Buy right – two words that form the basis of The Jacobson Company’s investment philosophy; a philosophy that many real estate investors are failing to adhere to by virtue of current interest rate and market environments. Low rates have enticed stakeholders to absorb increasing levels of risk in search of yield. This, coupled with a considerable influx of foreign capital, has resulted in record liquidity in real estate markets. Consequently, investor decision-making has become increasingly skewed, illustrated by a propensity to chase yield in the absence of appropriate risk premium. In our view, asset prices for many transactions in multiple markets do not account for the margin of safety associated with quality real estate investment. Longer term, this may well create opportunities as the economy cycles, interest rates rise, and loans mature.
Even in a bull market, The Jacobson Company observes the following tenets critical to sound real estate
We raise and deploy capital in markets having sustainable economic characteristics. These include, but are not limited to, a strong and diverse employment base; a business-friendly public sector fostering a supportive regulatory environment; an educated tenant population; available transit; and a quantifiable demand for square footage. In terms of student housing, The Jacobson Company seeks properties in proximity to universities/colleges with student populations exceeding 15,000, positively trending enrollment and application numbers, and superior freshman retention and six-year graduation rates. Likewise, we target institutions having (1) limited development opportunities adjacent to campus and (2) high percentages of their respective student bodies living in off-campus housing. High school enrollment growth is also monitored.
Value Is A Function Of Operational Cash Flow In Addition To Appreciation
In our view, value in any given acquisition is driven by our capacity to grow distributable cash flow as a result of expert management, or by upgrading a property's outdated physical structure to optimize the opportunity for longer-term appreciation. In either case, the decision to acquire multi-family real estate or student housing is based upon exhaustive market research and comprehensive physical assessment of the asset. Absent from our analysis is the projection of a quixotic short-term increase in value based solely upon the likelihood that a “greater fool” might agree to pay more than a property is reasonably worth simply because we wish to sell it. If fifty years has taught us anything, it is that the economy is not always cooperative – prices decline just as they rise.
There is no substitute for sound underwriting. Favorable interest rates and liquidity in the marketplace do nothing to diminish this truth. When presented with investment opportunities, The Jacobson Company judiciously employs analytics, including reasonable cash flow assumptions and defensible growth projections, to determine property valuations – value being calculated as the aggregate of efficient distribution of cash flow plus the potential for appreciation in light of rising rents and supportive fundamentals.
Minimize Financial Engineering
Without question, leverage can be both constructive and destructive. A measured acquisition philosophy like ours allows for the assumption of moderate levels of leverage, sufficient to enhance returns, but conservative enough to assure capital preservation and flexibility through economic cycles.
A DISCIPLINED APPROACH
What differentiates The Jacobson Company is its unwillingness to acquire assets simply for the sake of acquisition. Our disciplined approach limits targeted properties (multi-family and student housing alike) to those that satisfy the foregoing criteria; this despite the valuations that other investor groups might be comfortable with by virtue of excess marketplace liquidity. Experience dictates that prime buying opportunities are rarely found at the top of the economic cycle, and we as a company strive to remain vigilant during exuberant periods such as these. Such restraint is designed to inure to the benefit of our investors in the form of enhanced returns, managed downside risk, and new investment prospects in the wake of real estate that becomes distressed due to unsubstantiated purchase prices.