1. real estate

Contents:
Our Vision
Letter from the
Chairman &
President/CEO
About Us
Investment
Strategy
Development/
Value-Added
Multi-Family
Retail
Office
Hospitality
Restaurants
Land
Construction
Asset
Management
Financial
Advisors
Encore Equities
Discipline. Research. Experience. Integrity
Research
our vision
Contents:
Our Vision
Letter from the
Chairman &
President/CEO
About Us
Investment Strategy
Development/
Value-Added
Multi-Family
Retail
Office
Hospitality
Restaurants
Land
Construction
Asset
Management
Financial
Advisors
Encore Equities
Research
Experience
Contents:
Our Vision
Letter from the
Chairman &
President/CEO
About Us
Investment Strategy
Development/
Value-Added
Multi-Family
Retail
Office
Hospitality
Restaurants
land
Construction
Asset
Management
Financial
Advisors
Encore Equities
Research
3
About Us
Encore is a privately owned, vertically integrated, actively managed real
estate investment company that invests in value-added and opportunistic
strategies. We are an entrepreneurial company operating on the principles
of integrity, discipline and commitment and a solid foundation of a dedicated
and experienced management team, driven by the vision and perseverance
of the founders.
We develop, acquire and manage:
Hospitality-Limited & Full-Service Hotels
Retail-Grocery Anchored Shopping Centers & Single Tenant Centers
Multi-Family Residential Projects
Office Buildings
Residential Land Developments
Restaurants
Encore is a research-driven firm. Research is critical in all phases of real
estate, which at Encore include value-added acquisitions, development, asset
management, recapitalization, and dispositions. Anticipating change in global
capital and local property markets through the use of rigorous analytical tools
and proprietary databases help us assess relative value, manage and mitigate
risk, and determine the price at which we are a buyer or a seller.
Our goal is to be best in class in each sector, to
create a sustainable organization, and to build
wealth for our investors and team members.
About US
•
•
•
•
•
•
The Encore Evolution
1999
Encore founded with Hotel and Retail Groups
2001
Acquisition of Pineapple Management
2003
Acquisition of hotel portfolio
2005
Encore, following three hurricanes including Hurricane Katrina, successfully orchestrates
disaster recovery on behalf of its employees, their families, and the Company
2007
Encore sells $400 million portfolio
2008
Encore launches Multi-Family Group
2009
Encore launches High Net Worth Wealth Management Group
2011
Encore launches Office and EB-5 Capital Groups
2013
Encore launches Land Group
2014
Encore sells $174 Million Multi-family Portfolio and launches Restaurant and
Financial Advisors Groups
2015
Encore sells Sterling Resorts in excess of $10 million
NCREIF total annualized U.S. property return, %
Encore Recapitalizes $175
Million Multi-family Portfolio
30%
Encore Founded with
Hotel and Retail Groups
Encore Launches High
Net Worth Wealth
Management Group
20%
Acquisition of
Hotel Portfolios
Encore Sells $400
Million Portfolio
10%
1999
2001
2003
2005
2007
2009
2011
2013
2015
-10%
Acquisition of
Pineapple Management
Encore launches successful
disaster recovery following
Hurricane Katrina
Encore Launches
Land Group
-20%
Encore Launches
Multi-Family Group
Encore Launches
Restaurants and
Financial Advisors Groups
-30%
EB-5 Immigration
Capital Program and
Office Groups Launched
Encore sells
Sterling Resorts in
excess of $10 Million
About US
Encore
Milestones
Contents:
Our Vision
Letter from the
Chairman &
President/CEO
Investment Strategy
Development/
Value-Added
Multi-Family
Retail
Office
Hospitality
Restaurants
Land
Construction
Asset Management
Teamwork
Financial
Advisors
Encore Equities
Research
Investment Streategy
About Us
Investment Strategy
Encore is a real estate investment company which focuses on several property types including multi-family, office, retail, hospitality,
restaurants, emergency medical centers and land.
Exhibit 1. Encore focuses on value-added and opportunistic property strategies.
Stock
Equity
Fixed
Income
Alternative
Assets
Real
Estate
Encore Strategy
Public
Private
Debt
Equity
CMBS
REITs/
REOCs
Mortgages
Property
Value-Added
Multi-Family
Office
Retail
Hotel
Restaurants
Land
Vacant Space
Deferred CAPEX
Recapitalization
Opportunity
Land
Entitlement
Development
Encore’s investment style is either value-added or opportunistic. The former includes the acquisition of existing properties with substantial
vacant space, aggressively leasing or releasing space, providing for necessary capital expenditures, and recapitalizing the asset.
Opportunistic strategies include land entitlement and development. Depending on whether portfolios sell at a discount or premium to net
asset value and the temporary expansion of spreads between development costs and exit cap rates, the firm will acquire portfolios of existing
properties or developable land.
Encore co-invests substantial equity in all of its transactions.
Investment Strategy
D’Iberville Courtyard Hotel
D’Iberville, MS
The life cycle of an investment differs depending on whether the investment style is opportunistic or value-added. Development can
provide alternative exit strategies, including sale at the end of the entitlement period.
Encore only develops when conditions are favorable; otherwise we sell assets, pursue value-added transactions, or just remain on the
sidelines, as we have in the past.
Rather than operating superficially across myriad markets (like a skipping stone across a placid pool), our teams focus on fewer markets
(as dictated by our research), which enables them to dive deeply into the ownership structure of a market and identify more off-market
opportunities, including distressed assets.
Each property group is functionally self-contained, but works synergistically with other groups and draws upon the full resources of the
company, including capital, research, performance reporting, technology, banking, and accounting.
Property groups, each of which has impressive experience in value-added and development transactions, are able to toggle between
these two investment styles depending on market conditions and which style provides the best risk-adjusted returns. If the market rests
at a point of inflection in the property cycle and we believe price changes are imminent, the property team, under the guidance of the
Investment Committee, determines whether it makes sense to remain on the sidelines or sell.
Research, which is distributed across all functions of the firm, is a systematic, evidenced-based way of thinking about problems and
turning these problems into investment opportunities. Research at Encore is the backbone of investing. The firm invests substantial
resources in its research function, which spans the granular details of a single deal and the complexities of global capital markets. We
are information sponges; we translate data into information and information into knowledge; we are independent thinkers.
Our success reflects the following principles:
• Remain true to your investment style.
• Invest when markets are in disarray, market liquidity is low, price discovery is impaired, and fear rules the day.
• Buy below replacement cost and seek out great assets in weak financial hands.
• Wait indefinitely rather than make a bad investment out of compulsion.
• Eschew herd mentality; wisdom of the crowd is inherently fraught with danger for investors.
Investment Strategy
Vision
Exhibit 2. Value-added and opportunistic investment timelines compared.
Sell
Development
Value-Added
Raw Land
Entitle Land
Develop
Lease
Acquire
Lease and Rehab
Stabilize and Sell
Stabilize and Sell
Contents:
About Us
Investment Strategy
Development/
Value-Added
Multi-Family
Retail
Office
Hospitality
Restaurants
Land
Construction
Asset Management
Financial
Advisors
Encore Equities
Research
Development/Value Added
Our Vision
Letter from the
Chairman &
President/CEO
Encore 6162
Dallas, TX
Encore Memorial
Tulsa, OK
Encore Alsbury
Burleson, TX
Encore Multi-Family
Encore Multi-Family, LLC, founded in 2008, is a full-scale multi-family
developer with a concentration in the southern regions of the United
States. The company’s capabilities include multi-family developments
and acquisitions, including ground-up developments, value-added
acquisitions, joint ventures, mixed use, and urban infill communities.
The Multi-Family team delivers quality work on time and on budget.
The Multi-Family team combines the personal attention of a small
firm with the resources of a large firm. Members of this team have
trained with the nation’s top multi-family developers and amassed
an impressive transaction and performance resume. Rather than
superficially operate across many markets, it focuses on fewer markets
in which its knowledge of off-market, distressed situations is superior.
Encore Landing
Temple , TX
The choice of renting or owning is one that is very sensitive to
demographics and lifestyle issues, relative prices, macroeconomic
conditions, personal income and household wealth. The team has
experience acquiring, repositioning, or developing single family,
condominiums, as well as multi-family properties. All of these property
types are, to varying degrees, near substitutes; knowing how to
recognize and exploit short-term market imbalances is a signature skill.
Encore 281
San Antonio, TX
Development/Value-Added
Encore Multi-Family has one of the most seasoned management teams
in the industry.
Encore Retail
Encore Retail, LLC specializes in the value-added acquisition and
development of neighborhood and community shopping centers. The
single tenant division provides complete in-house real estate services from
site selection to store openings.
The team acquires, owns, repositions, asset-manages and develops highgrade properties from the ground-up in primary and growing secondary
markets. Value-added components include leasing, remerchandising,
renovation, and redevelopment, specifically adding density, changing use
or building out vacant pads.
Encore Retail also offers NNN solutions tailored to the client’s needs on a
national scale with local focus, including national roll-outs, corporate, and
franchise driven expansion programs.
The management team consists of proven leaders in acquiring, developing,
financing, negotiating, leasing and managing retail assets.
The group has strong relationships with tenants, especially with all of the
major grocers and local and national brokers. Identifying at an early stage
a grocer anchor is critical in attracting high quality, in-line tenants and
securing third-party capital.
Encore Retail has had considerable success investing in secondary and
tertiary markets. Retail is less concentrated than office in the larger,
gateway cities, and offers a greater variety of investment opportunities in
smaller cities.
Governor’s Pointe
Cincinnati, Ohio
Encore pursues large multi-use projects that include retail, multifamily, single-family land, office and other synergistic uses. Strong retail
performance depends on many of the same economic drivers as those
which support office and multi-family performance, such as employment,
household wealth and disposable income. For example, an urban grocery
store, its complementary in-line shops and adjoining office space can help
support the demand for urban apartments.
Development/Value-Added
Pelham Towne Center
Pelham, AL
The Towers at Frisco Square
Frisco, TX
Encore Corporate Office
Occidental Tower
Dallas, TX
Two Forest Plaza
Dallas, TX
Encore Office
Encore Office, LLC acquires, develops, redevelops and repositions A-quality office
properties to achieve consistent risk-adjusted returns. Members of the Encore
Office team have acquired or developed over $1.8 billion of office investments. The
ability to switch between value-added and development strategies is a prized skill
which enables the firm to actively participate in a broad set of cities over most of the
real estate cycle. The emphasis is pursuing off-market opportunities and identifying
value-enhancing opportunities which may not be readily apparent to the market.
The success of an office investment depends critically upon how market conditions
determine the initial rent and the rate of rental growth. Financial structuring
alters the distribution of net operating income, but the underlying fundamentals
are critical for long-term success. Even when pursuing value-added strategies
with existing properties, the team considers the development pipeline, the size
distribution of projects on line, the lagged arrival of new space, the likely impact
on investment performance, and the total demand for space by all users, including
corporate owners and governments.
In addition to acquiring assets below replacement cost, aggressively managing
tenant quality and lease terms are important risk reduction tools. Leases are often
to the tenant a substitute for corporate bonds. As such, using extensive databases,
the team is better able than most investors to assess the nuances of tenant credit
and default probability. The team views an office building as a portfolio of leases
which can be an important source of flexibility; much of this flexibility pertains to
the ability to improve the credit quality, increase the diversity of the tenant mix, and
lease vacant space.
Value-added strategies may involve acquiring an office building with substantial
vacant space and aggressively releasing the space to expanding or newly arrived
office tenants, or even converting the occupancy of a portion of the building to nonoffice uses, such as apartments.
Development/Value-Added
The team, while self-contained, relies upon the capital and other shared resources
of the parent company. Encore’s senior leadership brings essential knowledge
to negotiating, properly underwriting and closing transactions. The team has
developed impressive research and underwriting capabilities, which facilitates a
better assessment of urban and regional economics.
Commitment
Encore Hospitality
Encore Hospitality, LLC is a private real estate acquisition, development,
and asset management company focusing on the upper mid-priced,
branded select-service and full-service hotel sector. Encore Hospitality has
one of the most seasoned management teams in the industry. The team
has extensive experience in value-added and development strategies; it is
equally proficient in stand-alone and mixed-use hotel strategies.
Hotel investing is consistent with the firm’s active management
investment strategy. Hotels require the continual active management of
capital expenditures, marketing, and room sales. The team has impressive
management experience in these areas and knows how to create
incremental value. For example, a significant portion of the net proceeds
of Encore’s August 2007 portfolio sale reflected the team’s timely purchase
and professional management of the firm’s hotel portfolio.
Hotels are a synergistic complement to office, public-private development,
and even retail. Since Encore has embedded many self-contained but
centrally managed property groups, Encore and its investors can capture
the unique synergies and beneficial spillovers derived from the joint
development or redevelopment of various property types, including hotel.
Development/Value-Added
Starting in 1999, Encore significantly increased the Company’s hospitality
portfolio from seven hotel assets to as many as forty-one. The firm gained
a skilled hotel management team and a number of Marriott hotels when it
acquired Pineapple Management Services, Inc. and Sterling Resorts.
22
Encore Restaurants
Encore Restaurants, LLC develops, owns and manages specific territories
of various Full Dining and Fast Casual concepts. Five Guys Burger and
Fries. We currently own 8 and have 12 in development for 2015 in the
Central corridor of California. Our plan also includes 33 more in this
territory by 2018. Our Mississippi IHOP territory is still expanding. The 2
established locations will be accompanied by 2 new locations summer
of 2015. Established in 2014, Encore Restaurants, LLC, is a new division
for Encore Enterprises Inc., and will put Encore center stage as one of the
leaders in restaurant operations and growth.
Encore Restaurants’ capabilities include:
• Brand selection criteria lending to the most desirable risk to reward
ratios.
• Tenured, national experience providing precise execution of national
concepts and operations.
• A strong team of leaders with the unique ability to reach higher in
levels of sales and profitability.
• Operating fast casual and full dining brands with national
advertising funds. This enables strong marketing, and increased
leverage with suppliers nationwide.
• Treating guest to great tasting food, in a clean environment, with top
shelf service.
Five Guys Burger and Fries
Fresno, CA
Encore Restaurants is now exploring newer concepts that can strengthen
our current portfolio.
23
IHOP
Pascagoula, MS
Encore Land
Encore Land, LLC is a land investment company focusing on the
identification and acquisition of strategic land parcels in unique locations
for the master planning and entitlement of commercial and residential
developments. The team focuses on markets and submarkets with the
strong prospects of long-term secular growth.
The land developer essentially manages a portfolio of options, retaining
those options which are cheap and selling those options which are
dear. The more volatile the market, the more valuable is the option and
the stronger is the incentive for the owner to defer development and
warehouse the land.
Jordan Run Estates II
Midlothian, TX
The entitlement and re-entitlement phases of development can account
for a large share of the total value created by the development process.
In some cases, the best execution is selling just-entitled land and letting
others take the risk of development. In other cases, by acquiring land at a
low price, Encore Land can hold the land in its inventory and either sell or
develop at a later time.
Villages of Park Hill
Mansfield, TX
Development/Value-Added
Land development is replete with significant optionality: the option to
entitle, the option to develop, the option to sell, the option to delay, the
option to switch uses (through re-entitlement). Knowing how to value
these real options is not just an art form; it is amenable to rigorous analysis.
Our research team is skilled in pricing these embedded real options.
Encore Construction
Encore Construction, LLC provides turn-key commercial construction
services, which include cost estimation, quality assurance and scheduling,
subcontract negotiation, field engineering, financing and document
control, negotiating the permit process, foundation work, masonry,
steel and wood framing, drywall and interior finishes, HVAC, electrical
and communication and data systems. The team has completed over 17
million square feet or $200 million of commercial retail space and over
7,700 hotel rooms and multi-family units across 18 states. Our group has
experience working through the toughest regulatory and developmental
obstacles. The team works with sophisticated, institutional grade clients,
such as Goldman Sachs Group, Inc., Bank of America/Merrill Lynch, Wells
Fargo/Wachovia, Wal-Mart Stores, Inc., Lowe’s Home Centers, Inc.,
Marriott International, Inc., and Hilton Worldwide.
International House of Pancakes
Pascagoula, MS
All the Encore property groups benefit from the insights and experience
that only a well-seasoned construction management firm provides.
25
Villages of Park Hill
Mansfield, TX
Development/Value-Added
Encore 6162 Construction
Dallas, TX
Contents:
About Us
Investment Strategy
Development/
Value-Added
Multi-Family
Retail
Office
Hospitality
Restaurants
Land
Construction
Asset Management
Financial
Advisors
Driven
Encore Equities
Research
Asset/Financial Management
Our Vision
Letter from the
Chairman &
President/CEO
Asset Management
Asset management is a critical function because once the firm commits
to an investment, be it a value-added or development strategy, asset
management must oversee and manage the investment’s performance.
Encore has adopted a distributed asset management function wherein each
property group manages its own asset management strategy. Encore has
a matrix organizational structure; the property group manages the day-today operations of asset management and the holding company, through
its executive management team, oversees all corporate governance and
monitors financial performance.
We embrace technology because, when used well, it increases efficiency
and promotes the diffusion of information, which is the life blood of our
business. Encore has invested a great deal of capital in systems, performance
reporting, information technology, and risk management tools because we
are first and foremost investors and not fee-based asset managers. We are
grateful nevertheless that institutional and high net worth investors alike
applaud our commitment to state-of-the art technology.
Encore has been an industry leader in its quest for paperless management
systems.
Over the last three years the firm has completely transferred its applications
to the cloud, enabling the company to use best-in-class applications to
maximize productivity and to enhance its internal control and reporting
systems.
Diligence
Asset Management
Trust
Contents:
Our Vision
Letter from the
Chairman &
President/CEO
Investment Strategy
Development/
Value-Added
Multi-Family
Retail
Office
Hospitality
Restaurants
Land
Construction
Asset
Management
Financial
Advisors
Encore Capital
Research
Encore Capital
About Us
Financial Advisors
Encore Financial Advisors, LLC is a full-service wealth management firm serving family
office, high-net worth, and institutional investors.
As an independent fiduciary for clients, we seek to empower clients with institutional-level
access to intelligence and solutions sourced from across Wall Street’s major firms as well
as the broader market. Whether clients engage with our banking and lending services,
investment management, trust & estate planning, insurance solutions, or sophisticated
capital markets projects, we work to fully understand the needs and goals of our clients to
guide development of custom solutions.
We believe that true wealth management brings together all the elements of your financial
life—including investments, tax planning, estate planning, risk management, and more—
into a long-term strategy, informed by your uniquely personal priorities, that is designed to
bring about continued success across generations. Our mission at Encore Financial Advisors
is to make that happen.
Our advisors are fully independent of Wall Street, but have access to all of its resources. As
a result, we are free to put your needs front and center—we do not push products, while
seeking to provide access to unique investment opportunities.
Our advisors will consult with your family attorney, accountant and other advisors, or we
can recommend highly qualified experts. Coordinating all your advisors will ensure that all
your financial activities work in concert to realize your vision of the future.
Most important, we listen. We seek to understand where your issues lie, what keeps you up
at night. Then, we draw from the full range of wealth management solutions to deliver a
customized approach to addressing what concerns you.
Encore Financial Advisors…driven by our passion to help investors realize their life and
organizational vision.
Our Financial Planning Process:
Financial Advisors
Our Scope of Services:
Leadership
Contents:
Our Vision
Letter from the
Chairman &
President/CEO
Investment Strategy
Development/
Value-Added
Multi-Family
Retail
Office
Hospitality
Restaurants
Land
Construction
Asset
Management
Financial
Advisors
Encore Equities
Research
Encore Capital
About Us
Integrity
Encore Equities
Encore Equities Management, LLC manages the funding of offerings for the various real
estate value-added and opportunistic (development) opportunities and works closely with
the investors.
Encore creates efficient capital structures in order to reduce the weighted average cost of
capital and minimize loss. The capital stack may involve a layering of claims which may
include the equity (GP and LP), mezzanine debt or equity, and senior debt. In the case of
development, the capital needs may include guarantees, predevelopment funding, bridge
loans, construction loans, and acquisition lines. Encore believes that institutional and
high net worth capital can and should be complementary; hence, Encore always looks for
innovative and prudent ways to combine institutional and high net worth capital.
Exhibit 3. Encore minimizes the overall cost of capital to any project.
Value of
Financial
Interests
Capital Stack
GP Equity
The owner has a call option
on the property with an
exercise price equal to the
face amounts of the senior
and subordinated debt. The
creditors are long the firm
and short the call option
held by the owner.
LP Equity
Subordinated
Debt
Senior
Debt
Property
Value
F1F1+F2
F1+F2+F3
Encore Capital
Encore Capital consists of two capital raising platforms: (1) Encore Wealth Management,
LLC sources equity capital from high net worth individuals and family offices and (2) Encore
Global, LLC raises capital through foreign nationals focused on EB-5 investment. Our Global
team’s mission is to help foreign investors achieve their immigration and investment goals
while revitalizing local and regional real estate markets, which will promote the growth
of U.S. jobs and the local economy. Encore additionally raises institutional equity through
outside placement firms.
Collaboration
Contents:
Our Vision
Letter from the
Chairman &
President/CEO
About Us
Development/
Value-Added
Multi-Family
Retail
Office
Hospitality
Public/Private
Construction
Land
Asset Management
Financial
Advisors
Encore Equities
Research
Research
Investment Strategy
Encore Research
What is the purpose of research? Research is systematic, evidencebased inquiry; at Encore it forms the backbone of every investment
decision. The purpose of research is to provide a competitive edge to
all facets of the investment process, to enhance value, and to manage
and price risk. Research has a dual focus: the broad economic and
capital market forces that drive value and local and regional economic
drivers.
Research at Encore consists of (1) property market research to estimate
the levels and rates of growth of rents and other deal parameters; (2)
portfolio research to explore ways to incorporate real estate within a
multi-asset portfolio; (3) capital markets, which includes the study of
capital flows, capitalization rates, and capital market strategies; and
(4) risk management, which analyzes and manages potential losses.
Property market research. Markets are always in disequilibrium,
and they slowly reestablish balance. This adjustment process is a
complex dynamic incorporating subtle simultaneity, feedback loops,
leads and lags. Since property development, especially large office
development, involves long lags, the careful study of market dynamics
and rental growth paths is essential. We generate metropolitan as well
as submarket supply and demand market gap forecasts to help guide
our investment decisions.
Property markets are cyclical; they are rarely synchronized. Encore
periodically reviews for each property market and property type the
best investment strategy. Sometimes it makes sense to develop; at
other times, value-added acquisitions are more desirable given the
cost to build.
Property market scenario analysis. Encore models the supply
and demand dynamics of metropolitan property markets using
sophisticated econometric methods tempered by experience and
market knowledge. Property performance reflects these dynamics.
Our approach book-ends a strong bottom-up analysis with a series of
macro, or top down, scenario forecasts to test the validity and internal
consistency of deal assumptions, including exit capitalization rates.
Portfolio research. Encore is a leader in real estate portfolio
research. Investors always ask Encore: What is the appropriate
portfolio allocation for property? Since real estate can be public
or private, equity or debt, the answer to this question is not
straightforward, especially when we consider investor liabilities
and aversion to loss. Optimizing the performance of the
portfolio’s surplus—assets minus liabilities—introduces new,
even counter-intuitive complexities: safer assets may be risky
and higher risk assets may be safer in the context of liabilities.
We focus on a number of sources of risk, which include lease
default, the likelihood and associated cost of development
delay, the choice of floating versus fixed rated debt, optimal
portfolio mix, hedging, valuation of guarantees as a function of
LTV, valuation of real options (including the option to expand,
the option to postpone, and the option to sell a development
project), lease renewal and extension options, and optimal
working capital and other reserves.
We occasionally use sophisticated risk simulation techniques,
such as Monte Carlo analysis, to evaluate complex transactions.
Static analysis, which is the industry standard, usually fails to
convey the true extent or implications of risk; in fact, it often
masks risk.
Research
Risk assessment. The English dramatist, William Gilbert, of
Gilbert and Sullivan, once wrote, “Things are seldom what they
seem; Skim milk masquerades as cream.” Investment risk is no
exception. Investors frequently ask, what is the likelihood of a
capital loss or negative return? Encore embraces the explicit
and rigorous assessment (and pricing) of risk using Monte Carlo
and other simulation techniques. We actually analyze riskadjusted returns; we do not just talk about it.
Exhibits 4 and 5 illustrate this point. These exhibits compare the expected
performance of two complex, highly structured deals, each with the same projected
average returns, 13.5%. Investors who conclude that the projected performances
of Investments A and B are identical would be wrong. Investment A, as Exhibit 4
indicates, has less downside risk than Investment B because the probability of
loss, 3.6%, is less than the likelihood of loss associated with Investment B, 13.2%.
However, Investment B has more upside beyond a 20% return. Unlike traditional or
static analysis, which collapses performance into one number—the average—Monte
Carlo treats risk explicitly and correctly evaluates the shape of risk or the distribution
of returns. Investors, both general and limited partners, especially those who seek
to mitigate potential loss, value and understand this intuitive approach to risk.
Encore continually studies capital market flows and non-real estate asset
performance in order to price real estate property risk more effectively. Investors
have choices; they can acquire property or publicly traded equity or debt. They can
buy mortgages. In place of real estate, they can buy stocks and bonds.
Capital markets and financial innovation. The capital markets price real estate risk
in relation to other asset classes. Lease valuation is a good example since leasing is
a corporate alternative to issuing corporate debt.
Encore’s mission is to introduce real estate investors to the richness of the real estate
capital markets through prudent transactions and published research.
Encore is a financial innovator. Professionals in our research and capital markets
teams have trained at leading investment banks and have participated in billions
of dollars of complex financial transactions. To us, real estate is a hybrid asset with
equity- and debt-like characteristics and a bundle of embedded options. We believe
that just about any financial instrument or financial strategy which currently exists
can be adapted to real estate.
Exhibit 5. The return distribution of Investment B
0.02
0.010
0.000
-30
50
40
30
0.005
20
10
0
-10
-30
0.00
-20
0.01
13.533
12.613
-1.1395
5.4000
50
0.025
Mean - 13.533
0.03
33.8%
40
0.030
Mean
Kurtosis
Skewness
Std Dev
52.9%
30
0.035
13.533
7.500
0.0000
3.0000
13.2%
20.0
Mean - 13.533
0.010
0
0.04
Mean
Kurtosis
Skewness
Std Dev
19.4%
77.0%
-10
0.05
3.6%
-20
0.06
0.0
20.0
10
0.0
20
Exhibit 4. The return distribution of Investment A
Whinvat
es
em
d th rd to
e
r
e
nee
ega
lay
ors
ulti with r
est
M
inv
t
:
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in
Estate is a Poor Inflation Hedge
b
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What
investorsneed
needtotoknow
know
about
What investors
about
. . .. . .
estors
n:
p Rat
Priests
augur 2
50
ary; it is wrong.


The IDEA Factory:
Big ideas for
practical investors


5005 LBJ Freeway, Suite 1200
Dallas, TX 75244
Phone: 214-259-7000
Issue No. 5
59-7
14-2 W
Wha h
e: 2
t in a
D
n
Pho
t inv
ed toes
knowto
ab r
vest
ors
ne
Inflation hurts real estate performance in over-supplied leasing markets since in-place leases are worth less as nominal interest rates rise
with little, if any, offsetting increase in rental growth.
Co. r7 e
dit
When real estate is leveraged with debt, the change in equity value
with respect to interest rates will depend on how closely the cash co
st o
flow payments of the debt match the anticipated lease cash flows.
Borrowers, who rely on debt of shorter duration, especially variable
f
Why
rate debt, are betting on interest rates, a dangerous game.
is
out
Phone
:
s ne
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ed t
o kn
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a
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Issu
bou
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No . 3
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rat
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cred
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ital and th
tory uate s it ration
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e
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p
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p
.
So, if real estate is not a good inflation hedge, then why should
inves? B
form urse
ly a
e
e
n
s
Par
mati ation, w may g d dem ginning
tors embrace real estate? Should investors care about real estate?
an
on is
here loss
s
t1
ov d. P tuden
in
h
We say, “Absolutely, and now more than ever!”.
Cre
dit ra idden. players er critic rofessio ts are
ta
s
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a
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Times
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ill of th
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(client
the lastabout . . .
What investors need to know
s) and
What investors need to know about . . .
decade
.
2
1
Scylla and Charybdis:
Au g u s
t 30, 2
010
Navigating a Liquidity Trap
R2
500
5 LB
JF
Dall reewa
y
as,
TX , Suite
752
44 1200
e: 2
14-2
59-7
000
Pho
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Issu
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No.
1.
rn
lend
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R1
A
RE
R*, op
Inte timum
rest
rate
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the
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it
Non
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sirab
Inte
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rest
le are the size -price st
rate
as a
D
nd b of loan,
orro
wers
.
Recession Macroeconomics for
Curious Real Estate Investors
Greek Mythology is replete with pithy metaphors and exciting stories. The great
poet, Homer, wrote about Scylla and Charybdis1, two sea monsters domiciled
on opposite sides of the Strait of Messina, between Sicily and the mainland of
what is now southern Italy. (See Exhibits 1 and 2.) In close proximity to each
other, they posed an inescapable threat to passing sailors; avoiding Charybdis
meant passing too closely to Scylla and vice versa.
Today, investors must maneuver betwixt and between the Scylla and Charybdis
of deflation and inflation. Investors are fearful and anxious. The Fed has recently signaled increased concern regarding possible deflation. The received wisdom is a weak guide; but act they must and inaction is itself a decision. This
paper discusses the implications of a spiraling asset price deflation (or liquidity trap) for real estate investors normally accustomed to worrying
about inflation.
Exhibit 1. Charybdis
The IDEA Factory:
Big ideas for
practical investors
S
R*
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nbetw
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The hydra-headed Scylla (full recourse debt) was rooted to one spot in the ocean, and regularly ate sail- 6
mod
the tr n the m f betwe moothin
t eno
ors (over-leveraged investors) who passed by too closely. Charybdis (asset price deflation) was a single
en
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g
ugh
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to oth
gaping mouth that sucked in huge quantities of water, and belched them out three times a day, creating
d
r
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r
iv
rd d
er
whirlpools (an economic black hole of downward spiraling asset prices). Odysseus (Fed Chairman
evia biased s 11%, w e an ad
tion
h
ta
ju
Bernanke) was forced to choose which monster to confront while passing through the strait; he opted to
of eq ndard ich is ab sted
pass by Scylla and lose only a few sailors (banks), rather than risk the loss of his entire ship (the economy)
de
uity
o
REI viation ut half
into the whirlpool. The shipwrecked Odysseus saved himself by clinging to a tree (quantitative easing
T
of p
s.
and regulatory accommodation) on the shore until his raft floated to the surface. Jason and the Argorope
rnauts (investors with very low leverage) were able to navigate through without incident due to Hera's
ate f
tio
ns
avors
d
n
 P n mod egative are no ed real
els
esta : Priv
tc
ro
to
S
1
Exhibit 2. Scylla
.
ut .
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it w
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(185
sell
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. H. al estate redators
010
A. H
ed b
re
ep
0, 2
own
oriam life. The estors b
ust 1
Wha
Mem
inv
of
Au g
ning
t on's In ature
Issu
na
pec
tion
he re sha
la
ug
ing
al w re the ssump ls often ht that
Real estate, public or private, debt or equity, is a potent diversifier
othe tive in
ti
orld
p
fo
s
rs d borrow applies
if th
dep ame in ons, su rget th rices a
o no
ers
to c
a multi-asset portfolio. Diversification increases portfolio
efficiency.
e
arts
form ch a
at in djus
borr y offere t, and who ap ircums
fr
s
t
a
tr
om
th
By efficient, we mean increasing returns without incurring
greater
this tion an symme oducto o owers in d to pa e reje pear to tances
d
tr
sim
btain Thereth
cte
in
y
b
risk, or, equivalently, reducing risk without sacrificingcre
returns.
plifie no info ic inloan e pop a highe d appli e identi which
dit,
rd
m
e
u
c
r
s
c
ithe
thehedge.
al s
latio
ode
ants
inte
at a
is a role for real estate in your portfolio, but not as anRinflation
ati
y
r
o
l.
re
n
nom oning in would. ny intere who, w st rate would me rec (a) amo
e
n
ic R
;
(S
n
evie Markets ee Jo st rate, ith a giv or (b) thot rece ive a lo g proHidd
ive
an a
sep
w, 7
eve
en s
e
w
re
it
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a
h
nd
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h
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up
lo
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,3J
tion n info
th
Im
s, 11, 2010
une perfe . Stiglitz ough ply of re iden an eve
rm
tifi
wOctober
c
n
w
c
198
he espec ation
1: 3 t Inform and A ith a la redit, a able
mea n credit ially wh poses
re
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ti
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are ns. Ba is more en tran critical
c
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e Am iss, “C
of
rate ot willi nks cull plentifusaction halleng
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s
an E redit
are may s g to pa loan ap l, lend volume es to th
The
coe
in
the experi ignal hig y high plicants rs still is low. e analy
IDE
ra
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the nder ju enced, her ris tes, b and re ration lo Even sis of tr
Big A Fac
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elop st doe poorly k. Thu t beca ject ma ans throin norm ansacprac idea
s
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ny,
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s
ugh al tim
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ita , ban
n
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th
t or
l inv for
Exhib
leas feel com lized, o ks reje e willin ot beca non -pri es,
it 1
c
esto
u
ing
g
c
risk fortabler possib t applic ness to se the e
rs hhigighher tha.nBanks prefe
, or
ants
ly
pay y
w
R*,
d
er ra
it
th
r no
b
e pro h the ishon
the
thos
profi
te
t
es ecau
p
table loans optim to lend
e
pert
incr
u
y ty roject, t. Som se they
ease . Even are so ri m rate at rate
pe.
the
s
, si
s, R*
sk
if
loca etimes
doe the sup y as to nce
Exhib
Expe
tion
s no
b
cted
t cha ply of lo e less
,
R*, it 2. At
retu
a
To
d
n
abo
w:
cla
d
n
th a rse
nd
uy a
too
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to b
n
i
’s c comes the urge
d
r
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e
n
R
et
?
win recoveringemwainrkner’s curse g strategy eenin
ly
for th
The
bidd
oid th
slow
n
orts. . .
vtoeknsowtabou
need
aesttorsin
h
t inv
tureW
Wha
.
w
kno
(Zisler Capital Associates, LLC) assistance, while Aeneas (investors who effectively shorted CMBS, FNMA
and AIG in 2007) was able to bypass the deadly strait altogether. Who says mythology is not fun and
relevant?
September 23, 2010
No v
emb
er 1
6, 2
0
10
Research
o
a
a
e
ra
p
,
n
To r alue o Ts and portfoli ot look l estate ication erefore Tr ’shoeve
v
if
ing ity REI mestic e do n er rea divers ee. Th investo vel. IDyEA F
acto
le
r
th
f
o
zation
f
W
f
e
u
o
(
r
d
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The heights by great men reached and kept were
not attained by sudden flight, but they, while their
companions slept, were toiling upward in the night.
– Henry Wadsworth Longfellow
A Vertically Integrated Commercial
Real Estate Operating Company
5005 LBJ Freeway, Suite 1200
Dallas, TX 75244
214-259-7000
535 Fifth Avenue, 4th Floor
New York, NY 10017
646-362-1628
2 Greenwich Office Park, Suite 300
Greenwich, CT 06831
203-347-0360
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