FULL SCRIPT OF THE VIDEO

Welcome to our video on the different types of commercial real estate assets and portfolios. Real estate has always been a popular investment option for many individuals and institutions. However, not all real estate assets are created equal. In commercial real estate, there are different types of assets that investors can choose from, depending on their investment goals and risk tolerance. In this video, we will discuss four main types of commercial real estate: Core, Core Plus, Value-Add and Opportunistic asset classes along with fixed Income asset class which is relatable to real estate as an alternative investment.

The classification of Core, Core Plus, Value-Add, and Opportunistic Commercial Real Estate assets is a widely recognized framework used in the commercial real estate investment industry globally. While the specific terminology used may vary somewhat in different countries, the basic concepts underlying these categories are generally similar.

The framework is commonly used in the United States, Europe, Middle East, and Asia, and is used by real estate investors, developers, brokers, and lenders. This framework provides a common language for discussing and comparing real estate assets across different markets and helps investors to evaluate potential investments based on their risk-return profile and investment objectives.

Understanding the different types of commercial real estate assets, such as Core, Core Plus, Value-Add, and Opportunistic along with Fixed Income asset class is important for several reasons.

Firstly, each of these asset classes has its own unique risk and return profile. Investors who understand these differences can make informed investment decisions that align with their risk tolerance and investment goals. For example, investors who are looking for stable income streams may prefer Core assets, while those seeking higher returns may consider Value-Add or Opportunistic assets.

Secondly, understanding the different asset classes can help capital partners identify opportunities in the market. By knowing the characteristics of each asset class, investors can identify properties that may be undervalued or have potential for growth and can take advantage of these opportunities.

Thirdly, understanding the different asset classes can help capital partners manage risk. By diversifying their portfolios across different asset classes, investors can reduce their exposure to any one type of risk. For example, a portfolio that includes both Core and Value-Add assets may be less vulnerable to market fluctuations than a portfolio that only includes Core assets.

In summary, understanding the different types of commercial real estate assets is important for making informed investment decisions, identifying opportunities, and managing risk.

Our website’s home page of Properties Jointly dot com illustrates how our joint-ventures and partnerships comprise various commercial real estate assets and portfolios balanced on risk-return rationale starting from Fixed Income Assets of lowest risk and return to all the way towards Opportunistic real estate assets of highest risk and return.

FIXED INCOME ASSETS

Let’s start with Fixed Income. They are known as fixed income because they pay a fixed interest rate credited to investors. Fixed income asset class are debt securities that pay a fixed rate of return over a specific period of time. Fixed income investments typically provide investors with regular, predictable cash flows in the form of interest or dividends, making them a popular choice for those seeking stability and income. The most common fixed income securities are bonds, which pay a fixed interest rate to investors. At maturity, investors typically receive back their principal investment plus any interest earned. In the case of bankruptcy, fixed-income investors often have a higher claim to the company’s assets than common stockholders. This type of asset is considered the safest option for real estate investors. These types of assets typically have low risk but also offer low returns.

WHAT CAN THE FIXED INCOME REAL ESTATE PORTFOLIO STRATEGIC APPROACH BE?

Based on the given focus, risk profile, returns expectations, goal, and timeframe, the strategy for the FIXED INCOME real estate portfolio is to invest in private debt partnerships that offer senior or first-lien and mezzanine or second-lien debt. The objective is to generate consistent and fixed returns with the assurance that the debtholders always get paid first within such leveraged finance deals. The investment will be made towards equity, securely or insecurely guaranteed, and priority returned with consistent cash flow, exited with an agreed redemption in front of the equity capital return queues.

The investment strategy will focus on positioning the safest bond-like direct lending, which secures the greatest stability of cash flow with low risk. The investments will be made in private leveraged loans to reduce syndication risk and ensure certainty of execution by providing own bridge, hard money and short-medium term finance. The investment will be made in such a way that the debtholders are always paid first, and the investment should be exited with an agreed redemption in front of the equity capital return queues.

The risk profile for this investment strategy is least risky, and the returns expectations are low, typically ranging from 4 to 8%. The investment should be made for a short-medium term basis. The location and property age are not specific requirements for this investment strategy.

CORE ASSETS

Core commercial real estate assets are also low-risk investments, but they offer slightly higher returns than fixed income assets. These assets are typically located in prime locations, such as downtown areas or popular shopping centers. Core assets have long-term leases with reliable tenants. Core assets are often the foundation of a real estate portfolio, providing stable returns and minimal risk. These properties are characterized by long-term leases with creditworthy tenants, providing stable and predictable cash flow. Examples of such assets include triple net lease or full repair and insure properties, government-leased properties, and build-to-suit properties. These properties are usually fully leased with high credit tenants in best areas. Core assets include Class A office buildings, industrial facilities, and top-tier retail properties. Hence, core assets have long-term leases with annual rent increases, providing a stable income stream for investors.

WHAT CAN THE CORE REAL ESTATE PORTFOLIO STRATEGIC APPROACH BE?

The CORE Real Estate Portfolio is a private equity investment focused on conservative, low-risk investments in getaway and primary markets with properties less than 10 years old. The investment strategy targets risk-averse investors seeking passive income generation almost as safe as bonds, but with higher returns and steady rental income growth. The risk profile is conservatively low, and returns expectations are moderate to low, typically in the range of 6 to 10%.

The goal of the investment is to hold and collect highly passive and solid gains from leasing offered by the lowest CAP rates or yield, typically between 3 to 4.75%, and then sell the property in the future. The investment strategy is focused on the longest-term basis and leases. The properties are in the best places with the most substantial economic drivers in the local market, highly sought-after locations, primary markets being highly densely populated, with over 5 plus million people, downtowns and city centres containing long-established commerce, major metropolitan hubs with lowest crime rates, strongest local school ratings, strong natural traffic, strong local economy, high demand, and significant land supply constraints.

The properties are Class A – Premium Buildings with no deferred maintenance concerns and issues and are professionally managed. They are among the finest in their market and region, boasting top facilities and have the potential of producing stable income, and generally having strong finishes with solid high-end amenity packages and minimal upside. The occupancy consists of blue-chip, high-credit score and high-earning tenants with the highest average rents and high collection rates backed up with a rent guarantee from the parent company in case the tenants might leave.

The leverage or loan to value is kept as low as possible, typically between 0 to 30%. This investment strategy provides exposure to inflation-adjusted returns and long-term appreciation through the ownership of a physical asset.

CORE PLUS ASSETS

Core Plus commercial real estate assets are a step up from core assets in terms of risk and return. These assets typically require some form of renovation or improvement to increase their value. Core Plus assets often have shorter leases and may have a higher vacancy rate than core assets. Core Plus assets offer slightly higher returns than Core assets but come with more risk. These properties typically require some form of repositioning or value enhancement to reach their full potential. Examples of Core Plus assets include older office buildings that need renovation or repositioning, retail centers with vacancies, or industrial facilities that need upgrades. These assets can offer attractive returns to investors who are willing to take on a bit more risk.

WHAT CAN THE CORE PLUS REAL ESTATE PORTFOLIO STRATEGIC APPROACH BE?

The Core Plus Real Estate Portfolio has a low to moderate risk profile and is located in primary and secondary markets with a population of around 1 to 5 million people. The properties in this portfolio are commercial assets that are 10 to 25 years old and are mostly Class B buildings with some deferred maintenance concerns. The focus is on increasing cash flows through optimizing management and operational efficiency, light property and underlying tenant covenant improvements with recurring predictable income and strong growth.

Returns expectations are moderate, typically ranging from 9 to 14%. The goal is to hold and collect income from leasing with higher CAP rate deals or higher in-place yielding deals, allowing for strong cash flow on day one. Upgrades may be made at the beginning or in the near future to slightly fix up the properties, and a more robust management approach will be taken to lower expenses and increase tenant retention. The timeframe for holding the properties is long term, and leases will be put in place.

The location of the properties should be in good areas with a substantial population and high-growth economic areas in the local market, with moderate crime rates, good local school ratings, some natural traffic, good local economy, and the potential to improve over the coming years. The properties may be located in less desirable densely populated urban areas and suburban areas located further from the city center in a decent neighborhood that is showing signs of expansion.

The occupancy rate for these properties may not be quite as high quality, and the tenants may be paying lower rents and may not have a rent guarantee from a high-quality national company. Still, they are reliable, resilient, and fairly qualified tenants.

Leverage or loan to value for this portfolio is looser, with a relationship of 30 to 50% or more.

VALUE ADD ASSETS

Value-Add commercial real estate assets are higher-risk investments with potentially higher returns. These assets require significant renovations or improvements to increase their value. Value-Add assets may have a higher vacancy rate or require new tenants to be acquired. These assets are typically older, distressed, or underperforming properties that require significant improvements to increase their value. Investors who are interested in Value-Add properties typically have a higher risk tolerance and are willing to invest in properties that require significant renovations or upgrades. Examples of Value-Add assets include older multifamily properties, distressed retail centers, and underperforming office buildings.

WHAT CAN THE VALUE-ADD REAL ESTATE PORTFOLIO STRATEGIC APPROACH BE?

The real estate portfolio strategy should be focused on upgrading distressed properties with transformational potential in secondary and tertiary markets, with a moderate to high risk profile and moderate to high return expectations. The approach is to acquire assets with slight distress or deferred maintenance issues, improve them with a capital renewal program, and implement a proactive management strategy to achieve capital value appreciation through income maximization and risk reduction.

The portfolio is expected to generate returns of around 12 to18%, and the investment goal is to find high-potential buildings in burgeoning markets at a lower price with a slightly greater CAP rate or yield. The properties can be 20 to 40 years old, slightly run-down, and require upgrading to achieve higher market rents. The occupancy might be lower at the beginning, but the stabilized property should have higher occupancy rates, leading to higher rent increases and faster tenant turnover.

The leverage or loan to value is more heavily financed, with 40 to 70% of the investment being financed through loans. The typical timeframe for the investment is short-term, which means that the properties are likely to be sold after they have been stabilized and upgraded.

Overall, the portfolio strategy seems to be focused on identifying properties with significant upside potential in emerging markets and implementing a value-add approach to generate returns. This approach is not without risks, as the properties may require significant upgrades, and the market conditions may change, affecting the investment returns. However, with a proactive management strategy and careful risk management, the portfolio should be able to generate the targeted returns.

OPPORTUNISTIC ASSETS

Opportunistic assets are the highest-risk, highest-reward option for investors. Opportunistic assets typically involve ground-up development or significant repositioning of a property. These assets are often located in emerging markets or areas with high growth potential. Opportunistic investors typically have a long-term investment horizon and are willing to take on significant risk for the potential for outsized returns.

WHAT CAN THE OPPORTUNISTIC REAL ESTATE PORTFOLIO STRATEGIC APPROACH BE?

The opportunistic real estate portfolio should be seeking to capitalize on market conditions by investing in distressed properties that require significant renovations or repositioning. The focus on finding ideal brownfield or land opportunities and leveraging the industry connections to move quickly when suitable opportunities arise is a sound strategy.

However, it is important to note that the risk profile is high due to the nature of the investments. Investing in distressed properties with deferred issues or over 30 to 40 years old requires significant rehabbing before the market value returns. Additionally, investing in areas with high crime, delinquency issues, and a demographic of low-earning tenants also carries risk.

The returns expectations are high, which is typical for this type of investment strategy, with an expectation of 15 to 25% returns. However, it is important to keep in mind that returns can be variable and may not always meet the expectations.

The time frame is medium to long-term, which is appropriate for this type of investment. The location of the investments is mixed, with a focus on up-and-coming areas that have the potential for growth and appreciation.

The properties capital partners are seeking to invest in are Class C to Class D buildings with low cash flows at takeover and in need of attention, redesign, and major renovation or construction to provide more value to tenants and charge more effectively. The portfolio is also targeting low occupancy or vacant properties with moderate average rents and collection rates but high upside stabilization potential later after significant renovation.

It is important to note that the leverage or loan to value can be high, with 50 to 80% capital required up front to fund projects. While leverage can help maximize returns, it also increases the risk profile, and it is essential to manage this risk carefully.

Overall, the opportunistic real estate portfolio has the potential for high returns, but it is important to carefully manage the associated risks. A thorough understanding of market conditions, industry connections, and careful management of renovations and construction is critical to the success of this type of investment strategy.

DIVERSIFICATION IS THE KEY TAKEAWAY

Diversification is the logical hedge against risk factors and a strategy that mixes a wide variety of investments within a portfolio to reduce portfolio risk.

Here, at Properties JOINTLY, we diversify our real estate portfolios across different asset classes to mitigate risk factors. By combining income-producing, income and growth, and growth-appreciation joint portfolios with various core, core plus, value add, and opportunistic assets, we create balanced portfolios that offer a range of potential returns and risk levels.

By including different types of properties like retail, office, hotel, multifamily, and logistics, we spread our investments across multiple sectors, each with its own risk profile and potential for growth. This diversification strategy helps to reduce the overall risk of our portfolios and enhances our chances of achieving the investment goals.

However, it’s worth noting that diversification alone cannot guarantee a profit or protect against losses in every market scenario. Therefore, as part of our risk management assessment, we regularly review and adjust our portfolios with assets based on changes in the market and the investment goals.

Our Partnership Group takes a robust approach to assessing risk appetite versus risk tolerance in order to generate solid risk-adjusted returns and hedge against inflation. By utilizing our networks, industry expertise, and scale, we are able to target the desired returns for our partnerships while proactively managing expectations and achieving market outperformance.

Real estate can indeed be an excellent investment for achieving a risk-adjusted return, and our partnership’s approach to assessing investment opportunities based on partners’ risk appetite and desired rate of return is a sound strategy. Diversification is a crucial part of our approach, as it helps to optimize return while achieving well-balanced investment portfolios across the risk-return continuum.

In conclusion, commercial real estate offers a range of investment options for investors with varying goals and risk tolerance. Whether our capital partners are looking for a stable income stream or are willing to take on more risk for higher returns, there are commercial real estate asset classes and portfolios that can meet their needs within Properties JOINTLY Partnership Group.

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Disclaimer

This presentation has been prepared by Properties Jointly group of companies (PJ) for educational purposes only. By no means is any statement, disclosure, disclaimer, another information, or material contained herein a financial promotion nor an invitation, offer, recommendation or solicitation nor an inducement to buy or sell any securities or interests in PJ’s respective products. It should not be relied upon to make any investment decisions and does not have a purpose or intent to persuade or incite anyone to engage in investment activity under any applicable law. Reliance on this information for the purpose of becoming involved in any investment activity may expose a person to a significant risk of losing all of the funds or other assets invested.