The Ultimate Hedge Against Inflation Webinar Replay

Mike Law:

All right. Hello and welcome everyone to First National Realty Partners educational webinar series. My name’s Mike Law, I’m one of the managing directors here, and I’ll be your host for today’s events. Really great having you guys on. Today’s topic is all about inflation. It’s a dirty word for most of us, and a hot topic around here and one that many of you have requested that we cover. So we’ve spent the last couple of weeks putting this webinar together and really excited to be sharing it with you guys today. Today I’m going to be joined by Mr. Drew Carpenter, fellow managing director here at First National who will be presenting our content. And we’ll be getting started here in just a couple of minutes. First thing I want to do today is kick things off with a few shout outs. So I’m going to ask you to go ahead and find the Q&A box on your webinar viewer, type in the city and state where you’re joining from.

Mike Law:

We have investors all over the country who would love to hear where you guys are dialing in from. And also, if this is your very first FNRP event, please type in first timer, something like that to let me know it’s your very first time, love to give you guys a shout out as well. So again, it’s city and state where you’re joining from into the Q&A box. And we’ll go ahead and read off some of the responses here. So go ahead and type those in. All right, I see them coming in here. Let me get my viewer squared away. So first blood is looks like Gene from the Greater Boston area, Massachusetts. Welcome Gene. Great to have you on. Tommy from Winchester, Virginia. Got Bill from Sparta, New Jersey. John is our first-timer from New Rochelle, New York. John, welcome, John’s Great to have you on.

Mike Law:

Got Veys from Chicago. Let’s see here. Charles from Fort Collins, Colorado. Eric from Lunenburg, Jerry from St. Joseph, Michigan, I think. Let’s see, we got Chris from Vero Beach also a first timer, welcome Chris. Go ahead and get your responses in guys. We’ll give this a couple more seconds here and we’ll keep moving. Got David from Maryland. Welcome David. Let’s see here. Mimi from Marion, Illinois. John saying, thank you, John, you’re welcome. Atule from Chicago. Let’s see, we got CG from Redbank, welcome, CG. Rocky from Sebastian/Vero Beach. Got a couple from the southeast corner of Florida there. Let’s see, we got Jay from Troy, Alabama, and the last one I’ll read is Robert from Asheville, North Carolina. Welcome guys. It’s great to have you guys. I really appreciate the responses. Let’s go ahead and keep it moving here. So if you’re just tuning in, let me be the first to welcome you to the Ultimate Hedge Against Inflation sponsored by First National Realty Partners.

Mike Law:

My name’s Mike Law and I’ll be your host for today’s event. Again, it’s really great to have you guys on this afternoon. A couple quick housekeeping notes as we’re getting started. First up, if you have any audio or tech issues, you can usually fix those with a quick browser refresh. Second, this presentation is expected to run for about an hour. We got about 30 minutes for the content, and then we’re going to be taking your questions live in our Q&A session. So if you’d like to ask a question that’s really easy, you’ll do the same thing that you just did by entering your city and state. Look for that Q&A box and type your question in. No rules for the Q&A, you can ask as many questions as you like, as often as you’d like, and we’ll do our best to answer those questions live during the Q&A session.

Mike Law:

All right, so quick disclaimer before we get started here. This presentation is solely intended to educate and provide information on the following topics. The presentation should not be considered a solicitation to purchase securities, that can only happen via a private placement memorandum. Past performance is not an indicator of future results and there’s an element of risk in any investment, you could potentially lose your principle. Lastly, FNRP can only work with accredited investors as defined by SSC regulation D and guided by the income net worth requirements that are shown here on your screen. All right, so with that out of the way, let’s move on. So next up I’d like to do a quick poll. And so I’d like to go ahead and invite your attention over to the polls tab. It’s located over there next to the Q&A box. And here’s the question, have you taken any steps to protect your portfolio against the threat of inflation?

Mike Law:

Answers are not yet, but I’m planning on it. B, I’m taking a wait and see approach. C, I’ve already made changes to my portfolio, and D, I’m not planning on making any changes at this time. So go ahead and select the best answer and we’ll take a look at the results here in just a moment. All right, so moving on is our way of saying thank you for all those attending today’s event. I’d like to furnish everyone who sticks around through the conclusion of today’s webinar with this accredit investor kit. It’s an awesome kit, includes everything on the screen here. Two eBooks written by FNRPs founders and chairman Anthony Grosso and Chris Palermo. In 2015, we put together Value Added Real Estate and then in 2019 the guys wrote The Art of Commercial Real Estate, two fantastic eBooks that you definitely want to have in your real estate book collection.

Mike Law:

We also are going to include three eBooks that our content team put together, The Ultimate Guide to Investing in Private Real Estate, The single best Investment, which is a great overview in comparison of private equity commercial real estate versus other asset classes. And then lastly, an ebook about how you can invest your retirement funds into private equity deals using a self-directed IRA. So if you’d like to claim these resources, all you need to do is just type in the word tool kit. That’s tool kit into the Q&A box, and if you stick around through the end of the webinar, we’ll get those sent right out to you. All right, so let’s circle back and take a look at our survey results. I’m going to push them up to the screen here. It looks like the leading response is, I’ve already made changes to my portfolio.

Mike Law:

This is really fascinating to me because we ran a very similar webinar back in December or January and most of the responses of overwhelming majority were not yet, but I’m planning on it. So if some of you may be attending this event, again, you can see how the responses have changed. And if this is your first event, you can see that most everyone here on today’s event has already made some changes to their portfolio. That’s great news and I really appreciate the responses there guys. Okay, so let’s go ahead and cover the agenda next. So in just a moment, as I mentioned, I’ll be bringing on Mr. Drew Carpenter, a fellow managing director here at FNRP. And Drew’s going to be presenting our content today. He’s going to start with the basics. So what is inflation? What are the impacts of inflation? Next, Drew’s going to dig into the goods by sharing with you where you can invest during inflationary periods.

Mike Law:

And I want to give you a hint, it’s probably not what you think. Lastly, Drew’s going to wrap up with a short brief about FNRP, and share one of the deals that we’re currently working on. And then lastly, we’ll be joined by Mr. Sam Perrelli, FNRP’s Vice President of Relationship Management and open up the floor to help us with Q&A. So again, we’ve allocated about an hour in total for today’s presentation, 30 minutes or so for the content, and then we’ll spend the rest of our time taking your questions live. So without further due, I’d like to go ahead and introduce you to the world famous Mr. Drew Carpenter, managing director here at First National Realty Partners to step us through the ultimate hedge against inflation.

Drew Carpenter:

Hey, thanks Mike. Pleasure to be here. Can you hear and see me okay?

Mike Law:

Loud and clear. The floor is yours, sir.

Drew Carpenter:

Wonderful. Thanks again, man. My name’s Drew Carpenter as Mike said, one of the managing directors here at FNRP, and I just want to personally welcome each and every one of you on the call. It’s an honor to have you with us. Now, inflation continues to be a hot topic and in our opinion, will continue to be one for some time to come. As with any economic edition, there’re pros, there’re cons, really depending on how you’re positioned in the markets. And inflation harmful in a lot of ways to a lot of people. It’s really not something that you want to have excessive amounts of like we’re seeing now, but we really can’t change the fact that it is here. The good news is though, the commercial real estate, specifically triple net commercial real estate, is uniquely positioned to benefit from inflation. So today we want to share our perspective and our strategy of dealing with inflation.

Drew Carpenter:

So what is inflation? Let’s get clear on that first, as I’m sure everyone knows, the common definition of inflation is simply rising prices. Now, another definition that we like better is that inflation is a decline in our purchasing power per dollar. It can be thought of like an invisible tax. Now the bad news is if you ignore inflation, over time, it’s a very reliable and it is a very powerful destructive of wealth. You can think of it like compound interest working in reverse, working against you. So it definitely needs to be accounted for. And the good news I, once you’re aware of inflation, there’s several great ways to position yourself to actually make it work to your advantage. And we’re going to get into some of those strategies here very shortly. First up, I want to have you take a look at this graph here.

Drew Carpenter:

This graph shows that if you had $1 million in purchasing power in 1971 and you decided to play it safe in the traditional sense and just park that million dollars in a no-interest savings account, come a few years there, your $1 million of purchasing power in 1971 would be equal to $139,000 of purchasing power today. So effectively playing it safe would’ve netted you in over 85% loss in your purchasing power. So it’s really undeniable that inflation is not something to be ignored. And the next question is, are we in inflationary times? Is this something that we need to be worried about right now? Surprise, surprise, as you’ve likely heard, the answer is yes. What’s happened in the past two years is that inflationary pressure has been greatly accelerated by COVID and government and central bank actions around the globe. Take a look at this slide here. Overall, as you probably heard, inflation is up 9.1% year over year according to the latest CPI numbers.

Drew Carpenter:

Chicken is up 18%, eggs are up 33, milk is up 16, and you might say food prices, those are pretty easy for the more fortunate among us to shrug off. But the fact is, this pattern plays up and down the line with items that impact everyone no matter their level of wealth. Gasoline is up 59% and energy is up 41%. As you likely know, gas and energy are essential to almost everything, but new real estate development in particular, both commercial and residential. And the point is, and it’s very, very clear, is that the price of all types of commodities really up and down the line are going up much faster than in years past, which means that our purchasing power per dollar is going down at the same rate. So you know it and I know it the horse is out of the barn so to speak, inflation is on the rise.

Drew Carpenter:

And one thing to note is that this has come even at the surprise of the Fed, who not too long ago officially retired the term transitory when discussing inflation. And that’s really pretty telling. That should make your ears perk up a bit. So let’s take a look at what’s causing this inflationary trend. You probably heard about pent up post-pandemic demand and consumers being flushed with cash from government stimulus. This is driven demand and wages way up, creating what many would consider a wage price spiral, which is not a good thing. The increase in the demand for goods is very predictably causing a shortage of supply of both goods and of workers. And really this is just econ 101. If supply goes down, demand goes up, and consequently prices are going to rise. Now much of this comes back to central banks and not just domestically but around the world printing money at an absolutely unprecedented rate.

Drew Carpenter:

There’s been trillions of dollars of government stimulus put into the hands of consumers and prices have risen very sharply in parallel. You can see that in the graph here showing the amount of dollars currently in circulation. You look closely, you can see that spike there in 2020. And this is true not only for the dollar but for currencies up and down the spectrum. So really there is no safe haven for fiat currency. What we’re feeling now is the ripple effects of that cash entering the system. And you’re probably thinking, Drew, I know this, I watched the news, but please do stick with me because we’re going to dive into what this means to us as investors and the best way to navigate the current landscape. So you’ve likely heard in periods of inflation, there’s a common ethos that says, traditionally, equity goes up as prices go higher and debt goes down in value.

Drew Carpenter:

You’ll hear people say inflation is bad for the economy and ultimately we agree, but all you can really do is accept that it’s happening and try and make it work for you as an investor. Now really the goal of central banks and governments long term should be some degree of deflation. After all, more people with more purchasing power is a good thing. It means everyone is effectively richer, better able to provide for their needs. It’s really a sign of the economy becoming more efficient. Again, though, our opinions really don’t matter. What’s good for the economy in a personal sense really just depends on how you’re invested. And we’re currently in a period where being an equity is the only way to keep up. If you’re on the other side of the fence, if you’re lending money or you’re buying bonds or you’re just holding cash, you’re actually losing purchasing power and that obviously is not where you want to be.

Drew Carpenter:

So what is the best way to position yourself as an investor during times of high inflation like we’re seeing now? Excuse me. As I mentioned, you want to be an owner, not a loaner. And the reason is, when you lock in your return rate, let’s say you buy government bonds, which is effectively lending the government money or you hold private mortgage notes or whatever, you’re locking in today’s value of those returns for years into the future when the purchasing power of those returns is going to be much, much less. You don’t get to ride the tide up with inflation, so to speak. Your return are chained to money’s value in the year that you locked in those returns and inflation is going to eventually put you under water and it’s probably not going to take very long. And of course, that’s a really bad deal.

Drew Carpenter:

During an inflationary period, it’s best to own assets and equity and it’s bad to own debt because the price of the assets you own inflates along with everything else, you ride that tide up with inflation. At the same time, the payments you make on the loan that you took out to buy those assets are hopefully fixed for the duration or at least capped. Those payments will not inflate, they’ll become worth less and less as inflation does its work. So what you create is effectively a fuse burning at both ends where the debt that you borrowed costs you less and less and less in terms of spending power, but as inflation happens, the asset that you purchased with that debt becomes worth more and more and more. This is how you want to be set up. The key in an inflationary environment is that you want to own equity, you want to be an owner, you want to have assets, you don’t want to be involved with bonds or lending money.

Drew Carpenter:

Because as soon as you lock that in, you’re never going to do any better. So, for example, so you go and buy government bonds at a 3% interest rate, you’re never going to do any better than that 3%, it’s as good as it’s going to get. If inflation is at 9% like it is now, well, you can do the math on that. Whereas if you own equity, you have the ability to have some price appreciation, you have the ability for your cash flow to go higher as well. When your investments inflate in value, while your loan payments are going to remain the same, you ride that tide up and your assets keep pace. It’s kind of funny, in real estate, everyone is out there looking for high appreciation areas and properties.

Drew Carpenter:

Really, if you think about it though, appreciation is just sector specific inflation. A lot of people tell you, yeah, inflation is bad, but their house rising in value, well, of course that’s good. So it’s really strange how those terms are interpreted so differently. Now I want you to take a look at the second bullet here. In real estate, a very important figure is the NOI, the Net Operating Income of a property. And one easy way you keep up with inflation is by growing your NOI. There are multiple ways to do this that are built into the real estate market, assuming that you’re an owner. First off, you want rent increases built into your leases. Most of the leases that we do here at FNRP with our national tenants have built-in increases in the rents.

Drew Carpenter:

Specifically to allow us to keep up with or exceed inflation. This is standard and expected in the real estate market. Another way is through leasing up vacant space at our properties or through value add initiatives that lease up those value add initiatives, add value to our property, which means we can raise rents even further and the value of those properties go up as well. And with triple net properties, we’re able to offset inflation on expenses like taxes and maintenance because the tenant is going to be paying those and more on that shortly.

Drew Carpenter:

The point is though, that real estate is a great way to make sure you’re on the right side of the fence and you can ride that tide up when inflation is present. What you don’t want to be is a loaner in periods of inflation where your returns are fixed and get eroded away. Of course, it’s the absolute inverse during deflationary periods because the value of that debt will go higher and the equity will go lower. So now let’s take a look at some inflation hedge myths. So during inflationary periods, people often flock to gold or really on a broader base commodities. And while commodities like gold, may be a reasonable store of value, in our opinion, they’re not really an investment, at least not a very good one, primarily because they don’t produce any cash flow. When you buy gold, you’re speculating that the price of gold is going to go higher.

Drew Carpenter:

It’s not the same as owning part of an ongoing business or a piece of real estate. So commodities, while they may hedge and keep pace with inflation, if you’re lucky, that’s all they’re going to do, they are only a store of value, you’re never going to have any cash flow from them. And the same story with TIPS. You may have heard of these, these are Treasury Inflation-Protected Securities, really only a name only. We had Jared, our chief investment officer, take a look at where TIPS are trading right now, and these are government bonds that supposedly keep up with inflation. On a short-term basis though, they’re actually yielding negative results almost like European bonds. So do you want to go into gold where you can’t generate any cash flow? Do you want to buy government bonds that supposedly keep up with inflation but are actually negatively yielding all while gas is up 60%, building costs are through the roof, and rents continue to rise?

Drew Carpenter:

To us, that just doesn’t make a lot of sense. Which brings me to my main point, that in our opinion, the ultimate hedge against inflation is necessity based essential triple net commercial real estate. And let me tell you why we think that. So the first thing I touched on briefly a bit earlier is that when you’re using the triple net lease structure, 99% of the time we’re going to pass those expenses onto our tenants. No matter how much those expenses in flight, they pay us a base rent and they also pay us triple net charges, which cover taxes, insurance, maintenance, and utilities. And what that allows us to do is offset any increases in those costs. So if taxes go higher, the tenant pays for the increase. If electricity goes up, we’re going to pass that through to them. Same story with maintenance and repairs. If those inflate and prices are driven up, we’re going to pass that through to the tenant.

Drew Carpenter:

So we have this very nice little offset that allows us to protect ourselves against increases due to inflation. Whereas if you own, for instance, an apartment building or an office building that’s not set up in the triple net structure, if expenses inflate 9% per year, that’s going to be coming directly out of your cash flow. When you own triple net real estate, you’re able to pass that increase through to the tenant, which is absolutely huge. Now additionally, I mentioned built-in rent increases in leases. And this is just a wonderful perk to commercial real estate. Most of the leases that we inherit and almost all of the leases that we execute have a built-in escalator. Now the amount varies, but a lot of the times the increase is quite significant, 10% or more is absolutely not unusual. And what this allows us to do is keep up with or outpace inflation.

Drew Carpenter:

So the beauty of triple net real estate is that our asset appreciates right alongside in inflation while the expenses that are paid by the tenant, and we also have built-in escalations in those leases to make sure that returns are keeping pace with inflation. So it’s just an incredibly potent hedge, much more so than bonds or commodities like gold. So that’s why we really like essential needs triple net real estate. And I know I’ve mentioned essential or necessity based triple net real estate several times and we haven’t dived into what exactly that means. So our focus is a firm here at FNRP is on grocery anchored real estate, that is our bread and butter. But the same applies to other essential triple net real estate. It could be medical offices, it could be essential industrial. Really the key is that the properties provide something that the public is always going to need or want.

Drew Carpenter:

Rain, shine, COVID, no COVID. And those types of real estate are comparatively very, very sheltered from economic downturns and cyclicality. For instance, we had a lot of drugs and grocery stores in our portfolio during COVID, sales were up 20, 25% at many or most of these. During the pandemic, we were incredibly grateful to be in essential real estate. For instance, we talked to a lot of multi-family owners who were dealing with eviction memorandums and hotel operators. They were at per 5% occupancy. It really became clear to us how durable essential needs real estate is faring so well during such a grueling stress test. So necessity based real estate is very, very unique in its ability to do well during both times of high inflation and during recessions when they do come around. So now let’s talk about how to find these great real estate investments that are out there to protect you from inflation.

Drew Carpenter:

Now, first, obviously you can go acquire and own and operate personally. You can invest your own money, buy your own assets and manage them. Certainly not a passive investment though. In most cases, you’re buying a part-time job at best and you’re operating a business. So buying properties directly are in its own category. Now, the other three ways we see here on the slide, these are all passive. Public rates and private rates will benefit from inflation. But one caveat to them is that they lack a lot of the tax advantages or most of the tax advantages. You won’t benefit from depreciation with the REIT. Your 1031 privileges are severely restricted. REITs are also liquid, which means they’re much more volatile than investments with longer lockups like commercial real estate. Due to that instant price discovery, they’re also becoming much, much more correlated with a broader stock market.

Drew Carpenter:

So that leaves private equity deals, direct deals, or private equity deals that break down into funds. And the beauty of these is you get the full advantages of private real estate, of owning yourself, the benefits of keeping up with inflation, you get the tax benefits, you get the 1031 ability, you get cash flow and appreciation, and these are completely passive. You get no calls about frozen pipes or leaky roofs. And it’s because of these reasons that we think private essential grocery anchored centers are just a best in class investment and doubly so in times of high inflation. So that’s why we specialize in them here at First National Realty Partners. Now with that in mind, let me walk you through an overview of our firm and how we think about the investing process. We define ourselves as a vertically integrated opportunistic value add private equity sponsor.

Drew Carpenter:

We’re based out of Red Bank, New Jersey. Currently we have 10.3 million square feet in our portfolio and we offer investors stable passive investment opportunities, bringing all the advantages of real estate ownership, the cash flow, the appreciation, the tax benefits without the hassle of acquiring and managing that real estate. Currently we have over 140 real estate professionals working here at FNRP, and we’re growing very, very quickly. We realized early on that being able to source talent nationwide was an absolutely huge advantage. So we’ve been a fully remote team since, well before COVID. We optimized for competence over location and that has served us better and better over the years. Up top, you could see our founders and chairman Anthony Grosso and Christopher Palermo, our CEO, Andrew Denardo, managing principal, Ken Chapman, our chief operations Officer, Kurt Padavano. Jared Feldman is our chief investment officer. Deepika Bajaj, our VP of finance.

Drew Carpenter:

Our chief marketing officer is Casey Stanton. Fred Battisti, head of leasing. Zain Naqvi is our in-house counsel. Joe Palermo, head of investor relations, and Bill Comeau, welcome our CFO. You can read everyone’s bio at fnrpusa.com. All in all, I can guarantee you an incredibly accomplished group and it’s an honor to work with every one of them. As a firm, we’ve worked on over 141 million square feet of deals. Our leadership team has over 177 years of combined experience and has transacted on 30 billion dollars of real estate. So we often get asked what makes FNRP unique? There’s a lot of syndicators, a lot of sponsors out there. Why are you guys special? And we think it boils down to these three pillars, our dragnet acquisitions model, our investment thesis that we call tenant centric, value added investing, and our asset management approach, FNRP 360.

Drew Carpenter:

And I’m going to touch just briefly on each one of these. The first being our dragnet acquisitions model, and this is how we vet our properties. We have a saying here, it’s become of a bit of a north star, so to speak at FNRP that guides our acquisitions, that we want to look at 1000 deals for every one that we choose to pursue. And casting a very, very wide net and being incredibly picky about the deals that we do take on has always served us very, very well. We have developed over 60 specific boxes that have to be checked before a deal even makes it to our investment committee for evaluation. If it doesn’t have all those boxes checked, we’re just not going to move on that deal. Consequently, in order to source enough deal flow to find opportunities that do check all those boxes, we take a nationwide focus.

Drew Carpenter:

We leverage our relationships with the brokerage community, the institutional seller community and the family owners seller community to source our deals. And we’d run this drag net across the entire country, evaluating thousands of both on and off market deals, nearly all of which we’re going to toss out of the net for one reason or another. Maybe the anchor tenant sales aren’t good enough, maybe there aren’t enough national tenants, the population density could not be strong enough or frankly, just the returns don’t make sense at a certain price point. So taking all of these factors into consideration, after we do that, we’re hopefully left with one deal that we believe offers the highest returns for the absolute lowest risk. And we really look very, very hard for that asymmetrical risk to return ratio. It’s absolutely hard to find. There’s no denying that, but it is out there if you have the resources and wherewithal to look.

Drew Carpenter:

So here’s some recent acquisitions that did meet our criteria. Maple Park Place, that was an ALDI outside of Chicago, Brook Highland Plaza in Birmingham. That was a Sprouts and Best Buy anchored center. Dolphin Plaza in Harrisburg. Price Right Center, Tana Hill Promenade you see there in Bessemer. A Publix Consumer Square in Columbus, A Kroger and Hooksett Village in New Hampshire. That was a Shaws anchored center. And here you can see some of our recent dispositions. Most recently on the far left, a Pick n Save location in Wisconsin. This netted our investors a 45% annual IRR, a very, very good deal. Lenape Plaza in the middle there. That was a core deal, already stabilized when we bought it, but we’re still able to return our investors 13 and a half percent. And finally, Colony Business Park on the far right there. This was an industrial property. We were able to add several million dollars worth of value netting our investors just under 14% IRR.

Drew Carpenter:

Here you could see our REO schedule, or at least to effect similarly of it, if you would like a copy of our REO schedule, every property we own, what we paid for it and its current value, we would be more than happy to furnish that to you. Gives you a great idea of our scale. If you would like a copy, just type REO in the chat box or similar and we will get that out to you. Again, REO in the chat box and we’ll get you our real estate owned schedule. In total though, we’re right around a billion dollars of currently owned assets. So the second thing that we think makes us unique is something that we call tenant-centric value-added investing, which really is just kind of a fancy way of saying that we leverage our relationships with our tenants to add a lot of value both to their business and to ours.

Drew Carpenter:

So the first benefit that this focus on our tenants needs gives us is frankly just a tremendous amount of intel about what these national tenants will need to make a deal work. So when we’re looking at a deal and we see a Kroger anchor, for example, well, we already have seven or eight other Kroger’s in our portfolio. We have a great relationship with the brand. We work almost daily with the heads of real estate at these common popular national brands. So this is just a huge advantage. Because we’ve cultivated relationships with most of the major national tenants, this will let us get the scoop on a deal very, very quickly. So we know right away whether a deal is right for us or not. Now the second thing our tenant-centric approach does is position us to add value by leasing up space at any given center very, very quickly and frequently even prior to closing.

Drew Carpenter:

Now, one thing about having a national platform is that we can show these national tenants multiple options within our portfolio nationwide. And because we understand their needs better than most, that makes them really want to work with us specifically, we’ll get the first call, that means a win for them, and that means a win for us and our investors. So here’s just a few of the national brands that we do have relationships with. This is a very, very small slice of them. You see Walmart, Whole Foods, Home Depot, Tesla, CVS. These are brands that we’re in contact with on an almost daily basis. So the final thing that makes FNRP unique that we think is called FNRP 360, and what this refers to is our vertically integrated business model. So we’ve made the conscious decision to bring every single function needed for commercial real estate in house under our own roof, meaning accounting, property management, legal leasing, asset management, acquisitions and dispositions.

Drew Carpenter:

We don’t outsource these roles like many or most private equity firms do. And what this allows us to do is move faster and move more efficiently. In the end, we feel that nobody cares about our properties or our business more than we do. So we like to have full control. And there’s absolutely no question this vertical integration, it maximizes asset performance and efficiency and it really does improve returns for our investors. So that’s why we’ve coined our insourcing process FNRP 360. So that’s a little bit about us. To give you an idea of what kinds of deals we do invest in, I want to walk you through one of our current offerings right now. This is Ward Parkway. Ward Parkway is a 436,000 square foot multi-tenant retail center anchored by a very high performing Trader Joe’s Grocery. Honestly, I don’t think I’ve ever been in a Trader Joe’s that isn’t jam packed.

Drew Carpenter:

And I can assure you, this one is no exception. The center is currently 95 and a half percent occupied. That puts it squares in the core plus category. Extremely stable fundamentals in place and day one cash flow, which we always want in our deals. But still a lot of room here to add value and increase returns with the lease sub. And our leasing team, very, very big advocates of this center when they saw it. Fred and his team already making progress on the lease sub. We can’t share the specifics quite yet, but I can say things are happening quite quickly at this center. So here you can see our projected returns for the deal. It has a 65 million dollar purchase price. One important note, all returns you see here are net of or after fees, also known as net-net. So the fees are baked into these projections.

Drew Carpenter:

We estimate between a 1.4 and a 1.5 times equity multiple on the deal, a 13 to 14% targeted annual return, and six to 7% of that targeted annual return being cash distributions, which we pay out quarterly. And then all occurs over a short approximate three year hold. Now, it’s worth noting that the projected returns we show here are based on our historical returns from over 141 million square feet of grocery anchored real estate, this exact same type of asset, and our current portfolio value of over one billion dollars of this same type of asset. And quite frankly, we have such a strong group of repeat investors because we always try and be very, very conservative with our underwriting. We want to under promise and over deliver on every deal we do. This is how we build such a loyal investor base and that is not changing. So to get an understanding of how these returns are paid out, let’s take a look at a hypothetical investment.

Drew Carpenter:

So we estimate a 13.1% total return on capital. So for every $1,000,000 invested, we project to send you back your principle plus $131,000. So of that $131,000, 6.5% somewhere between six and seven or $65,000 approximately, would come back during the holding period as cash distributions, which are paid out quarterly. Stated as an equity multiple, as you can see here, for every $1,000,000 invested, we project to send you back 1.4 million. And as I said before, all fees already baked into these estimates, they are net-net figures, no additional fees on top of these figures you see here. So if you are interested in learning more about our award parkway deal, we have a one hour in-depth webinar going over all of the details, all of the due diligence that the investment committee did, coming up very, very soon. You can register for that by going to fnrpusa.com/webinar.

Drew Carpenter:

That’s fnrpusa.com/webinar. Totally free and hopefully very, very profitable. And I could tell you Ken Chapman knows this deal inside and out. He’s going to give you the low down on everything and we’ll walk you through all of the particulars followed by a very in-depth Q&A. So you can ask any question that comes to mind. Again, fnrpusa.com/webinar. So that about does it for me. I want to thank you for being here. It’s been a true honor. Now we’re going to go to our Q&A segment. I’ve seen some great questions come in during the presentation and we’re looking forward to answering them. So Mike and Sam, are you still with me?

Mike Law:

Yeah, sure am. Drew, great job. Can you hear me and see me okay?

Drew Carpenter:

I’ve got you both light and clear. Thanks so much guys. Floor’s yours.

Mike Law:

All right, great job. So guys, as we’re going to go ahead and kick off the Q&A segment of today’s webinar, we do have quite a few questions that have come in already today, so we’re going to get to those first. If you’d like to have us field your question, just type it into that Q&A box and we’ll get to as many as we can for the rest of the time that we have here. Questions about the award offering, questions about our acquisition process. It’s all fair game, and we’d love to field your questions today. So with that said, Sam, are you ready to go ahead and take the first one here?

Sam:

Yes. Go ahead and kick it off, Mike. Thank you for having me on.

Mike Law:

Absolutely. All right, so first question I’m going to take here is from Greg. He’s asking, is it true that private equity investments have lost value in the past year as much as 60%?

Sam:

Hey, Greg, thank you for coming on, great question, and I would say overall private equity is a very large scope. So that could cover anything from equity investments, commercial real estate, all kinds of alternative investments. So while it may be true at any given point in time, there were certain private equity deals that underperformed. I would say for the commercial real estate space, specifically the grocery anchored and necessity based space that we’re in, we have not seen any type of downturn of 60% drops, anything like that. So it’s possible in other industries, other sectors of the private equity market, but not within this grocery anchored commercial real estate space, fortunately that we’re in.

Mike Law:

That’s a great point. Sam, do you want to talk about our recent exits and our track record information as well?

Sam:

Yeah, so as Drew talked about a little bit earlier on, we’ve had a couple of dispositions just in the recent months here. In the last six months, we’ve officially closed on three properties, all of which hit our desired return metrics and exceeded them far beyond for certain offerings like that pick and save that we saw. We’re also currently under contract to disposition. One of our assets that we have in Long Island, New York, slated to close on the 25th of July just next week. And that’s going to average our partners about a 23/24% net IRR over a year and a half holding period. We’ve seen incredible demand for this grocery anchor necessity based space, and I think that’s really what’s fueling our ability to continue to disposition these assets at favorable cap rates.

Mike Law:

Absolutely. Thanks, Sam. And Greg, and for any of the rest of you who’d like information on our track record and recent deals that we’ve dispositioned, you’re going to want to visit fnrpusa.com/track-record. I’ll drop that into the chat here in just a moment. But again, it’s fnrpusa.com/track-record. All right, so let’s go ahead and move on to the next one. Thanks for your question, Greg. Got another question here also from Greg. And his question is, what is the impact of inflating borrowing costs on an FNRP deal?

Sam:

Yeah, so it’s a great question. And of course as rates go up, we are actively taking a look trying to work with the lenders, banks that we could get at the most favorable rates for. Typically, what we try to do is also get rates that have some sort of interest only period so that we could pay out favorable returns. But overall, as rates do go up in the market, we have to work more diligently to get rates that are attractive for us. So yes, as rates go up, it becomes a little more difficult to source the proper debt for these deals. But fortunately, being a fully vertically integrated team here, we have a debt capital market side, Jack McLarty who heads the debt service team really works diligently to get some of the most attractive debt that is available. So we have seen in recent times, as rates go up, we’re still able to secure great risk adjusted returns for our partners.

Mike Law:

All right, awesome. I got another question here from Dan. It looks like it’s a multi-part question. And Dan says, thanks for all this. I’ve been passively following you all for a while now. Good stuff. What do the 10% worst performing properties look like? What are the common attributes they share? And also asking, how often have investors receive returns below their estimates?

Sam:

Okay, so it’s a great question. And what I would say is 10% worse performing properties would likely be ones that, off the top of my head, I could think of maybe one or two that we acquired back in 2017 that had certain tenants that didn’t do so well during COVID. We’re really fortunate here that we have never lost a partner’s original investment capital, their principle. We’ve had deals that, like I mentioned, through COVID, had certain tenants that left the center where we had to work with our leasing team to re-tenant the space. So what that situation looked like is a short period of time, maybe nine to 12 months where distributions were lower than expected while we worked to fill up those vacant spaces. In recent times, the acquisitions that we’ve acquired in the last couple of years in the post-COVID world, we’ve worked diligently to ensure that the 10 synergy is right.

Sam:

We don’t have large department stores, things of that nature. So a lot of the deals that we’ve put under contract in recent times have been performing really well in line with what our expectations are. We had a few that took a little bit of a hit through COVID, but fortunately at the point that we’re at now, those spaces have already been leased up. We have an incredible leasing team here who’s proactive to get everything solved. So the bottom 10% of the performing deals are slightly lower than expectations, but we’ve never foreclosed or lost capital on a property.

Mike Law:

Thank you, Sam. Great question, Dan, really appreciate that. The next question, I think it’s a good segue to this, but I got Janine who’s asking, I was a little bit late, can you discuss the differences between grocery anchored real estate and regular retail real estate?

Sam:

Yes. So that is a great question and one of the main things that differentiate is what we learned through COVID, a word that we all now know, necessity based things that continue to operate during viruses, things of that nature, any type of economic downturn. We know that there are still going to be people that need to go get their groceries. So the main differentiation from what we do comparative to just the general scope of a retail real estate truly is the fact that it’s necessity based. Throughout COVID, our centers fared really well due to the fact that they’re all anchored by grocery stores, department stores, things that were deemed essential by the government and continued to operate over time. We saw many different things out there throughout COVID where real estate might have underperformed, but the necessity based space was one of the ones that performed the best. So that is the main difference from what we do comparative to just putting retail real estate into one sector, it is really a whole different atmosphere due to the fact that it cannot be shut down.

Mike Law:

All right, awesome. Thanks, Sam. So next question I got here is from Rocky, a common question we get is, do you do 1031 exchanges at exit? And also maybe you can discuss there if you can 1031 into our deals as well?

Sam:

Yes, so you can 1031 in and out of each and every one of the deals that we bring out on our platform, and you’ll see Ken Chapman in there up on the screen. He is one of the most knowledgeable people in our department regarding 10 30 ones. I would encourage each and every one of you who either have potential 1030 ones coming up, if you’re in your identification period, or even just really thinking about potentially dispositioning an asset soon that you may be looking to 1031, go ahead and schedule a call with Ken and he will be happy to walk you through the process. It’s a very straightforward and simple way. We will help you to identify the property as your 1031 replacement property. We achieved this all through the tick 10 econ structure. And again, if you’re unfamiliar with it, want any additional details, I would encourage you to schedule a call with Ken.

Sam:

And just for the second half of that question, in terms of 1030 wanting out of an asset, when we sell a deal, we will give you the option to either take your final cash out distribution or to reinvest your proceeds to defer capital gains payments and do a 1031. So when we sell a deal, you’ll always have the option to take your liquidity and utilize that cashflow for whatever you’d like or to stay in the deal and reinvest with us, and we will work with the entire entity, all of the partners involved to exchange out of the deal.

Mike Law:

All right, great. Thanks, Sam. We’re going to move on to the next question here. So another question from, let’s see, it was from Joe, also, I think you addressed this one about 1031 exchanges. Next question here from Ishwar. And also the same question from Barry. What is the minimum investment required?

Sam:

Yeah, so it’s a great question. Minimum investment, general rule of thumb is $50,000. What we encourage you to do is get involved at an investment point in which you feel comfortable, but at the same time, you’ll be motivated to do more when we succeed. And what I mean by that is we have certain investors that come in at our 50,000 minimum to get their feet wet. And then there’re other investors of ours that if we performed extremely well on a 50,000 investment, it wouldn’t move the needle for them. Our average ticket size is probably about 150 to 200,000. And again, we always encourage you to start where you’re comfortable. It’s really about building up that line of communication with us and that trust that’s there. Whether you do 50,000 in a deal or five million with us, we’re going to close the deal regardless. We just want to have you in as a partner regardless of what the investment amount is, just so that we can continue to build that track record and trust along the way.

Sam:

But just to rehash, 50,000 is the typical minimum. And on the 1031 side, if you are looking to do a 10 31 into one of our deals, the typical minimums are a half a million dollars. But I just want to be clear on that differentiation, if you’re a limited partner coming in with cash, it is only 50,000 comparative to a 1031 for 500,000.

Mike Law:

Yeah, that’s great. Thanks, Sam. And for those of you guys who may be interested in get involved in one of our deals, the Ward Parkway Center offering that we’re currently working on, and Drew mentioned the upcoming webinar is a great place to get started. You can register for the webinar, the webinar’s next Wednesday night, 7:00 PM Eastern the 27th, and Ken Chapman, our managing principal’s, going to be the host of the webinar. I’ll be there, We’ll have Fred Battisti joining us, who’s our director of leasing. I think we’re also going to have Jared Feldman or one of our senior acquisitions directors on, Jared Feldman is our Chief investment officer. So you’ll really get to hear the perspective on why we acquired this property and hear all the fantastic details that you don’t get on the emails that you’ve probably seen about Ward Parkway already.

Mike Law:

So it’s a great way to get to know us, a great way to get to know the focus and the expertise that we have on the deals and learn about how to get involved with us. If you can’t make the webinar and you’re interested in getting involved in the deal or learning more about it, you can respond to any of the emails that you may have received from Ward Parkway and set up a call with Ken Chapman and his team. That’s definitely the two ways I would recommend if you’re interested in getting involved with us. So with that said, Sam, let’s go ahead and move on. We got about 10 minutes left and let’s take some more questions. Okay, so next one up here is, I got a question here from, looks like Karen, the question is, does FNRP offer any DSTs?

Sam:

Karen, thank you for joining us. And no, we do not offer DSTs. DSTs are slightly different from the tick structure, but we do accommodate the 1030 ones through tenant econ structure. So slightly different from the DST, typically for TIPS, there’s a slightly higher minimum, which we talked about. But yes, if you’re interested in doing a 1031, we could accommodate it, but it will be through the tenant econ structure versus the DST. And there’s a lot to talk about between the differences on the two. Again, if you’re interested in having a conversation, I would encourage you to schedule a call and we’ll be happy to go on about the differences between DSTs and TIPS.

Mike Law:

All right, fantastic. I got another question here from, let’s see, this one is from Ed. He says there’s a great presentation. Is there any way I could share it with a few possible collaborators? I’ll go ahead and take this one. Ed, we’re going to circulate a replay of this webinar sometime this afternoon or possibly tomorrow morning. You’ll be able to forward that email onto your collaborators. And also, Ed asked another question. He says it was regarding the returns, and he said, if those returns happened over three years, the one million became 1.4. Is the annual return really 1.4X? I think he was talking about the hypothetical returns here. So could you address Ed’s question there?

Sam:

Yeah. So, Ed, I believe what he might have been referring to is the annual return over time being 14% comparative to the 13,1. And I think one thing to keep in mind here is that these figures are what we would call an IRR, internal rate of return, which it’s slightly different in calculating this than just punching in the numbers of your annual return. Timing comes into play with IRR calculations, how quickly the money is paid out. So the amount that is paid out over quarterly distributions, the timeline, all of that comes into play. For all of our deals, what we do is we create an entire financial model that our chief investment officer, Jared Feldman, along with his team put together.

Sam:

So what you’ll notice is that on each and every offering where we do have these financial projections, you could actually take a look at our model to back into how we calculated this. And of course, if you have any questions after reviewing or feel as if there might be a discrepancy, we’re happy to have that conversation. But there is a full financial model there, which goes into how these returns are all calculated.

Mike Law:

All right, thanks, Sam. Let’s see here. I’m looking for the next question. This is a pretty good one. This is from Steve. He’s asking, do you accelerate depreciation? If so, how would we recapture affect the returns?

Sam:

Steve, thank you for coming on. And that is a very common question that we get. So to the first part of your question, yes, we do accelerate the depreciation. For anyone who is on the call that may not be familiar with depreciation at commercial real estate as well as the acceleration, to give a quick synopsis, commercial real estate is naturally depreciated over a 39 year period. So in theory, if you buy a building that’s 39 million dollars, you’re going to be allowed to depreciate approximately a million dollars a year. There’s something called a cost segregation study, which is something we perform on each and every asset that we acquire. And what that does is exactly what Steve is referring to here, it accelerates the depreciation. So most of our partners are extremely happy when they hear about that, and it works out favorable to them in the sense that when you get your K1, which is the tax document you’re going to get at year end, you’re going to see a very sable year one paper loss, which is the accelerated depreciation.

Sam:

So I’m not a tax professional, I can’t give specific tax advice here. We recommend you consult with your CPA or accountant to talk about how you’ll be able to utilize that depreciation to your benefit. And to the second part of your question, how would the recapture affect the returns? So with the recapture, Steve, at the end of the investment, as we touched on a little bit earlier, you’ll have the availability to 1031 or defer any type of capital gains tax temporarily on this investment. So if you were to 1031 out of this investment, the recapture wouldn’t hit you right away, but eventually when you stop 1031-ing, you will have recapture to pay, which is essentially just based off the amount of depreciation you previously used. And again, if you have more in depth questions about that, happy to talk offline and go over it in depth with you.

Mike Law:

All right, thanks, Sam. So it looks like we got about five minutes left. Still have plenty of questions here. We got a question from Steven. He’s got a question about debt. He says, what about interest rates as you pay… I’m sorry, I got to read this here. What about interest rates as you pay as interest rates have gone up and your properties are financed, is the debt you enter into for a property such as the Ward Parkway, a variable rate fixed, and what do you anticipate it being?

Sam:

Okay, great question Steve, and I think I’m understanding it properly. And yes, we do get fixed rates for any of the loans that we have on these properties. So in the event that interest rates do continue to go up over the course of the next year, it’s not going to affect the debt payments for this. These aren’t variable rate loans, they’re fixed for each and every deal, I’d be happy to provide you with a loan summary. Again, we could send that to you offline. We have a whole loan summary there, which will tell you the loan term, the interest rate, as well as if there’s any type of IO period on the loan. Off the top of my head, I don’t recall what it is on this Ward Parkway deal, but again, if you sign up for the webinar, we’ll be covering all this in-depth or if you wanted to schedule a call at another time when I have those resources at my disposal, happy to provide you with the information for this current Ward Parkway deal.

Mike Law:

All right, great. Thanks, Sam. So next question here, I got a question from Jeremy. He’s asking, could I invest $10,000 to start? And maybe you can add to that about our requirement to take on accredit investors.

Sam:

Yeah, so Jeremy, and that’s a great point, Mike. So first and foremost, just want to make it clear that we are only allowed to work with accredited investors, which the SCC defines as someone with either an individual income of 200,000 or higher or filed jointly with their spouse of 300,000 or higher or to have a net worth of a million dollars or higher. We typically find that by working with these accredited investors, the 50,000 minimum is typically a good spot. Jeremy, what I would say is if you were looking to get started at a lower caliber than that and you are an accredited investor, schedule a call with a member of the team and we’ll be happy to speak to you and see if we could work with you. The general rule of thumb is that our minimums there are 50,000, but again, reach out and we’ll see if we could work with you.

Mike Law:

All right, awesome. I got a question here from Frank. It’s a 1031 question. He says, if you 1031 out of this investment and I roll it into another… I’m sorry, I got to read this here a little bit more thoroughly. I think he’s basically asking, can you 1031 out of say Ward Parkway and then 1031 into another FNRP deal, even if the position is under 500K? If they’re a particular position. Does that make sense, Sam?

Sam:

Yeah, so I think what Frank’s asking, and Frank let us know in the chat if I’m replying to this appropriately, but I think what Frank is asking is if you come in as a limited partner, say for a $100,000 and then you at the end of that investment want to 1031, yes, you will be able to. So Frank, just to be clear, that $500,000 minimum is if you are looking to enter a deal of ours with 1031 funding, but say you invest in a deal of ours as a limited partner, those minimums will be waived when it comes time to sell that property. So for example, if you’re an investor again who does a $100,000 in the deal and we look to exit the property and say your proceeds are approximately 140,000 from the sale plus upside, that will be able to be 1031 into another deal since you are getting grouped in with the entity.

Sam:

So again, it can get a little confusing and I’m happy to talk offline at length, but the bottom line is yes, if you come in as a limited partner below 500,000, you will be allowed to 1031. And I just wanted to address another question I saw here from Rocky. It’s a great point. He said, you don’t stop 1031 exchange, swap till you drop. A very common theme we see with our partners, and again, another thing I’d be happy to go and talk offline on. But the premise of that, what he’s saying there is if you continue to 1031 exchange and eventually you pass and it gets inherited by your heirs, they will then get the step up in cost basis. So another factor that would avoid, I guess that recapture that Steve was talking about earlier. So yes, agree with you Rocky and continue to swap till you drop.

Mike Law:

Awesome, Sam. Well, thanks so much. Guys, this brings us to the top of the hour. It’s really been a fantastic hour. I love the engagement and so many questions we got. I apologize for not getting to all them. If you posted a question and didn’t get a response, I really encourage you to reach out and schedule a call with Ken Chapman and his team. That’s the best way to get, not just an answer to your one question, but answer to your dozens and dozens of questions. The guys will gladly sit on the phone and answer all the questions that you have, and it’s never a high pressure sales tactics or anything like that with FNRP. We really want to make sure that we’re partnering with you to meet your investment goals. So guys, it’s been a fantastic afternoon. Drew, thank you for the very informative presentation on inflation.

Mike Law:

Sam, thanks for all your insights and answering these guys questions. I want to remind you guys, if you do want to get involved with FNRP or get to know us a little bit better, the best way to do that is to check out our webinars, Ward Parkway Center webinar’s next Wednesday night, 7:00 PM Eastern. I’ll be there. I will have some other representatives, Ken Chapman is going to be there, Jared Feldman, Fred Battisti, all the major influencers of acquiring this deal and putting it together, we’ll be on this call and we’ll be doing a deep-dive into Ward Parkway. So you definitely don’t want to miss this if you’re interested in this deal or interested in getting to know us further.

Mike Law:

The best what you can do is you can visit fnrpusa.com/webinar. Sign up there, or you can click the button here on your webinar viewer. And also, if you can’t make the webinar or you’re interested in learning more, or again, if you’re interested in getting your questions answered, please reach out to Ken and his team and set up a call with them directly. Lastly, if you requested the REO or the toolkit, we’ve received your request and we’ll get those sent out to you guys here within the next 24 hours. Again, thank you so much for your time today. I hope you guys enjoyed it. I hope it was informative, and we’ll see you on the next webinar. Have a great afternoon everyone.

Drew Carpenter:

Thank you.

Sam:

Thanks, everybody.