On October 12th, 2011, Seth Singerman, President and Managing Partner of Singerman Real Estate, discussed the fundamentals of real estate investing within the context of current market conditions at the latest in the Real Estate Executive Speaker Luncheon Series. Singerman, an alumnus of the real estate program at Cornell, began his career at JMB Capital during the 1980’s and later became a Director at GEM Realty Capital. He attended Kellogg and graduated in 2005. In 2008, he left GEM and recently started his own venture.
In a roundtable setting, Singerman described to students his investment method, an idea not unique to investing but perhaps not fully represented in every real estate portfolio. “I see the world in four quadrants. You’ve got public debt and private debt, public equity and private equity.” Singerman stressed that with any given property, there is likely to be a form of opportunity. “The key is to understand when you want to be a lender, and when you want to be a buyer.”
Singerman highlighted the $1 trillion of commercial loans due to mature in the next four years, for which the deteriorated underlying property value is less than the loan value; he estimated that roughly $400 billion in capital will need to be raised for the owners to retain or transfer control. These loans represent viable recapitalization investments as either debt or equity positions. To date, Singerman Real Estate’s transactions have represented approximately two-thirds debt and one-third equity.
Asked about the difficulty of raising a fund in this market, Singerman noted that, although there might have been easier times to raise capital, it becomes easier with a track record of healthy returns. Singerman stated, “I have never lost money on an investment, ever,” and told those in attendance that he’s comfortable on the sidelines if he doesn’t see opportunities that meet his risk/return profile. He went on, “For deals that make sense, there is equity money sitting on the sidelines.” Those deals, he said, are moving faster than before.
Singerman went on to stress the importance of buying into real estate only at a fundamentally attractive basis. He elaborated, “We don’t generally make decisions on an asset making generous assumptions of growth.” He explained that the flexibility in the nature of his transactions leaves a wider range of opportunities to invest in fundamentally sensible situations.
Questioned about taking equity positions in distressed properties, Singerman noted that they routinely present opportunities with relatively low risk through the solving of simple problems. He explained that the owner of an underperforming office building who believes that he is going to lose the building eventually will starve the building of cash, unwilling to commit to the tenant improvements that would turn it around. He used this scenario as an example of how a well-capitalized investor could quickly turn a distressed property into a profitable investment with a reasonable capital commitment. Other situations, he explained, are more difficult. A poorly performing hotel, for example, would be unable to retain or acquire a new operator without a large infusion of capital and an experienced, well-respected management team put in place.
Singerman turned his discussion of the current state of real estate markets from private equity to the realm of public equity, pointing out that REITs are priced much higher relative to stock indexes than their historical norms stating, “either the REITS are too expensive or the stocks are too cheap.” He noted that some non-REIT equities with heavy on-balance sheet real estate are more valuable than the REITs themselves. Asked about the potential of firms to capitalize on their real estate assets by separating them from the operating companies, Singerman opined that usually, the on-balance sheet real estate should be viewed as a sensible floor to the valuation of operating companies. In the event of liquidation, “if it’s a good box,” he stated, “we can find a way to fill it.”
Singerman closed by commenting on current growth firms and areas where students might begin careers within the industry. He noted that while certain mega funds are continuing to target multi-billion dollar fundraising goals, he is beginning to see niche funds pop up in areas like farmland and timber. He advised that most students should target these middle-market and niche funds, since these platforms usually offer fantastic learning opportunities and still attract top-tier talent. He finished by explaining that there are also unique growth opportunities in areas that previously have not had institutional quality management, such as student housing, gaming, and cruise ships.