Raggedy Ann, Doughboy and O’ Boy!: Imagine this iconic American rag doll poking Doughboy’s belly waiting for a laugh or a cry. Is Raggedy Ann looking for some love or simply being a bother? Not necessarily America’s odd couple for analogies, but this unusual relationship could be a bit like the Fed and the economy. It does seem that the often criticized monetary policy of our beloved Fed Doughboy has had its impact; let’s call it “ragdoll economics-from lifeless to hopeful!” As of April Fool’s Day, no kidding, the S&P 500 rose to a record of 1,890.90. The Dow Jones Industrial Average rose 40.39 points to 16,573, within four points of its all-time high set Dec. 31. This positive tone continued right through to the Bureau of Labor Statistics’ (BLS) jobs report. Six years following the Great Recession’s 8.8 million job loss, the U.S. private sector added 192,000 jobs in March, the 42nd consecutive month of growth with an aggregate increase of 8.9 million as of today. Full disclosure alert! The economic landscape must reflect the fact that total payroll still remains 300,000 below the peak and the adult population (16 years and older) has grown by 14 million since the recession began; factor an aging and growing workforce with current unemployment of 6.7%, and many negative nabobs believe that the U.S. job market is nowhere near recovered on a per-capita basis. Don’t lose perspective as US unemployment rates have consistently declined over the past five years; 9.6%/2010, 8.9%/2011, 8.1%/2012, 7.4%/2013 or approximately 43%. According to the BLS, jobless claims decreased by 32,000 in the week ended April 5, the least since May 2007, seven months before the worst economic slump since World War II. Inflation is harmless at around 1.4%. The Bureau of Economic Analysis pegged US GDP at 2.6% in 4Q13, with positive increases in personal disposable income since the beginning of the year. On balance, things look pretty good, with folks buying houses, getting raises and spending on goods and services. I believe that our favorite Doughboy is pretty pumped and ready to hit the dance floor with R Ann and grind to “Let the Good Times Roll”.
If You had Everything, Where would you put it? Just ask the Oracle of Omaha! Considering that the majority of our private equity comes from high net worth investors, an evolving investment trend among this group is particularly noteworthy. According to Reuters, high net worth-family offices, reached a combined wealth of $20 trillion in 2013, a phenomenon that coincides with a shifting focus from luxury mansions to commercial properties. Data compiled by Real Capital Analytics showed that family offices spent $11.2 billion in the US on office, retail, industrial and hotel properties in 2013, up from $7 billion in 2012 and 3 times amount spent in 2008. Many of these “families” are moving away from the traditional money managers and financiers and migrating to actual real state owner and operators to acquire real estate long term. This phenomenon is not unique to equity returns from real estate. Warren Buffett of Berkshire Hathaway has underperformed the S&P 500 four out of the last five years. Bill Gross of PIMCO has been hammered for sub-par performance and watched billions withdrawn from his respective funds. Plagued by high fees, poor advice and mediocre returns, many investors are ready for a change. The mandate by this extremely liquid investor is not complicated: reduce management cost, eliminate multiple layers of sponsor-promote-carried interest and fees, bypass manager-imposed liquidations (sales), hold long term and maximize value on a tax advantaged structure. That all makes sense; unfortunately many of these families have made a strategic choice to invest at the top of the market. My advice is to be careful. The intoxication of excess liquidity and massive personal wealth may produce some serious hangovers when cap rates and interest rates increase over the next several years. “Prices for office buildings, shopping centers and multi-residential have skyrocketed past the market peak levels of 2007 in New York, San Francisco Bay Area and Boston, according to Dan Fasulo, Managing Director of Real Capital Analytics.
A Shoe for Every Foot: DJM is pleased to announce that veteran Retail and Single Tenant Net Lease expert Robert Brown has joined the firm. We have considered for some time the addition of a risk-return investment option for our partners. We understand the interest many of you have investing in our previous short term Mezzanine Debt and Preferred Equity offering, which totaled around $50 million over the past several years. The structure of this Net Lease platform is yet to be determined as we evaluate tax implications, liquidity, redemption rights and exit. DJM’s Net Lease will target properties in urban high barrier markets, with strong credit in high traffic-high visibility locations. Financial modeling will include 50% leverage with lease terms averaging no less than 12 years. Target markets are the West Coast, the Sunbelt Sates (TX, AZ, FL), and New England. The potential exit strategy may include a bulk portfolio sale to a larger entity in the Net Lease space, IPO, or become part of a larger DJM roll-‐up strategy. Investor yields are being targeted in the 7%- 8% return range with cash flows commencing at deployment of funds. Prior to joining DJM, Bob was the CIO for A&C Ventures, Inc. where he played a key role in acquiring, underwriting, evaluating and financing a $600 million dollar portfolio of Single Tenant Net Lease properties located in 32 states.
The Madness of March is Upon Us: It’s that time again for DJM to take another deep dive back into the debt pool for yet another re-capitalization of several of its prized assets. We are adding debt to our Pacific City and Lido Marina Village properties, which were originally acquired all cash for approximately $75 million. Now we are recapitalizing those properties with new debt and equity. At the moment, with nearly $340 million in property capitalization along with commencement of construction on our “Beach” assets, DJM is firing on all cylinders with great team cooperation between development, leasing, finance and operations. The challenges of development and redevelopment have allowed us to expand our bench of highly competent development and leasing professionals. We’re definitely elevating our game. Everyone at DJM has responded so positively to our growth trajectory, with all its attendant responsibilities. I liken the energy and espritd’ corp to the concept of “Optimal Experience”, as outlined in the timeless work of famed- psychologist Mihaly Csikszentmihalyi’s book “Flow”. His basic concept is that “people performing an activity who are fully immersed in a feeling of energized focus, full involvement, and enjoyment in the process of the activity…” are at their best! We’re there. Trust me, I’m no version of Independence Day’s alien-obsessed madman Dr, Okun, but I am just as passionate about preserving and protecting your equity as I am about our team and projects. So, let’s Dance and Go with the Flow!
As always, please give us a call if you have any questions or comments.
DJM Capital Partners, Inc.
D. John Miller, Founder & CEO