people generally named “Walton”).  Before the stores operating in buildings owned by that trust (not all of them are) ever declare a profit, they pay the trust a rent check.

This sort of bifurcation is helpful for a lot of reasons.  First, and particularly in small family businesses, the interests in the real estate may be very different from the interests in the business.  Some family members may want to work in the family business — and should rightfully share in the business related profits.  Others may want to simply enjoy the fruits of the real estate ownership.  Recognizing how much fo the assets are tied up in business and how much are tied up in real estate helps settle these disparate claims.

Recognizing and bifurcation the real estate portion of the investment also aids in measuring the business profits versus the real estate values.  I’ve worked with many types of businesses — car dealers and retailers are common in this arena — who mistakenly think their businesses are still profitable, when in fact the real financial issues are masked by under-paying the fair rent on the real estate.  Forcing a rent payment out of the income statement, and re-evaluating that payment as if it is being paid to a third-party landlord, can give clarity to the business value in changing economies.

Finally, the real estate may no longer have the same highest-and-best use it had when the business was founded.  I dealt with one business (again, a car dealer) who had owned a site for many years that was now highly desired for high-density housing.  Other car dealers had moved out to the suburbs to an “auto mall” where people when shopping for cars.  The profit-maximizing strategy for the dealer was to sell the land and move the dealership, but it took years for this family owned business to realize that the business and the location no longer had a sound nexus.

By the way, I regularly get calls, e-mails, and texts from folks who just need to ask a simple question about this stuff.  I probably answer a half dozen or so random questions a day.  E-mail is the best way to reach me.  Let me know if I can help.

Written by johnkilpatrick

February 15, 2020 at 2:57 pm

Posted in Uncategorized

Fed meets — yawn

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I don’t mean to be snide, but pretty much everything released today was fully discounted in the market.  For a great and detailed synopsis of today’s release, see Jeff Cox’s excellent article at CNBC here.

The short answer is that the FED will keep the benchmark funds rate at 1.50%-1.75% for the time being.  (Market prognosticators foresee no changes at least thru the end of the 3rd quarter.). Of more interest, the Open Market Committee has agreed to continue its repo activities for the time being.  This has been described by some as a form of quantitative easing, and has boosted FED reserves to over $4 Trillion — not unlike the explosion in the monetary base we saw after the 2008 meltdown.  Indeed, very little of the monetary expansion from that era had been liquidated before the current operations began.


Graphic courtesy, October 24, 2019.

The repo process allows banks to sell high-grade instruments to the FED in trade for much-needed liquidity.  One can pretty much track the stock market performance of late to the repo activity.  Forecasters generally predicted a continuation of this, and not surprisingly the S&P has performed well, if not spectacularly, since the announcement today.

For the initiated, there are actually two “FEDs”.  The 7-member Federal Reserve Board oversees the operation of the Federal Reserve System itself.  The meat-and-potatoes policies, such as today’s, are the province of the Fed Open Market Committee, made up of the 7 fed members, the president of the NY Fed Bank, and 4 of the other 11 bank presidents (a rotating membership).  There is no rule that the FED chair also chair the FOMC, but that’s been the custom since 1935 when the FOMC was created.

Written by johnkilpatrick

January 29, 2020 at 11:26 am

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Seven Biggest Real Estate Mistakes — Part 2

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Two weeks ago, I introduced this series as a sneak peek at a new lecture series I’m developing for this year.  We hope to kick this off coincidental with the March release of my new book, Real Estate Valuation and Strategy.

Mistake #2 — Overpaying

Doesn’t this seem like common sense?  It really should be, but it’s amazing how many overpriced deals close every day.

Overpricing is often tied to falling in love with a property, an investment, an investment pool or team, or just being sloppy and having to put some money somewhere.  A real estate mentor of mine w-a-a-a-y back when taught me about the importance of walking away from a bad idea — that there will always be another “deal” coming along tomorrow.  There is no amount of inflation, great management, or market demand that will get you back to even on an over-priced investment.

For example, imagine a small investment which should throw off $1 million in Net Operating Income (NOI) during the first year.  Rents and net operating income are expected to grow by about 4% per year.  The market currently values investments of this type and quality at a capitalization rate of about 8%, and we expect this to remain fairly constant for the foreseeable future.  Thus, the indicated value, and purchase price, should be about ($1mm / 8% = ) $12,500,000.  However, for a variety of reasons, you are coaxed into overpaying for this — paying a “cap rate” of 7%, which translates into a purchase price of just over $14 million.  Obviously, this is a materially large difference, but more importantly, getting back to even will take some serious time.

Since the value at any point in time is the capitalized income, and income is increasing, then the “fairly” purchased investment should always be worth more than we paid for it (ignoring transaction costs and such).  However, the badly-purchased investment will be underwater until sometime in year 3, and that is only if everything else works out right.  Of course, we will be collecting rents, which increase year-to-year, so that will offset a bit of the mistake.  However, the overall return on investment (ROI) for the badly priced project will simply never catch up with the well-priced project.

1 20 20

If we had to sell the badly-priced property at the end of year 1, we’d actually have a negative ROI, even accounting for rents collected.  ROI (including both sales proceeds and collected rents) turns barely positive in year 2, but will never actually catch up.

What’s worse, investors stuck with overpriced properties eventually realized that they overpaid, and invariably these become the neglected mutts in the portfolio.  I’ve often seen overpaying to the extent that no amount of increasing rents will ever bail out the bad purchase price.  Invariably, such properties get neglected in favor of properties with better anticipated ROIs, and are often the last to be sold if a portfolio needs to be liquidated.  Remember, too, that in a liberal lending environment (such as we have right now), banks can be enablers of such mistakes, lending too much money on too little project.  In those scenarios, the actual loan-to-value, and the actual debt-service-coverage, will exceed the expectations, and the investors will find themselves owing too much money for too little collateral.

How to avoid these situations?  I would suggest five rules for taking on any real estate investment:

  1. Be sure to get the advice of an independent consultant or appraiser.  Pay someone who doesn’t have a horse in this race to evaluate the deal.
  2. Beware of projects that only seem to work with complex financing structures.  I recently looked at a project that was attractive because the general partner had extremely favorable financing.  Once we re-evaluated the project with market-normal financing, the pricing of the deal made no sense.
  3. Beware of the seller’s estimates of expenses, revenues, vacancy and collection problems, and miscellaneous rents.  Test these against market norms, and re-evaluate the operational structure against various scenarios.
  4.  Be very concerned when you hear the phrase, “if this works out the way we plan…”  (There is an old proverb:  If you want to hear God laugh, tell him your plans.)
  5. Never be afraid to walk away from a deal.

I’m a big fan of value-added or opportunistic investments, of which there are always plenty available.  In that context, chasing overpriced investments is a real waste of time, effort, and money.

Written by johnkilpatrick

January 19, 2020 at 10:58 am

Posted in Uncategorized

Seven Biggest Real Estate Mistakes

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I’m dusting off a new lecture series for 2020 with the above title.  I thought I’d go ahead and give everyone a peek here on the blog.  In the coming weeks, I’ll post a brief discussion on each of the seven.

Mistake #1 — Misuse of Leverage

Leverage is usually taught as a powerful advantage for real estate investors.  Residential buyers can commonly enjoy loan-to-value ratios above 80% and even approaching 100% with good credit.  Investors can typically enjoy 60% or 70% LTVs, and we recently advised one investment group that was offered 80% for an apartment development.

The question all-to-often is not “can you do it” but “should you do it”.  Inarguably, the recent housing debacle was triggered in no small measure by the mis-use of leverage.  Intriguingly, though, many shrewd investors who understood the proper use (and potential mis-use) of leverage came thru the real estate crisis quite well.

Consider a $1 million commercial investment which can be financed with either a 70% LTV loan or an 80% loan.  The initial “cap rate” is 7%, and both net rents and value are expected to increase by 5% per year:

1 7 20 a

1 7 20 b






Cash-on-cash return favors 70% leverage, due to the lower debt service burden.  However, in a positive-growth scenario, the 80% leverage situation catches up after year 5.  As far as equity return is concerned, it is hands-down an 80% leverage race, with much steeper increases from the start.

However, consider a model with some negative returns.  Let’s say, just for an example, that rents actually decline by 10% after year 1, but then return to a positive trend after that.  The scenario is quite different:

1 7 20 c

1 7 20 d






With just a little negativity, the 70% LTV model dominates cash-on-cash return, in fact dominates the equity return until after year 4.  Naturally, these sensitivity analyses can be run quite easily for any one of a number of potential scenarios.

So, what do the smartest folks in the room do?  One clue comes from successful REITs, many of which enjoyed positive returns thru the last recession.  Admittedly, REITs in problematic sectors (mortgage REITs, for example) were in trouble.  However, every sector faced struggles with vacancy, collections, and rent growth during the recession.  REITs that are successful in the very long turn use leverage sparingly.  For example, Hudson Pacific Properties, which owns about 50 or so office buildings on the west coast, has about $7.5 Billion in assets.  They are only leveraged about 47% as of the last SEC filing.  Essex Property Trust is one of the largest apartment REITs, with about 60,000 apartments across the U.S.  Their $13 Billion in assets are funded by only about 50% debt, even though apartments are generally recognized as fairly low on the risk scale.

In general, well-managed real estate portfolios maintain leverage somewhere south of 60% or even 50% in more risky sectors.  While real estate is generally considered to be a great hedge against troubled economic times, that hedge won’t work if it is over-leveraged.  Leverage can be your friend, but can at times also be your enemy.

As always, I or colleagues at Greenfield may or may not have investments in firms mentioned in this blog.  Mentioning a firm in this blog is not to be construed as a recommendation to buy, sell, or hold a particular investment.  Always consult with your advisors on these matters.

Written by johnkilpatrick

January 7, 2020 at 10:30 am

Posted in Uncategorized

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