Investors Continue to Seek Returns with Continued DST Opportunities

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 adinicola@namcoa.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.

Thank you,

NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC