Rotational Real Estate Investment Strategy In Raleigh Revealed By Reilly: Key Factors For Excess Returns
September 2, 2011 - The Wall Street Transcript has just published REITs Report offering a timely review of the Real Estate sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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David J. Reilly is President and CEO of Cornerstone Real Estate Advisers LLC. He is responsible for all facets of Cornerstone's operations, including chairing the investment committee. His career in real estate spans more than 30 years, with extensive experience in asset and portfolio management, acquisitions and dispositions, and operations. His experience includes all institutional property types, including hotels, office, industrial, residential and retail.
Prior to joining Cornerstone in 1995, Mr. Reilly was President of Mellon/McMahan Real Estate Advisors, a real estate pension fund adviser managing portfolios of wholly owned and leveraged properties valued at approximately $2 billion. In this capacity, Mr. Reilly was responsible for the operations of the company, including asset management, acquisitions and dispositions. From 1978 through 1992, Mr. Reilly was a Managing Director for Aetna Realty Investors, a wholly owned subsidiary of Aetna life and casualty. He was responsible for asset management and dispositions for portfolios of real estate valued in excess of $3 billion. He was also a Senior Member of the investment committee. Prior to joining Aetna Realty Investors, Mr. Reilly served as Vice President of HNC Mortgage and Realty Investors REIT. Mr. Reilly received his B.S. in business from Boston College. He has been a Member of the Urban Land Institute, the International Council of Shopping Centers and served on the board of directors of the National Association of Real Estate Investment Managers.
TWST: In general, how would you describe your investment philosophy?
Mr. Reilly: We are primarily known as a barrier and rotational market investor. A barrier market is one where there are either natural or political barriers to development. For instance, Boston is a barrier market. The Boston CBD is constrained by water, significant historical considerations and a rigorous permitting process for new development. In our view, this is a positive as these constraints also contain excessive new construction, thus supply is more closely aligned with demand. Long term, barrier markets will outperform nonbarrier markets.
We also invest in what we refer to as rotational markets. We began to utilize that term many years ago when our research group, which is a significant operation at Cornerstone, identified the opportunity. Rotational markets are those we think, based on our research, will experience stronger job growth formation in the short run, even though they may not be in barrier markets, with limited constraints to new development. An example might be Austin or Raleigh, markets that traditionally have supply issues, but if you enter and exit them at the right point in the cycle - rotate in and rotate out - then you can experience excess returns. That summarizes our general investment philosophy - barrier and rotational market investment.
In addition, as it relates to mortgage financing, we focus on institutional-grade real estate with strong sponsorship, again supported by market information supplied by our research. As I said, we have a very significant research operation housed in Hartford and their responsibility is to provide us macro and micro information relative to all the markets and product types. In the U.S., we analyze market data right down to the ZIP code. So basically, wherever you live today, we can provide you a very detailed array of information within literally 30 seconds.
We have a proprietary system called "The Analyst" that we've developed over the last 15 years that capsulizes and condenses significant data generated by the government and other sources related to real estate. It resides on the computer of every investment professional, portfolio manager and analyst at Cornerstone, and with the touch of a button, we can get data on any market in the U.S. relative to population growth, income levels, competition, new development, market rents, retail sales - you name it, we can readily supply it. That's critical because it allows us to analyze individual real estate opportunities very quickly as opposed to taking two or three weeks accessing data to ascertain what's going on in the marketplace. The debt, equity and REIT securities operations are all tied into The Analyst. We are expanding its capabilities to include Europe.
Complementing our research group are Cornerstone's regional offices. Being more local in nature, they provide bottom-up, real-time information back to our research operation, thus providing more of that local influence of knowledge and interpretation of market trends.
TWST: You have said you look to take advantage of opportunities depending on where we are in the cycle. So where are we in the cycle and what does it look like right now?
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