DST Monthly Landscape Commentary
By Al DiNicola, AIF®
DST 1031 Specialist
NAMCOA® – Naples Asset Management Company®, LLC
Securities offered through MSC-BD, LLC
Investors Focus on Opportunities
Investors have continued to pursue a variety of Delaware Statutory Trust (DST) alternatives for 1031 tax deferred exchanges. Sponsors continue to fully subscribe (sell out) current offerings. Sponsors are in full acquisition mode of future properties (sponsor pipeline) that will be released in the near future. Prior to new offerings be released to investors sponsors go through due diligence as well as third party reports on the Private Placement Memorandum (PPM). Investors have also raised a lot of good points related to the offerings and trying to understand what is buried inside the PPMs. Part of our fiduciary focus is to provide the absolute best due diligence and obtain all the answers any investor needs to make the best decision for your group. It is safe to say that if the overall real estate markets are seeing asking price escalation so would real estate that would be offered as a DST.
The past few years has seen a variety of forces that affect the metrics on all real estate as well as the DST offerings.
Over the past few days, we have reviewed DST offerings (about 20-30) from 2-3 years ago for comparisons on pricing, yields, etc.
Prices UP! Acquisition prices have increased over the past few years. It is not a surprise that back in 2018 & 2019 properties could be purchased for less than today. The traditional real estate market dynamics in many parts of the country over the past 6 months have created bidding session as frantic buyers attempt to secure their real estate assets. This dynamic has impacted the residential market as well as the commercial market. If sellers of real estate could turn the clock back a few years ago and NOT have sold when they did, those sellers may have sold for more today. For the sellers who did sell a few years ago naturally those sellers would have reinvested in the same environment. The proceeds from that sale (three or four years ago) may have been less than today and the potential distribution rate from the DST may have been more than today. Many of the offerings reviewed from years ago returned higher distributions than current distribution projections. We will go deeper on potential reasons. While sellers who did wait to sell their property and received more proceeds, they would be attempting to find properties to replace their real estate that was sold in a very competitive marketplace. Selling a few years ago may have offered more alternatives and solutions than today. Potentially more money today but challenged to where you place the money. Inventory in many locations in the country is limited. Based on feedback from several recent investors they are reporting a sale price for the property they owned far exceeded their expectations. One investor who realized a 50% increase in their in their property value from 2018 to 2022 compared the distribution amount from a potential investment back in 2018 to today. That particular investor was receiving less in distribution by 1.5% but because the proceeds were greater their dollar amount of return was greater. This could be a different twist to the theory of relativity. One final comment from the investor was “more capital from the sale with a reduced annual distribution rate creates more actual dollars”.
The capitalization rate (cap rates) has compressed over the past few years.
Meaning the Net Operating Income in relationship to the purchase price has moved down. The inverse relationship of cap rates to purchase price as cap rates move down prices move up is allusive to predict. In the larger real estate offerings, there is also increased competition from institutional REITs, insurance companies as well as national builders some who are entering the build for rent market. This tends to drive prices up. This is fueling the hottest sector of the real estate market where some are chasing yields. Other are simply acquiring asset for potential growth. DST sponsors still need to take the normal path to acquisition without waiving any inspections or due diligence tasks. There are antidotal comments from the traditional real estate markets where sellers are waiving inspections and submitting nonrefundable deposits simply to acquire the properties. DST sponsors avoid those risks by using the same acquisition process and checking all the boxes.
Interest rates are moving up (more within the past few months). In looking at the DST offerings of the sponsors interest rates are .25% to .50% higher than the end of 2021. Sponsors anticipate increased rates with current signals by the Federal Reserve (FED).
There have been many cost increases blamed on the COVID effect.
The employment cost directly related to the Multifamily facilities are on the rise. There is also the ongoing operational cost of the property that are on the rise. Fortunately, (many locations) in the multifamily space there has been an increase in rental rates that can be reset on either lease renewal or new market rate leases. There continues to be a demand for housing units and the pressure on construction cost continues.
The Projected revenue growth rate of 3% (once stabilized) and an expense growth rate of 2% are typical in offerings. Expense ratios under the typical 36%-38% ratio (expenses to Income) is desired.
There are properties (through DST Master Lease/Master Tenant agreements) that utilize an incentive program for the Master Tenant with regards to increasing rents. There may be sharing of rents over a specific investors’ minimum distribution level. Some of the current offerings were at a high of 50% sharing above a certain base level (those typically have a higher starting investor distribution) to a low of 10% sharing above a base investor distribution level. These are incentives to retain renters, release vacant units as soon as possible and basically increase income and revenue. This may create a win-win situation for the investors as well as the sponsors. Increased Net Operating Income will increase the overall valuation of the property when it comes time to sell the property.
What we have found when analyzing the offerings is that across the board all of the above factors have prompted sponsors to be more conservative in their proforma and long-range outlook.
As DST advisors, we need to be current with sponsor offerings. With the amount of equity being invested Sponsors are busy securing future offering sometime referenced as the “pipeline of offerings”. Multiple times a week we are in contact with the sponsors not only to evaluate new offerings but the obtain the status of current offerings to evaluate proper alignment with investors profiles, risks and needs. The current weekly equity being invested has been over $250 million. The same amount is coming on the market which requires us to constantly review new opportunities.
DSTs are not for all investors. The acquisition of a DST is for accredited investors only. Contact your investment adviser for additional details on how a DST may be a solution to your 1031 Exchange and suited for your investment future. For more information on how to properly set up an IRC 1031Tax Deferred Exchange or if you are an accredited investor and would like additional information on a DST contact Al DiNicola at 239-691-8098 or email email@example.com.
This is not an offer to purchase or solicitation to purchase any security, as such be made only through an offering memorandum or prospectus. Investing in securities, real estate, or any investment, whether public or private, involves risk, including but not limited to the potential of losing some or all of your investment dollars when you invest in securities. You should review any planned financial transactions that may have tax or legal implications with your personal tax or legal advisor. NAMCOA, LLC is a Registered Investment Advisor, regulated by SEC (Securities and Exchange Commission). Our corporate office is located at 999 Vanderbilt Beach Road, Suite 200, Naples Florida 34108. Securities Offered through MSC-BD, LLC, Member of FINRA/SIPC. 410 Peachtree Parkway Suite 4245, Cumming, GA 30041. MSC-BD, LLC and NAMCOA are independently owned and are not affiliated.
NAMCOA® – Naples Asset Management Company®, LLC