Real Estate Equity Investment Categories

For sophisticated real estate investors, commercial real estate as an asset class offers a variety of equity investment alternatives at various points on the risk spectrum. Through Prescott’s range of investment products, investors can tailor their real estate investment strategy to specific return objectives and risk tolerance levels, and can further “fine tune” their goals with respect to current returns, capital appreciation, and preservation of capital. Equity market segments range from the lowest yielding, lowest risk “Core” investment category to the highest yielding, highest risk “Opportunistic” segment. In all cases, the terminology, while commonly used, is somewhat subjective and categories do overlap.

Through Prescott’s investments, sophisticated investors can clearly define their investment objectives and pursue highly tailored investment strategies in direct real estate ownership. This broad variety of options offers comprehensive access to the asset class and an appropriate risk adjusted return at all points in the investment risk spectrum.

Core investments tend to appeal to longer term, strategic investors, including many U.S. and international institutional investors as well as some individual investors. Investors in core assets typically seek a secure return, largely generated from ongoing current property cash flow. Representative core investments include properties with long term net leases to strong credit tenants; first class or “trophy” office buildings in major urban markets, such as New York and Washington, D.C. with intermediate to longer term leases; premier multi-tenant buildings with limited lease rollovers; and assets with a modest level of leverage (40.0% to 50.0%) relative to value. While overall returns (IRRs) in the core category are below 10.0% in the current market, investors view these returns as offering an attractive premium relative to other asset classes, including stocks and bonds.

Core Plus
The Core Plus segment is a variation on Core investing, offering slightly higher overall returns that typically range between 9.0% and 12.0%. Core Plus investments often derive a somewhat lower percentage of their overall return from current cash flow and a correspondingly higher percentage from residual value. The higher returns from core plus investments relative to core investments may reflect such factors as somewhat higher releasing risk, lesser credit leases, and/or higher levels of leverage (50.0% to 60.0%).

Value Added
Investments in the value added category offer opportunities for a balanced mix of current cash flow and future appreciation. These properties may be located in recovering primary markets as well as in secondary or tertiary markets, and may offer some retenanting exposure, though often coupled with the opportunity to increase cash flow when existing rents are below current market levels. Value added assets can often benefit from a change in marketing, operating, or leasing strategy; physical improvements; and/or a new capital structure. Moderate leverage (60.0% to 70.0%) can enhance yield while still allowing for healthy debt service coverage. Value added investments appeal to knowledgeable institutional and individual investors seeking an enhanced return in exchange for somewhat higher levels of operating risk, as these risks can often be substantially mitigated.

Investments in the opportunistic category tend to be growth and development oriented or centered on a repositioning or redevelopment strategy, with high overall returns. Typically, a significant portion of the return is “back-end loaded” and achieved upon the sale or refinancing of an asset. Opportunistic investments frequently involve assets or operating entities that offer "turn around" potential and can significantly benefit from a new strategic direction. Opportunistic investments may further entail new or innovative product types, involve new development, or require entry into new developing markets. Opportunistic investors tend to be large, sophisticated, and well capitalized investors who have a high risk tolerance and are comfortable with the higher levels of leverage that are typical in this segment. Investment in this category can involve the commitment of significant capital based on an assessment of broad market trends. Investors are often able to spread their investment risk across a broad pool of investments, and capital markets techniques such as hedging and the use of derivatives can be utilized to mitigate and manage risk.