Looking Forward: Capstone’s Core-Plus Returns with Core Risk Investment Proposition

In 2008, seeing an untapped opportunity to provide larger investors with access to the diversification benefits and premium returns of the small-cap real estate arena, Capstone added a new emphasis to its strategic direction. The company has targeted a range of stable properties in strong, smaller markets across the U.S. with the objective of providing investors with Core-Plus and even Value-Added returns at Core risk levels.

Target Market

Near-stabilized properties in secondary and tertiary markets

Objective

Provide access to the premium returns of smaller markets with mitigated risk

Goal

15-18% gross IRR over 5-10 years

Properties of smaller size from less efficient markets have historically yielded a 150-250bp higher “cap rate” than typical “institutional” properties (Note 1). Capstone’s ability to provide access to attractive opportunities within these markets will be driven in part by the vast network of local industry professionals the company’s President, David Lee, has built during his over 25 years experience in the industry. Capstone’s ability to mitigate the risks of this strategy will be based on:

  • The company’s over 40 years of successful investing in the most challenging, distressed areas of the smaller-cap arena. Capstone’s experience in identifying opportunities and capitalizing on them provides a distinct advantage
  • The current absence of institutional investment in secondary and tertiary markets translates into far less competition—and therefore higher risk-adjusted return potential—than the marketplace for Core assets
  • Geographic and tenant diversification are expected to further reduce risk by decreasing the volatility of cash flows from properties

The properties included in this present strategy will have stable operating track records and strong income growth potential. Investment candidates will be targeted in areas with growing populations within the top 100 metro-micro areas of the U.S.

As in the past, Capstone plans to use leverage to enhance the return potential of its investments, but at a level that would not place investments at risk in the event of a prolonged market downturn or further credit tightening.

Note 1 Source: PWC Korpacz Real Estate Investor Survey