A Real Alternative

On page 71 this month, you’ll find an overview of the alternative investment market and our premiere, exclusive directory of the firms that offer them. The numbers indicate that among alternative products, hedge funds are among the hottest things around today. But long before hedge funds came along some five decades ago, property was the alternative investment of choice. It still is for many folks. A great portfolio balancer, real estate has little correlation with stocks. It can also generate both current income and long-term capital gains, albeit with some unique risks (just remember that mantra: location, location, location).

But if you are trying to persuade a client to invest in real estate, what route do you take? Buy an office or apartment building? Well, maybe the client doesn’t want to be a landlord. What about publicly traded real estate investment trusts (REITs)? Their diversified portfolios are usually great for income, but over the long haul, REIT prices may be more subject to the overall whims of the equity market than you would prefer.

Then there are private REITs. True, they are far less liquid than their publicly traded cousins; investors may suffer discounts of 10% or more off net asset value if they want to exit before a REIT is due to wind down. But some private REIT sponsors have done an admirable job for investors. I’d like to tell you about one of the more unusual ones, Bill Carey. A courtly Baltimore native whose antiques-filled offices overlook Manhattan’s Rockefeller Plaza, Carey is the alchemist of the REIT biz.

Bill and his team specialize in sale-leaseback deals, which basically aim to turn underdeployed assets on corporate balance sheets into gold. Carey looks for companies that need cash and own real estate, but may not have the credit rating to borrow cheaply. Using equity raised from investors plus some debt, Carey buys these corporations’ properties and then leases them back for long periods to the original owners, who remain responsible for paying all taxes, insurance, upkeep, and other operating costs. That provides Carey with immediate cash flow and gives him a shot at earning a profit on the sale of the property down the road. In some cases, he has even received equity in tenants as well, allowing for an extra gain when the shares are sold. If you have shopped in a PETsMART store or gone to a Rave Reviews cinema lately, it’s likely you’ve visited a Carey property without even knowing it.