Late last year, Sacramento-based First Capital Real Estate Investments acquired United Realty Advisors, the external advisor to United Realty Trust Inc. – a non-traded REIT founded by New York real estate developer Jacob Frydman.
Suneet Singal, the founding principal and chief executive officer of First Capital, agreed to have a discussion with The DI Wire about his company, investment strategy, the future of real estate, and the changes facing the industry.
This is the first installment of a two-part series – part two will run on Monday.
Can you tell our readers a bit about First Capital?
First Capital is a vertically integrated real estate company that has a strong background in finance and value-add assets. We currently offer a variety real estate investment products on our platform, which includes a pipeline of private placement offerings that are driven by our value-add philosophy.
What changes do you anticipate in the non-traded REIT space?
With the implementation of FINRA Rule 2014-006, non-traded REITs are required to report a per share price/value, or net asset value (NAV) that reflects the value of the assets held by the REIT. This is a seminal change for both sponsors and investors in the non-traded REIT industry.
Can you tell us a little more about unlocking the value in real estate?
In my experience, unlocking value in real estate is really driven by finding ways to execute a business plan and succeed where the previous owner could not. This can be done through various strategies including buying high vacancy assets and improving occupancy through lease creation, capital improvement plans that increase demand and rents from potential tenants, improving brand recognition for hotels, developing raw land to functional real estate, converting below market leases to market rates or implementing cost cutting strategies on stabilized buildings.
This type of value creation is the result of active asset management and less about market timing, cap rate compression and high leverage. We look for opportunities that lead to higher, stable cash flow that can be monetized upon an exit. The most common valuation approach in real estate is the cap rate approach that divides NOI by a risk adjusted yield. Increasing NOI has the most direct and at times exponential growth impact to valuation.
Tell us about your experience in private equity?
In private equity, we do not make investments and wait until the result comes in. Rather we aggressively drive value by strategically and aggressively managing our investments to drive transformative growth in the portfolio on a case-by-case basis and on an overall basis. We are experienced in structuring deals that generate returns of 20-25 percent or more in a transaction.
Moreover, we are used to deal-by-deal economics so each deal must stand on its own merits. As a result, we are able to source, consummate and manage deals geared toward a higher rate of return. We hope to bring this to the non-traded real estate market and attract capital due to our ability to drive higher rates of return.
Given our private equity backgrounds, we understand that you cannot drive above-market returns without driving returns through superior operations and management. Like most PE investors, we believe in the old rubric of buy low and sell high. As a result, we will look at secondary and tertiary markets where there is less competition and greater chance to purchase assets at attractive valuations. We also subscribe to the PE belief that you make your money on the buy so long as you can buy right and structure the deal accordingly.
The real estate investment strategy focuses on income and growth, and is similar to our approach in private equity where we try to generate a current return of 7-15 percent as well as significant capital appreciation over time so that the overall return is an attractive mix of near term or annual cash flow and significant capital appreciation at the time of exit. The focus is to drive net asset value growth with a
healthy yield. One of the key component to real estate transactions is deal structure, and creating an alignment of interest between all parties to generate not only the most effective return but also to mitigate any of the risk in that asset. We pride ourselves on deal structures that accomplish all of those things.
Exit, exit, exit, one of the key things we do is pair up the investment banking philosophy of having a focus on exit as much as we do with the real estate philosophy of long-term. Which gives us a hybrid of generally between 2-5 year cycles for our assets to perform. Whereas our longer-term peers would want to be in an asset for 7-10 years plus, we like to see our exit sooner. Similar to PE deals whenever we make a real estate investment, we do so knowing what our exit strategy will be.
As experienced PE and real estate investors, we are keenly aware of market cycles and are always aware of possible downside scenarios. Due to our strong operating focus, we have the ability to pivot and reposition a real estate asset to minimize risk in the event of a downside occurrence.
It is always key to be aware that real estate is a cyclical industry like many other industries and historically going back a few decades the highs have generally exceeded the previous highs and the lows have exceeded the previous lows. It is important to be cognizant of market segments, interest rate risk, market risk, asset risk, industry risk and how that relates to those assets. Knowing what side of the spectrum to be on in what part of that cycle is key and why we focus on those scenarios.
Check back Monday to read part two.