First Capital Q&A Part Two
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 Real Estate Investments, 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 second installment of a two-part series – click here to read part one.
Are you planning to offer other alternative investment programs in the future?
We are singularly focused on the success of Fund I that we are currently managing. We are aligned with our investment partners since a significant percentage of our net worth is in Fund I. As a result, we are hyper-focused on generating a very attractive return on our current fund offering. However, we are also considering other product offerings to the extent the first fund has a successful exit. These include the following:
* Fund II – Similar approach to Fund I but with more of a focus on international markets
* Fund IV – A value-add sale/leaseback product offering
* International fund offerings – We are considering specific international offerings possibly in conjunction with potential strategic partners
* Delaware statutory trusts – We have built a strong DST platform and look to extend on that business offering
* Regulation D offerings – We will explore specific real estate or private equity related product offerings
* Other products – We have received a number of proposals for other types of offerings from business development companies, SPACs, etc. and will continue to consider these options as market opportunities arise.
We also intend to expand our 1031/DST platform. The 1031/DST investment strategy will differ from our traditional REIT projects and will focus more on stabilized single tenant NNN office and industrial, multifamily assets, and potentially hotels as well. We will focus on acquiring assets that deliver annual rent growth and initial cash on cash yields at 100-150bps above currently available DST deals in the market today.
These investments will be sold through the same retail distribution network and will give individual investors the opportunity to invest directly in beneficial interests to properties and thus maintain their 1031 status if they are exiting an existing real estate investment. We believe there is strong pent-up demand for this type of product from our investors especially with higher yields.
We have several Regulation D programs in progress for the broker-dealer and RIA community. All of our products will have a similar value creation opportunity which executes through our vertically integrated real estate firm.
Why do you believe that commercial real estate is still an attractive investment, particularly with the pending interest rate hike, rising sale prices and increasing cap rate compression?
My favorite part of real estate assets is that they are hard tangible properties. In a world of many intangibles and unknowns we find comfort in having good, solid, value-add American real estate as a base. These assets can throw off a yield that is significantly better than most other investment options out there, that’s why I believe that real estate is one of the very best investments in the marketplace today.
The current record sale prices and cap rate compression is really concentrated in the gateway, core markets. Rising interest rates also signify a lower unemployment and higher inflation rate environment that should also translate to rent growth opportunities. We feel there is still significant opportunity in select secondary markets with consistent macro demographics that benefit from multiple demand drivers including distribution hubs, universities, airports, and new business development.
What are your impressions of FINRA’s 15-02, the new rule requiring investor statements to reflect the impact of sales load?
While many folks in our industry feel that 15-02 and the Department of Labor ruling are prohibiting factors for growth in our industry, it is actually quite the contrary. We believe that sponsors have to make better investment choices. Part of being in value-add is that you have room for growth. Investing today in low yield core market assets is by nature already limiting when you have interest rates at an all-time low. With the rising market rate, you are essentially guaranteed a gradual loss on investment. It’s more of a preservation of capital strategy than it is a growth strategy.
If you look at the standard price/earnings ratios that are charged, and you compare that to the cost of the retail channel even in light of the regulatory changes, it is still a significant benefit, and win-win for the retail channel to invest in this space over the private equity channel. In addition, our opinion is that we believe that the full load can continue to be paid to broker-dealers. There is enough time and asset base in the pipeline remaining to create growth that overcomes that cost and still provide a net gain to investors.