Philip Blumberg is the Founder and Chairman of Blumberg Capital Partners, a commercial real estate firm based in Florida. In the Philip Blumberg Five he will be sharing his thoughts and insights on real estate, investing and other important business issues.

The fourth episode of Philip Blumberg Five focuses on the difficult topic of Real Estate Investment Trusts. Enjoy.

Show Notes

00:06 Five Reasons why Real Estate Investment Trusts are inefficient structures commercial property ownership.

00:18 Additional Info at www.blumbergblog.com

00:30 First Point: Corporate Structure and History of REIT’s:

REIT’s were created to provide tax advantage for public to invest in real estate

Creation of REIT’s > Industry of Mortgage REIT’s developed

01:09 REIT’s disappeared in the 1980’s: Worst Real Estate Depression

01:30 Private owners sold portfolios into an Equity REIT, to then sell portfolio to the public creating a higher monetary value.

01:56 REIT’s became escape for troubled owners, but appeal was in the liquidity >

02:18 Poor premise for industry to begin and to make an investment

02:45 Second Point: Management > public environment, Real Estate > traditionally private. Criticisms drawn are of office buildings public REIT’s

03:28 Consider management operating in a high risk environment (office buildings), but hampered by public/equity market pressures for quarterly earnings

03:57 Moving large commercial real estate portfolios into sync with quarterly expectations is very difficult. Mismatch between corporate and asset management (real estate) policies > Brings inherent disadvantage to public office building restructure

04:22 Third Point: Corporate structure and disadvantages to management result in evaluation mismatch

04:28 Public markets mistakingly identify REIT’s as operating companies, but are really portfolios of assets

Consequence: Stock Market value of REIT is below its true asset value

04:57 Consequence: REIT’s are a prime target for takeover and break up

05:28 Public market environment has a disadvantage and the value of a holding company being higher on breakup than it is as an operating company

5:47 Can you expand on your earlier point in regards to how common public perception is that public markets do not serve the REITs type of investments….

06:00 Fourth Point: Public market analysts are trying to get any company to define itself on a specialized basis

06:30 REITs have to hedge their whole investment to making sure it is defined clearly for public markets as opposed to taking the highest revenues they can generate.

06:57 Summary:

1^st Inflexibility of REIT corporate structure

2^nd The difficulty in managing them

3^rd The over-valuation that results form that

4^th Problems with public market perception

07:20 Conclusion: Public Office Building REIT’s are vulnerable to takeover and the structure they need to live in financially

07:44 REIT’s are generally moderately leveraged, have an institutional investor base, which aren’t very loyal

8:15 REIT’s can often times be bought and re-leveraged, excess leverage capacity and no cash is a bad stance in a hostile takeover. Continue to see takeover of public REIT’s, taking them private and breaking them up > Classic LBO

 

 Philip Blumberg Five 4 - Real Estate Investment Trusts [9:37m]: Play Now | Play in Popup | Download

Episode three of the Philip Blumberg Five looks at the top five considerations you should take into account when selecting a Tenant Service Provider. For detail, check the show notes.

Also if you have a minute check out the new Blumberg Capital Partners and Blumberg Office websites, as well as this article on BCP in the Tampa Bay Business Journal

Show Notes

00:18 Introduction - For businesses where real estate isn’t their Primary business, but could use tips because individuals don’t know the local market like brokers do

01:00 First Point: look at the kinds of companies that are available to you

01:05 1^st What Companies to Look for

- Small firms that are highly specialized some in certain industry segments vs. largest brokers, who all have tenant representation divisions

01:30 2^nd The individual broker leading the assignment must know how to utilize the resources of the company aren’t much if the broker doesn’t know how to utilize them, identify proper spaces, or negotiate a deal

01:50 Get history of different brokers deals, and resume of background to choose from

- Key Takeaway: Matching size and specialties of their company to your company

- Key Takeaway: Who’s the lead on negotiating your terms and interests

02:34 Second Point: hire someone that understand your needs

02:58 Evaluate personality of the lead in that company, based on how they do the interview, do they address your needs. If chemistry isn’t right end result won’t feel right

03:23 Third Point: determining the kinds of services you need that impact price you pay

03:37 Things to consider are, overall representation is charged toward the landlord, do you need financial modeling: long term vs. easy to assess. Make sure to understand where you want to go, what services you need to best get you there

04:22 Fourth Point: based on your needs, how long will they be involved with the deal

04:50 Summary

1^st size of the company

2^nd person they put on the deal

3^rd services you need

4^th how long they will be on the deal

05:05 Fifth Point: to do a reference check because an individual can’t evaluate all the variables that go inside signing a lease or hiring a tenant rep.

05:30 Key: Did initial deal that they negotiated serve your needs going forward

- Did they take time to get to know you> did that info turn into something in your lease

06:00 the type of reference feedback you should hear (positive and negative)

 

 Philip Blumberg Five 3 - Five Points In Selecting a Tenant Services Representative [6:52m]: Play Now | Play in Popup | Download

In Episode 2 of the Philip Blumberg Five — five short, sharp points on different aspects of the real estate business from an expert — Philip Blumberg discusses the five key checks you should make when choosing a Real Estate investment manager: the experience of the fund manager, the Fund’s compensation structure, key employee incentives, the Fund’s match with your investment objectives, and independent audits.

Show Notes

00.06: Introduction to real estate fund management

00.43: With real estate at its high point, how to assess the best manager

01.00: Experience of the Fund Manager. Check the track record over time. For a strategic fund investor, how a manager performs in a flat or down market is more important that how they perform in a bull market. Look at what underlying properties they’re invested in. Examine at their key ratios.

02.06: Ensure the Fund’s compensation structure is aligned with your interests. Fees should have a heavy performance element — it’s better to pay a 20% fee for success rather than 10% for failure or in fixed management costs. Acceptable fee structures — and finding hidden fees.04.03: Ensure key employees are incentivized. Key employees, not just the senior managers, need to be part of the Fund’s performance culture. The people who trade in and out of assets should share in your success, not get paid for failure05.18: Match the Fund’s terms to your investment objectives and horizons.

Does the Fund meet your requirements for asset diversity and allocation?

For minimum investment amounts and overall size of investment? For liquidity? Comparing value enhancement funds with other types of fund.

09.01: Get an independent audit. Take professional outside counsel on their financial statements. Ensure they report on a frequent basis. In an illiquid, long term investment like real estate, transparency is key.

 

 Philip Blumberg Five #2 :: Five Checks o Make When Choosing a Real Estate Investment or Fund Manager [10:32m]: Play Now | Play in Popup | Download

Parts of the recording session for the Philip Blumberg Five podcast were filmed and will be uploaded to a YouTube director’s account.

Here is the first video, introducing the podcast. Stay tuned for more:

My Podcast Alley feed! {pca-a3ea908b91c4b56aa1fe3dffe6607cb3}

I’ve written of late on the crisis in residential real estate and its potential ramifications to the commercial real estate sector.

Building on those thoughts, I’ve just produced a podcast and some video clips to expound on how the turmoil in the credit markets is likely to spread to other economic sectors.

The run of peak home pricing, which started in the early 1990s, was driven by the confluence of low interest rates, aggressive sub-prime lending and relatively low housing inventory. At the same time, a number of unsophisticated homebuyers got intertwined with mortgage investments unsuited to their means and real estate investment objectives. This built the foundation for the current crisis in the sub-prime segment, which has quickly spread to the middle and upper tiers of the residential real estate — borrowers and lenders alike.

Other segments of the debt markets also have begun to feel the pain.

Notwithstanding the Fed’s 50 basis point cut last week, interbank lending remains tight, as does consumer lending. This scenario is likely to continue with the ongoing decline of the dollar against other currencies, which should keep long-term interest rates from dropping (the opposite of the Fed’s objective). As a result, asset values (i.e., home prices) will likely continue to fall.

Experience tells us that volatility equates to opportunity.

At Blumberg Capital Partners, we’re now exploring an increasing number of situations where we can buy prime properties at below reproduction cost and then reposition them to Class AA or A+ buildings. Recalling the last major banking crisis — in the ’80s — it was the residential real estate sector that initially roiled the markets. So it’s only a matter of time before history repeats itself. In short, we’re still in the downwash part of the cycle.

For more, please open the attached podcast. I hope you find it informative. Please check future blog postings at the Philip Blumberg blog for more. I look forward to your feedback and questions.

Show Notes

00.42 Philip Blumberg introduces himself
2.30 How problems in the U.S. sub-prime residential housing market – the credit crunch in September 2007 – are impacting commercial R.E.
3.32 How the U.S. sub-prime market is impacting international markets – global consequences of the U.S. pricing peak and credit crunch
5.15 The fallout from a possible sub-prime market collapse
6.56 Selective opportunities and positive scenarios
8.28 Key commercial RE investment criteria – buy into diverse, growing local economies
8.52 Importance of avoiding over-leveraged acquisitions
9.45 Threats to global banking system
10.10 What September’s Fed 50 basis point cut signals
11.15 Characteristics of winning versus loosing banks
12.20 The sub-prime’s knock-on effect beyond banks and into private equity funds
13.04 Bank regulation: Tighter Federal supervision or better voluntary lending criteria?
14.05 The Fed signaling intent to avoid recession and to boost consumer and stock market confidence
16.29 The impact of the weak dollar for global investors in commercial RE
17.50 Advice for global investors on buying low relative to the economy not just the $
18.30 Questioning people’s rationale when buying at peak prices
19.24 The long term impact on access to capital
19.24 Possible impact if foreclosures increase and crisis broadens beyond sub-prime housing market
20.45 The upside of volatility
21.00 Residential housing price falls will lead to lower commercial RE prices in major cities; opportunity to buy distressed debt or units
21.52 Key commercial RE criteria – buy below reproduction cost

 

 The Philip Blumberg Five - Episode One [22:40m]: Play Now | Play in Popup | Download