John Randall, Senior Vice President for PCCP LLC
John W. Randall joined PCCP, LLC in December 2009 and focuses on East Coast debt and equity originations particularly in the Mid-Atlantic area. Prior to PCCP, Mr. Randall spent six years and invested over $1 billion in real estate debt and preferred equity positions within the Real Estate Private Equity group of Lehman Brothers. Prior to Lehman Brothers, Mr. Randall was a Vice President with Deutsche Bank, originating and underwriting mezzanine investments for the DB Real Estate Mezzanine Investment Funds. Mr. Randall started his career with Arthur Andersen and Jones Lang Wootton where he valued over $1 billion of real estate in the U.S. and Latin America. Mr. Randall holds a B.A. in Economics from Bowdoin College, magna cum laude, and an M.B.A. from the Wharton School of the University of Pennsylvania. John lives in Park Slope with his wife and two children.
Q: How have pension funds been affected by the low rates in the market?
A: Strictly speaking on the real estate investing side, pension funds generally haven’t benefited from the lower rates as they tend not to employ material leverage in their core or core plus CRE investments. In fact, lower rates have inured to the benefit of leverage buyers at the expense of absolute return oriented capital like pension funds. Although you can argue that the low rates have helped drive down cap rates creating a nice paper recovery for pension funds long on tier one real estate.
In general, pension funds are increasingly compelled to put money into the value-add and opportunistic space that they had shunned during the depth of the Great Recession when a more conservative mindset reigned. Now with the bounce back largely back on the core valuation, pension funds, particularly those with major asset / liability gaps (which is most of them) have to find yield. Currently, with rising rates and cap rates likely to hold steady or rise, the search for yield leads to riskier value-add and opportunistic investments.
Q: In the search for yield, can you still get opportunistic returns in a low interest rate environment? How do you take advantage of these opportunities?
A: Yes, but perhaps the measure of what is an “opportunistic return” needs to also be adjusted down on a spread basis to underlying rates. We’ve made some terrific investments in the last few years, great vintage years, buying loans / REO / recapitalizing cash-constrained owners because not only could we remove the broken capital structures that had held good real estate hostage, but also fix the real estate and take advantage of the returning fundamentals. These investments are harder to find as the tier one real estate markets mature and re-balance but they exist in some of the secondary markets.
We have also had success attracting pension fund capital to our debt strategies which for them is an alternative to core equity investing. The pension funds rightfully see senior debt with its current yield and down-side protection (given the equity subordination) as attractive. We have invested over $1 billion in the last twenty-four months in this manner.
Q: What is your strategy for investing in tertiary markets, which are now becoming prosperous?
A: Like many, we generally don’t favor those markets because of the challenges of the liquidity on the exit. We prefer markets where we have existing knowledge, the right local partner, and there is a real view to the drivers on the fundamentals and the real estate. An example of when we would invest in a tertiary market is when the operating partner has lengthy experience in the property or the market and the basis is compelling enough. For example, we made an investment recently with a local multi-family owner in Huntsville Alabama. There are more liquidity options for multi-family which allowed us to feel good about the investment.
Q: How risky are these markets, and what is your downside protection?
A: They can be risky because fundamentals may not be there, exit liquidity, and the local information / broker talent may be lacking. If you look at the universe of specially serviced assets, you tend to see them in secondary and tertiary markets. So when thinking about downside protection, we tend to seek deals where a greater share of the return is from cash flow than from the reversion.
Q: How are you reacting to the amount of aggressive capital that is currently in the market?
A: We tend not to focus on how much capital is out there or the competitive nature of it for our equity business. We can’t control that. We instead focus on using our competitive advantages towards a transaction (be it a partner, previous experience, creative structuring etc.) and being disciplined when the market may be over-reaching. We do not deviate from our knitting as experience has taught us that is when mistakes are made.