Our Strategy is Simple:
During our 60+ years of combined experience, we have analyzed a wide assortment of properties through multiple economic cycles. Our experience has taught us that real estate ownership succeeds when the primary focus is on risk minimization. As a result, we design risk minimization strategies into each ownership opportunity through our twin goals:
- maximize property occupancy
- maintain sufficient partnership liquidity to withstand unanticipated downturns
In real estate, staying power sometimes transforms average investments into outstanding investments.
Real estate is not a short-term investment. While current real estate returns are typically competitive with alternative investments (in the current economic environment they appear superior to alternative investments), it is the future years that provide the opportunities for out-sized returns. As a result, we invest in properties that have long-lasting value. In order to secure this value for the investor, we recognize the need to acquire/develop well-built complexes that provide value to the community and to the tenant.
Real Estate performance is determined through:
- The aggregation of multiple streams of income
- The preferential tax treatments of those income streams
- The value of the mortgage pay downs
- The impact of inflation
- Value created through repositioning
Commercial Real Estate investment in private syndications can have large performance swings from sponsor to sponsor. This is because CRE is a dynamic investment and heavily dependent upon the analytical capabilities of the sponsor during asset selection and management execution during the ownership phase. HHCP is a proven leader in both.
Capital Preservation and Capital Growth and are of the utmost priority to us and our investors. Every investor wants high returns, but high returns do not exist in a vacuum. Typically higher returns are coupled with greater risk of capital. However, sometimes this relationship of risk vs. reward is skewed toward the risk. We balance these priorities by evaluating the risk adjusted returns of every investment using a detailed financial model that weights future worst case, most likely, and optimistic scenarios to determine expected returns, variance, standard deviation, and risk adjusted return ratios. Only after our minimum yield criteria are matched with the appropriate risk adjusted return ratio do we continue with a project.
The old adage “you make your money on the purchase” is certainly true. However, this only happens after a detailed feasibility review including: Market & Competitive analysis, Site & Location analysis, Legal & Political analysis, and with the inputs gathered, Financial Analysis. This is an iterative process culminating in a go / no go decision on every transaction.
The components of value:
Annual Income Stream (Cash on Cash Return)
Upon completion or acquisition of a property, cash flow generated by the property is distributed to our investors on a quarterly basis. In Heritage Hill Capital Partners' investment opportunities, the initial investor return is typically in the range of 8% to 10% (annually) depending on type of real estate and risk level for that type of real estate. This return does not include the value add equity created repositioning.
Annual Increase on the Income Stream
In each real estate project, there are typically annual increases in revenues as the result of negotiated rent increases in the tenant leases. Modest annual increases in the range of 1% to 3% typically flow through to the cash flow at higher percentages because operating expenses are only a fraction of gross income. As a result, as the property matures, cash flows typically increase to levels above the initial preferred return.
Most real estate contains some level of mortgage debt and each mortgage requires all or partial reduction of principal during the life of the loan. This pay down reduces the mortgage balance and represents an additional (deferred) value to be received by the investor, either at the time of sale or re-finance of the property.
Increased Value of Real Estate
As the cash flow of the project increases, the overall value of the property also increases, typically at about the same percentage rate as the increase in the cash flow before debt service.
From a tax perspective, real estate is considered a depreciating asset. As a result, the tax laws allow the annual deduction of a portion of the value of the real estate based on the projected life of the property. Additionally, some expenses related to acquisition and/or development of the property is typically amortized over a shorter timeframe. The combination of these two events shelters a portion of the investor's cash flow from taxes. As a result, the cash flow has a higher pre-tax value than cash flows from unsheltered investments such as the dividends from stocks or the interest income from bonds.
Type of Real Estate
There are various segments of real estate including: office buildings, medical buildings, warehouses, retail centers, regional malls, apartments, hotels and many others. Each type has a unique set of active variables that influence the level of risk and therefore the investors return on investment. Currently our focus is distressed multifamily apartments.
Our investment strategy is mid to long-term. We expect competitive advantages to be built right into our real estate. Our focus is on “distressed” real estate that usually has upside rental growth and compressed pricing due to deferred maintenance, or high vacancy rates. These properties typically have been over leveraged and poorly managed.
All of the above items as well as the rental price and the marketing and proper positioning of the project will greatly affect the market's view of our properties within the marketplace. The successful combination of all of the above items will have a significant positive effect on the occupancy levels of the project.
Financial leverage is an obvious tool for the enhancement of cash returns. However, there is a balance between returns obtained through leverage and the safety provided by sufficient liquidity to survive the inevitable slow periods within our economy. If we are successful in achieving the first five points above, it becomes prudent to reduce the leverage levels to create a safety cushion within the operating cash flow.