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As is the case with global securities markets, most fund managers cycle assets more often than necessary in order to achieve yield-based performance benchmarks that enable significant personal compensation for the managers through profit participation agreements and acquisition fees. This typical, time honored incentive structure, which has served investors well when asset values were below historical averages, has several undesired consequences when asset values are flat or above historic averages, by encouraging managers to…

  1. Pursue high-yield (therefore high-risk) transactions
  2. Maximize the use of leverage, thereby increasing risk and decreasing whole-dollar profits
  3. Dump underperforming properties, rather than develop and execute a work-out plan
  4. Churn assets to generate acquisition and development fees
  5. Redistribute investor capital from existing transactions earning above market returns to new transactions earning market returns
  6. Make decisions that ignore and magnify investor tax consequences

Much like it makes little sense to sell a bond paying 8.0% interest in order to purchase another paying 5.0%, it makes little sense to sell a property producing a stable 8.0% yield, pay taxes, and then use the proceeds to purchase another property producing a 5.0% yield – that is, little sense to the investor, but not necessarily to the manager.

Henna’s boutique investment philosophy emphasizes quality over volume and full cycle holding periods to enable sufficient time to, (a) enhance property quality, therefore investor yields, through comprehensive asset management, (b) accumulate handsome whole-dollar profits, (c) optimize the timing of sales, and (d) minimize tax ramifications.

Henna’s investment philosophy is similar to that of an effective and well-prepared quarterback who executes a series of tactical, creative, calculated maneuvers to improve his chances of delivering quantitative results to his supporters, rather than a quarterback who pursues a high-risk strategy of long-yardage passes in an attempt to generate results quickly, but more often than not resulting in no quantitative gain and less time to recover.

 


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