Finding Principal Safety, Capital Appreciation With Real Estate Investments

Commercial real estate, given a multiyear boom in demand, may offer investor portfolios diversity and income.

In unpacking commercial real estate as an investment, Tom Zuber of Zuber Lawler led a Benzinga Reopening Stocks Summit conversation between Ian Selig of Safehold Inc SAFE and David Auerbach of World Equity Group.

REITs In Play: Due in part to the so-called reflation trade — an expansion in output of the economy as a result of stimulus and pandemic reopening — real estate is enjoying a boom.

In an example, Auerbach pointed to EPR Properties EPR, formerly Entertainment Properties, a real estate investment trust that owns and finances income-producing amusement parks, theaters, resorts and other entertainment properties.

“Not only are the movie theatres reopening but EPR also happens to be one of the partners and exclusive developers of a small concept called Topgolf which is owned by Callaway,” he said.

“As we’re getting out of COVID we will focus on these experience-type events – going to the movie theatre, driving range, ski resort, water park, amusement park, indoor sky diving – that you can’t replicate online.”

Simply put, investors can look to names like EPR, Innovative Industrial Properties Inc IIPR, Power REIT PW, AFC Gamma Inc AFCG, Easterly Government Properties Inc DEA and Simon Property Group Inc SPG, among others, for exposure to growth opportunities in property sectors like hotels, malls, offices, data centers, cannabis cultivation and cryptocurrency mining facilities.

“Capital raising is very in vogue across the REIT sector,” Auerbach added. “The reason being REITs proxy the 10-year Treasury, which is trading just around 1.25%. The average REIT dividend yield is sub-4%.

“You basically get about 275 basis points in your pocket to be acquiring real estate.”

Ground Lease Love: Ground leases are agreements to develop property during lease periods that typically last for 99 years. During the term, rents are collected. After, landowners like Safehold acquire whatever structures are built on top of the land.

Through its approach, Safehold, the only publicly traded company focused on ground leases, is democratizing real estate ownership, providing owners a better way to unlock the value beneath their buildings, and investors exposure to a multiyear boom in commercial real estate.

Graphic: Safehold’s typical investments in well-located real estate.

There is no other place in the investment world where two types of investments, land and building, are forced to be together, Selig says.

“In the corporate world, you do not have to buy the bonds of the company to buy its stock,” he elaborated. “That’s what has been happening in real estate because there has never been a national company with investment-grade ratings to acquire that land component and do it in a way that actually enhances the value of the building.”

Adding, there are three efficiencies Safehold offers for building owners.

The first two are capital and cost as a result of the separation of land and structure, which cuts down on mortgage, tax, and brokerage fees. Third, there’s a reduction in maturity risks, on the entire portion of the capital structure, via the involvement of near-permanent capital.

Investors are “given a 100-year passive investment daily liquidity and that is powerful arbitrage,” Selig said on generating nearly 200-basis points of excess value to long-term high-grade bonds.

“For the first time ever we have made investments in ground leases available to the individual investor. An investment that provides principal safety, growing income that’s achieved through contractual cash flow streams, along with the opportunity for significant capital appreciation.”

Photo by Laura Tancredi from Pexels.